Albo's economic report card: Must try harder on energy transition

Can Anthony Albanese’s government walk and chew gum at the same time? Should be able to, provided it stops trying to work both sides of the street.

As I wrote on Wednesday, the most urgent economic and political issue facing the government is the cost-of-living crisis.

But let’s get real. Everyone may be up in arms about the cost of living, but fixing it is standard stuff for the managers of the economy. We can be sure it will be fixed soon enough.

As we know from our own lives, we often let the urgent take priority over the more important, and that’s what this government has been doing.

What could be more important than easing my cost-of-living pain? All the different kinds of pain – the heatwaves, droughts, bushfires, floods and cyclones – that are coming our way unless the world does what’s needed to stop further global warming.

A big achievement at last year’s federal election was to get rid of a government of closet climate-change deniers only pretending to want to do something, and replace it with a government that did accept the scientists’ advice and did want to act on it.

But although Climate Change and Energy Minister Chris Bowen has been busy setting up the frameworks for reducing greenhouse gas emissions – fixing the “safeguard mechanism”, producing a hydrogen strategy and developing a critical minerals strategy, and, last month, announcing a scheme to underwrite the risk of investing in new renewable energy generation and storage – few new projects have begun or are in the offing.

That’s the trouble: actual progress is happening too slowly. Albanese’s game plan for this term seems to be softly, softly catchee monkey. Make sure you don’t offend any powerful interests, get comfortably re-elected and then think about getting tough.

There’s not enough sense of urgency. The longer it takes us to make the transition to renewable energy the more pain we’ll suffer in the process.

The Grattan Institute’s energy and climate change expert, Tony Wood, wants us to realise that this transition will be harder than anything we’ve had to achieve outside of wartime.

“We must manage the decline of the fossil fuel extractive sectors, transform every aspect of our energy and transport sectors, re-industrialise much of manufacturing, and find solutions to difficult problems in agriculture,” Wood says.

Note that the challenge comes in two parts. First, make the domestic shift from fossil fuels to renewables. Second – since the world will soon enough no longer want to buy our massive exports of coal and gas – find something else we can sell abroad.

Get it? If we don’t want to become a lot poorer, we’ve got to get weaving. Labor does get that to secure our future we must seize this limited-time opportunity to turn Australia into a renewable energy superpower.

Treasurer Jim Chalmers will tell you the government has already invested about $3 billion in the superpower project. But, again, we’re being too slow in getting on with it.

Nothing Australia can do by itself will halt climate change. That will take concerted, decisive action by all the big carbon-emitting nations. That will happen eventually, even if happens too late to prevent a lot more warming.

So, if we don’t mind being lasting losers from the eventual transition – the country that used to make a good living as an energy exporter – we can stay as laggards, waiting for America, China and Europe to do the heavy lifting.

If we want to stay winners, however, we have to get ahead of the others. We have to get to net-zero emissions before everyone else. We have to build a renewables industry so big it can meet our domestic needs, with at least as much energy to spare for export to countries less well-placed than us.

Most of our exported renewable energy would be “embodied” in green steel, green aluminium and other resources. This would be all to the good, allowing us to set up new manufacturing industries to further process our resources before selling them.

To achieve this unprecedented transformation will involve the government leading the way, funding research on how basic science can be commercialised, funding pilot projects, and reducing the risks for investors in renewables and storage.

This is challenging stuff for conventionally trained economists. They’re used to telling governments to let private firms pursue our “comparative advantage” by exploiting the nation’s “natural endowment”. They tell politicians never to try to “pick winners”.

But these are unprecedented times. Global warming has just torn up our comparative advantage in mining, rendering our natural endowment of huge remaining stocks of fossil fuels of little future value.

As Professor Ross Garnaut was the first to point out, however, in the new world where renewable energy is king, part of our natural endowment we formerly thought to be of little value is now our comparative advantage: relative to other countries, we have abundant supplies of sun and wind.

But waiting for private enterprise to turn our industrial structure on its head without government leadership is delusional. And, as we ought to have learnt by now, if you dissuade governments from picking winners, they end up backing losers: helping firms and workers who did well in the old world try to stop the clock.

That’s what’s wrong with the government’s softly, softly, all-things-to-all-persons approach to climate change. It’s working both sides of the street, taking an each-way bet: encouraging the move to renewables while retaining fossil fuel subsidies and allowing investment in new coal mines and gas projects.

It says a lot about the discombobulation of conventional economists that none of them beat the Australia Institute’s Dr Richard Denniss to pointing out the obvious: taking an each-way bet flies in the face of opportunity cost.

Allowing the established players to continue investing in fossil fuels deters them from investing in renewables. It also allows them to bid scarce skilled labour away from renewables and from rejigging the electricity grid. Sorry, the government must try harder.

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Climate change will hurt, but we can still be the Lucky Country

What are we in for with climate change? How will it change the environment, the way we live and the way we earn our living? Is it all bad news for the economy, or is there some upside? And, by the way, how much is it costing us as taxpayers?

The previous federal government didn’t want to think about these questions, much less talk about them. You could read the budget papers each year and hardly find a mention.

But all that’s changed with the change of government. So, no surprise that last week’s budget has a lot in it about climate change.

In various parts of the budget papers, the Albanese government acknowledges that, with the globe already having warmed by an average of 1.1 degrees above pre-industrial levels, global warming will continue changing our weather (short-term changes) and climate (longer-term patterns) for the rest of this century.

It will endanger more species and reduce biodiversity. It will adversely affect human health, with more days of extreme heat leading to more deaths of old people.

The productivity of labour and the number of hours worked are expected to decline as temperatures increase, particularly for people who work outdoors in agriculture, construction and some manufacturing.

Treasury expects farming yields to decline, and I expect that, over time, the production of different crops and the grazing of animals will migrate to the parts of Australia where the climate is less unsuitable.

Speaking of migration, you’d expect our population to grow faster where it’s relatively cooler, with fewer people wanting to live where it’s even hotter than it is today.

And that’s before you get to people – refugees, even – moving between countries in response to rising sea levels. Starting, in our case, with people from the islands of the South Pacific.

Treasury says the increased frequency and severity of natural disasters will also lead to reductions in the production of goods and services through disruptions to economic activity, and to the destruction of private property and road, bridge and rail infrastructure.

It shows that the value of insurance claims has steadily increased over the past decade, with temporary peaks caused by the floods in Queensland and NSW in March 2013, Cyclone Debbie and Sydney hailstorms in March 2017, then bushfires and hailstorms in NSW and the ACT in the last quarter of 2019 and the first quarter of 2020.

So far, the greatest insurance claims – $6 billion-worth – were from the floods in south-east Queensland and NSW in the March quarter last year. Then there were (less costly) floods in NSW, Victoria and Tasmania late last year.

Treasury says our economy will be reshaped by both the physical impacts of climate change and by the efforts of the more than 150 countries that have now signed up to the target of net-zero emissions by 2050. What they do will affect us, plus what we ourselves do.

Australia is one of world’s biggest exporters of fossil fuels, so we can expect our exports of coal and gas to decline steadily over the next decade or two, as our overseas customers reduce their own greenhouse gas emissions from burning the dirty fuel they bought from us.

Of course, not all of them will have their own plentiful sources of renewable energy. They’ll have to import it from somewhere, just as they’ve had to import our fossil fuels.

Which gives us an opening. As our great apostle of smart climate change, economics Professor Ross Garnaut, was first to realise, Australia’s huge expanse, full of sun and wind, means we’ll be able to produce far more renewable energy than we need for our own use. And do it cheaply.

Gosh, what good luck we’ve got. Turns out the move to renewables will give us a “comparative advantage” in international trade we didn’t know we had. All we’ve got to do is play our cards right and get in quick before other, less well-endowed countries sign up our potential customers.

The former government wasn’t interested but, as the budget papers make clear, the Albanese government is. The “net-zero transformation”, which represents one of the most significant shifts in the industrial structure of the economy since the Industrial Revolution, “holds major opportunities for Australia, given our endowment of renewable energy sources and our large reserves of many critical minerals,” the papers say.

There is a problem, however. As yet, there isn’t an economic way to ship raw clean electricity and green hydrogen across the sea to other countries.

But this could be a good thing. We can “embed” our renewable energy in our mineral exports by further processing our iron ore into green steel, and our bauxite into green aluminium, before we export them.

Whereas in the old, fossil fuel world the further processing of our minerals before export wasn’t “economic” (profitable) – in the renewables world it could well be economic.

Get it? We could give our declining manufacturing industry a whole new lease on life. What’s more, it would make economic sense to do the further processing out in the regions, close to the solar and wind farms generating the clean electricity.

Implementing such a transformation would require huge capital investment and risk-taking, the early part of which would have to come from the government.

So, yes, climate change – both the bad bits and the good bits – will come at a great cost to the budget, and thus to taxpayers.

The budget papers reveal the Albanese government planning to spend an extra $25 billion on new climate-related programs over several years in its first budget last October, and now a further $5 billion in last week’s budget. Don’t think that will be the last of it.

So, get ready to hand over more in taxes as the government seeks both to ameliorate the costs of climate change and turn the world’s energy transformation to our advantage.

At least now we’ve got a government willing to get off its backside.

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How party politicking let mining companies wreck our economy

A speech by former Treasury secretary Dr Ken Henry last month was reported as a great call for comprehensive tax reform. But it was also something much more disturbing: an entirely different perspective on why our economy has been weak for most of this century and – once the present pandemic-related surge has passed – is likely to stay weak.

The nation’s economists have been arguing for years about why the economy has grown so slowly, why real wages have been stagnant for at least a decade, why the rate of productivity improvement is so low and why business investment spending has been so little for so long.

