One small step for the wellbeing budget, giant leap yet to come

Hey, wasn’t this budget supposed to be Australia’s first “wellbeing” budget? Whatever happened to that? Well, it happened – sort of – but it turned out to be ... underwhelming. Didn’t arouse much interest from the media.

It met the expectations of neither the sceptics nor the true believers. Treasurer Jim Chalmers began talking it up long before he got the job. The treasurer at the time, Josh Frydenberg, thought it was a great joke.

He pictured Chalmers “fresh from his ashram deep in the Himalayas, barefoot, robes flowing, incense burning, beads in one hand, wellbeing budget in the other”.

No robes on budget night. But nor did we see Chalmers make a ringing denunciation of the great god GDP.

No quoting of Bobby Kennedy’s famous words that such measures count “air pollution and cigarette advertising, and ambulances to clear our highways of carnage ... special locks for our doors and the jails for the people who break them [and] the destruction of the redwood and the loss of our natural wonder in chaotic sprawl”.

In short, Kennedy said, “It measures everything except that which makes life worthwhile.”

No, none of that. Nor any condemnation of economic growth or attack on the materialism of our age.

What we got was what Chalmers promised on the day he became treasurer: “It is really important that we measure what matters in our economy in addition to all of the traditional measures. Not instead of, but in addition to. I do want to have better ways to measure progress, and to measure the intergenerational consequences of our policies.”

What we got on budget night was a start to just that. Not a wellbeing budget, but a normal budget with a chapter headed Measuring What Matters.

It kicked off with some stirring rhetoric about how traditional macroeconomic indicators don’t provide a “complete or holistic view of the community’s wellbeing. A broader range of social and environmental factors need to be considered to broaden the conversation about quality of life.”

Then followed a lot of earnest discussion of “frameworks” and other high-level stuff that’s deeply meaningful to bureaucrats, but not the rest of us. It’s not a long chapter, but I had trouble keeping awake – though I may just have been tired at the time.

But don’t get me wrong. Though none of this stuff gets the blood racing, Chalmers is on the right track. It’s just that he’s got a lot further to go before we see anything likely to make much difference.

Let’s start with GDP – gross domestic product. Everything Kennedy said about it is true. Those who say it’s a bad measure of progress or prosperity or wellbeing are right.

But, as every economist will tell you, it was never intended to be. It’s a measure of the value of all the goods and services produced and consumed in Australia over a period, which means it’s also a measure of the total income Australians earn from producing those goods and services.

It counts the cost of the ambulances and tow trucks that attend road accidents, not because accidents are a good thing, but because all the workers involved earn their income by turning up and helping.

If you’d like everyone who wants a job to be able to get one – meaning unemployment is kept low – the managers of the economy need to know what’s happening to GDP to help them achieve that goal.

GDP doesn’t count “the health of our children or the joy of their play” because, apart from the doctors and nurses, the income we earn from that is “psychic”, not something you can bank or spend.

What economists are more reluctant to admit is that their obsession with the ups and downs of GDP – with the purely material aspect of our lives; with getting and spending – has led them to revere GDP as though it measured our wellbeing.

The rest of us have caught the bug from them. This suits the rich and powerful, whose main objective is to get richer and more powerful. They are focused on the purely material, and it makes it easier for them if the rest of us are too.

It doesn’t suit them to have us asking awkward questions about what economic activity is doing to the natural environment – or the climate – why it’s better for so many jobs to be insecure and badly paid, and whether the pace of economic life is extracting an (unmeasured) price from us in stress, anxiety and depression.

So, Chalmers is right. There’s much more to life – to our wellbeing - than just working and spending. If that’s all governments are doing for us, they’re not doing nearly enough.

We put much effort into measuring and thinking about GDP, but need to put a lot more effort into measuring all the other things that affect our lives and how much joy we’re getting.

Business people say that what gets measured gets managed. True – provided politicians take account of those numbers in the decisions they make. Chalmers’ wellbeing budget is still a long way off.

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Nobel winners make economics more useful, not a parlour game

It turns out that, in economics, maths – like technology and much else – can be used for good or ill. The three academic economists (and one ghost) who won this year’s Nobel Prize in “economic science” used mathematics to make economics more realistic and thus more useful to society.

The reason economics has become dominant among the social sciences – has had so much influence over the thinking and actions of governments - is the belief that understanding how and why people behave the way they do in the economic dimension of their lives – their producing and consuming – will help our leaders solve problems with the economy and make us happier and more prosperous.

But sometimes I suspect that the bulk of academic economists – whose beaverings won’t go anywhere near winning any prize – have lost sight of the goal of improving economists’ understanding of how the economy works and being more useful to the community and its leaders in improving our lives.

I worry that academic economists have become more inward-looking and more concerned with impressing each other than in serving the mugs who ultimately pay their wages. (I make the same criticism of journalists, by the way.)

In the years since World War II, the greatest project in academic economics has been to make it more scientifically “rigorous” by making it more mathematical. To express economic reasoning not in words or diagrams, but in equations.

These days, you shouldn’t do economics at university if you’re no good at maths (which may help explain why student numbers are down). No one gets to be an academic economist unless they’re good at maths. No one gets to be an economics professor unless they’re really good at maths.

Impressing the other academics with your great maths is the way you get on in academic economics. Maths is just so logical, so beautiful, so “elegant”. But sometimes I think these people love maths for its own sake and are turning economics into a branch of applied mathematics.

In an infamous study economists prefer to forget, economists attending the American Economics Association’s annual meeting were asked to answer a question about opportunity cost. Eighty per cent of them got it wrong. Opp cost is the foundation on which most economics rests. Makes you think all these PhDs know more maths than basic economics.

It’s true that expressing an argument in mathematical equations exposes any flaws in your logic – given the assumptions the argument is built on. That’s why the results of modelling – including the epidemiological variety – should be viewed with caution until you know and accept as plausible the key assumptions on which the modelling’s based.

The other day I wrote that economics’ greatest weakness is its primitive model of human behaviour, based on the mere assumption that people always behave “rationally” – which I defined as acting with carefully considered self-interest.

A couple of economics professors took me to task on Twitter. Oh no, not that old canard. “Rational” is just one of the many words in economics that are used to mean something other than their meaning in common speech.

