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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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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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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Now the transition phase is ending, wages can start rising

This year should see the end of the economy's protracted "transition" back to business as usual. You beaut.

Resources booms - or any other booms - are nice, but the subsequent busts are always hard. We'll know the bust is over when the fall in investment in mining construction - which began in late-2012 - tails off at the end of this year.

According to Reserve Bank governor Philip Lowe, we've already come 90 per cent of the way.

As a matter of simple arithmetic, the removal of this "negative contribution" to quarterly growth in gross domestic product will leave the figures a lot stronger.

This will be a triumph for the managers of our macro economy, particularly at the Reserve Bank.

Back in 2014, some of the biggest names in Australian economics were predicting that, in the absence of major reform leading to a huge boost in our productivity, we'd end up in recession.

To get back to normal we needed not only a big fall in our exchange rate from the heights it reached during the boom, but a period of weak wages growth to ensure the fall in the nominal exchange rate became a fall in our real exchange rate, thus yielding a lasting improvement in the international price competitiveness of our export and import-competing industries.

This is the bit the big-name economists didn't believe we'd pull off.

But we have. Which serves as a reminder that the weak wages growth we've experienced since mid-2012 isn't just some random bit of bad luck for workers, but a key part of the process by which the economy gets back to normal.

The economist who's long made a close study of Australia's commodity booms, past and present, and the problems they've caused when they bust, is Dr David Gruen, now deputy secretary, economic, of the Department of Prime Minister and Cabinet.

In a speech he gave last week, Gruen reviewed the progress of our transition phase.

He started by reminding us of just how big an "economic shock" to our economy the resources boom has been. The size of the improvement in our terms of trade (export prices relative to import prices) makes it easily the biggest sustained boom in our history.

Since their peak in September 2011, however, they've deteriorated by more than 30 per cent.

The boom in mining construction saw it increase from less than 2 per cent of GDP to a peak of about 9 per cent in 2012-13.

This resulted in something like a quadrupling in the mining industry's stock of physical capital, and a tripling in its production capacity, in the space of a decade.

"The largest investment was in liquefied natural gas production capacity, with Australia on track to overtake Qatar as the world's largest sea-based exporter of LNG," Gruen said.

The economic activity and employment that accompanied the investment boom caused a significant re-alloc​ation of labour across industries, but this has now been largely unwound as mining projects reach completion.

The improvement in the terms of trade caused sustained growth in real income per person (much of it coming in the form of lower prices for imports and overseas travel).

Since their peak in 2011, the terms of trade have subtracted from income growth by so much that, even with reasonable improvement in the productivity of labour, real gross national income per person has been falling.

"This is reflected in gradually falling real average earnings per hour over the past four years - for the first time in living memory," Gruen said.

With an end to the trend deterioration in the terms of trade now in prospect - they've been improving for the past three quarters - it shouldn't be long before real incomes start growing again, with the size of that real growth strongly influenced by the rate of improvement in labour productivity.

It's important to note that the unusual ease with which overall real wages have adjusted to, first, the boom and then the bust, is explained by the way relative wages in particular industries (relative to the economy-wide average wage) have behaved in a textbook-like fashion.

As the resources boom gathered strength from 2004, strong demand for labour in the resources, construction, and professional services sectors saw wages strengthen relative to those in other sectors.

Relative wages in healthcare and manufacturing stayed close to the economy-wide average, while relative wages in retail trade, and accommodation and food services, grew more slowly than the average.

But then, as the resources boom receded after 2011, wage growth in the resources, construction, and professional services sectors slowed to less than the average, enabling wages in other sectors to catch up somewhat.

Gruen expects this pattern to continue as the resources investment downswing runs its course.

"This sort of relative wage adjustment didn't occur in the [commodity booms of the] 1970s or early 1980s, and the result was significant increases in unemployment - an outcome we've succeeded in avoiding during the latest episode," he said.

So how come the big-name economists' forebodings proved misplaced?

I think they underestimated the extent to which the micro-economic reforms of the 1980s and '90s, combined with the improved "frameworks" for the conduct of macro-economic management, have made the economy more flexible - better able to roll with punches from economic shocks; less inflation-prone and unemployment-prone - and hence easier to keep growing at a reasonably stable pace.

In particular, they underestimated the way the moves to a floating exchange rate, an independent central bank and decentralised wage-fixing would help us cope with our periodic commodity booms.

In their enthusiasm to urge more micro reforms on us, they failed to realise how much we'd benefited from those we'd already made.

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Let's do our sums on mining's economic contribution

With Malcolm Turnbull desperate to keep burning coal for electricity, just how important is the mining industry to our economy? Short answer: not nearly as much as it wants us to believe, and has conned our politicians into believing.

Because people like me have spent so much time over the past decade and more banging on about the resources boom, we've probably left many people with an exaggerated impression of the sector's importance.

It's true that, thanks to a quadrupling in the value of its physical capital, mining now accounts for about 7 per cent of our total production of goods and services (gross domestic product), compared with less than 5 per cent in 2004, at the start of the boom.

But 7 per cent ain't all that much, and if you measure mining by how much of our workforce it employs, it's even less: 2 per cent.

That's just 230,000 people, about as many as are employed in the arts and recreation.

It compares with 300,000 workers in agriculture, 400,000 in financial services, 800,000 in accommodation and food services, 900,000 in manufacturing, almost a million in education, a million in construction, another million in professional services, 1.2 million in retailing and 1.5 million in healthcare.

Still think the economy revolves around mining?

How can an industry account for 7 per cent of our production but only 2 per cent of our jobs? Because it's so "capital intensive" - it uses a lot of expensive equipment, but not many humans.

Because it employs so few people directly, the industry is always paying "independent" economic consultants to estimate how many people it employs "indirectly" as dollars earned from mining are spent in other parts of the economy.

This is always a good way to impress judges - who know a lot about law, but little about economics - when you're trying to persuade them to let you despoil the environment.

It's true that money earned from mining has a "multiplier effect" when spent. But it's just as true of money earned from any other industry. Or money spent by the government.

Normally I'd be happy to defend an industry against the idea that it didn't contribute much because its capital intensity meant it directly employed few workers.

That's because what matters most is how much income the industry earns from its production. When that income is spent - by employees, suppliers, tax-receiving governments or profit-earning shareholders - jobs will be created somewhere in the economy.

In the case of mining, however, there's weakness in the argument. Our mining industry is about 80 per cent foreign-owned - mainly by BHP Billiton, Rio Tinto and Glencore - which, in econospeak, adds a huge "leakage" to the "circular flow of income" around our economy.

(Another leakage is that most of the heavy equipment the miners and natural gas producers use is imported.)