Most economists think we’ve just been caught up in the “secular stagnation” – or slow-growth trap – that all the advanced economies are enduring.

But Henry has a very different answer, one that’s peculiar to Australia. Unlike everyone else, he’s viewing our economy from a different perspective, the viewpoint of our “external sector” – our economic dealings with the rest of the world.

What conclusion does he come to? We’ve allowed ourselves to catch a bad case of what economists call “Dutch disease” – but Henry thinks should be renamed Old and New Holland disease.

When a country discovers huge reserves of oil or gas off its coast – or, in our case, the industrialisation of China causes the prices of coal and iron ore to skyrocket – all the locals think they’ve won the lottery and all the other countries are envious. Now we’ll be on easy street.

But when the Dutch had such an experience in the 1960s, they eventually discovered that, while it was great for their mining industry, it was hell for all their other trade-exposed industries.

Why? Because the inflow of foreign financial capital to build the new industry and the outflow of hugely valuable commodity exports send the exchange rate sky-high, which wrecks the international price competitiveness of all your other export and import-competing industries: manufacturing, farming and services.

Not only that. The rapidly expanding mining industry attracts labour and capital away from the other industries, bidding up their costs. Their sales are down, but their costs are up. You’re left with a “two-speed economy”. Remember that phrase? It’s what we’ve had for a decade or two.

Well, interesting theory, but where’s Henry’s evidence that Dutch disease is at the heart of our problems over recent decades?

He’s got heaps. Start with the way the composition of our exports has changed. Between 2005 and today, and in round figures, mining’s share of our total exports has doubled from 30 per cent to 60 per cent. Manufacturing’s share has fallen from 40 per cent to 20 per cent. Everything else – mainly agriculture and services – has fallen from 30 per cent to 20 per cent.

Over the same period, exports grew from 20 per cent of gross domestic product to 27 per cent. This means mining exports’ share of GDP has gone from about 6 per cent to more than 16 per cent. Manufacturing exports’ share has fallen from about 8 per cent to 5.5 per cent.

Next, who buys our exports? China’s share has gone from about 10 per cent to more than 45 per cent. Actually, that was the peak it reached before China’s imposition of restrictions after some smart pollie decided it would be a great idea for Australia to lead the charge of countries blaming China for COVID. Since then, China’s share has fallen to 30 per cent.

Since 2005, mining’s share of total company profits has gone from about 20 per cent to 50 per cent. Manufacturing’s share has fallen from about 20 per cent to less than 10 per cent. Financial services – banking and insurance – have seen their share fall from 20 per cent to less than 5 per cent.

Now, what’s happened to those industries’ share of total employment? Manufacturing’s share has fallen from more than 9 per cent to about 6 per cent. Financial services’ share has been steady at a bit over 3 per cent. Mining’s share has risen from less than 1 per cent to 1.5 per cent. You beauty.

“In summary,” Henry says, “mining employs a very small proportion of the Australian workforce – except in the boom times, when it induces a worker to leave other jobs for mine-site construction work – generates about 60 per cent of Australia’s exports, about half of pre-tax profits (mostly repatriated overseas to foreign shareholders) and exposes the Australian economy to highly volatile global commodity prices and a heavy strategic dependence upon a single buyer, China.”

Not to mention the way mining leaves us heavily exposed to “the risk of global decarbonisation”.

How have we profited from being a mining-dominated economy? Real GDP per person – a rough measure of our material standard of living – has been in trend decline for two decades. In the decade pre-pandemic, “we recorded the sort of growth rates only previously recorded in recessions,” Henry says.

This weakness is largely explained by our poor productivity performance. Though no one else seems to have noticed, our productivity growth is negatively correlated with our “terms of trade” – the prices we get for our exports, relative to the prices we pay for our imports.

That is, when our terms of trade improve, our rate of productivity improvement worsens. And our terms of trade are largely driven by world commodity prices, especially for coal, gas and iron ore.

Now the tricky bit. Why would a mining boom depress productivity improvement? Because of the way it raises our real exchange rate – our nominal exchange rate, adjusted for the change in our rate of production-cost inflation relative to those of our trading partners.

The resources boom increased our nominal exchange rate by about 25 per cent. Then, by 2011, high wages growth and weak productivity growth relative to our trading partners had added a further 35 per cent to the rise in the real exchange rate, Henry calculates.

This caused our non-mining producers to suffer a “profound loss of international competitiveness”. Is it any wonder that, between the turn of the century and 2019, the annual rate of investment by non-mining businesses fell from 7 per cent of GDP to 5 per cent?

The result is that two centuries of “capital-deepening” – increased equipment per worker – have stalled. This move to “capital-shallowing” explains our poor productivity.

And also, our move from current account deficit to current account surplus. “We are exporting [financial] capital because Australia has become an increasingly unattractive destination for doing business in the eyes of foreign investors and Australian [superannuation] savers alike,” Henry says.

“The mining boom has left us with a very big competitiveness overhang that will probably take decades to work off,” he says, including by decades of weak growth in real wages.

What should we have done differently? Had we applied a rational tax to the windfall profits of the mining companies, we would not only have retained for ourselves more of the proceeds from the export of our own natural resources, but also caused the rise in our real exchange rate to be lower.

Remember Kevin Rudd’s proposed “resource super profits tax”? The mining lobby set out to stop it happening, telling a pack of lies about how it would wreck the economy. The Abbott-led opposition threw its weight behind the mainly foreign miners.

Julia Gillard consulted the industry and cut the tax back to nothing much. The incoming Abbott government abolished it.

Petty, short-sighted politicking caused us to sabotage our economy for decades to come.

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Climate choice: cling to past glories or strive for prosperous future

The big question facing our political leaders is: are we content to allow climate change to turn us from winners into losers, or do we have the courage and foresight to transform our mining, energy and manufacturing industries into clean energy winners?

For most rich countries, playing their part in limiting global climate change is simply about switching from fossil fuels to renewable energy. For us, however, there’s a double challenge: as one of the world’s biggest exporters of fossil fuels, what do we do for an encore?

When it comes to deciding how we can earn a decent living, economists are always telling politicians to pursue our “comparative advantage” – concentrate on doing what we’re better at than other people, and they want to buy from us; then use the proceeds to buy from them what they’re better at than we are.

Turns out our “natural endowment” makes us better at farming and mining. Climate change will be bad for farming (not that the world will stop wanting to eat), and the only future for fossil fuel exports is down and out. It may take a decade or two to reach zero, but there’ll be no growth from now on.

Most economists have little to say about what you do when your natural endowment becomes a stranded asset and our comparative advantage evaporates. Except for Professor Ross Garnaut, who was the first to realise that nature has also endowed us with a bigger share of sun and wind.

If we tried hard enough and were quick enough, we could not only produce all the renewable energy we need for our own use, but find ways to export it to less well-endowed countries, probably embodied in green steel and aluminium.

This, of course, involves innovation and risks. We’re talking about technological advances that haven’t yet been shown to work, let alone commercialised. Doing things that have never been done before.

When it comes to technology, Australia is used to following the leader, not being the leader. Until now, this has been sensible for a smaller economy like ours. But we’re facing the impending loss of our biggest export earner. If we can’t find something just as big to sell, we’ll see our standard of living rapidly declining.

The threat we face isn’t quite existential. We’ll still be alive, just a lot poorer – and kicking ourselves for not seeing it coming and doing something about it.

The solution’s in two parts. First, the federal government must make clear to the coal and gas industries, the premiers, the mining unions and the affected regions that there’ll be no further support or encouragement for anyone pretending they haven’t seen the writing on the wall. Anyone trying to stop the clock and keep living in the past.

There’ll be plenty of support and encouragement, but only for those industries, workers and regions needing help to move from the old world to the new. As part of this, the government must do what now even the UN secretary-general says every country must do: end subsidies of fossil fuels and use the money to assist the move to renewables and green production.

Help coal miners relocate or retrain – whatever. Promise that, wherever it made sense, the new renewable and green industries would be set up near the old mines.

Ideally, the policy of ending the old and moving to the new should be bipartisan. No opposition should take the low road of courting the votes of those preferring to keep their head in the sand.

But if that’s too much to ask of a two-party duopoly, Anthony Albanese and the Labor premiers should take their lives in their hands and overcome their life-long fear of what the other side will say when you put the national interest first.

Second, pick winners. Econocrats spend their lives telling governments not to do that – not to subsidise new industries you hope will become profitable.

Trouble is, politicians being politicians, you can be sure they’ll be putting taxpayers’ money on some horse in the race. And if they’re not trying to pick winners, they’ll be doing what they’re doing now: backing losers. Which would you prefer?

More importantly, it’s a neoliberal delusion that new industries just spring up as profit-seeking entrepreneurs seek new ways to make their fortunes. Doing something never done before is high risk. The chance of failure is high. Banks won’t lend to you.

We don’t stand a chance of becoming a green superpower without a lot of government underwriting with, inevitably, some big losses. But I can think of many worse ways of wasting taxpayers’ money.

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Consumers and Russians keep the economy roaring - but it can't last

They say never judge a book by its cover. Seems the same goes for GDP. This week’s figures showed super-strong growth in the three months to the end of June. But look under the bonnet and you find the economy’s engine was firing on only two cylinders.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by 0.9 per cent in the June quarter, and by 3.6 per cent over the year to June.

If that doesn’t impress you, it should. Over the past decade, growth has averaged only 2.3 per cent a year.

The main thing driving that growth was consumer spending. It grew by 2.2 per cent in the quarter and by 6 per cent over the year, as the nation’s households – previously cashed up by government handouts, and by most people keeping their jobs and others finding one, but prevented from spending the cash by intermittent lockdowns and closed state and national borders – kept desperately trying to catch up with all they’d been missing.

