Why so much spending on infrastructure is misspent

It’s the great conundrum of government policy: we have a big shortage of infrastructure, but also waste billions on it.

This seeming contradiction is easily explained: particularly in recent years, and at both state and federal levels, much money is being spent on infrastructure projects.

Trouble is, a lot of the dough’s being spent on flashy or low-priority projects, at the expense of more important but less sexy projects, particularly in the overcrowded outer suburbs.

I suspect we spend more than we should building expressways and too little on public transport – and within the latter, some argue, too much on rail and not enough on busses.

Why? Well, I’m sure it wouldn’t be because the big heavy engineering companies are better at lobbying politicians than public transport providers.

There aren’t many aspects of government spending – many contributors to debt and deficit – more in need of reform than spending on public infrastructure, or with more scope for making a bigger contribution to national productivity and a smaller contribution to budget pressures.

But you’d never know that from the way our politicians, the business lobby and Treasury obsess about tax reform for decade after decade. We’ve had lots of tax reform over the years, but it’s never been enough to satisfy their appetite.

So why is infrastructure spending so rife with wastefulness? Mainly because it’s one of the few areas of policy left where the pollies themselves have much scope for playing Santa Claus in particular states and even particular electorates, at times of their own choosing. Byelections, for instance.

It’s often too tempting for pollies to pick projects according to the votes their announcement is intended to bring, rather than the extent to which the public benefits they bring exceed their costs.

Last week the boss of Infrastructure Australia, Philip Davies, who leaves the job next month, made his last contribution by unveiling a list of 11 principles governments should follow in making decisions about infrastructure, so as to lift the quality of those decisions.

“Businesses and households across the country rightly want to know that governments are investing limited public funds in infrastructure that will bring strong productivity benefits to the economy, support our quality of life, and help to deliver a collective vision of a strong, fair and prosperous Australia for many years to come,” the document states.

It nominates some respects in which governments’ decisions on infrastructure still leave “room for improvement” – to coin a bureaucratic euphemism.

One is that there should be more transparency – that is, information about the stages of the decision process and the public release of analysis – in making decisions about projects.

This includes reviews on the completion of projects, showing the lessons learnt and application to future investments. Everyone agrees they’re a good idea, but such reviews are rarely done and rarely made public.

Taxpayers pay a high price for the political and public service predilection for never admitting anything they’ve done was less than perfect, for fear of what the opposition and the media would say. Much better to always be up-front about failings, so critics stop getting overexcited but lessons are learnt.

Further room for improvement arises because “projects are often developed without fully considering all available options to solve an identified problem, including potential solutions that make better use of existing infrastructure through technology and data”.

Too true. This happens because pollies love announcing that they’re spending big bucks to build something new and wonderful – then come back five years later to cut the ribbon.

They don’t get as much media attention when they merely upgrade existing infrastructure – and none when they spend money every year ensuring existing assets are well maintained.

And they’d get adverse media attention if they did what the bureaucrats were hinting at with their reference to making better use of existing infrastructure “through technology and data” – charging motorists directly for their measured use of roads and the time of day they made that use.

Yet more “room for improvement” arises because “too often, we see projects being committed to before a business case has been prepared, a full set of options have been considered, and rigorous analysis of a potential project’s benefits and costs has been undertaken”.

Why such travesties of good management? Because spending on what we used to call “capital works” is so closely associated with politicians using the first announcement of projects to win votes at elections.

All this expediency and lack of courage is another reason we should be slow to believe politicians promising to fix budget deficits (or pay for tax cuts) by cutting government spending.

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Economy’s health requires reform of earlier wage reforms

Can you believe that many economists were disappointed by this week’s news from the Australian Bureau of Statistics that consumer prices rose by only 2.1 per cent over the year to June?

Why would anyone wish inflation was higher than it is? Well, not because there’s anything intrinsically terrific about fast-rising prices, but because of what a slow rate of increase tells us about the state of the economy.

It’s usually a symptom of weak growth in economic activity and, in particular, of weak growth in wages. Prices and wages have a chicken-and-egg relationship. By far the most important factor that pushes up prices is rising wages.

But, as measured by the bureau’s wage price index, wages rose by just 2.1 per cent over the year to March, roughly keeping up with prices, but not getting ahead of them.

We’re used to wages growing each year by 1 per cent-plus faster than prices, but such “real” growth hasn’t happened for the past four years or so (which probably explains why so many people are complaining about the high “cost of living” even when price rises are so small).

It’s important to understand that wages can grow faster than prices without that causing higher inflation, provided there is sufficient improvement in workers’ productivity – output per hour worked – to cover the real increase.

Of late we’ve had that productivity improvement, but all the benefit of it has stayed with business profits, rather than being shared between capital and labour by means of increases in real wages.

I’ve said it before and I’ll keep saying it until it’s no longer relevant: the economy won’t be back to healthy growth until we’re back to healthy growth in real wages. That’s for two reasons.

First, in a capitalist economy like ours, the “social contract” between the capitalists and the rest of us says that the people without much capital get their reward mainly via higher real wages leading to higher living standards.

Second, consumer spending accounts for more than half the demand for goods and services in the economy; consumer spending is done from households’ income, and by far the greatest source of household income is wages.

So, as a general proposition, if wages aren’t growing in real terms, there won’t be much real growth in household income and, in that case, there won’t be much real growth in consumer spending. And the less enthusiastic we are about buying their stuff, the less keen businesses will be to invest in expansion.

Get it? Of all the drivers of economic growth, by far the most important is real wage growth. If your economy’s real wage growth’s on the blink, you’ve got a problem. You won’t get far.

Economists used to believe that real wage growth in line with trend improvement in the productivity of labour was built into the equilibrating mechanism of a capitalist economy. A chap called Alfred Marshall first came up with that idea.

But with each further quarter of weak price and wage increase it’s becoming clearer it was a product of industrial relations laws that boosted workers’ economic power by helping them form unions and bargain collectively with employers.

As has happened in most rich countries, our governments, Labor and Coalition, have been “reforming” our wage-fixing process since the early 1990s by reducing union rights and encouraging workers to bargain as individuals rather than groups.