If most of the profits made by our (highly profitable) mining industry don't belong to us and end up being spent in some other economy, this greatly reduces the economic benefit we get.

Which makes it doubly important the mining companies are paying a fair rate of tax on their earnings in Oz.

Here, the industry often pays "independent" economic consultants to write reports showing what huge amounts of tax it pays.

But these usually rely on the legal fiction that the minerals royalties the miners pay to state governments are a tax. In economics, a tax is something you pay the government for nothing specific in return (if you are paying for something specific, it's a "user charge").

Royalties are a user charge. The miners are buying access to valuable mineral deposits owned by us. Royalties are levied on different bases but, overall, they're probably charging less than the minerals are worth.

So the miners shouldn't expect brownie points for paying for the minerals we hand over to them. The Rudd government did try to ensure we taxed their profits more fairly and adequately but, as you recall, the miners objected and so Tony Abbott abolished what was left of the tax.

But, whatever their profits, they're paying 30 per cent of them in company tax, right? Right in theory but, as we've realised, in practice not so much.

Our big foreign mining companies are heavily into minimising the tax they pay by moving profits offshore, claiming to do their "marketing" in Singapore, where the tax rate is lower.

All of which makes you wonder how well we do from our foreign-dominated mining industry, considering all the environmental and economic disruption we have to put up with.

But it's worse than that. Our politicians, state and federal, are so desperate to create the temporary appearance of progress and jobs that mining projects bring - and, no doubt, to say thanks for the generous political donations the miners make - that they often use the offer of hefty subsidies to attract them.

The subsidy comes in the form of governments building railways, ports and other infrastructure on the miners' behalf. (Not to mention the federal government's exemption of mining from paying the diesel fuel excise, worth billions a year.)

Take the Indian Adani company's proposed Carmichael coal mine in central Queensland, which is so huge it would lower the world price of coal, to the disadvantage all existing Australian coal miners.

Queensland's Newman government was so keen to use the project as proof of progress it offered Adani a "royalty holiday". Now the Turnbull government is offering a $1 billion-plus concessional loan in the name of developing Northern Australia.

Both the miners and the politicians indignantly deny the industry receives any subsidies. But that's not what the West Australian and Queensland treasuries say in their submissions to the Commonwealth Grants Commission, revealing how poor the mining companies keep them.

If the nation is ahead on the mining deal, it ain't by a lot.

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Mining makes pollies confused about demand and supply

Since almost all of us have lived in a market economy all our lives, you'd expect the effects of supply and demand on price would be well understood, particularly by anyone who managed to get themselves into Parliament.

In fact, however, our politicians on both sides have terrible trouble working out how supply works. Sometimes they tell us increasing supply will put downward pressure on price and sometimes they tell us it won't.

Turns out they're wrong on both counts.

When it comes to natural gas, Industry Minister Greg Hunt – like his predecessors Ian Macfarlane and Martin Ferguson who, purely by chance, have since gone on to jobs lobbying for the mining and gas industries – tells us the solution to the high price and looming "shortages" is for the Victorian and NSW governments to give gas companies free rein to do their fracking wherever they choose on the states' farmland.

Adding to the eastern states' production of coal seam gas would increase supply and thus put downward pressure on gas prices and avert the risk of shortages, they tell us.

This would be true if Australia – strictly, our eastern seaboard – had a closed market. If there was no international trade in gas.

But that's the trick the pollies and the business interests they want to help don't want to draw attention to.

There's been little change to the eastern states' demand for gas, nor decline in the supply of gas from Australian gasfields.

What's changed is the decision of our governments to allow foreign investors to set up several gas liquefaction plants near Gladstone in Queensland.

By doing so they opened a link between our closed gas market and the world market, where the world price of gas just happens to be a lot higher.

The inevitable result is our wholesale gas price has doubled to reflect the world price, our manufacturers are claiming to be "uncompetitive" at such a price and people are claiming to see shortages looming.

(As is typical in a resources boom, when our politicians see their job as complying with every demand coming from the miners in their greed-driven frenzy, we allowed too many liquefaction plants to be built and now none of them is making money. But that's a separate stuff-up.)

The point is, for as long as our governments allow local gas producers to charge us the world price (which I think they should), no amount of additional coal seam gas production would be sufficient to lower that world price.

Federal pollies of both colours bang on about reducing the restrictions on fracking because they're doing the bidding of their mates/generous party donors/future employers in the gas industry and because they want to draw attention away from the truth that they allowed domestic gas prices to rise and don't want to do anything to cut them.

There'll be no gas shortage as long as we pay the world price.

When it comes to the politicians' enthusiasm for constructing Adani's Carmichael coal mine in the Galilee Basin of central Queensland, however, they leave us with the impression its addition to world coal supply would have no effect on the world coal price (or global carbon emissions, for that matter).

But we're one of the world's biggest exporters of coal. And Carmichael would be one of the world's biggest mines.

So it couldn't help but push down the world price, relative to what it would otherwise be, to the detriment of all our existing coal producers and their employees, and government royalty and company tax collections.

The Queensland government is so keen to see the mine proceed ASAP it's willing to subsidise a rail line to a coastal port by $1 billion. Can you imagine what that would do to its net royalty revenues?

It claims the rail line isn't a subsidy because it's a loan (believe that if you like) and because the line will open up the Galilee Basin to other mines.

Should they emerge, however, the downward pressure on coal prices and tax receipts would be even greater.

All this says Australia has not much to gain and a lot to lose by pressing on with the development of one more coal mine.

At a time when the whole world needs to make the transition from fossil fuel to renewable energy as soon as we reasonably can, pushing down coal prices slows the process down by increasing the relative price disadvantage of renewables.

There seems to be something about political office in Australia that interferes with our pollies' economic reasoning powers. I can't think what it might be.

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Where the jobs will come from

It's a question doubting customers have been asking me through the whole of my career: but where will all the jobs come from? We worry about jobs, convinced there's never enough of them.

Whenever we're in a recession, with unemployment high and rising, people simply can't see how we'll ever get it down again.

In the more recent resources boom, a lot of people got jobs in faraway places helping to build new mines and natural gas facilities, but we knew that wouldn't last.

Mining now accounts for about 10 per cent of the value of the nation's production – gross domestic product – but it still employs only about 2 per cent of the workforce.

When the three foreign car makers announced in 2013 that they'd be ending Australian production later this year or next, the familiar cry went up: where will the new jobs come from?

It was a question I used to find hard to answer, but now I don't. When I started in this job more than 40 years' ago, there were 5.8 million people in the workforce. By now it's more than doubled to 11.9 million.