No, what we mean by “rational” is not that people always think logically, but that we look at people’s “revealed preference” – what they actually do, not just what they say. This, I was assured, had long been part of mainstream economics.

Sorry, not convinced. It’s a circular definition: what people actually do (as measured by the statistical data available) is rational behaviour. Why? Because people are always rational. It’s getting around an implausible assumption by making it even more implausible. By defining non-rational behaviour out of existence.

Why would you do that? To make the assumptions of the neo-classical model mathematically “tractable”. That contrived meaning of “rational” may be longstanding mainstream econometrics, but it ain’t mainstream economics. That’s unconsciously assuming economics is now just maths.

When people were going crazy buying toilet paper last year, Australia’s brightest young economist export, Professor Justin Wolfers, argued it was “rational fear” to join the queue because, if you didn’t, toilet paper might all be gone when yours ran out. That was using “rational” to mean what everyone thinks it means.

You can say the same about former Federal Reserve chairman Alan Greenspan’s famous admission in 2008, after the global financial crisis, that he was mistaken to assume the banks’ “self-interest” would protect them from doing risky things that ended up damaging their shareholders.

The commentator Ian McAuley has observed that both engineers and economists use equations and mathematical models, but engineers check their maths against reality and modify their equations accordingly. Economists? Not so much.

To be fair, predicting the behaviour of bridges and suchlike is a lot easier than predicting the behaviour of human beans. This has led many academic economists not to worry about the plausibility of the assumptions on which their model rest.

Just make whatever nips and tucks are need to mathematise the mainstream model and think of all the fun games you’ll be able to play running different “data sets” through it. Other academic economists will be impressed.

Fortunately, not all academic economists are content with their work having such a tenuous link to real-world problems. Nor are the people who decide who gets the Nobel Prize in economics. The various founders of behavioural economics – which my critics contend isn’t real economics - have received awards, including a psychologist.

And the three academic economists sharing last week’s awards were about trying to make economics more realistic and therefore useful to economic policymakers.

Professor David Card, of the University of California, Berkeley, sought to test the straight-from-theory belief - then almost universally accepted by mainstream economists – that raising the minimum wage would increase unemployment, by searching for empirical evidence to support or refute neo-classical theory.

Until relatively recently, economists believed there was no way they could use experiments to test their theories. But a previous Nobel laureate showed some laboratory experiments were possible. And Card showed how theory could be tested by finding a “natural experiment” – a circumstance where the real world had created a test group and a control group, such as two nearby cities in different states, where one state had raised the minimum wage and one hadn’t.

Professors Joshua Angrist and Guido Imbens have done natural experiments too, and have also developed statistical methodologies for going beyond finding correlations between two variables to being able to demonstrate which caused which – showing other social scientists how it could be done.

The point is that the three honoured economists (plus the ghost of Professor Alan Krueger, who was a co-author with two of the three, but died in 2019) did reams of maths – or, more specifically, statistics – but put it to much more productive purposes. There’s hope for economics yet.

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Benefits from big data at risk from untrustworthy politicians

The digital revolution holds the potential to use mere “data” to improve the budget and the economy, and hence our businesses and our lives. But you have to wonder whether our politicians are up to the challenge.

In a speech last week, the Australian Statistician, boss of the Australian Bureau of Statistics, David Kalisch, said the new statistical frontier is “data integration” – you take two or more separate sets of statistics and put them together in ways that reveal new information. Things you didn’t know about how bits of the world work.

This is just exploring the huge, still largely untapped potential of computers to manipulate a lot of figures and produce useful information about what’s going on in this field or that. But it also involves new statistical techniques for combining data in ways that make sense and don’t mislead.

(This, BTW, raises a bugbear of mine. Digitisation, which allows us to measure any number of aspects of a company’s performance cheaply and easily, has given rise to the enthusiasm for “metrics”. But bosses who allow their metrics to be chosen and presented by people who know a lot about IT but nothing about the science of statistics, or who draw conclusions from those metrics without any knowledge of stats, are asking to be led up the garden path. They never know when the metric is answering a different question to what they imagine.)

Kalisch says data integration is already delivering new insights, such as improved estimates of Indigenous life expectancy, understanding outcomes for successive cohorts of migrants, and the importance of small to medium enterprises for job creation (not as outstanding as the propaganda would lead you to expect).

There’s much more of that kind of thing we could do. But Kalisch points also to the considerable untapped potential to use data integration to assess the performance of government policies and programs, and thus to target budget funding to programs assessed as more likely to be effective.

Kalisch says “Australia does not have a strong tradition of rigorously evaluating outcomes of government programs and policies”. That’s putting it politely. The Americans do (because Congress insists on it) and so do many other countries – even those backward and poverty-stricken Kiwis do.

Why don’t we? Because too many ministers and department heads fear the embarrassment if rigorous assessment showed a program was a waste of money, as many would. And also because Treasury and Finance don’t bother pushing it – perhaps because program evaluation costs money upfront, and only saves money down the track.

But that’s only one reason we risk failing to exploit all the benefits of big data analysis. The biggest is the very real probability bully-boy politicians and over-zealous agency heads try to ram through data aggregation schemes over the worries of people concerned about breaches of their privacy.

Consider the hash they’re making of My Health Record where, among other things, the instigators are relying more on slick ads than honest explanation. Consider the long running attempt by the masterful Alan Tudge, the department and the Centrelink PR man to deny there was any problem with robodebt, until the full extent of the fiasco – and the hurt it caused many innocent victims – could no longer be concealed.

Then consider the way Tudge used the shield of Parliament to reveal very private information about a woman who'd had the temerity to criticise him. And he escaped uncensured.

Such episodes, and many years of spin doctor-led politicians playing the true-but-misleading game, have hugely reduced the public’s trust in politicians and their happy assurances that nothing could possibly go wrong.

We stand on the cusp of reaping huge benefits from data analysis, or stuffing it up so badly the electorate punishes any government that touches it.

Part of this is the risk that government penny-pinching doesn’t give the data gatherers enough funding to install adequate privacy safeguards, or enough resources to respond honestly and adequately to the public’s questioning.

But that’s just part of a bigger money question: data integration isn’t particularly dear relative to the benefits of greater understanding, better public policy and more effective government spending it offers, but that doesn’t mean the pollies have the sense to cough up.