The other big contribution to growth during the quarter came from a 5.5 per cent jump in the “volume” (quantity) of our exports. Most of the credit for this goes to that wonderful man Vladimir Putin, whose bloody invasion of Ukraine has greatly disrupted world fossil fuel markets, thus greatly increasing our sales of coal and gas.

(It has also greatly increased the world prices of coal and gas and grains, causing our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – to improve by 4.6 per cent during the quarter, to an all-time high.)

But that’s where the good news stops. The other cylinders driving the economy’s engine have been on the blink. A marked slowdown in the rate at which businesses were building up their inventories of raw materials and finished goods led to a sharp slowdown in goods production.

Government spending took a breather, and an increase in business investment in new plant and equipment was offset by a fall in business investment in buildings and other construction.

And then there’s what happened to home building. Despite a big pipeline of homes waiting to be built, building activity actually declined by 2.9 per cent in the quarter and 4.6 per cent over the year.

Huh? How could that happen? Well, the builders say they couldn’t find enough building materials and tradies. Which hasn’t stopped them using the opportunity to whack up their prices. (I believe this is called “capitalism”.)

So, while we listen to lectures from the economic managers about the evil of inflation and how it leaves them with no choice but to slow everything down by jacking up interest rates, let’s not forget that the big jump in the cost of new homes and renovations has been caused by... them.

They’re the ones who, at the start of the pandemic and the lockdowns, decided it would be a great idea to rev up the housing industry, by offering incentives to people buying new houses, and by cutting the official interest rate to near zero. Well done, guys.

Speaking of higher interest rates being used to slow down the growth in demand for goods and services, the first two of the five rises we’ve had so far would have had little influence on what happened in the economy over the three months to June.

But don’t worry, they’ll have their expected effect in due course. Which is the first reason the strong, consumer-led growth we saw last quarter won’t last, even if we see more of it in the present quarter.

Another reason is that households are running on what a cook would call stored heat. During the first, national lockdown, the proportion of household disposable (after-tax) income that we saved rather than spent leapt to almost 24 per cent.

We’ve been cutting our rate of saving since then, and it’s now down to 8.7 per cent. This isn’t a lot higher than it was before the pandemic. And with the gathering fall in house prices making people feel less wealthy, it wouldn’t surprise me to see people feeling they shouldn’t cut their rate of saving too much further.

And that, of course, is before we get to the other great source of pressure on households’ budgets: consumer prices are rising faster than workers’ wages. This no doubt explains why our households’ real disposable income has actually fallen for three quarters in a row.

With businesses putting up their prices, but not adequately compensating their workers for the higher cost of living, it’s not surprising so many people are taking more interest in what the national accounts tell us about how the nation’s income is being divided between capital and labour, profits and wages.

ACTU boss Sally McManus complains that workers now have the lowest share of GDP on record. It follows that the profits share of national income is the highest on record.

What doesn’t follow, however, is that any increase in profits must have come at the expense of workers and their wages. Profits are up this quarter mainly because, as we’ve seen, our miners’ export prices are way up, and so are their profits.

No, the better way to judge whether workers are getting their fair share is to look at what’s happened to “real unit labour costs” – employers’ labour costs, after allowing for inflation and the productivity of labour (that’s the per-unit bit).

Turns out that, since the end of 2019, employers’ real unit labour costs have fallen by 8.5 per cent. If workers were getting their fair share, this would have been little changed.

Short-changing households in this way is not how you keep consumer spending – and businesses’ turnover – ever onward and upward.

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An economy with falling real wages can’t be “strong”

The main message from this week’s “national accounts” is that the economy isn’t nearly as Strong – Strong with a capital S – as Scott Morrison and Josh Frydenberg unceasingly claimed it was during the election campaign. In truth, it’s coming down to Earth.

According to the Australian Bureau of Statistics, real gross domestic product – the nation’s total production of goods and services – grew by 0.8 per cent during the three months to the end of March, to be up 3.3 per cent over the year.

Almost to a person, the business economists said – and the media echoed - this was “higher than expected”. But that just meant it was a fraction higher than they’d forecast a day or two before the announcement, once most of the building blocks for the figure had been revealed.

But as new Treasurer Dr Jim Chalmers has revealed, when Treasury was preparing its forecasts for the March 29 budget, it forecast growth of not 0.8 per cent for the quarter, but 1.8 per cent. Now that would have been strong.

True, if you compound 0.8 per cent, you get an annualised rate of 3.3 per cent. And that’s a lot higher than our average annual growth rate over the past decade of about 2.3 per cent.

But it’s high because the economy’s still completing its bounce-back from the two pandemic lockdowns when most people gained more income than they were allowed to go out and spend.

In other words, it’s a catch-up following highly unusual circumstances, which will stop once everyone’s caught up. It’s not an indication of what we can expect “going forward” as businesspeople love saying.

If you delve into what produced that 0.8 per cent result, you see we’re probably only a quarter or two away from returning to a much less Strong quarterly growth rate. Indeed, until we’ve fixed our problem of chronic weak wage growth, it’s likely to be quite Weak growth.

Growth during the quarter was led by a 1.5 per cent rise in consumer spending, which contributed 0.8 percentage points to the overall growth in real GDP. Pretty good, eh? Well, not really. Turns out real household disposable income actually fell by 0.9 per cent.

So the growth in consumer spending came from a 2 percentage-point fall in the rate of household saving during the quarter, to 11.4 per cent. Household saving leapt during the two lockdowns, from its pre-pandemic level of about 7 per cent.

This suggests it won’t be long before this honey pot’s been licked out. Note too, that consumer spending was very strong in the states still rebounding from last year’s lockdown – Victoria, NSW and the ACT – and particularly weak in the other states.

Why did real household disposable income fall during the quarter? Because real wages fell. The more they continue falling – as seems likely – the more continued growth in consumer spending will depend on households continuing to cut their saving. Sound sustainable to you?

The other big contributor to growth, of 1 percentage point, came from an increase in the inventories held by retailers and other businesses, caused by an easing of pandemic-related shortages of certain imported goods, including cars.

This is a sign of the economy returning to normal, but it’s a once-only adjustment, not a growth contribution that will continue quarter after quarter.

The third growth factor was a huge 2.7 per cent increase in government consumption spending, contributing 0.6 percentage points to overall growth.

Where did it come from? From increased health spending required by the Omicron variant and spending to help people affected by the floods in NSW and Queensland. Again, not something that will be happening every quarter – we hope.

With those three positive contributions adding up to a lot more than the final 0.8 per cent, there must have been some big negative contributions. Just one, actually. Net exports – exports minus imports – subtracted 1.7 percentage points.

The volume (quantity) of exports fell by 0.9 per cent, thus subtracting 0.2 percentage points from growth – mainly because the floods disrupted mineral exports.

The volume of imports jumped by 8.1 per cent, subtracting 1.5 percentage points from overall growth. Another sign of the economy returning to normal, with pandemic disruption easing and imports of cars (and their chips) resuming. Another once-off.

So, what else happened in the quarter? New home building activity fell by 1 per cent. The pipeline of new homes built up by lockdown-related government stimulus still contains homes yet to emerge, but the output has faltered because the industry’s at full capacity, with shortages of labour and materials.

Even so, with interest rates rising and house prices falling, you wouldn’t expect too many new building projects to be entering the pipeline. Housing won’t be a big part of the growth story “going forward”.

Business investment spending – mainly on plant and equipment – grew by 1.4 per cent during the quarter and by 3.6 per cent over the year. It will need to grow a lot faster than that if it’s to be a big part of the growth story.

The quarter saw the share of national income going to wages continuing to fall, while the share going to profits rose to a record high of 31.1 per cent.

On the face of it, that says the workers are being robbed. But the factors moving the respective shares are more complicated than that. For instance, all the growth in company profits during the quarter was from the mining industry. Coal, gas and iron ore commodity prices have jumped.

But a much less debatable indication that businesses are doing well at the expense of their employees comes from the 2 per cent fall in “real unit labour costs” – real labour costs per unit of production – during the quarter, and by 6 per cent since the start of the pandemic.

An economy whose strength comes from cutting its workers’ wages won’t stay Strong for long.

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Problems abound, but we could yet emerge as winners

As we begin to lift our heads and look beyond the lockdown, it’s easy to see the many other problems we face. It’s possible to view those problems with fear and disheartenment – and it suits the interests of many groups to play on our fears.

But it’s almost as easy to see Australia as still a lucky country, with a populace that’s confident, resourceful, committed to the “fair go” and capable of co-operating to convert our problems into opportunities to flourish.

The keys to making life in Australia better rather than worse are to face up to all the change being forced upon us, and to unite in finding solutions that share both the costs and the benefits as fairly as possible.

Ideally, we’d have a political leader who offered us a more united, optimistic and confident vision of the path to a better world, but the sad truth is the two main parties are locked in a race to the bottom that we can’t even be sure they’d like to escape.

In reviewing our problems, let’s start with the pandemic. There’s a risk that we’ve opened up too soon, that our hospitals are overwhelmed and death rates rise unacceptably, forcing the premiers to backtrack.

But it’s only a risk and, assuming it doesn’t happen, I think we can be confident the economy will bounce back strongly and quickly, as it did last year. It won’t be quite as strong as last year because the feds haven’t splashed around nearly as much money as last time.

Even so, most households have saved a lot of their incomes and, as we saw last year, will spend much of the increase over coming months.

At a global level, the risk is that the pandemic continues for years more, as long delays in vaccinating everyone in the poor countries allow new variants to emerge. That the rich countries, having hogged all the vaccines, then lose interest in the topic.