Trouble is, governments have been weakening legislative support for workers and their unions at just the time that powerful natural economic forces – globalisation and greater trade between rich and poor countries, “skill-biased” technological change, the shift from manufacturing to services – have been weakening the bargaining power of labour.

Whoops. In hindsight, maybe not such a smart “reform”. My guess is it won’t be long before governments decide they need to promote real wage growth by restoring legislative support for unions and collective bargaining.

But how could they go about this? Well, Joe Isaac, a distinguished professor of labour economics at Monash and Melbourne universities and a former deputy president of the Industrial Relations Commission, outlines a plan in the latest issue of the Australian Economic Review.

Isaac proposes four main reforms of the reforms. First, the Fair Work Act should be less prescriptive, giving the Fair Work Commission greater discretion to intervene in industrial disputes, to conciliate and, if necessary, impose an arbitrated resolution on both sides.

Second, the present restrictions on unions’ right to enter workplaces should be eased to allow them to check the payments made to union and non-union employees, as well as to recruit members.

The widespread allegations of illegal underpayment of wages suggest “a serious lack of inspection of pay records” – formerly a task in which unions had a major role. “These breaches in award conditions cannot be discounted as a factor in the slow wages growth,” Isaac says.

Third, legislation against “sham contracting” – employers reducing their workers’ entitlements by pretending those employees are independent contractors – should be tightened.

Fourth, the present procedures and delays before workers are allowed to strike while negotiating new wage agreements should be reduced.

As well, bargaining and striking over multiple-employer or industry-wide agreements should be permitted. As economists long ago established, real wage rises should reflect the economy-wide rate of productivity improvement, not the experience of particular firms.

Industry-wide and multiple-employer agreements allow unions to support people working in small and medium businesses, not just those in big businesses and government departments.

Such bargains are known as “pattern bargaining” and are illegal at present. It’s true that pattern bargaining was pressed and extended to other industries unjustifiably in years past, but the commission should have the power to prevent pattern bargaining where it’s not justified.

Now, many employers may view Isaac’s proposed “reregulation” of wage fixing with alarm. What’s to stop the return of unreasonable union behaviour and excessive wage rises?

Ah, that’s just the point. What will prevent it is all those other developments that have weakened workers’ bargaining power.

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Decades of economic success have come at high social cost

I’m thinking of starting a new social movement. Still working on the details, but I’ve already decided we’ll have lapel buttons, bumper stickers and, of course, a hashtag, all that say #letscalmdown.

I know I’m supposed to be banging on about the urgent need for economic reform but, although as a nation we’re better off materially than ever before, I doubt we’re the happiest, most contented or most fulfilled we’ve ever been.

Even if it’s true we all want to be richer (which I doubt), why do we have to be in such a tearing hurry about it?

While I was calming down on holidays a few weeks back, I read social researcher Hugh Mackay’s latest book, Australia Reimagined, and it occurred to me that we seem to be paying quite a price for our economic success.

Mackay says that two seminal facts about Australia suggest we are in urgent need of some course correction.

First, thanks to our rate of relationship breakdown, our shrinking households, our busy lives, our increasing income inequality and our ever-increasing reliance on information technology (and, he could have added, our greater division between public and private schooling), we are a more fragmented society than we have ever been.

Social fragmentation is the opposite of social cohesion. Our fragmentation has been exacerbated by rampant individualism and competitive materialism, whereas social cohesion is grounded in compassion and mutual respect and is the key to true greatness for any society.

“In countries like Australia, we are at more risk of antisocial behaviour from people who are socially isolated and mentally ill than we are from ideologically based acts of terrorism," he says.

Second, we are in the grip of what he insists is “an epidemic of anxiety”. “Two million of us suffer an anxiety disorder in any one year and the closely related epidemics of depression and obesity swell that number even more."

Up to a third of us will experience mental health problems in our lifetime, 20 per cent of young Australians will have had at least one episode of clinical depression before the age of 25 and two-thirds of us are overweight or obese.

These two facts are so closely linked, Mackay says, we should think of them as two sides of the same coin. “Heads we’re more fragmented; tails we’re more anxious.”

The link is that, because we’re herd animals by nature, we become anxious when we’re cut off from the herd and our anxiety, in turn, induces the kind of self-absorption that further inhibits social interaction, creating a vicious circle.

Many of us have retreated into self-absorption – a heightened sense of personal entitlement and an exaggerated concern with personal comfort and personal appearance – as part of our disengagement from political and social issues and desire to escape into our own comfort zone, both physical and digital. The echo chamber effect of social media is part of this escape.

Mackay admits there’s nothing new about people feeling anxious, but argues there’s a lot more of it today because we’ve been neglecting the four strategies we've long used to minimise it: the magical power of faith, the secret power of community, the restorative power of nature and the therapeutic power of creative self-expression.

Let’s look at faith and community. Research by the leading American psychologist Martin Seligman led him to conclude that faith in something larger than the self is the one absolutely essential prerequisite for a sense of meaning in life. And the larger the entity, the more meaning people derive from it.

For most of human history – and for most people living on the planet today – the God of religion has supplied that something greater. But in our ungodly era, “the vacuum created by the absence of religion must be filled by something else”, Mackay says. He’s right. Our psychological makeup demands it.

Most of the research showing the health benefits of religious faith and practice is actually identifying two influential factors: not just the faith, but also the “fellowship”. Church or mosque goers are members of a community of like-minded people who, at their best, are characterised by mutual support, kindness and respect.

The less obvious benefit of social engagement is that “belonging to a community keeps us in touch with people who might need us, and nothing relieves anxiety like a focus on someone else’s needs”. It is “the exercise of compassion – not merely the experience of belonging – that is the great antidote to anxiety”.

Don’t have enough time to do all that, you say? Don’t want to turn your life upside down? Mackay says we’re not going to turn the clock back, not going to junk the technology, not going to stop enjoying the fleeting pleasures of consumerism and not going to give up pursuit of material prosperity for a life of poverty in a monastic cell.