Operational funding of our bureau of statistics has been cut by 30 per cent in real terms over the past decade, by governments of both colours.

An independent benchmarking exercise in 2016 found that our bureau’s funding was about half the funding provided to Statistics Canada for roughly equivalent work. Even New Zealand’s official statistician got more than ours did. Smart thinking.

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Think you're pretty sharp? Try this simple quiz

It's the last (unofficial) holiday weekend of summer before the new year really gets down to business on Monday. So let's have some fun. Try yourself on this simple quiz.

Q1: Linda is 31 years old, single, outspoken and very bright. At uni, she majored in philosophy. As a student she was deeply concerned with issues of discrimination and social justice, and also participated in anti-nuclear demonstrations.

Which of these two is more likely: that Linda is a bank teller or that Linda is a bank teller and is active in the feminist movement?

If you went for a feminist bank teller - sorry, wrong.

Q2: As an investor you're trying to decide between buying shares in three listed companies when you notice that one of them's been chosen as company of the year by a business magazine. Would that make it best bet of the three?

Q3: You're trying to decide which super fund to put your savings in, so you look up the figures to see which one had the highest returns last year. Would it be the best bet?

If you answered yes to those questions you're likely to be disappointed.

Q4: The instructors of fighter pilots found that pilots who were praised when they'd flown well always performed worse the next time, whereas those who were criticised for performing badly always performed better the next time.

The instructors concluded that criticism was more effective than praise. Were they right?

If you answered yes - sorry, wrong.

Q5: You flip an unbiased coin and it comes up five heads in a row. Which is more likely from the sixth throw: heads or tails?

Q6: Which is the more likely birth order in a family of six kids: B B B G G G or G B B G B G?

In the first case the sixth throw is just as likely to be another head as a tail. In the second, the two birth orders are equally likely.

Q7: Which would you prefer, an operation with a 90 per cent success rate, or a different one with a 10 per cent failure rate?

Answer: Have another think about the question.

Apart from the investment questions (which I threw in to please the business editor) all those questions come from best-selling business writer Michael Lewis' latest book, The Undoing Project.

It's the story of two Israeli-American academic psychologists, Daniel Kahneman and Amos Tversky, who demonstrated how wide of the mark is the assumption of conventional economics that we're all "rational" - coldly logical - in the decisions we make, thus giving a huge push to the new school of behavioural economics.

A lot of their experiments involved our understanding of maths. Don't feel bad if you failed many of them. Most of us do, even people good at maths.

The moral is, however much or little people know about maths, particularly the rules of probability, we have trouble applying this to our daily lives because we let our emotions distract us.

Q1 was about the rules of probability. Linda certainly sounded like a feminist, but a lot of bank tellers aren't feminists so, statistically, there was a higher probability that she was a bank teller than a bank teller and a feminist.

All that guff about her interests at uni engaged our emotions and distracted us from the simple probabilities.

The questions about investment choices and fighter pilots were about a key statistical regularity most of us haven't heard of, called "reversion to the mean".

The performance of companies, super funds or fighter pilots in any year is a combination of skill and luck. We're always tempted to attribute good luck to high skill.

The luck factor is random, so a performance that's way above average is likely to have been assisted by luck, just as a really bad performance is likely to have been worsened by bad luck.

If good luck and bad luck average out over time, an outstandingly good performance is more likely to be followed by a performance closer to the average than by another rip-snorter. Similarly, a really bad performance is more likely to be followed by one not so bad.

Note that we're only accounting for the luck factor in performance, so a policy of always predicting reversion to the mean gives you a slight advantage in the forecasting stakes, not a sure thing.

The pilot trainers were observing reversion to the mean, but falsely attributing it to their own efforts in awarding praise or criticism.

Sadly, this has left many of the world's bosses suffering the delusion that criticism works better than praise.

The questions on coin tosses and baby order were about the "law of large numbers", which says that if events have equal probability of occurring, eventually they'll occur an equal number of times.

We all know that if you toss a coin enough times you'll get a roughly equal number of heads and tails. And we all know the numbers of boys and girls being born are almost equal.

Trouble is, you need thousands of samples to be sure of getting that result. By expecting to see equal numbers in a sample as small as six, we've turned the statisticians' law of large numbers into our own imaginary "law of small numbers".

Remember, probability theory applies to independent events, where what's gone before has no effect on what happens next.

Humans are pattern-seeking animals, but sometimes we go too far and see patterns that aren't real. Five heads in a row, or three boys followed by three girls, may look unlikely but, because the law applies only to large numbers, are perfectly consistent with a random draw.

Whether it's heads or tails, boy or girl, the safest bet remains 50/50. In the case of the five heads in a row, no one told the coin its duty was to make its sixth toss a tail.

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Why a 10-year census would be fine

What's the difference between a census – a full count – and a sample survey? The census will always be superior, right? Not really.

With talk that the Bureau of Statistics and the government are considering changing our census of population and housing from five-yearly to 10-yearly and making up for this with regular sample surveys, the difference between the two has suddenly become a question of interest to more people than just students of statistical theory.

Since all of us have to fill in the census form, many people have opinions on the topic. And it seems from the feedback backbenchers are getting that some of us quite enjoy census night. There's a feeling of togetherness as families across the land sit up answering a seemingly unending questionnaire for each person in the family.

In principle, a census provides a true measure of the population because, by definition, it doesn't involve any risk of sampling error. But if you think that makes censuses foolproof, you're mistaken.

For a start, in practice you fall well short of a 100 per cent "enumeration". When you've got to get forms from everyone, no matter how elusive or remotely located, you're bound to come up short. So you have to adjust the figures for this undercount, which you do by (get this) conducting a "post-enumeration survey".

For another thing, the answers you collect may be wrong, because people misunderstood the question or are being less co-operative than they should be. Errors in the census are both expensive and difficult to reduce.

Censuses are conducted on a particular day, which may or may not be representative of other times during the year. From that day on, the counts become ever-more-outdated. The things we're measuring are often too important for us to wait another five years for another count, but anything you do to update the figures in the meantime won't have the same certainty as a census.