Our first post-pandemic problem is that the economy will rebound only to the plodding rate of growth we were achieving before the plague arrived. Like the other rich countries, our rate of improvement in productivity – production per worker – is anaemic.

Our business people are going through a phase where the only way they can think of to increase profits is to use every tactic to keep wage rises as low as possible. The penny is yet to drop that, since wages are their customers’ chief source of income, this is not a winning formula.

Other problems abound: ever-rising house prices that can’t keep rising forever; adjusting to the ageing of the population and the growing demand for aged care; continuing digital disruption, with all its benefits to users but upheaval in affected industries; handling the growing assertiveness of China, while still taking advantage of being part of the global economy’s fastest-growing region; and the less tangible but no less worrying problem of the breakdown of trust in Australian and global institutions and relationships.

All that’s before we get to our biggest problem – responding to climate change – which, with the Glasgow conference starting in less than two weeks, is also our most pressing challenge.

No issue better illustrates the lesson that, if we want to be on top of our problems rather than crushed by them, we must face up to inevitable changes being forced on us by forces we don’t control.

We must stand up to powerful interests – our coal, oil and gas industries, in this case – hoping to stave off the evil hour as long as possible. They’ll protect their own interests at our expense for as long as we let them. We must be suspicious of political parties accepting donations from these urgers.

We must resist the blandishments of populist politicians – yes you, Tony Abbott – promising to save us from sky-high power costs (we got them anyway) because we can just let the whole thing slide.

Now we have the farmers-turned-miners National Party holding themselves out as champions of the put-upon regions and using their veto over adoption of the net zero emissions target to extort money from the Liberals.

People in the regions, we’re told, bitterly resent Liberal city slickers sitting pretty while imposing all the costs of adjustment on the bush.

This conveniently ignores two points. First, farmers are the biggest losers from climate change and the biggest winners from successful global action to limit further global warming.

Second, as Scott Morrison rightly says, coal mining jobs in NSW and Queensland will decline as other countries reduce their own emissions by ceasing to buy our coal and gas. But acting to get on with making Australia a renewable energy superpower – including by exporting hydrogen, clean steel and clean aluminium – will create many new skilled manufacturing jobs – all of them in the regions.

But only if we stop thinking and acting like losers, and do what it takes to be winners in the new, decarbonised world.

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Sorry, the economy's bum does look big. We've put on a lot of weight

If you’re like many readers, you think economists and business people are obsessed with gross domestic product and dollars, dollars, dollars. So, as a never-to-be-repeated offer, today I’m going to write not about what Australia’s production of goods and services is worth, but what it weighs.

Believe it or not, Dr Andrew Leigh, a federal Labor politician and former economics professor, is just publishing the paper Putting the Australian Economy on the Scales in the Australian Economic Review.

Using a lot of ancient statistics and making various assumptions – so that his figures are, on his own admission, “rough” but still indicative – Leigh estimates that the physical weight of the nation’s annual output of goods and services has gone from 55,000 tonnes in 1831, to 6 million tonnes in 1900, 62 million tonnes in 1960, 355 million tonnes in 2000, and 811 million tonnes in 2018.

Of course, our population has grown hugely in that time, but the weight of output per person is also way up. It was less than a tonne in 1831, six tonnes in 1960 and 32 tonnes per person in 2018. That’s a 47-fold increase.

Well, that’s nice to know. But who in their right mind would bother working out all that? What does it prove? More than you may think – especially if you worry about the impact all our economic activity is having on the natural environment.

You’ve heard, I’m sure, about our big and growing “material footprint” caused by our production and consumption of raw materials. It, too, is measured by weight. The United Nations Environment Program International Resource Panel publishes estimates of the footprints of 150 countries, with the Australian figures coming from the CSIRO and industrial ecologists at the universities of Sydney and NSW.

In measuring a country’s footprint, they take account of four kinds of raw materials: biomass (from grass to timber), metals, construction materials and fossil fuels. It turns out, for instance, that the footprint of a kilo of beef is 46 kilos.

The UN takes a great interest in countries’ material footprint because one of its sustainable development goals is to decouple economic growth from environmental degradation. Ecologists worry that, particularly as poor countries lift their living standards up towards those the rich countries have long enjoyed, the pressure on the globe's natural environment will be . . . well, unsustainable.

But whereas the ecologists’ figures show all countries’ material footprints getting bigger, a lot of economists argue that as economic growth and advances in technology continue, the economy is “dematerialising” – getting lighter.

This is because most of the growth in GDP has come from more provision of services rather than more production of goods through farming, mining and manufacturing. Human labour has no weight, even though it may involve more use of electricity and fuel.

But also because the physical weight of many goods is falling. Leigh reminds us that houses and vehicles are built from lighter materials. Domestic appliances are more compact. Transport networks are more energy-efficient. Software makes it possible to upgrade devices – from games to cars – that might previously have required new physical parts or total replacement.

These shifts led Alan Greenspan, former chairman of the US Federal Reserve, to claim in 2014 that “the considerable increase in the economic wellbeing of most advanced nations in recent decades has come about without much change in the bulk or weight of their gross domestic product”. Without question, he argued, the economy “has gotten lighter”.

So the point of Leigh’s calculations is to check who’s right: those economists claiming the economy is dematerialising, or the ecologists calculating that our material footprint is getting heavier.

Clearly, he comes down on the side of the ecologists. Although his method gives an estimate of the economy’s weight that’s about a fifth lower than the ecologists’, he confirms the general trajectory of their continuing increase. He estimates that a 10 per cent increase in real GDP is associated with a 12 per cent increase in its weight.

Now, you could argue that Australia’s huge “natural endowment” of minerals and energy makes us quite unrepresentative of the advanced economies. Our mining industry has been booming, on and off, since the late 1960s. All you need to know is that our production of (heavy) iron ore – most of it for export – has risen ninefold since 1990.

But Leigh believes all the rich economies have expanding material footprints. The goods they consume may have been getting lighter per piece, but they’ve gone on consuming a lot more of them. Planes may be more fuel-efficient, but far more people are flying far more often (when we’re allowed). Clothes may be lighter, but we buy more of them. Food packaging may be thinner – I can remember when fruit and veg arrived at the greengrocers in wooden boxes - but we’re eating more takeaway meals.

Leigh concludes that, like the paperless office, the weightless economy remains surprisingly elusive. Which doesn’t change the need for us to put the economy on an ecological diet.

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No progress on wages, but we’re getting a better handle on why

In days of yore, workers used to say: another day, another dollar. These days they’d be more inclined to say: another quarter, another sign that wages are stuck in the slow lane. But why is wage growth so weak? This week we got some clues from the Productivity Commission.

We also learnt from the Australian Bureau of Statistics that, as measured by the wage price index, wages rose by 0.5 per cent in the three months to the end of December, and by just 2.2 per cent over the year - pretty much the same rate as for the past two years.

It compares with the rise in consumer prices over the year of just 1.8 per cent. If prices aren’t rising by much, it’s hardly surprising that wages aren’t either. But we got used to wages growing by a percentage point or so per year faster than consumer prices and, as you see, last year they grew only 0.4 percentage points faster.

It’s this weak “real” wage growth that’s puzzling and worrying economists and p---ing off workers. Real wages have been weak for six or seven years.

So why has real wage growth been so much slower than we were used to until 2012-13? Various people, with various axes to grind, have offered rival explanations – none of which they’ve been able to prove.

One argument is that real wage growth is weak for the simple and obvious reason that the annual improvement in the productivity of labour (output of goods and services per hour worked) has also been weak.

It’s true that labour productivity has been improving at a much slower annual rate in recent years. It’s true, too, that there’s long been a strong medium-term correlation between the rate of real wage growth and the rate of labour productivity improvement.

When the two grow at pretty much the same rate, workers gain their share of the benefits from their greater productivity, and do so without causing higher inflation. But this hasn’t seemed adequate to fully explain the problem.

Another explanation the Reserve Bank has fallen back on as its forecasts of stronger wage growth have failed to come to pass is that there’s a lot of spare capacity in the labour market (high unemployment and underemployment) which has allowed employers to hire all the workers they’ve needed without having to bid up wages. Obviously true, but never been a problem at other times of less-than-full employment.

For their part, the unions are in no doubt why wage growth has been weak: the labour market "reforms" of the Howard government have weakened the workers’ ability to bargain for decent pay rises, including by reducing access to enterprise bargaining.

But this week the Productivity Commission included in its regular update on our productivity performance a purely numerical analysis of the reasons real wage growth has been weak since 2012-13. It compared the strong growth in real wages in the economy’s “market sector” (16 of the economy’s 19 industries, excluding public administration, education and training, and health care and social assistance) during the 18 years to 2012-13 with the weak growth over the following six years.

The study found that about half the slowdown in real wage growth could be explained by the slower rate of improvement in labour productivity. Turns out the weaker productivity performance was fully explained by just three industries: manufacturing (half), agriculture and utilities (about a quarter each).

A further quarter of the slowdown in real wage growth is explained by the effects and after-effects of the resources boom. Although the economists’ conventional wisdom says real wages should grow in line with the productivity of labour, this implicitly assumes the country’s “terms of trade” (the prices we get for our exports relative to the prices we pay for our imports) are unchanged.

But, being a major exporter of rural and mineral commodities, that assumption often doesn’t hold for Australia. The resources boom that ran for a decade from about 2003 saw a huge increase in the prices we got for our exports of coal and iron ore. This, in turn, pushed the value of our dollar up to a peak of about $US1.10, which made our imports of goods and services (including overseas holidays) much cheaper.