“But is easing back a possibility? Rethinking our priorities, slowing down, disconnecting from technology sometimes (such as when we’re eating a meal in the company of family or friends, or heading for bed), noticing what is happening to our children as a result of the toxic blend of their excessive screen time and our excessive busyness ... in other words, being a little more observant, a little more moderate, a little more restrained, a little better prepared for the future”, Mackay suggests.

Sounds good to me.

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Budget office fills vacuum left by politicised Treasury

I see the federal Auditor-General has been less than complimentary about the Turnbull government’s cashless welfare card. The cheek! I say the man should be removed and replaced by a Liberal Party staffer forthwith.

Always provided the staffer has done at least a year or two of accounting at uni, of course. Wouldn’t do for voters to gain the impression his chief qualifications were his years of loyal service as a ministerial flunky.

If this ironic scenario seems over the top, it’s not way over. If the present Auditor-General actually had incurred the government’s serious displeasure, it would be more likely to wait until his statutory term had expired before replacing him with someone less likely to provide it – and us – with critical advice.

You don’t have to be very long in the workforce to realise that one of the hallmarks of a bad manager is his (or occasionally her) penchant for surrounding themselves with yes-men. See that happening and you know you’re in the presence of a disaster waiting to happen.

But installing a tame auditor-general wouldn’t be a big step beyond the flouting of convention and good governance we’ve seen the government engaged in over the past two weeks.

Following Tony Abbott’s unprecedented dismissal of the secretary to the Treasury in 2013, and his replacement with hand-picked candidate John Fraser, Malcolm Turnbull and Scott Morrison have now completed the politicisation of Treasury.

What an accomplishment for Malcolm to include when he boasts in his memoirs about the glorious achievements of his reign.

With the sudden resignation of Fraser, he was replaced by Philip Gaetjens, whose service as chief-of-staff to Peter Costello and then Morrison himself was interspersed with his time as secretary of the NSW Treasury, appointed by the O’Farrell government after it sacked the apolitical secretary it inherited from the Keneally government, Michael Schur.

The timing of Fraser’s departure was portrayed as all his own inconvenient idea, which may well be true. But, with the federal election so close, it reminds me of a trick practised by the self-perpetuating boards of the mutual insurance companies of old.

Any director not wishing to serve another term would resign just a few months before his term expired. This would allow the board to select his successor, and that successor’s name to go onto the ballot paper with an asterisk beside it, certifying to the voting punters that he was a tried-and-true incumbent.

Morrison then topped off this innovation in Jobs for the Boys by installing Simon Atkinson, a former chief-of-staff to Finance Minister Mathias Cormann, as a deputy secretary in Treasury.

Worse, Atkinson got the job to replace Michael Brennan, who’s been moved up to be the new chairman of the Productivity Commission, which has had a long and proud tradition of independence, giving fearless advice to governments of both colours.

We’ll see how long that lasts. Morrison tacitly admitted Brennan’s appointment was questionable by using his press release to make Brennan sound like a career public servant, conspicuously failing to mention he’d been a staffer for two Howard government ministers and a Liberal Victorian treasurer, not to mention a candidate for Liberal state preselection.

My greatest fear is that the next Labor federal government will use this bad precedent to behave the same way, thus making the politicisation of government departments and supposedly independent agencies bipartisan policy. What a great step forward that would be.

Fortunately, as trust in the professional integrity of Treasury forecasts and assessments declines, the vacuum is being filled by the rise of the Parliamentary Budget Office, which has the same expertise as Treasury, Finance and the spending departments, but is independent of the elected government.

Just last week it produced a most revealing report on the sustainability of federal taxes, one Treasury would have had trouble getting published even in the good old days.

Its message is that there are structural vulnerabilities limiting the future revenue-raising potential of most federal taxes, with the main exception being income tax and that eternal standby of dissembling politicians on both sides, the supposed evil they only pretend to disapprove of: bracket creep.

This is the last thing either side would want us thinking about before the election.

After all, thanks to the budget’s chronically overoptimistic forecasts and what-could-possibly-go-wrong 10-year projections of endless budget surpluses and ever-falling public debt, they can afford to turn the coming election into a tax-cut bidding war.

Vote for me and I’ll cut taxes more than the other guy.

The budget office has punctured that happy fantasy. After the election, whomever we vote for will have to find a way to cover not just the cost of ever-growing but untouchable spending on health, education and all the rest, but also the tax system’s built-in inadequacies.

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Jobs growth goes from extraordinary to ordinary

How’s the job market going? Not nearly as well as the Turnbull government would like us to believe, but not as badly as its critics claim.

According to the money market economists, the figures we got this week from the Australian Bureau of Statistics for the labour force in June were “another strong jobs report”.

Total employment rose during the month by a “stronger than expected” 51,000 jobs. More than 80 per cent of the extra jobs were full-time, and the rate of unemployment fell to 5.4 per cent, its lowest in more than five years.

Impressed? Don’t be. What happened in just the past month tells us little about how the labour market is travelling, particularly as the money market economists insist on using the ropy seasonally adjusted figures because this makes their betting games more exciting.

That the increase was “stronger than expected” sounds nice, but it means nothing to anyone but them and anyone foolish enough to lay money based on their prediction. They make predictions every month, but they’re wrong more often than they’re right.

No, for a sensible view of what’s been happening to jobs we need to look over a run of months and focus on the bureau’s “trend” (smoothed) estimates.

Six weeks ago, when we learnt that real gross domestic product grew by a “stronger than expected” 3.1 per cent (seasonally adjusted) over the year to March, Treasurer Scott Morrison was keen to put this together with the fact that total employment grew by more than 400,000 in 2017 – the strongest growth ever for any calendar year, with more than 1000 jobs created on average every day.

It was proof that Australia had “climbed back to the top of the global leaderboard”. Tough times were over and, under his and Malcolm Turnbull’s masterful plan for Jobs and Growth, everything was on the up and up.

Now, all his claims about our extraordinary jobs performance last year were true. But last year was six months ago. How’ve we been travelling since then?