So the jobs did come, despite 40 years of worrying that they wouldn't. Where did they come from? I could work out from the figures how many came in which particular industries, but I'll skip to the bottom line: virtually all the extra 6 million jobs came from the services sector.

Where will the jobs be coming from in the years ahead? Same place. Indeed, they already are.

Our most recent worry has been where our economic growth would come from now coal and iron ore prices are falling and no new mining construction projects are taking the place of completing projects.

But the evidence is coming in. We're experiencing strong expansion in parts of the vast services sector, which is generating lots of extra jobs.

Whereas mining – and farming and, these days, even manufacturing – are capital-intensive, and so provide few jobs, service industries are labour-intensive, and so provide lots of 'em.

From a job-creating perspective, the trouble with physical things – "goods" – is that it's been relatively easy to use machines to replace workers, whereas you still need a lot of people to provide services, even when those people are given better machines to help them.

The other trouble with goods industries is that there's a limit to how many things – clothes, cars, fridges, laptops – you want to own. Time has shown there's almost no limit to the number and kinds of services we'd like others to perform for us.

Did you know there's such an occupation as "lactation consultant"? There used not to be, but there is now.

These are the reasons why almost all the extra jobs being created are in the services sector.

Last year, total employment grew by a very healthy 300,000 jobs, more than half of them full-time.
Research by Professor Jeff Borland, of the University of Melbourne, has found that more than 90 per cent of these jobs occurred in the private sector.

This private sector growth was concentrated in NSW and Victoria, whereas the growth in public sector employment was concentrated in Queensland and South Australia.

But where did the additional jobs come from? Fully a third – 100,000 – were in (the mainly private sector parts of) healthcare. Then came 75,000 in businesses providing professional and technical services, almost 50,000 in retailing, more than 40,000 in financial services and more than 30,000 in administrative and support services.

The thing to note about that list is that while some of those jobs would have been low-skilled, many – particularly those in professional services and healthcare – would have been high-skilled, well-paid and intellectually satisfying. But even the lesser-paid jobs would have been clean and safe.

So don't turn up your nose at services sector jobs.

And get this: the extra jobs went disproportionately to older workers. Although people aged 45 and above account for only 31 per cent of the overall workforce, they accounted for 57 per cent of the growth in jobs.

But wait, there's more. Though we keep hearing about the growth in the quantity of our mineral exports as the new mines come on line, we've heard far less about the growth in the quantity of our exports of services, particularly education and tourism. (We "export" services when foreigners come to Oz to receive them.)

Our services exports have benefited greatly from the fall in our dollar, which has made them cheaper to foreigners.

Last year, spending by international students on course fees, accommodation, living expenses and recreation grew by 13 per cent to more than $19 billion. Spending by foreign tourists in Australia rose by 11 per cent to almost $16 billion.

What's more, our lower dollar has encouraged many Aussies to take their holidays at home rather than abroad. We now have more tourism money coming in than going out.

You well know it was exports to China that did most to fuel the resources boom. What nobody's bothered to tell you is that it's China and its growing middle class that's doing most to boost our exports of education and tourism services.

Don't underestimate the contribution services are making to "growth and jobs".

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Resources boom not done yet

If you think the resources boom is all over bar the shouting, someone who ought to know begs to differ. He thinks the last phase of the boom is just getting started. But even he thinks the boom leaves us with stuff to worry about.

In a speech this week, Mark Cully, the chief economist of the federal Department of Industry and Science, says the resources boom actually consisted of three booms.

The price boom lasted for about eight years and peaked in 2011. The overlapping investment boom lasted for about six years, with $400 billion worth of resources projects. Overall, business investment spending peaked in the last quarter of 2012 at an astonishing 19 per cent of gross domestic product.

By now we're in the early stages of the production boom, making the whole thing more of a "super-cycle" than a common or garden boom.

We're well aware that resource prices are still falling from their 2011 peak and that mining investment spending is rapidly coming to an end. But, according to Cully, the production boom is set to last far longer than the others did.

As always, it's a story of global prices being determined by the interaction of global demand with global supply. World prices shot up because demand grew faster than supply could keep up with.

Eventually, however, the world's producers of resources such as iron ore, coking and steaming coal, liquefied natural gas and petroleum responded to the high prices in textbook fashion, desperately expanding their production capacity so as to cash in on the bonanza.

It took a while for that extra capacity to come on line. But, as the textbook predicts, once supply started catching up with demand prices started falling back. And, adding to the pressure for lower prices, world demand started to fall off.

So, isn't that the same-old, same-old end to the story of the boom? And if we get to the point where world supply actually exceeds world demand, doesn't that mean prices could have a lot further to fall?

Not if it's turns out to be true – as I and others have believed – that this commodity cycle is being driven more by a longer-term change in the structure of the global economy than by the usual shorter-term cyclical mismatch between supply and demand.

Many people see the resources boom as caused by the rapid development of China, whose economy is now growing more slowly. But Cully sees China as just the first act, with other countries to follow.

"Economic growth in the highly populated emerging economies of Asia will continue to be a defining theme of this century," he says.

Per-person consumption of energy and materials in most countries in Asia lags the developed nations by a large margin and so is almost certain to grow. As incomes rise and they attract infrastructure and commercial investment, Asia's consumption of resources will grow by volumes that far outweigh whatever's happening in the rich countries.

Iron ore and coking coal are used to make steel, of course. Cully says China's steel production is estimated to have reached a record last year. He expects it to fall in the short term but, over the medium term, to reach a new peak almost 10 per cent higher by 2020.

"This will be required for China to continue expanding its infrastructure networks, especially rail, build more housing and grow its capital stock," he says.

Then there's India. Its Ministry of Steel wants present production to be four times higher by 2025. It may not achieve that target, but this still suggests rapid growth.

There've been highly publicised falls in the world price of iron ore in recent times, but Cully expects it to remain low this year and next before rebounding over the medium term as higher-cost producers exit the market and demand continues to grow. Australia has some high-cost producers, but most are in other countries, leaving Rio Tinto and BHP Billiton as the world's lowest-cost producers.

Turning to steaming coal, Cully questions the environmentalists' optimistic belief that world demand for it is on the way out. More than 300 gigawatt (one billion watts) of coal-fired electricity generation capacity is being constructed or has been approved in developing countries.

"Barring major policy adjustments," he expects coal-fired power to remain a primary source of generation in China and India. Japan, South Korea and Taiwan are increasing their use of steaming coal, while Indonesia, Malaysia, Vietnam and Thailand are increasing by even more.

Australia is likely to play an important role in meeting this increased demand because our coal's higher energy content makes it more suitable for use in advanced generators. Cully expects our exports to have increased by 15 per cent by 2020, making us the world's largest exporter of steaming coal.