This, of course, was reflected in the consumer price index. When you use these “consumer prices” to measure the growth in workers’ real wages before 2012-13, you find they grew by a lot more than justified by the improvement in productivity.

In the period after 2012-13, however, export prices fell back a fair way and so did the dollar, making imported goods and services harder for consumers to afford. So there’s been a sort of correction in which real wages have grown by less than the improvement in labour productivity would have suggested they should. Some good news: this is a one-time correction that shouldn’t continue.

Finally, the study finds that a further fifth of the slowdown in real wage growth is explained by an increase in the profits share of national income and thus an equivalent decline in the wages share.

Almost three-quarters of the increase in the profits share is also explained by the resources boom. It involved a massive injection of financial capital (mainly by big foreign mining companies, such as BHP) to hugely increase the size of our mining industry – which, as the central Queenslanders lusting after Adani will one day find out, uses a lot of big machines and very few workers. Naturally, the suppliers of that capital expect a return on their investment.

But harder to explain and defend is the study’s finding that more than a quarter of the increase in the profits share is accounted for by the greater profitability of the finance and insurance sector. Think greedy bankers, but also the ever-growing pile of compulsory superannuation money and the anonymous army of financial-types who find ways to take an annual bite out of your savings.

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Zero net carbon choice: do we want to be losers or winners?

You may regard economists as a dismal lot, always reminding us of the cost of this or the risk of that. But there’s one prominent economist with a much more positive story to tell.

Professor Ross Garnaut is more prophet than gloomy economist, a man with the vision of a better future that our politicians have lost as they squabble over votes.

The Morrison government trembles at the thought of the Paris agreement’s goal of achieving zero net carbon emissions by 2050. All it can see is the need for higher taxes and the loss of jobs in coal mining. Garnaut, by contrast, sees a golden opportunity for us to shift from an industry in terminal decline to a new set of industries with bright prospects in the low-carbon world that’s coming.

Garnaut foresees that, if we rise to the challenge of climate change, we "will emerge as a global superpower in energy, low-carbon industry and absorption of carbon in the landscape".

This vision is set out in his latest book, Superpower, which seems to offer something for everyone. Do you regret the decline of manufacturing? Garnaut sees how we could give it a new lease on life.

Have you always thought that, rather than sending our minerals off for further processing abroad, we should do it ourselves? Garnaut sees how we can.

With climate change making the land hotter, drier and more prone to bushfires, do you fear for the future of farming? Garnaut sees the bush getting a whole new source of income and activity.

Do you fear that, with the decline of coal mining, regional Australia will be left even further out of the economic action? Garnaut see all the new industries created by the world’s move to renewable energy being located in the regions.

Of course, as the author of two government reports on our response to climate change, Garnaut has form as a prophet. In his first report in 2008, he relied on scientists’ advice to predict that "fire seasons will start earlier, end slightly later, and generally be more intense. This effect increases over time, but should be directly observable by 2020."

On the other hand, Garnaut now admits that even his second report, in 2011, has been overtaken by events. Then, he calculated that the cost of moving to renewable energy would come early and reduce our rate of economic growth for many years before it was eventually outweighed by the benefits of climate change avoided.

Now, he sees that the move to renewable energy won’t cost a lot, low-carbon electricity will be cheaper and will give us major new export opportunities. These more positive benefits will come earlier than the benefit of less climate change.

The cost of moving to all-renewable electricity has been transformed by two things. First, the huge reduction in the cost of solar panels and lesser falls in the cost of wind turbines and batteries.

Second, by the fall in global interest rates to record lows, which seem likely to persist. Whereas much of the cost of coal-fired electricity comes from the cost of the coal, with solar and wind power almost all of the cost comes from setting up the system – sun and wind are free. Lower interest rates mean the capital cost is much reduced.

So far, a chunk of Australia’s prosperity derives from our huge natural endowment of coal and gas. Now Garnaut has realised that, relative to the size of our population, Australia is more richly endowed with sun and wind than any other developed country – or our Asian neighbours.

So zero-emissions electricity will be cheaper to produce (though we may have to pay more in transmission costs). More significantly, our carbon-free power will be much cheaper than other countries’.

Carbon-free electricity is the key to our efforts to achieve zero net emissions overall, and to our various opportunities to profit from the world’s move away from fossil fuels. Our transport emissions will be slashed by moving to electric vehicles and increased use of public transport.

The scope for exporting our electricity through submarine cables – or via tankers of electrolysis-produced hydrogen – is limited. But this will now make it economic to further process alumina, iron ore, silicon and ammonia before we export them. That processing is best done adjacent to the mine site.

At present, plastics and many chemicals used in manufacturing are produced from fossil fuels. But we will have more plentiful supplies of (renewable) biomass – plant material – than many other countries, which we can use to produce plastics and chemicals for ourselves and for export.

The "net" in zero net emissions implies that the world will still be emitting some carbon dioxide, but these emissions will be offset by "negative emissions" as atmospheric carbon is captured and sequestered in soil, pastures, woodlands, forests and plantations.

Guess what? Few countries have more scope for "natural climate solutions" such as carbon farming than we do. We need research to improve the measurement of carbon capture, but we have so much scope that, after meeting our own needs, we could sell carbon credits to the rest of the world. This could be a new rural industry, much bigger than wool.

To maximise our chances of benefiting from the move to a low-carbon world, however, we have to get to zero net emissions sooner than the other rich countries, not later.

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The great drawback from 27 years of economic sunshine

Talk about ingratitude. It’s enough to make a grown economist cry. The nation’s dismal scientists labour mightily to produce almost three decades of continuous economic growth, and few people care.

In April this year a venerable crowd called CEDA – the Committee for Economic Development of Australia, the gentlepersonly end of big business – conducted an online survey of almost 3000 people from all states, asking for their thoughts on the economy.

Asked whether they’d gained from 26 years of uninterrupted economic growth – actually, it’s now ticked up to 27 years – only 5 per cent said they’d gained a lot, with 40 per cent admitting they’d gained “a little”.

That left 40 per cent saying they’d gained nothing and 11 per cent who didn’t know. This is deeply shocking for most economists, who hold as their highest article of faith the belief that the public is crying out for unceasing and rapid growth in the size of the economy – by which they mean an ever-rising material living standard.

But if you and I gained little from all the economic growth, who do we think gained a lot? Well, 74 per cent thought large corporations had, but only 8 per cent thought small and medium-sized businesses had.

Just over half of us thought foreign shareholders gained a lot, whereas only 31 per cent thought Australian shareholders did.

Almost three-quarters of us thought senior executives had gained a lot, a third thought white-collar workers did well, and only 12 per cent thought blue-collar workers did.

These answers don’t add up. They reveal that the public’s understanding of how the economy fits together is confused.

While it’s probably true that big businesses are, on average, more profitable than smaller businesses, it’s a mistake to think big business has been coining it over the past three decades, with most of small business struggling. Were that true we’d have heard a lot more howls of complaint.

It’s true that our mining companies did exceptionally well from the resources boom, and that those companies are about 80 per cent foreign owned, but mining accounts for only 6 per cent of the economy. Looking overall, foreign owners would account for more like a third of businesses. And it’s wrong to think foreign shareholders get a better deal than local shareholders.

People often forget that, when you trace it through, the shares in Australia’s big listed companies are owned mainly by Australians with superannuation and other savings for retirement. So, if big companies have done well over recent decades, that means yours and my super balances are a lot higher than they were. This not a gain?

It’s true that the incomes of senior executives have grown a lot faster than the rest of us over recent decades. But with a workforce of 12.6 million, that’s just a relative handful. Say there are 400 big companies. If each of those has 10 people on million-plus salaries, that’s just 4000 of them.

Make it 40,000 and you’re still not talking about many people. Enough to be envious of but, arithmetically, not enough to make a big difference. Were we to take their millions off them, there wouldn’t be enough to give the remaining 12.6 million of us much more than a small pay rise.

In other polling, many people – even many West Australians – say they have nothing to show for the much-trumpeted resources boom. Do you remember the four or five years before 2015 when the dollar was worth a bit less or a bit more than $US1? It was up there because of the resources boom. And, whether or not they realise it or remember it, the many people who took the opportunity to go on an overseas holiday or three were getting their cut from the boom.

What’s the bet all those people with seniors cards, paying only nominal amounts to use public transport, think they’ve gained little over the decades? The aged have done a lot better, mainly because of changes made by the Howard government. And that’s before you count the rising value of their homes and investment properties.

It’s the young who are much more justified in lacking gratitude.

Speaking of which, most people don’t get the point when reminded of our 27 years of uninterrupted economic growth. It doesn’t mean we’ve had twice the growth other countries have had, and so should all be rolling in it. We’ve had more, but not a huge amount more.

No, what it really means is that the others have had three or so severe recessions in that time – including the Great Recession – and we haven’t.

The one great drawback of going for so long without a recession is that so many people have no experience of how much harm and hurt they cause – how depressing they are – while others have forgotten it.

Still, voters have precious little gratitude to give politicians and bureaucrats, and absolutely none for what amounts to the absence of something that would have been terrible. And anything good that happens to us, we soon take for granted.

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Services are taking over the economy – despite the politicians

One test of whether our political leaders are looking to the economy’s future or clinging to its past is whether they show an understanding that most of our future lies in the services economy.

Whether they hanker for an economy where most people earn their living by growing things, digging things out of the ground or making things.

Probably only the dearly departed Malcolm Turnbull passes this test, with his early enthusiasm for innovation and agility. Kevin Rudd said he didn’t want to be the leader of a country that didn’t make things. Scott Morrison took a lump of coal into the Parliament to show where his allegiances lay.