Ah, not quite so swimmingly. Whereas over the course of 2017 total employment grew, as we’ve seen, by more than 400,000, or 3.3 per cent, over the first six months of 2018 it’s grown by 124,000, which is growth of 1 per cent or, annualised, 2 per cent.

So, after its extraordinary performance last year, this year the job market’s been very ordinary. Indeed, 2 per cent is right on the average annual rate of growth over the past 20 years.

And note this: whereas last year 80 per cent of the extra jobs were full-time, over the past six months less than a third of ’em have been.

I don’t take this as a sign the economy is slowing, however. Rather, it’s an indication that a year-long period in which employment grew far faster than the economy’s unspectacular rate of growth would have led you to expect, has ended and things have returned to normal.

And while we’re cutting the hype back to size, note this. You could have expected that the extraordinary period of jobs growth would have produced a big fall in unemployment. It didn’t. The rate of unemployment fell just from 5.8 per cent to 5.5 per cent, which is good to see, but not outstanding.

Why was the improvement in unemployment relatively modest? Why didn’t the extraordinary growth in jobs cause an extraordinary fall in unemployment?

Because while employment was growing by 3.3 per cent, the number of people in the labour force (that is, those with jobs or actively seeking one) grew by an extraordinary 3 per cent.

Why did the labour force grow so strongly? Partly because the population of working age (everyone 15 and older) grew by a strong 1.7 per cent, but mainly because the rate at which those of working age chose to participate in the labour force (either by holding a job or by seeking one) rose by 0.8 percentage points to a (near record) 65.5 per cent.

Why is participation so high when the experts were expecting the ageing of the population (aka the retirement of the baby-boomer bulge) to bring it down? Mainly because so many baby boomers are continuing to work, even if only part-time. (Stop looking at me like that.)

But while we’re deflating the government’s triumphalism, its critics also need taking down a peg. They like to remind us that the official unemployment rate understates the true extent of worklessness. Specifically, it fails to take account of under-employment  – people with part-time jobs who’d like to work more hours.

All that’s true. But when you correct the unemployment rate (for May) of 5.4 per cent by adding the underemployment rate of 8.5 per cent to give a broader measure of labour “underutilisation” of 13.9 per cent (as, admittedly, the bureau encourages you to do), you’ve gone from understating the problem to overstating it.

Why? Because, by using this “head count” method of measurement, you’re adding apples to oranges. The underemployment rate counts every part-timer who’d like more hours (which is only about a quarter of them), whether they’re after a full-time job or just a few more hours a week.

(Similarly, many people don’t realise that, of the 720,000 people who account for the unemployment rate of 5.4 per cent, about 30 per cent of them are seeking only a part-time job. That is, the official unemployment rate also involves adding apples and oranges.)

Knowing this full well, the bureau also measures labour underutilisation (unemployment plus underemployment) on a consistent, “volume” (or hours-wanted) basis, which it buries deep on its website at catalogue no. 6291.0.55.003, table 23b.

On this other basis, the rate of unemployment falls from 5.4 per cent to 4.2 per cent, and the rate of underemployment from 8.5 per cent to 3.1 per cent, giving an overall rate of underutilisation of not 13.9 per cent, but 7.4 per cent.

This measure of the rate of underemployment hasn’t changed in three years, but the rate of unemployment has fallen slowly, meaning underutilisation has fallen from 7.9 per cent in May 2015. Slow progress.

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Corporate crime is far too common

If we’re to believe what we see in the media, we’re being engulfed by a corporate crime wave. An outbreak of business lawlessness that engages in “wage theft”, mistreatment of franchisees, abuse of workers on temporary visas, and much else.

But should we believe it? Regrettably, my years as a journalist have taught me not to believe everything I read in the paper (this august organ excepted, naturally).

News gathering is a process of what when I was an accountant I would have called “exception reporting”. That’s because people find the exceptions more interesting than the ordinary, everyday occurrences.

When the exceptions pile up, however, the risk is that they’re taken by readers to be representative of the wider reality.

So, in the case of businesses behaving badly, how exceptional are the exceptions? The answer from Rod Sims, chairman of the Australian Competition and Consumer Commission, in a speech he gave last Friday night, is not as exceptional as you’d hope.

To prove his point, Sims offered an extraordinary list of the commission’s enforcement activity, just in the month of April this year.

Ford was ordered to pay $10 million in penalties after it admitted that it had engaged in unconscionable conduct in the way it dealt with complaints about PowerShift transmission cars, sometimes telling customers that shuddering was the result of the customer’s driving style despite knowing the problems with these cars.

Telstra was ordered to pay penalties of $10 million in relation to its third-party billing service known as “premium direct billing” under which it exposed thousands of its own mobile phone customers to unauthorised charges.

Thermomix paid penalties of more than $4.5 million for making false or misleading representations to certain customers through its silence about a safety issue affecting one of its products which the company knew about from a point in time.

Flight Centre was ordered to pay $12.5 million in penalties for attempting to induce three international airlines to enter into price-fixing agreements.

K-Line, a Japanese shipping company, pleaded guilty to criminal cartel conduct concerning the international shipping of cars, trucks and busses to Australia.

Woolworths had proceedings instituted against it alleging that the environmental representations made about some of its Homebrand picnic products were false, misleading and deceptive.

Phew. Surely that was an exceptional month. But Sims has more cases to list.

Earlier this year, the Federal Court found that the food manufacturer Heinz had made misleading claims that its Little Kids Shredz products were beneficial for young children, when they contained about two-thirds sugar.

Who could forget the case of four Nurofen specific pain products? Their packaging claimed that each was specifically formulated to treat a particular type of pain when, in fact, each product contained the same active ingredient and was no more effective at treating that type of pain than any of the others. “The key difference was that the specific pain products were near double the price of the standard Nurofen product,” Sims says.

Hotel giant Meriton was caught taking deliberate steps to prevent guests it suspected would give an unfavourable review from receiving TripAdvisor’s “review express” prompt email, including by inserting additional letters into guests’ email addresses.