Finally, natural gas. Cully's team projects that our exports of natural gas will increase more than threefold to about 75 million tonnes a year in 2019-20. By that time Australia would be the world's largest exporter of gas.

The increased volume of gas exports is likely to be the principal driver of growth in Australia's export revenue. Looking across all the mineral commodities, increases in the volume (quantity) of exports are expected to outweigh further decreases in prices, so that the value of these exports (price times quantity) increases by about a third through to 2019-20.

So what could there be to worry about? Well, it's worth remembering that, although we're exporting more thanks to the resources boom, our share of global exports is actually falling. Other countries' exports must be growing faster than ours.

More concerning, while we've been becoming global export leaders in iron ore, coal and natural gas, our range of exports has become even less diversified than it was before the boom.

Considering how dependent we are on exporting fossil fuels, that ought to worry us more than it does.

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Interest rates to stay low, but lending curbs loom

With the Reserve Bank worried by fast-rising house prices, but the dollar coming down and the unemployment rate now said to be steady, can a rise in the official interest rate be far off? Yes it can.

On the face of it, last week's revised jobs figures have clarified the picture of how the economy is travelling. The national accounts for the March and June quarters show the economy growing at about its trend rate of 3 per cent over the previous year, which says unemployment should be steady.

And now the jobs figures are telling us the unemployment rate has been much steadier than we were previously told, at about 6 per cent.

If economic growth is back up at trend, we need only a little more acceleration to get unemployment falling. The Reserve is clearly uncomfortable about keeping interest rates at 50-year lows while rapidly rising house prices tempt an already heavily indebted household sector to add to its debt.

So, surely it's itching to remind us that rates can go up as well as down and, in the process, let some air out of any possible house-price bubble.

Well, in its dreams, perhaps, but not in life. Even if hindsight confirms the latest reading that the economy grew at about trend in 2013-14, the Reserve knows it can't last. Its central forecast of growth averaging just 2.5 per cent in the present financial year is looking safer, maybe even a little high.

The sad fact is that a host of factors are pointing to slower rather than faster growth in 2014-15, implying a resumption of slowly rising unemployment and no scope for even just one upward click in interest rates.

The biggest likely downer is the long-feared sharp fall in mining investment spending. To this you can add weak growth consumer spending, held back by weak growth in employment and unusually low wage rises.

Now add the point made by Saul Eslake, of Bank of America Merrill Lynch, that real income is growing a lot more slowly than production, thanks to mining commodity prices that have been falling since 2011.

Weak growth in income eventually leads to weaker growth in production, which, in turn, is the chief driver of employment. With the Chinese and European economies' prospects looking so poor, it's easy to see our export prices falling even faster than the authorities are forecasting.

Real gross domestic income actually fell in the June quarter, and Eslake sees it falling again in the September quarter.

Apart from the recovery in home building, pretty much the only plus factor going for the economy is the recent fall in the dollar, bringing relief to manufacturers, tourist operators and others.

But measured on the trade-weighted index, the Aussie is back down only to where it was in February, and since then export prices have fallen further, implying the exchange rate is still higher - and thus more contractionary - than it should be.

In other words, the usually strong correlation between the dollar and our terms of trade has yet to be restored. Why hasn't it been in evidence? Because our exchange rate is a relative price, affected not just by what's happening in Oz but also by what's happening in the economy of the country whose currency we're comparing ours with.

The Aussie has stayed too high relative to the greenback not because our interest rates have been too high relative to US rates, as some imagine, but because one of the chief effects of all the Americans' "quantitative easing" has been to push their exchange rate down.

As the US economy strengthens and the end of quantitative easing draws near - and, after that, rises in their official interest rate loom - the greenback has begun going back up. The prospects of it going up a lot further in coming months are good.

That's something to look forward to. But our exchange rate would have to fall a long way before it caused the Reserve to reconsider its judgment that "the most prudent course is likely to be a period of stability in interest rates".

But that still leaves the real risk of low rates fostering further rises in house prices, particularly in Sydney and Melbourne.

What to do? Resort to a tightening of "macro-prudential" direct controls over lending for housing. The restrictions may be announced soon, be aimed at lending for investment and even limited to borrowers in the two cities.

But though they'd come at the urging of the Reserve, they'd be imposed by the outfit that now has that power, the Australian Prudential Regulation Authority.

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Mining boom makes little sense

Conventional economic analysis assumes the behaviour of businesses is always rational but, in reality, the booms and busts that cause the ups and downs of the business cycle are driven by emotion more than rational calculation: unwarranted optimism, greed, impatience, short-sightedness and herd behaviour. Consider our resources boom.

The ideology of economic rationalism says private enterprise can do no wrong; ill-advised behaviour by business arises only through its rational response to distorted incentives created by the misguided interventions of governments.

This confers on the demands made by business a sanctity the captains of industry are quick to exploit. But their demands often aren't in the community's wider interest.

Now we're emerging from the decade-long resources boom it's easier to view the process with greater insight and make a more sober assessment of its costs and benefits.

What happened was a huge jump in the world prices of coal and iron ore as China's period of rapid economic development of heavy industry and infrastructure caused global demand to outstrip global supply.

The surge in China's demand caught the world's mining industry unprepared.

Like miners in other countries, our largely foreign-owned miners lapped up the huge increase in prices and profits.

But it didn't take long for greed ("the profit motive", if you prefer) and the irrational optimism that drives the world's entrepreneurs to take over, with companies seeking to exploit the high prices to the full by expanding their production capacity as much as possible as fast as possible.

What then kicked off was a multibillion-dollar race - between rival companies in a country, but also with the many companies in other countries, all expanding their capacity as fast as they could.

It takes a long time to build new mines and bring them into production. So the chances of your mine being completed in time to enjoy the super-high prices aren't great - the more so because it's essentially a self-defeating process: the more companies join the race and the harder they try to be among the first to complete, the sooner supply catches up with demand and prices start falling.

If mining companies were more rational, fewer would join the race. But companies are just as subject to herd behaviour as investors in a booming sharemarket. A mining chief who didn't join the comp would be subject to heavy criticism.

This is where the irrational optimism comes in. Each individual entrepreneur is in no doubt he'll be among the race's winners. We're gonna make a motza.

But while the miners are busy gearing up, their foreign customers are just as likely to be coming towards the end of their own boom in investment and construction. The inevitable result is that the global mining industry moves from a starting point of undercapacity to an end point of overcapacity.

This is the eternal story of mining. Only in passing is it ever in equilibrium; it's almost always in either under or oversupply - probably spending a lot more time over than under, the less profitable of the two conditions.