But as the Organisation for Economic Co-operation and Development reminds us in its latest report, the shift from producing goods to performing services is fundamental to the process of economic development.

Every country’s economy starts on the economic development journey with most people working on the land, and others in mines. That’s where we were in the 19th century. About a hundred years ago, the great migration from the country began, with more and more people moving to the city to work in factories.

By 1971, employment in manufacturing had reached 1.4 million workers. Manufacturing’s share of total employment in Australia reached 25.5 per cent a little earlier in 1966.

But from that period on, employment in manufacturing began to decline, both in absolute numbers and as a share of the total.

It – and employment in the other goods industries: agriculture and mining – declined as a share of the total simply because employment in the services sector grew much faster.

So, for at least for the past 50 years, it’s services that have been going up while goods industries have been going down. That’s true whether you look at shares of total employment or shares of total production (gross domestic product).

When you turn to the absolute numbers of workers, they’ve been declining in agriculture for more than a century. Today, just 325,000 people work on the land.

In manufacturing, they’ve been falling since 1971, to be down to 980,000 today.

Mining employment got a fillip from the resources boom, but even its job numbers have resumed their decline since 2013, and are now down to 245,000 – or just 2 per cent of our total employment of 12.6 million.

There’s nothing peculiarly Australian about this move from farming to manufacturing to services. You can see just the same progression in other rich economies and in “emerging” (that is, rapidly developing) economies.

It’s been unfolding before our eyes in China since it began opening its economy to the world in the late 1970s. It was all the people leaving its farms to work in city factories that, a few years ago, took the proportion of the world’s population living in urban areas to more than half.

Returning to Oz, don’t get me wrong. Some of us will always be working in the goods part of the economy. That’s particularly true of Australia because, though we’ve never been great shakes at manufacturing, we have had, and will continue to have, a comparative advantage in agriculture and mining, relative to other countries.

Note this: though the number of people working in the three parts of the goods sector has been falling, that doesn’t mean we’re growing less food or digging fewer minerals. Our annual production of food and minerals and energy is greater than ever. Even in manufacturing, our annual production has been falling only since 2008.

How can production go up while employment goes down? Easy. Increased productivity of labour caused by automation – technological advance. The use of more and better machines has made farming, mining and manufacturing more “capital-intensive” and so less “labour-intensive”.

That’s the thing about the goods side of the economy: it’s relatively easy to use machines to replace men (and women). And this isn’t bad, it’s good – for two reasons. First, it’s helped make goods cheaper, thus making us more prosperous.

Second, it’s much harder to use machines to replace workers delivering services. Robots will change this to an extent, but by not nearly as much as the alarmists claim.

And it’s not hard to think of more services we’d like other people to do for us. That’s why total employment is higher than it’s ever been. And why further growth in services’ share of total employment and production is inevitable and inexorable.

Where will the new jobs be coming from? That's where.

The OECD report tells us that, in 2014, the goods sector’s share of production was down to 17 per cent (agriculture 3 per cent, mining 6 per cent, manufacturing 8 per cent), with the services sector’s share up to 83 per cent – about average for the OECD.

Within services, the biggest industries are: business services, 14 per cent of GDP; wholesale and retail trade, 10 per cent; financial services, 9 per cent; construction, 8 per cent; health and aged care, 7 per cent; education 5 per cent and defence and public administration, 5 per cent.

A favourite argument the goods industries use to exaggerate their importance to the economy is to point to their higher share of exports (a widget sold to a foreigner is more virtuous than one sold to a local, they claim).

A third of all our agricultural production is exported. For manufacturing it’s more than a quarter (bet you didn’t know that) and for mining it’s more than 90 per cent. For services it’s a mere 11 per cent.

This means that, as usually measured, agriculture contributes 8 per cent of total exports; mining, 40 per cent, manufacturing 26 per cent, and services, 26 per cent.

Education of overseas students is now our third biggest export, after iron ore and coal. Tourism is the other big one.

But the OECD points out that the goods we export have inputs of services embedded within them. Allow for this and agriculture’s share of total export “value-added” drops to 5 per cent, mining’s to 30 per cent and manufacturing’s to 13 per cent, while services’ share rises to an amazing 52 per cent.

Services are taking over the economy. Live with it.

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Turns out productivity's been fine all along

What a joke. A scholarly article in Treasury's latest Economic Roundup has admitted that all the years of handwringing over our poor productivity performance was just jumping at shadows.

Turns out all the angst was caused by not much more than the figures being distorted by the mining industry's construction boom.

This after our top econocrats gave speech after speech urging "more micro reform" to improve productivity and keep living standards rising. (They'd have advocated more reform even if productivity was improving at record rates; its supposed weakness was just a convenient selling proposition.)

Meanwhile, the business lobby groups, led by the Business Council of Australia, claimed – without any evidence – the supposed weakness had been caused by the "reregulation" of wage fixing under Labor's evil Fair Work changes, and demanded the balance of bargaining power be shifted yet further in favour of employers. (A claim even the Productivity Commission wasn't convinced by.)

Even at the time, it seemed the contortions of the mining industry during the decade-long resources boom were a big part of the story, but that didn't stop people who should have known better going into panic mode.

"Despite concerns", the paper by Simon Campbell and Harry Withers, says with masterful understatement, "Australia's labour productivity growth over recent years is in line with its longer-term performance.

"In the five years to 2015-16, labour productivity in the whole economy has grown at an average annual rate of 1.8 per cent.

"This compares to an average annual rate of 1.4 per cent over the past 15 years, and 1.6 per cent over the past 30 years," it says.

Let's take a step back. Productivity compares the quantity of the economy's output of goods and services with the quantity of inputs of resources used to produce the output.

When output grows faster than inputs – as it does most years – we're left better off. This improvement in our productivity is the overwhelming reason for the increase in our material standard of living over the years and centuries.

Productivity can be measured different ways. The simplest (and least likely to be inaccurate) way is to measure the productivity of labour: growth in output per worker or, better, per hour worked.

Labour productivity improvement is caused by two factors. The first is by increases in the ratio of (physical) capital to labour used in the economy.

This known as "capital deepening" – translation: giving workers more tools and machines to work with, which makes them more productive.

The second driver of labour productivity is improvements in the efficiency with which labour inputs and capital inputs are used, arising from such things as improved management practices. This is known as MFP – multi-factor productivity.

In recent years the figures have shown multi-factor productivity growth to be zero or even negative, causing great concern among some economists, including the Productivity Commission.

But Campbell and Withers argue this focus on MFP is misplaced. They remind us that MFP is calculated as a residual (the product of a sum), meaning its likelihood of mismeasurement is high.

And they criticise the conventional view that physical capital should grow no faster than output – known as "balanced growth" - because capital deepening is an inferior source of productivity improvement to MFP.

People take this view because (making the unrealistic assumption that the economy is closed to transactions with foreigners) increased investment in physical capital must come at the expense spending on consumption.

The authors point out that achieving improved MFP isn't costless, while the price of capital goods (most of which are imported) has fallen persistently relative to the price of consumption goods.

"This has allowed Australia to sustain its high rate of capital deepening without forgoing ever higher levels of consumption," they say.

Actually, they say, our economy has never fitted the "balanced growth" story. Of the 30-year average of 1.6 per cent annual growth in labour productivity, MFP contributed only 0.7 percentage points, while capital deepening contributed 0.9 points.

Next the authors examine the causes of the ups and downs in labour productivity improvement overall by breaking the economy into six sectors: agriculture, mining, manufacturing, utilities, construction and services (everything else).

They find that labour productivity in agriculture is now 2 1/2 times its level in 1989, but it's too small a part of the economy – 2.5 per cent – for this to make much difference to the economy-wide story.

The utilities sector showed strong productivity growth until the turn of the century, before steadily declining through to 2011-12, mainly because of one-off developments such as the building, then mothballing of many desal plants.

The story of mining is well-known: its productivity fell because of the delay between companies hiring more workers to build new mines and gas facilities and that extra production coming on line. Since 2012-13, however, mining productivity has shot up. What a surprise.

Productivity in manufacturing and construction has grown at similar rates to the economy overall, as has productivity in the services sector (hardly a surprise since services now account for 70 per cent of gross domestic product).

Over the past five years, more than half of our total labour productivity improvement was attributable to the services sector, compared with about a quarter attributable to mining.

Apart from productivity improvement in the various sectors, overall productivity can be affected when changes in the industry structure of the economy cause workers to shift from lower-productivity sectors to higher-productivity sectors, or vice versa.

Because mining, being highly capital-intensive, has by far the highest level of labour productivity, the authors say it's really only when workers move in or out of mining that structural change has much effect on economy-wide productivity.

"These movements of labour into and out of mining have been the key driver behind the fluctuations in ... aggregate labour productivity growth," the report concludes.

Now they tell us.

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Higher employment our payoff for avoiding recession

When Boris Johnson, Britain's Foreign Minister, visited Oz lately, he implied that our record 26-year run of uninterrupted economic growth was owed largely to the good fortune of our decade-long resources boom.

Johnson, no economist, can be forgiven for holding such a badly mistaken view – especially since many Australian non-economists are just as misguided.

They betray a basic misconception about the nature of macro-economic management and what it's meant to do.

It's clear that Johnson, like a lot of others, hasn't understood just why it is that 26 years of uninterrupted growth is something to shout about.

It's not that 26 years' worth of growth adds up to a mighty lot of growth. After all, most other countries could claim that, over the same 26-year period, they'd achieved 23 or 24 years' worth of growth.

No, what's worth jumping up and down about is that little word "uninterrupted". Everyone else's growth has been interrupted at least once or twice during the past 26 years by a severe recession or two, but ours hasn't.