The court found this to be a deliberate strategy by Meriton to minimise the number of negative reviews its guests posted on TripAdvisor.

Optus Internet recently admitted to making misleading representations to about 14,000 customers about their transition to the national broadband network, including stating that their services would be disconnected if they didn’t move to the NBN, when under its contracts it could not force disconnection within the timeframe claimed.

Pental has admitted that it made misleading claims about its White King “flushable” cleaning wipes, saying they would disintegrate in the sewerage system when flushed, just like toilet paper, when our wastewater authorities are having big problems because the wipes can cause blockages in their systems.

Shocking. But, you may object, isn’t this just more anecdotes? How representative are they? Sims acknowledges that not all companies behave poorly.

He says that “poor behaviour usually occurs on a spectrum, with few companies behaving badly often, but rather many engaging in occasional significant instances of bad behaviour” – which, he insists, remains unacceptable.

So what can the commission and the government do to reduce the incidence of unacceptable behaviour?

Since businesses commit these excesses in their completely legitimate pursuit of higher profits, the key is to increase the cost to them of bad behaviour.

Many firms invest heavily in their brand reputation, which is a signal that they can be trusted. “The greater the likelihood that bad behaviour will be exposed and made public [see above], the more companies will do to guard against such behaviours.”

In their amoral, dollar-obsessed way, economists assess the attractions of law breaking by weighing the benefit to be gained against the cost of being caught multiplied by the probability of being caught.

Leaving aside the cost of reputational damage (just ask AMP if it knows about that), if you can’t do as much as you should to increase the chance of being caught, you should at least wack up the fines.

Sims says that “the penalties for misconduct, given the likelihood of detection, are comparatively weak”. He believes he’s had some success in persuading the Turnbull government to increase them.

“Just imagine if the penalties I mentioned [see above] were 10 to 20 times higher,” he concludes.

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Digging up a lot more coal won't bring more jobs

One thing I admire about greenies is their soft hearts. Whereas big business pushes its self-interest to the exclusion of all else, environmentalists worry that, in their efforts to save the planet, some workers may lose their jobs.

What worries me, however, is the greenies’ soft heads. Many of them profess to a soul above such sordid (and boring) matters as economics, but the less you know about economics the more easily you’re taken in by developers’ and politicians’ promises of Jobs and Growth.

Greenies know that the “green economy” creates jobs and growth, but worry that their opposition to the building of new thermal coal mines would cost jobs and growth.

So does the miners’ union. Hence the advent of “just transition” – the notion that the transition from fossil fuels to renewables needs to be “just” in that people who lose their jobs in the fossil fuel industries get treated fairly.

Fair enough. Trouble is, if you think the goal is to eliminate the need for workers and regions to change, rather than to help workers adjust to the reshaped economy – you end up doing crazy things like insisting new solar and wind farms are built near the old coal mines, rather than where there’s most sun and wind.

A particular sore point at present is the greenies’ implacable opposition to the establishment of Adani’s Carmichael coal mine in the Galilee Basin of Queensland. What about all the potential jobs and growth that wouldn’t happen?

Well, perhaps it’s not as big a problem as it seems. The thing about the economy that non-economists keep forgetting is that “everything’s connected to everything else”. And as the economists at the Australia Institute remind us in a new paper, when you trace through the linkages you realise that development of the Galilee Basin could be expected to displace a lot of mining jobs – maybe even more than it created.

First point, the Adani mine would be huge. It aims to produce 60 million tonnes of coal a year, making it three times the size of the highest producing mine in NSW.

And if some government subsidises a railway linking Adani’s mine to the nearest port, this would clear the way to building other mines in the Galilee Basin, which could take the basin’s total production to 150 million tonnes a year by 2035.

Australia is already the world’s largest coal exporter. Modelling by commodity analysts Wood Mackenzie, commissioned last year by the world’s largest coal export port, Port of Newcastle, estimates that such increased production would raise the world supply of internationally traded coal by about 15 per cent.

Wood Mackenzie estimates that, assuming the Paris agreement has little effect and world demand for traded thermal coal rises by 10 per cent out to 2035, the excess of supply over demand would cause coal prices to be $3 a tonne lower than otherwise in 2026, rising to $25 lower in 2030.

(Such an assumption about world demand is optimistic for coal producers and pessimistic for the planet. Coal use has been falling in Europe, the US and China, with global coal demand falling by 2 per cent in 2016, for the second year in a row. The International Energy Agency sees the traded thermal coal market as having contracted by 60 per cent in 2040 if countries keep their Paris commitments. If so, coal prices would fall by a lot more than Wood Mackenzie suggests.)

The lower world prices caused by the development of the Galilee Basin would discourage development of new mines – and thus the maintenance of production levels, as existing mines are worked out - in other coal producing regions.

Wood Mackenzie estimates that, by 2035, production in NSW’s Hunter Valley would be 86 million tonnes a year lower than would have been the case had the Galilee development not gone ahead.

For Queensland, this relative reduction would be 17 million tonnes a year for the Bowen Basin and 13 million for the Surat Basin. So, plus 150 million from the Galilee versus minus 116 million from the rest.

The Australia Institute economists’ study seeks to translate these relative reductions in production into relative reductions in employment. Based on Adani’s estimates of labour productivity in its mines, the whole Galilee Basin would employ between 7,800 and 9,800 people to produce 150 million tonnes per year by 2035.

By contrast, their most optimistic estimate is relative reductions of 9100 jobs in the Hunter Valley, 2000 in the Bowen Basin and 1400 in the Surat Basin, a total of 12,500.

How could a net increase in production yield a net decline in jobs? Much greater scope for economies of scale in the Galilee Basin. And that's before you take account of rapid advances in automation, such as driverless trucks controlled remotely from head office in Brisbane.

If we want Jobs and Growth in the future, mining ain’t the place to look.

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How economic reformers and politicians blew out power prices

The privatisation of the electricity industry may not be the worst of the many stuff-ups perpetrated in the name of “micro-economic reform”, but it’s certainly the one that’s cost the greatest number of Australian households and businesses the greatest amount of money.