Attempting to question every person in the country is such a huge exercise that it's hugely expensive. The census in 2011 cost taxpayers about $440 million. And because there's so much data on so many subjects, it takes ages to process. The figures can be maybe two years old before we get to see them.

It's such a major exercise that the bureau begins planning the next census two years before the latest one has been conducted.

A big part of the reason some people have been dismayed by news that a move from five- to 10-yearly censuses is being considered is that they've heard only half the story. They know what they'd lose, but not what would be put in its place. Researchers and interest groups who make great use of a particular part of the census have visions of going 10 years between drinks.

But another part of the problem, I suspect, is that a lot of people don't know much about the wonders of the science of statistics, a branch of mathematics that draws particularly on probability theory.

One way of thinking of statistical science is that it's the study of ways to be sure you're drawing accurate conclusions from a bunch of puzzling data. Another way is that statistics is the search for ways to draw accurate conclusions about a "population" (of people, things or events, such as all the road accidents in Victoria in 2014) as quickly, easily and cheaply as possible.

Get it? Statistics is the discovery of mathematical tricks that allow us to avoid all the hassle, delay and cost involved in always having to do censuses of this, that and the other.

The truth is that, as interestingly told by an article in the Christmas issue of The Economist, we've made great strides in this just since World War II.

In which case, why shouldn't we take advantage of this technological advance, just as we unhesitatingly take advantage of advances in computer science? Why run to the great expense of frequent censuses when we can get results that are almost as reliable, and in other respects better, much more easily, quickly and cheaply by using sample surveys?

That, after all, is why we've developed sampling theory – being able to take just a small sample of a population and draw accurate conclusions about the characteristics of that population.

The trick to sampling is to ensure the sample has been drawn at random from the population – to be sure it's representative of that population – and to ensure the sample is large enough to make conclusions reliable.

Sampling theory tells us how big a random sample needs to be, given the size of the population. It does so using probability theory. In the case of the population and housing census, we get information about innumerable, quite small sub-populations – such as the proportion of dwellings in the Sydney CBD that are owned outright by owner-occupiers. The smaller the sub-group, the bigger the sample needs to be to maintain accuracy.

The Americans conduct their census only every 10 years and keep it very short. But they make up for this by having an annual survey of the population covering a host of questions, with a sample size of (get this) three million households, representing 1 per cent of the population.

It seems that if we decide to go to 10-yearly censuses, we'll introduce a similar, detailed annual survey, with a sample size covering about a million people. (Our present monthly household survey – from which we get our estimates of unemployment – covers about 55,000 people.)

This would leave us with a 10-yearly census to "benchmark" all our surveys against, but give us much more frequent, less outdated, accurate information about a host of census topics, doing so more flexibly.

It would do so quickly, easily and much more cheaply, enabling us to spend the saving on replacing the bureau's ancient computer systems.

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'Wealth creators' push materialism over social side

There is a contradiction at the heart of the way we organise our lives, the way governments regulate society and even the way the Bureau of Statistics decides what it needs to measure and what it doesn't. Ask people what's the most important thing in their lives and very few will answer making money and getting rich. Almost everyone will tell you it's their human relationships that matter most.

And yet much of the time that's not the way we behave. Too many of us spend too much time working and making money, and too little time enjoying the company of family and friends.

We live in an era of heightened materialism, where getting and spending crowds out the social and the spiritual. That's the way most of us order our lives and it's the way governments order our society. They worry about the economy above all else.

Indeed, the parties' chief area of competition is over their ability to manage the economy. The opposition's latest criticism is that under Labor we're losing our "enterprise culture". What's an enterprise culture? One where all the focus is on "creating wealth" - making money, to you and me - and none is on how that wealth should be distributed between households or what it should be spent on.

It's one where the demands of the "wealth creators" (read business people) should receive priority over the selfish concerns of the wealth recipients and dissipaters (read you and me). But above all, it's one where the chief responsibility of governments is to hasten the growth of gross domestic product.

On the face of it, Julia Gillard seems to fit the opposition's criticism. This week she's hoping to make progress in putting her long-cherished national disability insurance scheme into law. Last week she was in the western suburbs of Sydney celebrating international women's day and offering "a pledge to all women and girls" that "Australia is promoting a world where women and girls can thrive and where their safety is guaranteed".

And Gillard used the occasion of her visit to the west to demonstrate her practical concern about growing traffic congestion and to announce a "national plan to tackle gangs, organised crime and the illegal firearms market".

At one level, all this is true, none of it's made up. At another level, however, it's carefully crafted image building, intended to highlight the difference between Gillard and her opponent and emphasise those differences considered most likely to appeal to traditional Labor voters who show every intention of changing sides.

The deeper truth is that, like most politicians, Gillard is working both sides of the street. Ask her and she'll assure you her government is just as good at managing the economy - and "creating wealth" - as her opponents, if not better.

Unsurprisingly, this other, harsher side of Labor was revealed at the weekend by the Treasurer. Wayne Swan opened his weekly economic note thus: "Putting a budget together is always about priorities. For the Gillard government, our No. 1 priority will always be putting in place the right strategies to support jobs and growth to keep our economy one of the best performing in the developed world."

Ah, yes. Labor professes to be just as devoted to the great god GDP as its evil, uncaring opponents. As part of this, it's been struggling - unsuccessfully so far - to get its budget back to surplus. And as part of this struggle it has required all government agencies to economise in their use of resources.

The Bureau of Statistics has been required to find savings of between $1.1 million and $1.4 million a year - hardly a huge sum in a government budget of $387 billion. But the bureau has found a way to solve its problem for the coming financial year pretty much in one go. It's decided to cancel the "work, life and family survey" long scheduled for this year.

This is mainly a survey of how people use their time, requiring a random sample of households to keep diaries of the way their time was spent for a short period. GDP measures only the value of work that's been paid for in the marketplace. It ignores all the unpaid work performed in the home, including caring for kids, and the work of volunteers.

Time-use surveys fill that gap. How much time are women spending in paid and unpaid work? How is women's participation in the paid workforce changing over time as they become better educated? How much paid work is being done by people of retirement age? To what extent is paid work encroaching on our weekends? How is the burden of housework being shared between husbands and wives in two-income families?