That's the other, and better way to put it: we've gone for a record 26 years without a severe recession.

But now note that little word "severe". As former Reserve Bank governor Glenn Stevens often pointed out, we did have a mild recession in 2008-09, at the time of the global financial crisis, and earlier in 2000-01.

So, yet another way to put the Aussie boast is that we've gone for a period of 26 years in which the occasional increases in unemployment never saw the rate rise by more than 1.6 percentage points before it turned down again.

What you (and Boris) need to understand about macro-economic management is that its goal isn't to make the economy grow faster, it's to smooth the growth in demand as the economy moves through the ups and downs of the business cycle.

This is why macro management is also called "demand management" and "stabilisation policy". These days, the management is done primarily by the Reserve Bank, using its "monetary policy" (manipulation of interest rates), though both the present and previous governor have often publicly wished they were getting more help from "fiscal policy" (the budget).

When using interest rates to smooth the path of demand over time, your raise rates to discourage borrowing and spending when the economy's booming – so as to chop off the top of the cycle – and you cut rates to encourage borrowing and spending when the economy's busting – thereby filling in the trough of the cycle.

This is why the economic managers find it so annoying when the Borises of this world imagine that the decade long resources boom – the biggest we've had since the Gold Rush – must have made their job so much easier.

Just the opposite, stupid. Introducing a massive source of additional demand in the upswing of the resources boom made it that much harder to hold demand growth steady and avoid inflation taking off.

But then, when the boom turned to bust, with the fall in export commodity prices starting in mid-2011, and the fall in mining construction activity starting a year later, it became hard to stop demand slowing to a crawl.

We're still not fully back to normal.

This is why the macro managers' success in avoiding a severe recession for 26 years is a remarkable achievement, and one owed far more to their good management than to supposed good luck (whether from China or anywhere else).

But what exactly is the payoff from the achievement? Twenty-six years in which many fewer businesses went out backwards than otherwise would have.

Twenty-six years in which many fewer people became unemployed than otherwise, and those who did had to endure a far shorter spell of joblessness than otherwise.

The big payoff from avoiding severe recessions – or keeping them as far apart as possible – is to avoid a massive surge in long-term unemployment that can take more than a decade to go away – and even then does so in large part because people give up and claim disability benefits or become old enough to move onto the age pension.

Dr David Gruen, a deputy secretary in the Department of the Prime Minister and Cabinet, has demonstrated that, though the US economy had a higher proportion of its population in employment than we did, for decades before the global crisis, since then it's been the other way around.

"The key lesson I draw from this comparison is that the avoidance of deep recessions improves outcomes in the labour market enormously over extended periods of time," he concluded.

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We've slowed a lot, but we're not about to go backwards

There's no denying the economy has slowed down, by far more than we were expecting. But don't conclude it's likely to subside into recession any time soon.

This week's national accounts for the March quarter, from the Australian Bureau of Statistics, show real gross domestic product grew by a pathetic 0.3 per cent during the quarter, and by just 1.7 per cent over the year to March. This compares with its "potential" annual growth rate of 2.75 per cent.

This time last year, the government's budget forecast was for growth averaging 2.5 per cent in the financial year just ending, accelerating to 3 per cent in the coming year.

So what's gone wrong? And why is it unlikely get a lot worse?

First point: don't think the economy's running down like a battery-powered toy. Looking back over the past four quarters, we see OK growth of 0.7 per cent in the June quarter of last year, then a contraction of 0.4 per cent, then super-strong growth of 1.1 per cent and now weak growth of 0.3 per cent.

This unnatural, saw-tooth pattern says some transactions may have been recognised in the wrong quarter. For instance, investment spending by federal and state public corporations leapt by 37.8 per cent in the December quarter, but then contracted by 20.9 per cent in the March quarter.

Neither figure should be taken literally.

Two major drivers of activity at present are home building and exports of coal and iron ore. Both have been disrupted by unusual weather that's not been smoothed away by normal seasonal adjustment. Climate change?

Home building has been growing strongly for several years, but it contracted by 1.2 per cent in September quarter and by 4.4 per cent in the March quarter. Most of this is explained by unusually wet weather in some parts of the country.

The volume (quantity) of exports was up 2 per cent in the June quarter, then slowed to growth of 1.4 per cent, then leapt by 3.7 per cent and now has actually fallen by 1.6 per cent.

Much of this volatility is explained by extreme weather disrupting shipping carrying coal from Queensland or iron ore from Western Australia.

We could expect the figures for the present quarter to be boosted by a catch-up from the weak March quarter – were it not for the further disruption in April and May we know has been caused by Cyclone Debbie.

Note that a sudden build-up in business inventories contributed 0.4 percentage points to growth in the March quarter. Much of this was a jump in mining industry stockpiles, suggesting a lot of coal was produced, but couldn't be shipped.

But to explain much of the quarter-to-quarter volatility in GDP growth in terms of misallocation and wild weather doesn't alter the fact that, when you add up the four quarters, you get only to utterly weak annual growth of 1.7 per cent.

One major component of growth that's unlikely to be affected by either factor is consumer spending. It's been unusually weak in all quarters bar December, growing by a pathetic 1.3 per cent over the year to March.

And this despite households cutting back their rate of saving from 6.9 per cent of household income to 4.7 per cent over the year.

This weakness in consumption ain't hard to explain: growth in household income has been held back by weak growth in employment and, more particularly, negligible growth in real wages, notwithstanding a 1.2 per cent improvement in the productivity of labour over the year.

Real labour costs per unit – a measure of the race between real wages and labour productivity – fell 1.7 per cent in the quarter and 6.3 per cent over the year to March.

Wanna know why the economy's growth is so weak? You won't find a more powerful explanation than that.

Remember, however, that the weakness isn't spread equally across the country.

State final demand is a poor substitute for gross state product, but the best we get each quarter. Across the whole economy, domestic final demand also grew by 1.7 per cent over the year to March.

But state final demand grew by 4.5 per cent in Victoria, 3.3 per cent in South Australia and Tassie, an above-par 1.9 per cent in NSW, and a below-par 1.6 per cent in Queensland.

Now get this: in Western Australia, final demand contracted by 6.6 per cent. So the West is still bearing the brunt of the bust in the mining construction boom. This explains a fair bit of the weakness in the national average.

The West's contraction in the March quarter was just 0.2 per cent, however, suggesting the inevitable end to its contraction phase isn't far off. That's the first reason things won't continue weakening nationwide.

As part of that, the long-running fall in mining investment spending must also be within a few quarters of ending. You need to be good at arithmetic to see that, when our focus is on rates of growth, "the removal of a negative is a positive".

The housing construction boom has a few more quarters to run, and strong grow in infrastructure spending is in the pipeline.

But much depends on what happens to real wages. Certainly, the government's forecast of economic growth returning to our potential growth rate of 2.75 per cent in 2017-18 as a whole, rests heavily on a resumption of real growth in wages.

To the extent the present weakness in wage growth is merely cyclical, wages will recover soon enough. This is hardly the wildly optimistic expectation that some, who've forgotten the economy moves in cycles, have claimed.

But to the presently unknown extent that the weakness in wage growth has deeper, structural causes, we won't get back to a decent rate of growth until the government acts to fix the problem.

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How politicians use claims about 'jobs' to mislead us

What's the four-letter word politicians of both stripes most use to bamboozle voters? Jobs. Or, as Neville Wran, former NSW premier and never given to understatement, used to say Jobs, Jobs, Jobs.

Economists and business people worship at the shrine of Growth because it raises their material standard of living. Materialism is the god of our age.

But growth is rarely what the pollies try to sell the public on. No, what presses the right button with ordinary folk is jobs.

Just as most of us don't know much about art, but know what we like, so most of us don't know much about economics, but do know there's an eternal shortage of jobs. We can just never hope to have enough of them.

So the sleaziest, most obviously self-aggrandising business person knows to say about whatever money-making project they want permission to undertake that it will create loads and loads of new jobs.

No matter what damage your scheme would do to the surrounding environment – and thus to the prospects of other industries – nor how great the risk you'll skip town if it's not working out, promise jobs and you're already half way in the door.

You can always find a friendly economic consultant who, for a small consideration, will do some modelling of your proposition and produce a generous – even exaggerated – estimate of the many thousands of jobs your plan will generate. Directly and, not forgetting, indirectly. Thousands.

Then there's a high chance government politicians will take up your cause, accepting without question or qualification you inflated job estimates, and castigating all those who lack the vision to see how much your scheme will contribute to the community's wellbeing (not to mention their re-election).

This, among many other instances, is the story of the resources boom, which our leaders applauded all the way and made little effort to control.

Think of all the jobs created. The main price we paid was that the dollar, caused by the boom to stay way too high for too long, prompted a slab of our manufacturing sector to give up the struggle.

Perversely, the highly-publicised loss of jobs that followed has served only to reinforce the public's conviction that we can never have enough jobs and that anyone claiming to want to create a few should be welcomed without further question.

It's true, of course, that a healthy rate of growth in employment is the most important thing we should expect of our economy, given our growing population.

Trouble is, our uncritical obsession with jobs – any jobs – leaves us open to manipulation by business people and politicians with their own barrows to push.

Promoters of projects exaggerate the number of jobs they will create secure in the knowledge that politicians and the media will repeat their claims without bothering to check them.

And no one but no one will return a few years later to check the gap between what was promised and what was delivered.

With mining projects, too little is done to remind people that almost all the promised jobs are for the construction, not running the thing. As soon as the project's completed, the construction workers go back where they came from – often overseas – leaving the nearby towns as flat as a tack.