Like most of the other stuff-ups, this one is explained by the naivety of the nation’s “economic rationalists”. They underestimated the willingness of governments to sabotage the privatisation process and the susceptibility of econocrats to being “captured” by the business interests they were regulating.

They underestimated the industry’s willingness to search out and exploit any weaknesses it found in the regulations. And they overestimated the willingness of consumers to devote their leisure time to penetrating the thicket of electricity retailers’ deliberately confusing pricing plans.

All this naivety arose from their failure to allow for the many oversimplifications of the neoclassical model of markets, which so permeates their thinking. Their plan was perfect on the pages of a textbook, but utterly other-worldly in the real world of politicians and business people on the make.

According to this week’s final report of the Australian Competition and Consumer Commission’s inquiry into retail electricity pricing, over the 10 years to 2017-18, the average price per kilowatt hour paid by residential customers rose by about 56 per cent above the rise in other consumer prices.

(The real increase in average residential customers’ bills was a mere 35 per cent, partly because households economised in their use of electricity, but mainly because 12 per cent of households invested in solar panels.)

The electricity industry divides into three parts: the mainly privatised power stations generating power and feeding into the national electricity market’s grid (the “wholesale” sector), the privatised natural monopoly companies transmitting power over long distances and distributing it through poles and wires in local areas (the “network”), and the mainly privatised companies selling power at the “retail” level.

As the commission’s report makes clear, stuff-ups in all three sectors have contributed to the price blowout.

The wholesale electricity market, via which individual power stations sell their energy to retailers in a real-time auction market, is a completely new, highly sophisticated, government-created market controlled by no less than three government agencies.

For many years it worked well, using the oversupply of generation capacity and the lack of growth in demand to keep the wholesale price low. By now, however, higher wholesale prices account for more than a quarter of the overall retail price increase during the decade.

Competition has been weakened by increased market concentration. Rather than selling each power station to a separate owner, the Queenslanders have just two (still government-owned) businesses running all their stations while, in NSW, two generators were sold to AGL – which, along with Origin and Energy Australia, has been allowed to dominate the national market at both the wholesale and retail levels.

Our big, clapped-out coal-fired power stations are now being closed, but in a way that enhances the oligopolists’ pricing power. Uncertainty over the Coalition’s intentions on reducing carbon emissions, and a separate stuff-up which has hugely increased the costs of gas-fired power stations, have mismanaged the shift from coal to renewable energy sources.

The oligopolists have found ways to game the auction pricing system, which the bureaucratic regulators have been too slow fixing, placing the interests of producers ahead of consumers.

Turning to the network, the micro-economic reformers originally were happy to see this government-owned natural monopoly distribution system privatised, provided prices were tightly regulated.

Except they weren’t. The new private owners fought whatever legal and political battles were needed to get the price regulation loosened, leaving the regulator with little ability to stop them exploiting a loophole which let them pad their profits by spending more on their infrastructure, whether needed or not.

State governments that still owned networks – mainly NSW and Queensland – fattened their profits by imposing excessively high standards of reliability on their networks, thus requiring them to spend big on upgrading.

This was “gold-plating”. When the regulator tried to discount the unnecessary spending, the NSW government took it to court and got the cuts curtailed. Why? Because it was planning to sell its network businesses and wanted to get top dollar at its electricity users’ expense.

The commission estimates that over-investment in NSW and Queensland now costs households in those states an extra $100 to $200 a year. All told, higher network costs across the national market explain 38 per cent of the increase in the average price per kilowatt hour.

At retail level, retail prices used to be regulated by state governments, until the micro-reformers persuaded them this was no longer needed because prices would be restrained by competition between the private companies.

Whoops. In reality, the reverse. The reformers should have known that oligopolists invariably try to avoid competing on price.

The problem was compounded by the way state governments maximised the sale price of their big retail businesses by selling them intact rather than breaking them up. The significant economies of scale this gave the newly purchased incumbents left them well placed to fend off new entrants to the market.

The electricity market’s bureaucratic regulators moved at a snail’s pace to correct this failure, anxious not to impinge on private firms’ freedom to overcharge their customers.

The commission estimates that mishaps at the retail level account for more than a fifth of the rise in average power prices over the decade. About a third of that is explained by spending on the selling costs (marketing, commissions, etc) of persuading people to buy a necessity, with the rest going straight to the bottom line.

That leaves “environmental” costs – hugely excessive incentives for people installing solar systems, the incentives associated with the renewable energy target (the RET) and some state government schemes – accounting for just 15 per cent of the real rise in average power prices, because the cost of these incentives has been shifted to other electricity users.

Little wonder the report concludes the national electricity market needs to be “reset”.

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There's a smarter way to encourage better staff performance

I’ve tried reading a lot of books about management in my time, but the only one that made sense was called The Witch Doctors, by two whip-smart journos on The Economist magazine.

They argued that, for almost a century, management experts hadn’t been able to make up their minds between two polar opposite theories. That’s why there were so many fads in management practice. Managers kept flip-flopping from one extreme to the other.

The first theory was Frederick Taylor’s scientific management, which boiled down to a belief that workers were dumb and lazy. They needed to be closely supervised at all times and motivated to work by being paid piece rates.

The other theory came from Elton Mayo’s Hawthorne experiments, which amounted to a belief that the better you treated your workers the harder they’d work.

It’s the central question in management theory and practice: how do you get your staff to do a good job and keep getting better?

For big organisations – business and government – the latest management super fad, “metrics”, where everything the outfit does is measured and workers are urged on by means of “key performance indicators”, is clearly a flip in the direction of Taylorism.

You’ve seen me fulminating against the folly of KPIs, which are often used as a substitute for management mental effort, and are far too easily – and frequently – fudged.

Only last month it was reported that Victoria Police is investigating suggestions that thousands of random breath tests have been faked, with police complaining of being pressured to conduct unreasonable numbers of breath tests on a shift, along with all their other duties.