It had been hoped that this year's survey would shed more light on changes in the time devoted to caring for invalids and the frail aged as governments try to save money by keeping people out of institutional care. And while we're at it, what has growing traffic congestion done to the time we spend commuting?

One of the most popular maxims of the wealth creators is: you can't manage what you don't measure. Directly or indirectly, most of the Bureau of Statistics' efforts are directed at measuring GDP. It's so important it's measured four times a year. Our time use hasn't been measured since 2006. The cancellation of this year's survey means it won't be measured again until 2019.

How do we keep on our present, hyper-materialist path? One of the ways is by failing to measure its consequences.

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Adding the environment to the national accounts

Over the eight years to 2010-11, gross domestic product increased by 28 per cent, whereas Australia's net energy use increased by 18 per cent. So our "energy intensity" - energy used per $1 of GDP - is falling at the rate of 1 per cent a year.


In 2010-11 we produced 89 per cent of our total energy supply domestically, with the remaining 11 per cent being mainly imported oil. This took our total annual supply of energy to almost 19,000 petajoules. Of this we exported 71 per cent - mainly coal, uranium and natural gas.

Turning from energy to water, the price charged to households rose by 17 per cent in 2010-11, while the amount of water consumed by households fell by 8 per cent. On average, households were paying $2.44 a kilolitre. Of total water consumption of more than 13,000 gigalitres, 54 per cent went to agriculture and 33 per cent to the rest of industry, leaving just 13 per cent going to households.

Turning from water to land, Victoria's 23 million hectares of rateable land are valued at more than $1 trillion. Residential land accounts for 83 per cent of this total value, even though it accounts for only 5 per cent of the state's total area.

How do I know all this? Because I've been reading the "energy account", the "water account" and the "land account (Victoria, experimental estimates)", each published by the Bureau of Statistics in the past few weeks.

You may think from the examples I've given that the sort of information contained in these "accounts" is mildly interesting. But this exercise is really important and, to those of us who worry about the ecological sustainability of economic activity, even exciting.

You've seen me bang on before about the need for us to stop thinking of the economy being in one box and the environment in a completely separate box. The economy can't sensibly be separated from the environment because it exists within the natural environment - the ecosystem, if you prefer.

The economy depends on the ecosystem for its continued existence. It draws renewable and non-renewable natural resources and "ecosystem services" (such as photosynthesis and other natural processes) from the natural environment, then pumps all manner of pollution and waste back into the ecosystem.

It's clear that if our neglect of the ecosystem as we run the economy causes damage or depletion to the ecosystem, a point could be reached where the malfunctioning of the ecosystem inflicts damage and loss back on the economy. We could get into an adverse feedback loop between the economy and the environment.

This, of course, is exactly what's worrying us about climate change. The extensive burning of fossil fuels is causing emissions of carbon dioxide and other gasses which, partly because the clearing of land has reduced the role of forests as carbon sinks, are building up in the atmosphere, trapping in heat and interfering with the world's climate.

I fear climate change is just the first and most pressing instance of adverse feedback between the economy and the environment. If so, we need to become a lot more conscious of the interaction between the two.

But how did we get into the habit of thinking of the economy in isolation from the environment? The rest of us fell into the habit because that's the way the economists have always thought of it.

In the second half of the 19th century, when economists were setting in concrete their way of conceptualising the economy and analysing its workings, it made sense for them to conclude the environment could be excluded from the model without any great loss of relevance.

At the time, global economic activity was quite small relative to the vastness of the natural world. They couldn't know how hugely economic activity would grow, with a rapidly multiplying global population and an ever-rising worldwide average material standard of living.

Nor could they know how damming rivers, irrigating crops and sinking bores would interfere with the water cycle, how clearing land, running farm animals and growing crops would interfere with soil quality, or how ever-improving fishing technology would almost denude our oceans of fish.

Another problem was that their model was built on the role of market prices in co-ordinating economic activity. Many aspects of the natural environment, vital though they were to the functioning of the economy, weren't privately owned and didn't have a market price, so were "external" to the model.

Yet another part of the reason we've fallen into the habit of ignoring the environment when we think about the economy is that this is the way we've constructed our economic indicators - our gauges of how it's travelling. The chief gauge is the "national accounts" with their bottom line, gross domestic product.

We've taken to sharing the macro-economists' obsession with GDP, a measure of market production of goods and services during a period and the income generated by that production. It's a good indicator of employment prospects, but it takes no account of the using up of natural resources, nor of the cost of the damage economic activity is doing to the ecosystem.

But though economists may be stuck in their ways, the world's national statisticians aren't so hidebound. The concepts, classifications and accounting rules needed to calculate the national accounts in member countries have long been set down by the United Nations Statistical Commission. Earlier this year the commission decided to introduce a system of integrated environmental and economic accounting. This will involve developing environmental accounts on a comparable basis to the existing economic accounts, so they can be combined to give a more comprehensive picture of how the economy is affecting the environment and the environment is affecting the economy.

This "system of environmental-economic accounting" - SEEA - is a huge project, involving the measurement of various environmental dimensions not presently measured and the conversion of physical measures - such as petajoules and gigalitres - into dollar values.

Our Bureau of Statistics is at the forefront of this international development. Its recently published energy, water and land accounts are stepping stones in this great advance.

Publishing integrated economic and environmental accounts won't magically solve all our environmental problems, but it will make it much harder to forget these two aspects of our existence are inextricably joined.

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We're adding the environment to the national accounts

How do you get economists and business people to take the environment and its relationship with the economy seriously? Change its name to one that resonates with commercial values. What's a word that denotes great value, preciousness to a capitalist? I know - "capital".

You've heard of physical capital (machines, buildings and other structures), financial capital (securities such as shares and bonds), human capital (an educated and skilled workforce) and social capital (the shared values and norms of behaviour that enable mutually advantageous cooperation).

So why don't we rename the environment "natural capital"? It wasn't me who thought of it, however.

It doesn't sound like a lot of progress has been made at the Rio+20 summit on sustainable development. But one thing giving me hope is the "natural capital declaration" made by banks and big businesses, including our National Australia Bank, represented by its chief executive, Cameron Clyne.

"Natural capital," it says, "comprises Earth's natural assets (soil, air, water, flora and fauna) and the ecosystem services resulting from them, which make human life possible. Ecosystem goods and services from natural capital are worth trillions of US dollars per year and constitute food, fibre, water, health, energy, climate security and other essential services for everyone.