Many development projects require skilled workers. But workers with particular skills are usually in short supply, meaning the project doesn't create additional jobs for plumbers or whatever so much as create vacancies that have to be filled by attracting plumbers away from their existing jobs elsewhere.

Every dollar anyone spends has indirect, flow-on effects beyond what was originally spent on. But these indirect effects are hard to measure and easy to exaggerate.

My rule of thumb is that whenever you hear the promoters of projects talk about all the jobs to be created indirectly, they ain't to be trusted.

As you recall, the centrepiece of Malcolm Turnbull and Scott Morrison's "plan for jobs and growth" was their desire to cut the rate of company tax from 30 to 25 per cent over 10 years.

Last week the Senate agreed to cut the rate to 27.5 per cent for companies with turnover under $50 million a year.

Turnbull and Morrison have chosen to regard this a big win, and are already assuring us it will do wonders to encourage small and medium businesses to expand and create jobs.

ScoMo​'s demanding to know whether Labor would reverse the tax cut and spend the money on other things, such as education and health, accusing it of "playing cynical politics all along with no regard for the jobs and wages that are at stake".

Get it? Cutting company tax creates jobs; not cutting it doesn't. Nor does spending the money on education and health create jobs.

This is economic nonsense. ScoMo regards it as a self-evident truth that cutting taxes creates jobs whereas raising taxes destroys jobs. Unfortunately, no one's told the Scandinavians.

In fact, there's no empirical evidence of a relationship between countries' level of taxation and their success in creating jobs.

ScoMo's own Treasury modelling predicts that the full company tax cut would do almost nothing to increase employment.

Beware of politicians trying to sell propositions on the basis of all the jobs they'll create. They just know which of your buttons to press.

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Politicians addicted to the appearance of economic success

I realised Australian government was fast approaching peak fake when I read Laura Tingle of the Financial Review's revelation that Malcolm Turnbull's Snowy 2.0 announcement was timed to favourably influence the imminent fortnightly Newspoll result.

When our leaders progress from being mesmerised by opinion polls to trying to game them, that's when we know the country's in deep, deep trouble.

It's long been clear that, acting on their belief that "the perception is the reality", the political class – Labor and Coalition – has focused less on attempting to fix problems and more on being seen to be fixing them.

But trying to game the political polls takes faking it to a new level: being seen to be seen to be trying to fix things.

It hardly needs saying that Snowy 2.0 was just a stunt, designed to excite the media and portray Turnbull as the great Nation Builder, while being no more than a feasibility study of a scheme that's probably not feasible, would end up costing at least double what we were told it would and, if it did eventuate, would come years too late to help with the energy crisis.

Since faking progress – conning the media into conning their voting customers – is a lot less time-consuming than pondering real solutions, you fill the vacuum by attacking your opponents' policies and record – even though such attacks rate sky-high on the hypocrisy Richter scale.

The pollies must know from their focus groups how this slagging off of opponents serves only to alienate the voters – and discourage most young people from taking any interest in politics.

But since they have little in the way of genuine policies to outline and explain, and have to keep burbling on about something, they don't seem able to stop themselves saying things that make the public change the channel.

Veteran Australian National University political scientist Professor Ian McAllister says trust in politicians is at its lowest than at any time since he started surveying it all the way back to 1969.

The other group whose perceived trustworthiness has declined badly are the media. Purely coincidental, I'm sure.

Sometimes I wonder if the pollies haven't turned the hostility between them up so high that it's no longer possible for any flesh-and-blood prime minister to survive for more than a year or two. When every day is a minefield, the sharpest leader will often put a foot wrong.

Certainly, the leadership instability we've seen since the ejection of John Howard shows no sign of abating. Whoever's leading the Coalition by the time of the next election – likely to be late next year because of last year's double dissolution – it's hard to see the Coalition surviving.

But who could convince themselves Bill Shorten's the man to restore stable government and the steady pursuit of good policy?

The superficiality of the way we're governed these days has made our politicians even more prone to short-term thinking, to the quick fix.

This explains the difficulty we're having getting both sides to accept a more disciplined, objective approach to the selection of infrastructure projects.

Infrastructure isn't something you use to improve the nation's productivity – its ability to move people and goods around efficiently; its accumulation of human capital – it's something you use to buy votes in particular electorates for particular reasons.

Speaking of getting a fix, pollies on both sides and levels of government have become addicted to announcing new mining projects, notwithstanding that the resources boom turned to bust long ago.

No one in their right mind would think now is a good time to build a mega coal mine in the Galilee Basin, but that hasn't stopped either the Turnbull government or the Palaszczuk government from offering huge subsidies to get one going.

And when politicians are waving their cheque books, you can usually find some enterprising miner – usually foreign and often tax-haven-based – confident of their ability to extract more from the government than the government extracts from them, even if history tells us most go out backwards.

There's a large element of con trick in mining projects. Their supposed attraction is the many jobs they're said to create. But these numbers are invariably hugely exaggerated and, in any case, relate only to the construction phase.

The one thing new mines don't do is create many jobs, barring the first few years.

What they do is create short booms and long busts for nearby towns. They're the bringer of all the joys of going cold turkey.

Viewed from the front, however, they look like Christmas. No wonder our vision-bereft politicians are addicted.

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Dig deep and you find the two-speed worm has turned

If you learn nothing else about the economy, remember that it moves not in straight lines but in cycles of good times followed by bad times, and bad times followed by good.

Nowhere is that truer than with our famed "two-speed economy".

For most of the decade to 2012, the resources boom meant that the two main mining states – Queensland and, especially, Western Australia – were growing much faster than the rest of the economy, which was being held back by the effect of the boom-caused high dollar on other export industries.

For the past few years, however, the roles have been reversed, with Queensland and WA now growing much more slowly than Victoria and NSW.

In an article in the latest Reserve Bank Bulletin, Thomas Carr, Kate Fernandes and Tom Rosewell argue that looking at what's been happening from state to state does much to help explain what the Australian Bureau of Statistics is telling us about developments in the national economy.

It also helps explain why Colin Barnett was thrown out of office so unceremoniously in WA last Saturday. Forget the politicos' obsession with the role of One Nation, the deeper explanation is economic.

After peaking at growth of 9.1 per cent in gross state product (the state equivalent of gross domestic product) in 2011-12 at the height of the mining boom, growth slumped to just 1.9 per cent in 2015-16.

There's nothing new about governments getting tossed out when their boom turns to bust. Especially when it becomes apparent what a hash you made of the good times, spending like there was no tomorrow.

To see how the two-speed worm has turned, consider this. In 2015-16, real GDP grew by 2.8 per cent for the year as a whole.

Within this, NSW's real GSP grew 3.5 per cent and Victoria's 3.3 per cent. By contrast, Queensland's grew 2 per cent and, as we've seen, WA's 1.9 per cent. (If you must know, South Australia's was 1.9 per cent and Tasmania's 1.3 per cent.)

What's that? You think WA's annual growth of 1.9 per cent doesn't sound all that terrible? It's being held up by the increased volume of WA's exports of iron ore and liquefied natural gas.

Trouble is, that generates next to no additional jobs. In mining, most of the jobs come from building new mines. When construction ends, the building workers go back where they came from (which ain't Perth).

Our trio from the RBA say that, over the period of the resources boom's build-up and let-down, differences between the performance of the states have been explained mainly by differences in private investment spending.

Consumer spending accounts for a far bigger slice of GDP/GSP than investment spending. And consumer spending has been much less variable between the states than investment spending – although it's been weakest in WA.

Consumers keep their spending reasonably smooth from year to year. They do this by cutting back their rate of saving when their incomes aren't growing fast enough.

We know from the national accounts that, while wages and employment growth have been weak in recent times, households have been progressively lowering their rate of saving to help keep their consumption steady.

That's normal cyclical behaviour. What we now know from the RBA trio's investigations, however, is that pretty much all the decline in the national saving ratio is explained by the actions of West Australians and Queenslanders. Ah.

Another national-level story we're familiar with says the economy is making a transition from mining-led to non-mining-led growth. So, as mining projects are completed and mining investment spending falls way back, we need strong growth in non-mining business investment to take its place.

The national accounts tell us it's not been happening. You've heard all the wailing and gnashing of teeth – not to mention speculation about causes – that's accompanied this bad news.

But here again the RBA trio's data diving shows the story in a different light. While mining investment was booming in the mining states, so was non-mining investment in those states. Confidence in one part of the local economy spills over to other parts.

While this was happening in the mining states, non-mining business investment in the other states was weak.

As the trio almost admit, this was part of the RBA's dastardly plan to ensure the mining boom didn't cause runaway inflation – as every previous commodity boom had.

While the politicians were letting foreign miners make all the crazy investments we now realise they did – leaving us with a gas-bonanza-caused energy crisis – the RBA had to "make room" for the miners by holding back the rest of the economy and, in particular, non-mining business investment.

It would have been willing to achieve this restraint by holding interest rates higher than otherwise needed but, fortunately for it, most of the work was done by the abnormally high exchange rate, which crunched manufacturers, tourism and foreign student education.

Back to the now. While the national figures reveal non-mining investment failing to show signs of recovery, the trio's data diving shows it's actually falling in the mining states (as lack of confidence in mining spills over) but recovering elsewhere.

In NSW, non-mining investment has grown at an average rate of 8 per cent a year for the past three years. In Victoria, it's been 4 per cent.

The obvious explanation for this recovery is the dollar's return to earth. But much of it's been in business services, including, in NSW, construction of new office buildings. In Victoria, there's been investment in wholesale and retail, with investment by manufacturers stabilising.

But the other private investment category – new housing – is also part of the story. Home building has fallen in the West (what a surprise), but grown strongly in NSW and Victoria.

It's surprising what you discover when you dig.

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