Now, this cycle isn't news to conventional economics, with its familiar "cobweb theorem" and "hog cycle" seeking to explain the phenomenon. But these models put too much of the blame on the unavoidable delays in increasing production, and too little on animal spirits.

And they don't prepare us for all the waste and inefficiency involved in a resources boom. In the miners' race to be first in and best dressed they compete furiously for resources, bidding up hugely the prices of labour, equipment and materials, and ending up with mines that cost them far too much to build.

They also develop lower-grade mineral deposits, the exploitation of which becomes uneconomic as soon as the world price drops back from its record heights.

In the aftermath of the boom, many acquisitions are written off, the chief executives who presided over these excesses get the chop and are replaced by bosses whose main skill is cost-cutting. They make speeches about how excessive Australian wages are.

Anyone who has followed the fortunes of our big three - BHP Billiton, Rio Tinto and Glencore Xstrata - will know just what I'm talking about.

In their race-driven frenzy to start new projects, the miners always portray themselves as impatient for God's will to prevail, with any politicians or community members who have doubts about allowing them to rip up the environment denounced as agents of the anti-progress devil.

In the aftermath of such booms we realise we should have refused to be rushed. Why does no economist ever warn us to be less short-sighted? Their faulty model.

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We've handled the resources boom surprisingly well

Are we in for big trouble in the aftermath of a misspent resources boom, or has the boom been over-hyped, leaving us in good shape to face the future?

This is a matter of debate among some of Australia's most prominent economists. Professor Ross Garnaut, of the University of Melbourne, advanced the former argument last year in his book Dog Days: Australia After the Boom, and Dr John Edwards, a fellow of the Lowy Institute and member of the Reserve Bank board, makes the counter-argument in his new book, Beyond the Boom.

This week Dr David Gruen, of Treasury, weighed into the argument in a speech written with help from Rhett Wilcox. Gruen took a middle position, agreeing with each man on some points and disagreeing on others. Appropriately, he was speaking at the annual conference of economists in Hobart. They enjoy that kind of thing.

Gruen strongly disagrees with Edwards' claim that the resources boom "hasn't been as important for Australian prosperity as widely believed", saying the boom was "one of the largest changes in the structure of our economy in modern times" which "generated the largest sustained rise of Australia's terms of trade ever seen".

"The result was that resources investment increased from less than 2 per cent of gross domestic product pre-boom to around 7.5 per cent in 2012-13, an increase, in dollar terms, from around $14 billion to more than $100 billion a year," he says. "This has seen an additional 180,000 workers employed in the resources sector since the boom began and will see the capital stock in the resources sector almost quadruple by 2015-16."

But Gruen disagrees with Garnaut's implication that the economy was not well managed during the boom. He notes that all previous commodity booms - including the rural commodity boom of the early 1970s - led to blowouts in wages and inflation, followed by recessions after the boom busted.

This time, however, wages have been well controlled and the rise in prices has rarely strayed far from the Reserve Bank's 2 per cent to 3 per cent target range. The boom in the resources sector has not led to excessive growth in the economy overall. Real GDP growth averaged 3 per cent a year over the decade to 2012.

Edwards supported his claim that the resources boom has not been as important for our prosperity as commonly believed by comparing this 3 per cent growth rate unfavourably with the 3.8 per cent annual rate achieved over the decade to 2002.

But Gruen counters by noting the earlier decade "saw above-trend growth as the economy recovered from the deep early-1990s recession, with unemployment falling from above 10.5 per cent to below 6 per cent over the course of that decade".

So why has the upside of the resources boom been handled so much better than in earlier commodity booms? Gruen gives much of the credit to three micro-economic reforms: the floating of the dollar in 1983, the move to letting the Reserve Bank set monetary policy (interest rates) independent of the elected government, formalised by Peter Costello in 1996, and the decentralisation of wage-fixing, largely completed by the Keating government before 1996.

(This to me is a point worth noting: the greatest continuing benefit from the era of micro reform - but also from the move to set formal "frameworks" for conducting the two arms of macro-economic policy - is a much more flexible economy, one that is less inflation-prone and less unemployment-prone. By the way, Garnaut and Edwards can take their share of credit for these reforms.)

Next Gruen rebuts Garnaut's argument that the income the nation earned from the boom was misspent.

Garnaut might have in mind the Howard government's decision to respond to the temporary increase in collections from company tax and capital gains by cutting income tax for eight years in a row, a move that does much to explain the trouble we are having getting the budget back into surplus.

But there is more to the economy than what the feds do with their budget. And Gruen points out that, over the decade to March 2014, national consumption spending (by households and governments) actually declined from about 76 per cent of GDP to 73 per cent. If so, the nation's saving must have increased by 3 percentage points of its income (remember: income equals consumption plus saving).

Against that, over the same period bar the last few quarters, national investment has been high and rising, relative to income. "Rather than the income gains from the boom having been consumed, it would be more accurate to conclude that they were invested," Gruen says - a point Edwards also made.

(Had the nation been "living beyond its means", that would show up as a widening in the current account deficit. Instead, the deficit has been narrower in recent years.)

But what about the downside of the boom? Will the bust result in a period of contraction for the economy as a whole? Gruen's answer is "so far, so good", but he concedes that, over the next three or four years, investment spending by the miners is expected to fall from about 7 per cent of GDP to about 2 per cent or 3 per cent, a subtraction from growth of about 2 per cent to 2.5 percentage points (remembering that about half of mining investment is in imported equipment).

Remember, too, that mining production and export volumes will be growing strongly. Even so, avoiding recession will require a further significant fall in the dollar.

Gruen agrees with Garnaut that for the economy to benefit from such a "nominal" depreciation in the currency, it will need to be translated into a "real" depreciation by only moderate wage growth. But this could be achieved provided real wages grow by less than the growth in labour productivity.

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Why weaker demand means lower pay rises

Just about everyone assumes we can never have enough jobs. So it's funny that our unending discussion about how the economy's growth is doing rarely delves into the detail of what's happening in the labour market.

But that's what Dr Chris Kent, an assistant governor of the Reserve Bank, did in a speech last week. He shows it really is a market, with the demand for labour interacting with the supply of labour to help determine the price of labour (wages) and the quantity demanded (employment). Unlike textbook markets, however, this one never "clears" - there's always some labour left unsold (unemployment).

It shouldn't surprise you that, in studying developments in the labour market in recent years, one big thing stands out: the effect of the resource boom as it moves through its three stages of high export prices, booming mine construction and rising production of minerals and energy.

The demand for labour is "derived" demand - it flows from the demand for goods and services. To produce those things you need machines and workers. The more you produce, the more workers you need.