"Neither these services, nor the stock of natural capital that provides them, are adequately valued compared to social and financial capital. Despite being fundamental to our wellbeing, their daily use remains almost undetected within our economic system.

"Using natural capital this way is not sustainable. The private sector, governments, all of us, must increasingly understand and account for our use of natural capital and recognise the true cost of economic growth and sustaining human wellbeing today and into the future," the declaration says.

It goes on to say that "because natural capital is a part of the 'global commons' and is treated largely as a 'free good', governments must act to create a framework regulating and incentivising the private sector - including the financial sector - to operate responsibly regarding its sustainable use.

"We therefore call upon governments to develop clear, credible and long-term policy frameworks that support and incentivise organisations - including financial institutions - to value and report on their use of natural capital and thereby working towards internalising environmental costs."

Lovely. Great stuff. Most enlightened. But if you think we're just at the earliest stages of realising we need to measure our impact on the environment and incorporate it into our decision making, I have good news. At the level of national accounting, we're a lot further advanced than you realise.

You often see me banging on about the "national accounts", from which key economic indicators such as gross domestic product emerge. You've also seen me pointing to the limitations of GDP as a measure of wellbeing or progress, particularly its failure to take account of the costs economic activity is imposing on the environment and of the environment's present state of repair.

The "system of national accounts" we use is laid down by the United Nations Statistical Commission for use in all countries. It's an accounting framework that measures economic activity and organises a wide range of economic data into a structured set of accounts. It defines the concepts, classifications and accounting rules needed to do this.

So here's the news: earlier this year the UN Statistical Commission adopted as a new international statistical standard with equal status to the system of national accounts, the "system of environmental-economic accounting" - SEEA.

Our Bureau of Statistics has been at the forefront in the development of SEEA. Last month, it published a document, Completing the Picture: Environmental Accounting in Practice, explaining what SEEA is. I'm drawing on this document.

SEEA is another accounting framework that records as completely as possible the stocks and flows relevant to the analysis of environmental and economic issues. So SEEA is different from the various present independent sets of statistics because it demands coherence and consistency with a core set of definitions and treatments.

Get it? An accounting framework allows you to add a lot of different things together, making sure they fit together logically and there's no double-counting. SEEA puts information about changes in the environment on the same basis as the existing information about changes in the economy, so they can be combined and give us an integrated picture of how the environment and the economy are affecting each other.

Just a small problem, however. The existing national accounts measure economic activity in money terms. To achieve this, they stick almost wholly to measuring transactions in the market, since these reveal market valuations.

But the very reason economists and business people have been taking too little notice of the environment for the past centuries is that, for the most part, it's outside the market system - a "free good". There's not one price for clean air and another for dirty. Photosynthesis, pollination and precipitation are ecosystem services to the economy that aren't paid for, so it's hard to put a figure on what they're worth.

Despite this, SEEA extends the national accounts by recording environmental data that are usually available in physical or quantitative terms in coherence with the economic data in monetary terms. Maybe one day we'll discover a way to value natural capital so we can add it all together.

There are three main types of account in the SEEA framework that are added to the existing monetary flow (the change in something over a period) and stock (the position at a point in time) accounts of the national accounts.

First are physical flow accounts that record flows of natural inputs from the environment to the economy, flows of products within the economy and flows of "residuals" (various forms of waste) generated by the economy. These flows include water and energy used in production and waste flows to the environment, such as solid waste to landfill.

Second are functional accounts for environmental transactions between different economic sectors (such as industries, households, governments). Such transactions include investing in technologies designed to prevent or reduce pollution, restoring the environment after it has been polluted, recycling, conservation and resource management.

Finally, asset accounts in physical and money terms measure the stocks of natural resources available and changes in the amount available. There'd be accounts for minerals and energy, timber, fish, soil, water and land.

The bureau is beavering away to produce more of these accounts. It's making progress in turning SEEA into an Australian reality.

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There are lies, damned lies and vested interests' reports

What's the world coming to? The latest is that Australia has become a net importer of food. Last financial year our imports of food and groceries exceeded exports by $1.8 billion, a dramatic turnaround from our $4.5 billion surplus five years earlier. This alarming news comes from a report by the accounting firm KPMG for the Australian Food and Grocery Council.

The council's chief executive, Kate Carnell, said the industry "is still a major exporter but imports are rising fast, eroding the trade surplus historically enjoyed by the industry".

"I don't think Australians really understand what we're facing at the moment," she said. "We really are facing a scenario where Australia really won't manufacture much at all in this space. The majority of products will come from overseas.

"The ... costs of power, costs of staff, costs of transport, costs of government regulation, costs of the drought in the food space [have] really put pressure on costs for Australian manufacturers.

"To protect Australia's food supply and overcome this challenge, there must be a 'whole-of-government' national strategy to ensure food and grocery manufacturing's long-term growth, increase export earnings and boost competitiveness. Proposed water allocation cuts for food production in the Murray-Darling Basin will also threaten the future viability of numerous food manufacturers in the basin ... and making it harder for locally produced goods to compete with imports."

There's just one problem. This is all nonsense. Australia? A net importer of food? Yeah, sure. If you fell for it, your bulldust detector has seriously failed you in the media space.

And in these days of he-said-she-said journalism, you need your detector working as never before. Increasingly, the media are used by interest groups - whether governments, oppositions, businesses or lobby groups - to push their own barrows. And increasingly the media suspend disbelief and happily pass on the most dubious claims, provided they're sufficiently novel, alarming or combative.

Often the vested interests are waving some "modelling" or "independent report" they've bought from some seemingly reputable source. Only if you find the report and read its fine print do you discover the reputable source covering its backside with disclaimers.

Consider this from KPMG's report for the food and grocery council: "no opinions or conclusions intended to convey assurance have been expressed. The report has been prepared for general guidance on matters of interest only, and does not constitute professional advice.

"You should not act upon the information contained in this report without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this report ..."

Translation: if your bulldust detector isn't working that's your look-out.