Now a University of Sydney study commissioned by the NSW Teachers Federation, based on survey responses from about 18,000 teachers, has found they are drowning under increasing amounts of paperwork. I dare say a few Victorian teachers know the problem.

While it’s the age of computers that’s powering the metrics craze, in practice people with real jobs to do are being required to spend a lot more time – often their own time – on data entry, as part of the demand for them to be more “accountable”.

This is a significant cost along with the assumed benefits of improved information, a cost often underestimated by the metrics enthusiasts because the time it takes is “outsourced” to lesser mortals.

But let’s be positive. If the obsession with KPIs is a folly that will be abandoned soon enough, what better ways are there to encourage staff to do a better job?

After all, there aren’t many outfits whose performance couldn’t be improved, certainly not our schools. The teachers’ unions hate admitting it, but international tests show our student performance is declining, too many students are leaving school ill-prepared for adult life, and the gap between our top and bottom students needs closing.

The move to needs-based funding is just a first step. If the additional funds aren’t directed towards the cost of helping teachers teach better, not much will change.

But if the schools’ version of KPIs – standardised testing via NAPLAN and “accountability and transparency” via the MySchool website – has been a failure, what’s a better way?

The key is that we’ve veered too far towards Taylorism and too far from the Mayo mentality. The metrics approach is too top-down.

Bosses decide what the problems are and how they can be fixed, then impose their solutions on underlings, using KPIs to keep it simple, stupid.

Fortunately, teaching – but not other parts of the public sector – has avoided business’s error of trying to motivate people with pay-for-performance. “Extrinsic” motivation – doing things for the money – is a poor substitute for “intrinsic” motivation: doing things well because it gives you a greater sense of achievement. Because it’s satisfying to know you’re giving customers a good deal.

The growing administrative burden being unthinkingly imposed on professional staff is symptomatic of the top-down mentality. “We need this information for our use; whether you know why we need it and what we use it for is of little consequence – as is the time it takes you to comply.”

Smart bosses keep administrative demands to a minimum, make sure people know why particular information is needed and share it with the data providers so they can use it to improve their own performance. They should even be consulted about which performance information would be most useful.

A chalkie complains that “we are not being trusted as teachers to make judgments”. True. The key to improving the performance of organisations is for bosses (and politicians) to stop thinking they know better than the professionals and telling them how to do their jobs, but to respect, enhance and exploit the professionalism of their people.

It’s about asking people at the coalface what needs to be done to improve performance and what extra help they need to do so, including information about that performance. More consultation and a two-way flow of information.

But professionalism is itself two-sided. With greater freedom in decision-making goes greater acceptance of individual responsibility for improved performance and when something goes wrong.

And greater consultation with teachers at the coalface doesn’t equal putting union leaders on departmental committees making decisions about “protocols for data collection” or anything else.

Professionalism is supposed to mean putting your client’s interests – the interests of students, in this case - ahead of your own. It doesn’t sit easily with militant unionism.

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Business is busier dividing the cake than making it grow

The developed world’s economists have been racking their brains for explanations of the rich countries’ protracted period of weak improvement in the productivity of labour. I’ve thought of one that hasn’t had much attention.

Productivity isn’t improving as fast it could be partly because of the increasing number of our brightest and best devoting their efforts to nothing more productive than helping their bosses or customers game the system.

That is, helping them find ways around our laws – tax laws, labour laws, even officially supported accounting standards for how profits should be measured and reported.

What put this into my mind was all the kerfuffle a few months ago when Labor announced its plan to abolish refunds for unused dividend franking credits.

When Paul Keating introduced dividend imputation in 1988, unused credits weren’t refundable. Only in 2001 were they made so by John Howard. At first, the cost to the budget of this minor concession was tiny. Over the years since then, however, the cost has blown out extraordinarily.

Why? Because a small army of accountants, lawyers and investment advisers started advising their clients (many of whom can’t use their franking credits because they pay no tax on their superannuation payouts) on how to rearrange their share portfolios to take advantage of the new refund.

Thus did they turn a small concession into a hugely expensive loophole. Scott Morrison’s claim that Labor had overestimated the saving to be made by closing the loophole rested on his since-refuted assumption that it had failed to take account of the way the small army would respond by further rearranging their clients’ portfolios.

But that’s just one example. The truth is that helping their customers steal a march on the government is one of the main services the entire investment advice industry uses to justify its fees and commissions.

A particular favourite is helping people with loads of super turn the cartwheels necessary to frustrate the means-test rules and still get a part pension.

Some tax agents help their clients pad out their work-related tax deductions so the punters’ tax refunds are big enough to have the agents’ fee deducted without them feeling much pain.

For years, starry-eyed economists exulted in the phenomenal growth of the banking and financial services sector on the grounds of all the financial innovation going on.

Post the global financial crisis it’s clear much of the innovation was no more productive than finding new ways to minimise tax or get around financial regulations. And, of course, all the advances in “risk management” turned out to be more about slicing, shifting and hiding risk than reducing it.

It’s an open secret that our compulsory super system leaves employees open to hugely excessive fee charging, as layer upon layer of “advisers” clip each other’s tickets and send the bill to the mug savers.

The banks’ volume of trading of currencies, securities and derivatives in financial markets exceeds by many multiples the amount required to service the needs of their real-economy customers – or even to keep markets “deep” (able to process big transactions without shifting the price much).

The banks are just betting against each other - meaning much of the bloated financial sector’s activity isn’t genuinely productive.

And now there’s the “gig economy” – Uber, Airbnb, fast-food delivery services and all the rest.

They represent a strange amalgam of genuine innovation – using the internet and smart phones to bring buyers and sellers together much more efficiently than ever before – with a lot of terribly old-fashioned tricks to get away from the tax, labour and consumer protection laws faced by their conventional competitors.

"Oh no, the people who drive cars, ride bikes or do odd jobs at our behest aren’t our employees. Gosh no. So if they don’t pay their tax, make super contributions or insure themselves, it’s nothing to do with us."

Note that even if all the cost saving extracted from the hides of these poor sods was passed on to customers, it would still be less a genuine efficiency improvement than a mere income transfer from unempowered workers to consumers, most of whom are not in need of a free kick at other people’s expense.