For most of the two years since the middle of 2012, the economy (real gross domestic product) grew at less than its 3 per cent annual trend rate, held back by the decline in mineral export prices, the decline in mining construction, the high level of the dollar and the weak growth in public demand (government spending).

A big part of the problem was that the downturn in mining-driven activity came at a time when the non-mining economy was subdued.

This below-trend growth in the production of goods and services meant weaker growth in the demand for labour, as we can see from the various indicators of labour demand.

The rate of unemployment is high relative to its recent history. The rate at which people of working age (15 years and above) are participating in the labour force, either by holding a job or actively seeking one, is at about the lowest it's been over the past eight years. And since 2010 there's been a significant decline in the ratio of employed people to the working-age population.

It's true the economy seemed to grow more strongly in the last quarter of 2013 and the first quarter of 2014. And we can see some small improvement in the indicators. Using the trend estimates, employment grew by 0.7 per cent over the first five months of this year, unemployment seems to have stabilised at 5.9 per cent and the participation rate at 64.7 per cent.

But much of the growth in real GDP over the past two quarters has come from greatly increased production and export of minerals and energy, as newly built mines start working. Trouble is, mines are so capital-intensive that all this extra production would have created few extra jobs.

So, for once, the growth in real GDP overstates the increase in demand for labour. Kent suspects the growth in employment is explained partly by slightly stronger growth in the non-mining economy and by a catch-up from weaker-than-you'd-expect employment growth last year.

If so, we're not out of the woods yet. And Treasury's forecast is that unemployment will have risen a little further to 6.25 per cent by June next year.

Now let's turn to the supply of labour. At the most basic level, growth in the population of working-age adds to the supply of labour, whether that growth comes from "natural increase" - more young people joining than old people retiring - or immigration.

But not everyone of working age chooses to participate in the labour force, of course. And, in practice, changes in the participation rate are a key indicator of the strength of labour supply.
Kent says growth in labour supply has slowed substantially over the past year or so, with the "part rate" down from 65.1 per cent.

This is a sign of the interaction between labour demand and supply: when demand is strong, more is supplied, but now it's vice versa. So it's usual for the part rate to fall during periods of weak demand.

"As jobs become more difficult to find (at the prevailing wage), some individuals become discouraged from searching," Kent says. If they are still available to work these people are "discouraged workers", many of whom will resume the search for work when conditions improve.

But Kent says that, since 2010, the rise in the number of discouraged workers accounts for only less than a quarter of the fall in the part rate. Some of these other people may have chosen to make themselves unavailable to work by embarking on a period of study or accepting involuntary early retirement.

But another, more structural, factor helping to explain the fall in the part rate is the ageing of the population. Ageing means a higher proportion of the population is in older age brackets which tend to have lower rates of participation. (And if oldies are still working, they're more likely to be part-time).

Kent says ageing is estimated to have subtracted between 0.1 and 0.2 percentage points a year from the part rate over the past decade-and-a-half. But now the rate is a clear 0.2 points. In recent decades this purely demographic change has been offset by the decisions of individual oldies to continue working, but now this second trend seems to have stopped.

In textbooks, prices adjust automatically to bring supply and demand into balance. In the real-world labour market, it ain't that simple. Even so, the weaker demand for labour has seen wage growth decline to well below its average over the past decade. Pay rises of more than 4 per cent are now far less common and rises of 2 to 3 per cent are more common than 3 to 4 per cent. So are rises of 1 per cent or less.

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No handouts for miners not paying enough tax

It's in the nature of the news media to focus on the new, on the bit that's changing. So when people like me bang on about the resources boom - as we've been doing for about a decade - it's probably inevitable we leave many people with an exaggerated impression of the size of the oh-so-important mining industry.

Most people have little idea how mining compares with the rest of the economy. Some, when asked, say it may account for a third of the total.

Sorry to mislead. It's actually a bit over 10 per cent of all the goods and services we produce. If that doesn't seem like much, it is. It's a bit more than the whole of the manufacturing industry contributes and about three times what agriculture does.

More to the point, it's up from about 4 per cent before the boom began. And it's a big deal for any industry to go from 4 per cent to 10 per cent in the space of a decade. That couldn't happen without having big implications for other parts of the economy, with the high dollar just one example. So it's little wonder the economists have been so obsessed by it.

It's the biggest single development affecting the economy - the whole of the economy - in that time. And though the smarties began proclaiming the boom's death a year or two ago, its closing stages will still have big effects on the economy - favourable and unfavourable - for at least another couple of years.

Many people are uneasy about the expansion of mining. Digging non-renewable resources out of the ground and shipping them overseas seems such a dead-end occupation. People's reservations are compounded when they realise how amazingly capital-intensive mining is. That is, how few people it employs.

Mining may account for 10 per cent of our total production, but it accounts for only about 2 per cent of total employment. Building new mines is labour intensive, but running them isn't. If so, why bother?
It's a mistake to think it's only direct employment of people that makes an industry worthwhile. What matters is how much income an industry generates. Why? Because when that income is spent it will generate jobs elsewhere in the economy. That's what spending does: generate jobs.

In the case of mining, however, there's a complication. Though the powers that be don't trumpet the fact, mining is about 80 per cent foreign-owned. Even BHP Billiton is, essentially, a foreign company. And most of the extensive capital equipment mining uses is imported.

Mining in Australia is a highly profitable activity because we possess a large share of the minerals and fuel the world values highly, and because our deposits are generally high quality and easily extracted.

If mining creates so few jobs directly, and so little of its profits accrue to Australians, that leaves two key concerns to ensure Australians get suitable recompense for the exploitation of our natural inheritance: make sure miners pay adequate royalties on the minerals we grant them and make sure their profits are adequately taxed.

Business people tend to portray taxes and revenue received by governments as dead money. The opposite is true. The government spends the money it receives, and when it's spent it creates jobs, like all spending does.

The Labor government bungled its attempt to ensure the miners' profits were adequately taxed. But, rather than correcting Labor's errors, Tony Abbott has pledged to abolish the tax and let the foreign miners off the hook. Then he'll wonder why the huge expansion in mining production we're now seeing is creating so few jobs.

It gets worse. Not only are we under-taxing the miners, we're giving them lots of subsidies. Not only does the federal government give them a rebate on the excise on their diesel fuel, the state governments give them assistance by building the roads, railways and ports they need to ship their minerals abroad.

According to calculations by the Australia Institute, the states gave the mining industry $3.2 billion in concessions in the financial year just ending. Queensland gave assistance worth almost $1.5 billion, mainly by providing railway infrastructure and freight discounts.

Western Australia spent almost $1.4 billion, mainly on roads and port infrastructure. Other states' subsidies are much smaller - $140 million in NSW, $40 million in Victoria - but so too are their receipts from mining royalties.