According to figures compiled by the Department of Foreign Affairs and Trade, in calendar 2009 we had total food exports of $25.4 billion and imports of $11 billion, leaving us with a surplus of $14.4 billion. Even if we ignore unprocessed and look only at processed food, we still had a trade surplus of $5.8 billion.

So how did the food and grocery council get exports of $21.5 billion and imports of $23.3 billion for 2009-10, giving that deficit of $1.8 billion? By using its own definition of "food and groceries". We're not talking about farmers here but the people who take what the farmers produce and process it for presentation in supermarkets.

So the council's figures exclude unprocessed food exports, including wheat (worth $4.8 billion in 2009), other grains and live animals. They include "grocery manufacturing products", such as medicines and pharmaceuticals, plastic bags and film, paper products and soap and other detergents.

That's food? It turns out our exports of "groceries" totalled $4.9 billion in 2009-10, whereas our imports totalled $12.9 billion, leaving us a "grocery" trade deficit of $8 billion. This is hardly surprising. Since when was Australia big in the manufacture of medicines? (And since when were they a major part of the Murray-Darling Basin economy?)

If you leave out groceries, the report's figures show we had exports of processed food and beverages worth $15.9 billion compared with imports of $9.9 billion, plus exports of fresh produce worth $700 million against imports of less than $500 million. That leaves us with a trade surplus of $6.2 billion for fresh and processed food and beverages. Don't be conned.

It is true, of course, that agriculture has been hard hit by the drought and by our very high exchange rate. And the international price competitiveness of manufacturing - whether of food, "groceries" or anything else - has been, and will continue to be, harmed by the high dollar.

The food and grocery council claims to represent about a quarter of Australian manufacturing industry. Rest assured, for as long as the resources boom keeps our exchange rate uncomfortably high - which might be for a decade or more - we'll be hearing complaints from manufacturers and demands that the government do something. The rest of them won't be hiding behind farmers, however.

Just to prepare you for the onslaught: Australia has long had, and always will have, a positively huge deficit on trade in manufactures and it's almost certain to get worse. None of this is a worry because you can't be good at everything.

Australia has long been a major world exporter of agricultural, mineral and energy commodities. Being a net importer of manufactures goes with that territory. Live with it.

Now we're being paid a fortune for our coal and iron ore and we're engaged in a decade-long period of investment for a huge increase in export capacity. The dark side of this is a high exchange rate and pressure on our farmers, manufacturers, tourism operators and education providers. You can't have everything.

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USES AND ABUSES OF CRIME STATISTICS

NSW Bureau of Crime Statistics and Research annual symposium
February 18, 2009

When I was at university many years ago I read a fascinating little Pelican by Darrell Huff called, How to Lie with Statistics. It’s proved invaluable in my career as a journalist. In talking about the uses and abuses of crime statistics I could focus on the misdemeanours of the politicians, but instead I’m going to concentrate on something I know a little about, the failings of journalists.

In June last year the bureau put out a report showing no link between the heroin shortage and the rise in the use of amphetamines such as ice. The study was reported on the front page of the MX newspaper with the banner headline ‘Users switch to ice - heroin blitz forces drug change’. MX is Murdoch’s afternoon giveaway paper - I guess you get what you pay for.

On another occasion the bureau gave a newspaper figures showing that the number of eight and nine-year olds coming to the attention of police had fallen from 130 a month to 94 a month over the two years to 2007. The bureau also told the journalist that less than 1 per cent of the population aged eight or nine had some contact with the police. The headline on the journo’s story was ‘Kid Crime Rampage’.

On a third occasion the bureau gave the media figures showing there was no upward or downward trend in knife attacks in Sydney or the rest of NSW. One newspaper’s report of this study attracted headline ‘Stabbings skyrocket as knives plague city’.

A fourth example involves a paper called the Herald. The bureau put out a report showing that the percentage of convicted offenders receiving prison sentences had risen substantially since 1993. The study also showed that prison terms for most offences had increased, as had the proportion of defendants refused bail. The headline on the Herald’s report of the study said, ‘Prison population rises despite lower jailing rates’.

I could quote more examples, but that’s enough. What I want to focus on is how this misuse of crime statistics is brought about and then why it occurs. We’ll start with the how.

I quoted headlines to you and the truth is that the headline on a story heavily influences a reader’s perception of what the story is saying. But headlines are written by sub-editors, not reporters, and sometimes there’s a gap between what the story actually says and what the headline says it says. If there is, most readers won’t notice it. Such gaps can occur for three reasons: because the hard-pressed sub doesn’t accurately comprehend what the story’s actually saying, because the reporter has left some ambiguity in his copy and the sub, who generally knows far less about the topic than the reporter, has jumped the wrong way, or because the sub knowingly writes a headline that makes the story sound more exciting than it actually is. The first two explanations - misunderstandings - are more likely to be the case on broadsheet newspapers; the third - misrepresentation - is more likely to be found in tabloid newspapers. In the case of the Herald story I quoted, the reporter focused on all those offences where the rate of imprisonment had fallen. Since he noted but didn’t highlight that, overall, rates of imprisonment had risen, this left the opportunity for the sub-editor who didn’t read the story as carefully as he should have to conclude from the early paragraphs that the overall rate of imprisonment had fallen.

The interesting question is why the reporter wrote his story in a way that encouraged that error to be made - why he’d focus on the unrepresentative falls rather than the representative rises. I’ll try to answer that when we get to the question of motive - why the media behave the way they do. Perhaps here I should remind you that journalists have to draw the essence from sometimes long and complex reports or events in just an hour or two - under pressure from bosses to make it quick and make it sexy - so it’s not surprising errors and misinterpretations occur.

Now let me give you some relevant background information. Much of the news the media publish comes to them in the form of press releases. All of the bureau’s reports, for instance, are accompanied by a summarising press release. It’s often alleged that the media are so lazy they largely publish uncritically the press releases sent to them by powerful government, business and other interests. In my experience that’s usually not the case; quite the reverse. These days most interest groups seek to use the media to advance their own interests. They employ PR people to put their own spin on the information they release to the media. Most journalists aren’t lazy and they see it as their job to get past the spin, finding the news their audience would like to know about but which the powerful interest would like to conceal. When they receive a report or a press release they think: there’s probably an interesting story in here somewhere, but I’ll have to dig for it; certainly, it won’t be the one the people who put out the press release put at the top of the release. There’s so much spin in the world that many journalists come to the conclusion that everyone’s trying to pull the wool over their eyes. You may regard the bureau as a beacon of independent truth-seeking, but I guess many journalists would suspect it’s just another government agency pumping out bromide about the receding crime wave at the behest of its political masters. There’s a saying in journalism that news is anything somebody somewhere doesn’t want you to know. My guess is that the Herald journalist in question waded through the bureau’s report until he found the bit he thought the NSW Government wouldn’t want people to know: that in the case of five significant offences, rates of imprisonment are going down not up.

Much of the misrepresentation of crime stats arises from statistical misinterpretation. You can misrepresent a time series in a host of obvious ways: by choosing a convenient time period for your comparison, by ignoring random variation (ie failing to ignore outliers), by ignoring seasonal variation (eg the number of assaults peaks in January each year and troughs in May or June), by ignoring base effects (eg saying some crime rate has doubled when it’s gone from 2 a year to 4 a year) and by ignoring the effect of police activity. For instance, when the number of arrests goes up because we’ve got more police on the job arresting people, you call it a crime wave; when the number of arrests goes down you say police aren’t out there on the job countering the crime wave.

The question is whether the journos who commit these statistical crimes are knaves or fools. I couldn’t deny there’s a lot of knavery - journos who know they’re distorting the statistics’ message, but don’t care - but there are more fools than you may imagine. Most journalists are arts-degree types with a very weak grasp on maths and little clue about how to interpret statistical information. If they did understand those things they’d be an economics editor by now. But the question goes deeper: many journalists wouldn’t be sure the diligent performance of their job required them to take account of those statistical niceties. The rules of statistical interpretation aim to ensure the user draws from the stats an accurate or representative picture of the aspect of the world the stats relate to. But that’s simply not the objective of journalism. Journalism pays no heed to the scientific method.

So let’s turn to the question of why the media misuse crime statistics and misrepresent the extent of crime. As the coppers would say, let’s look at motive. Much of the criticism of the media rests on the unspoken assumption that the media’s role is to give us an accurate picture of the world around us. We don’t have first hand experience of much of what’s happening around us and we need the media to inform us.

If that’s the role you think the media play - or should play - I have shocking news. The news media are on about news. What is news worthy? Anything happening out there that our audience will find interesting or important, although the interesting will always trump the important. Paris Hilton is interesting but of no importance; the latest change in the superannuation rules is important but deadly dull - guess which one gets more media overage?

Maybe 99 per cent of what happens in the world is of little interest: 99 per cent of the motorists who crossed the Bridge today made it without incident; someone you’ve never heard of went to work as usual and sold a new ring to someone you don’t know; Australia didn’t declare war on New Zealand . . . the list of uninteresting things that happen is endless. Journalists sort through all the things that happen looking for things they believe their audience will find interesting: the 10-car pile-up on the Bridge, Brad Pitt bought a ring for Angelina Jolie to make up after a fight, the Dutch withdrew their troops from Afghanistan.

When social scientists take a random sample they may examine the sample and discard any outliers that could distort their survey, throwing them on the floor. A journalist is someone who comes along, finds them on the floor and says, ‘these would make a great story’. I happened to be in the Herald’s daily news conference a fortnight ago on the day Kevin Rudd’s $42 billion stimulus package was announced, with all its (then) $950 cash handouts. We discussed searching for a farmer who’d get $950 because he was in exceptional circumstances, $950 because he paid tax last year, $950 because his wife also works, $4750 because he has five school-age kids, and maybe another $950 because one of the kids is doing a training course. And, of course, he’d have a big mortgage, meaning he’d also save $250 a month because of the 1 per cent cut in interest rates announced the same day. Had we found such a person and taken a good photo of him he’d have been all over our front page. The point is that we were search for the most unrepresentative person we could find. Why? Because our readers would have been fascinated to read about him. It’s reasonable to expect the media to be accurate in the facts they report but, even if they are, it’s idle to expect them to give us a representative picture of the world. And that takes me to an even more shocking thought: if the media aren’t on about giving us a representative picture of the world around us, why would journalists bother adhering to the rules of statistical interpretation? Why not highlight a quite unrepresentative statistical comparison if it happens to be the most interesting comparison?

It’s often claimed that the media focus heavily on bad news, often ignoring good news. Guilty as charged. But we do so for a simple reason: we know our audience finds bad news a lot more interesting than good news. So I’m not particularly apologetic for this state of affairs: our failings are the failings of our audience, which are the failings of human nature. Why do people find bad news more interesting than good news? As I’ve written elsewhere (SMH 12.4.2006), I believe the explanation can be found in our evolutionary history. Our brains are hardwired to perpetually scan our environment for threats, and now the chances of our being eaten by a lion have diminished we’re left with a strong appetite for bad news about, for instance, the threat of crime.

Communications research tells us we read much more for reinforcement than enlightenment. While there’s a niche market for columns that challenge the conventional wisdom, and news about some new and unexpected twist in a standard story will be found interesting, journalists know the news that goes down best is the news that confirms people prejudices. Perhaps thanks to the efforts of the media themselves, most people know as a self-evident truth that crime is increasing. Most stories about crime are intended to reinforce that belief.

Let me conclude. The media’s defence against criticism is that their failings are those of their audience; they do what they do because their audience demands it of them. But shouldn’t we hold the media to a higher standard than we hold ourselves? Yes we should. We can expect less crass commercialism and more professionalism. Doctors, for instance, don’t ask patients what disease they want to be told they have and don’t let patients pick the medicine they want prescribed.

And there’s a limit of inaccuracy and sensationalism below which market punishment sets in. Mediums that play too lightly with the truth eventually lose their credibility and their audience’s respect. This means there are checks and balances. Mediums that value their credibility - in commercial as well as ethical terms - often employ commentators who set a high store on making sure their audience isn’t misled, even when those commentators spend a fair bit of time highlighting the media’s own failings and trying to beat down some of the things that get beaten up on the front page. My guess is that, as information overload and infotainment continue to grow, at least the better-educated audience will gravitate to those journalists and journals they perceive to be committed to the search for truth. What’s more, it is possible to be truthful and interesting at the same time. So don’t slit you throat yet.

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