It turns out the Queenslanders' subsidies to mining are equivalent to almost 60 per cent of the royalties they receive. In WA it's about a quarter, and in NSW it's less than 10 per cent. In Victoria, however, it's three-quarters.

And this while governments, federal and state, are crying poor and cutting spending on many worthy causes.

As Ian McAuley, of the University of Canberra, has pointed out, we're slashing our planned spending on foreign aid because we can no longer afford such generosity, but by abolishing the mining tax we're being very generous to big foreign mining companies. This makes sense?

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States change lanes in two-speed economy

You've heard of a Goldilocks economy where everything is just right. Well, when it comes to the states, welcome to the biblical economy, where the last shall be first and the first shall be last.

We're still looking at a two-speed economy, but the fast lane is turning into the slow lane and the slow lane into the fast.

During the 10 years of the resources boom to 2012-13, the West Australian economy grew by 62 per cent in real terms, against 48 per cent in Queensland, 30 per cent in Victoria and 23 per cent in NSW.

But, in the year to March, the mining states' "state final demand" - not as full a measure as gross state product - contracted, while NSW and Victoria steamed on.

The Victorian budget papers last month said the state was "well placed to take advantage of the national shift from mining investment towards more broad-based drivers of economic growth.

"Lower interest rates and a moderated exchange rate, compared with the highs in 2011 to 2013, are expected to benefit Victoria's industry structure."

Whereas the national economy (real gross domestic product) grew by 2.6 per cent in the 2012-13 financial year, Victoria managed only 1.6 per cent growth. And, in the financial year just ending, while the nation is expected to have managed growth of 2.75 per cent, Victoria is looking at an expected 2 per cent.

But the federal budget papers show the nation's rate of growth is expected to slow to 2.5 per cent in the coming financial year as Victoria's growth accelerates to 2.5 per cent. It's expected to reach 2.75 per cent in 2015-16.

And this week's NSW budget papers show its government expects its acceleration to be even faster. NSW managed growth of just 1.8 per cent last financial year, but it's expected to have accelerated to 3 per cent in the year just ending, and to stay at that rate in the coming year and the following one.

So, while Victoria is expecting to catch up with the national average in the coming financial year, NSW believes it has already exceeded it, and will continue growing faster than average in 2014-15. Only by the following year, 2015-16, will the nation have caught up.

Well, that's all very lovely, but how's it supposed to happen? What changes will bring it about?

You may already have noticed that whenever the economy improves, there's always a politician on hand ready to take the credit. Well, here's a tip: when they're at the national level, they're probably taking more credit than they should; when they're at the state level, they almost certainly are.

The truth is we live in a single, national economy. The six states and two territories that make up our national economy are different but highly integrated. So, to the - limited - extent that what's happening to a particular state is influenced by politicians, it's more likely to be federal politicians than state. Macro-management of the economy happens at the most macro level.

State governments don't do macro, they do micro. They manage their own financial affairs, and make decisions about planning and the regulation of particularly industries - how heavily we should tax companies developing new housing on the outskirts of the city, for instance - that do affect the growth of their state economies, but slowly and to a small extent.

So, for the most part, differences in the rates at which particular states are growing are determined by differences in the industrial structures of their economies - for instance, some have a lot of mining, some don't - and in their histories. NSW and Victoria are long established with large populations; WA and Queensland have smaller populations with more scope for development; they're frontier states.

This is why an event such as the resources boom, which has essentially come to the Australian economy from overseas, can affect states so differently.

The point, however, is that the most spectacular stage of the resources boom - the surge in construction of mining and natural gas facilities - which did most to foster the rapid growth of WA and Queensland in recent years, is going from boom to bust.

The rapid fall-off in mining construction in the coming financial year and the year after will cause those two states to grow far more slowly - maybe even contract in WA's case - while NSW and Victoria steam on.

Victoria's big advantage is that, since it has little mining, it has nothing to lose. NSW does have some mining, mainly for steaming coal, but says its big advantage is that its mining construction activity has already fallen about as much as it's going to.

It's their knowledge that we have two years of big falls in mining construction activity to come - along with the dollar's failure, so far, to fall back as much as we'd hoped - that has made the macro managers so obsessed by the need to get the "non-mining sector" growing much more strongly.

They've done this primarily by cutting interest rates to their lowest level in yonks, trying to encourage any spending that also involves borrowing, but particularly home building and home-related consumer spending.

Victoria will get some stimulus from this, but not much because it has already had a lot of building activity and may have some oversupply.

In contrast, NSW has a big backlog of home construction - arising from problems on the supply side that are the product of micro-economic mismanagement by this state government's predecessors. Its home building activity has already taken off, with much further to run.

Put all that together and you see why the last are about to start coming first.

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Mining hides news of non-mining recovery

And the smarties told you the resources boom was finito. Now it's being given most of the credit for this week's news that the economy grew by a rip-roaring 1.1 per cent in the March quarter and by an above-trend 3.5 per cent over the year to March.

The boom is far from finished. It will be adding to - and subtracting from - the growth in real gross domestic product for several years yet.

Media reports that "the mining industry accounted for around 80 per cent of growth in GDP in the March quarter" come from no lesser authority than the Bureau of Statistics itself. Sorry to say it, but this is true from a certain perspective, but essentially misleading.

It comes from the estimate that the mining industry's volume (quantity) of production grew by an amazing 8.6 per cent during the quarter, which means it made a contribution of 0.9 percentage points to the overall growth in real GDP of 1.1 per cent.

Almost all that increased production would have been exported. So it explains most of the growth of 4.8 per cent in the volume of total exports during the quarter, which itself made a contribution of 1.1 percentage points to the overall real growth in real GDP of 1.1 per cent.

But that's not the only way the mining sector affected the economy's growth during the quarter. Overall, business investment spending fell by about 1 per cent during the quarter. But Kieran Davies, of Barclays bank, estimates this was composed of a fall of about 8 per cent in mining investment, plus a rise of about 3 per cent in non-mining business investment.

And that's not all. The accounts show that the volume of imports fell by 1.4 per cent in the quarter which, since imports subtract from gross domestic product-ion, means their fall made a positive contribution to the overall growth in real GDP of 0.3 percentage points.

But if the economy is roaring along, why on earth would imports be falling?

Because such a high proportion - about half - of spending on new mines and natural gas facilities goes on imported capital equipment. And if mining investment is falling, imports of mining equipment must be, too.

Complicated, ain't it. Perhaps this will help. The resources boom, which began a decade ago, has had three stages: first, the huge rise in the prices we get for our exports of coal and iron ore; second, the massive investment in additional mining production capacity; third, a big increase in the volume of our exports of minerals and energy as the new mines come on line.

We're still being affected by all three of those stages. Export prices peaked in mid-2011 and have since fallen a fair way, though they remain a lot higher than they were before the boom started. Prices fell further during the quarter and, though this doesn't affect real GDP directly, it does represent a loss of real income to the economy, which must dampen demand indirectly.

Mining investment spending peaked in 2012 and has since started falling. It fell further during the quarter and this subtracted from growth, though less so when you take account of the related fall in imports of equipment.

Since so many mining construction projects are finishing, mining production is now growing strongly. It grew particularly strongly in the quarter because we didn't have any floods or cyclones to disrupt it. But though mining production has a lot further to grow, it can't keep growing as fast as it did this quarter.

Putting all that together, the mining sector's net contribution to growth during the quarter accounts for not 80 per cent of the growth during the quarter, but just under half, meaning the "non-mining sector" contributed just over half.

And that's good news. Why? Because this quarter's mining performance was the exception to the new rule. Mining made a net positive contribution because mining investment didn't fall as much as it could have, while mineral exports grew by a lot more than could have been expected. And neither of those two things can last.

The new general rule is that mining has been and will continue to make a net negative contribution to overall growth.

That's because the fall in mining investment spending generally outweighs the rise in mineral exports, even after you allow for the fall in mining-related imports.

The good news is that just over half the growth didn't come from mining. This is good news because for at least a year we've been worried about the economy "rebalancing", making the "transition" from mining-led to broader-based growth.

And even though the bureau did its (inadvertent) best to hide the fact from us, its accounts actually show that non-mining growth is at last taking hold.

Consumer spending grew by a not-so-wonderful 0.5 per cent during the quarter, but by an almost-OK 2.8 per cent over the year.

Home building grew by a rapid 4.7 per cent in the quarter, the first really strong quarter. But best of all, by Davies' estimate non-mining business investment grew by about 3 per cent.

Economists usually can't see the future with any clarity, but the mining investment boom is different. Because it consists of a relative small number of hugely expensive projects, it isn't hard to see how close they are to finishing and whether there are many new projects getting going.

They are, and there aren't. The macro managers have known for ages that mining will give the economy a big (net) dump in 2014-15 and 2015-16. That's why getting the non-mining economy going is so vital.

It's why the Reserve Bank has keep interest rates so low and won't start raising them until it knows we're out of the woods. It's also why, despite all his budget cuts, Joe Hockey made sure they don't do much to dampen demand until 2017-18.

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Why manufacturing in Australia has a future

Few things about the economy are worrying people - particularly older people and those from Victoria and South Australia - more than the decline in manufacturing. But many of our worries are misplaced, or based on out-of-date information.

For instance, many worry that, at the rate it's declining, we'll pretty soon end up with no manufacturing at all. And everyone knows that, unlike other states, Victoria's economy is particularly dependent on manufacturing.

But Professor Jeff Borland, a labour economist at the University of Melbourne, has written a little paper that sheds much light on these concerns.

It's true that manufacturing's share of total employment in Australia is declining. But this is hardly a new phenomenon, which suggests the end may not be nigh. Half a century ago, manufacturing accounted for a quarter of all employment. Today it's 8 per cent.

And almost none of that dramatic decline is explained by a fall in our production of manufactured goods. The great majority of the fall in manufacturing's share is explained simply by the faster growth of other parts of the economy, particularly the service industries.

It's true, however, there's been a (much less dramatic) decline in employment in the industry over the years. Employment in manufacturing reached a peak of 1.35 million in the early 1970s. Today, it's about 950,000. Of the overall loss of 400,000 jobs, about 200,000 occurred during the '70s, about 100,000 in the recession of the early '90s and the rest since the global financial crisis in 2008.

Many people would explain this decline in terms of the removal of protection against imports in the '80s and the very high dollar since the start of the resources boom in 2003. But, in fact, the great majority of it is explained by nothing more than automation.

How do I know? Because if you look at the quantity (or real value) of manufactured goods we produce, it reached a peak as recently as 2008, and has since fallen just 6 per cent. Nowhere have the machines of the computer age replaced more men (and I do mean mainly men) than in manufacturing. Is this a bad thing? It would be a brave Luddite who said so.

The consequence is a change in the mix of occupations within manufacturing, the proportion of machine operators, drivers and labourers falling by 10 percentage points since 1984, with the proportion of managerial and professional workers increasing by about the same extent. The proportion of technicians and tradespeople is little changed.

But there's also been a change in the types of things we manufacture, with the share of total manufacturing employment accounted for by textiles, clothing and footwear falling from 11 per cent to 4 per cent since 1984, while the share accounted for by food products has risen from less than 15 per cent to more than 20 per cent.

The share of transport equipment (cars and car parts) is down, but the share of other machinery and equipment is up by much the same extent.

The next thing that's changed a lot since 1984 is the location of manufacturing in Australia. Then, almost 70 per cent of manufacturing employment was located in NSW and Victoria; today it's down to 58 per cent. Then, NSW had more manufacturing workers than Victoria; today they have 29 per cent each. (Bet you didn't know that.)

But if the big two states now have smaller shares, which states' shares have grown? The two we these days think of as "the mining states". Western Australia's share has risen to 10 per cent, while Queensland's share has almost doubled to 21 per cent. (Bet you didn't know that.)

So far, South Australia's share of national manufacturing employment has fallen only a little to 8 per cent.

This tendency for manufacturing's distribution between the states to become more even over time, plus the much faster growth of other industries, has made all states less dependent on manufacturing for employment, as well as narrowing the gap between the most dependent (SA on 10 per cent of its total employment) and the least (WA on 7 per cent).

Whereas in 1984 Victoria depended on manufacturing for 21 per cent of its jobs, today it's 9 per cent. (See what I mean about out-of-date information?) Victoria's more dependent on the health industry (12 per cent) and retailing (11 per cent), with almost as many jobs in professional services as in manufacturing.

The wider conclusion is that, though the faster growth of other industries has made all states less dependent on manufacturing for jobs, this doesn't mean manufacturing's dying. Its actual output hasn't fallen much, though it's using fewer workers to produce that output.

The unwritten story is there've been big changes in what Australia's manufacturers produce: less stuff that relies on protection against imports and more stuff that fits with Australia's comparative advantage. You see that with food products - including things such as wine-making - now being the biggest category within manufacturing, employing 20 per cent of all manufacturing workers.

You see it also in the growth of manufacturing employment in the mining states - a spillover from the resources boom.

Manufacturing is undoubtedly suffering from the high dollar. But, apart from that, it's in good shape. It has shed some fat and is fitter and wirier than it has ever been, better able to survive in a harsh world.

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