Now, it’s true most of the practices I’ve described are perfectly legal. And many people have convinced themselves that if it’s legal it must be moral. But they can’t have it every way: it may be legal and even moral, but what it’s not is particularly productive.

For many years business people loved to lecture the rest of us about the need to grow a bigger pie, not squabble over how the pie was divided.

Turns out a surprising amount of business activity involves ensuring their slice is bigger than yours. If so, don’t be surprised productivity improvement is slow.

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How governments shift income from rich to poor

Everyone knows the gap between high and low incomes has grown. But much of what we think we know about why it’s happened, and what the government has been doing about it, is probably wrong.

For instance, many people imagine that the main thing governments do to reduce the gap between rich and poor is to raise much of their revenue via the most “progressive” tax in their arsenal, income tax. (A progressive tax takes a progressively higher proportion of tax from people’s income as incomes get higher.)

Sorry, that impression’s wrong.

Another strongly held perception is that, if the gap between high and low-income people is growing, it must be because of something the government is doing. For instance, stages two and three of the Turnbull government’s three-stage, seven-year tax plan are intended to make income tax significantly less progressive.

Sorry, it’s only partly true that growing inequality is caused by government policy.

Yet another misperception is that the inequality of incomes increases as each year passes.

These misunderstandings are what’s so great about the Australian Bureau of Statistics’ publication last month of its six-yearly “fiscal incidence study”, for 2015-16. It’s the most comprehensive guide to what’s been happening to income inequality and, in particular, how it’s been affected by government policies.

Professor Peter Whiteford, of the Australian National University, has written an excellent summary of the study’s findings.

The study allocates the federal and state taxes we pay between the nation’s eight million households, then allocates federal and state government spending to those households. (Some taxes, such as company tax, it can’t attribute to households. Nor some classes of government spending, such as spending on defence and law and order. But these omissions should roughly cancel out.)

So, on one hand, the study takes account not just of income tax, but also all the other, federal and state “indirect” taxes, most of which are “regressive” – they take a higher proportion of low incomes than high ones.

On the other hand, it takes account not just of government benefits in cash (pensions, the dole, family allowance), but also in kind - particularly healthcare (subsidised doctors and pharmaceuticals, free public hospitals, subsidised private insurance), subsidised aged care and childcare, plus pre-school, school, technical and university education.

So it starts with households’ “private income” – the money people earn from wages, profits, investments and superannuation payments – then subtracts the taxes they pay and adds the value of government benefits they receive in cash and kind to get their “final income”.

Get it? The difference between a household’s private income and its final income is the net monetary effect of all the things federal and state governments’ budgets do to the household’s budget.

It shows the extent to which government budgets redistribute income between high and low-income households.

Before we get to that, however, note that most economists believe the fundamental cause of rising inequality is changes in private incomes arising from globalisation and skill-biased technological change which, over many years, have caused the wages of high-skilled workers to grow much faster than those of low-skilled workers.

But the usual way to measure inequality is to compare not individual workers, but individual households, many of which contain two workers, plus dependent children.

It seems likely that, over the decades, the growing gap between high and low wages has been offset by the growing incidence of two-income families.

And note this: in more recent times – the six years between 2009-10 and 2015-16 - there’s been no increase in inequality.

Turning back to the effect of government budgets, the study shows they redistribute a lot more income than many people realise.

Get this: In 2015-16, the poorest 20 per cent of households (mainly pensioners) started with private income averaging just $168 week but, after taking account of their pensions and health and aged care benefits, their final income almost quintupled to $808 a week.

At the other end of the spectrum, the best-off 20 per cent of households (mainly two-income couples with good jobs) started with private income averaging $2863 a week, but had that cut to final income of $2168 a week, a loss of almost $700 a week.

How come? Well, on average they paid $714 a week in income tax and $178 in other taxes, but received just $16 in social security benefits and $192 in non-cash benefits, mainly school education.

Look now at the middle 20 per cent of households and, on average, their final income was only a little different from their private income because the taxes they paid were pretty much offset by the benefits in cash and kind (particularly education) they received.

See what’s happening? Government budgets are highly effective at transferring income from the top 40 per cent of households to the bottom 40 per cent.

And it’s not just progressive taxation that does this. Surprisingly, most of it’s done on the spending side of the budget.

The most common way of measuring inequality is the “gini coefficient”, where zero represents perfect equality between households and 100 represents one household getting all the income.

The study shows a quite high coefficient of 44.2 for private income being reduced to 24.9 for final income.

Now get this. Of this overall decline in inequality of 19.3 points, the progressive income tax scale explains only 4.5 points. And the regressive effect of other taxes reduces this by 0.8 points.

So the remaining 15.6 points of decline in inequality are explained by 8.1 points coming from governments’ cash social security payments, plus 7.5 points coming from the effect of governments’ benefits in kind, particularly health and aged care and education spending.

The first bit should be no surprise. As Whiteford reminds us, Australia’s system of social security payments is the most heavily means-tested in the world.

The big surprise is that our generally non-means-tested benefits-in-kind should do so much to reduce inequality.

My guess is that the high proportion of health and aged care benefits going to age pensioners does much to explain this.

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The taxes we pay come back to us - now or later

As we roll on to the federal election, there’s a surprising number of economic problems we should be discussing, but probably won’t.

For the longer term, the most important problem is the likelihood we’re not doing enough to meet our Paris commitment to reduce greenhouse gas emissions - which is, in any case, inadequate.

Linked with this is the appalling mess we’ve made of privatising electricity. Despite (and partly because of) Tony Abbott’s wrong-headed abolition of the carbon tax, this has left us paying power prices far higher than they need to be.

Linked with soaring electricity prices are soaring gas prices, caused by the gas companies’ gross overestimate of the amount of gas available for export through the many liquefaction plants they built. Absurdly, it would now be cheaper for local users to import gas from the world market.

The most pressing problem we should be discussing is the causes of the four-year-long run of weak growth in wages, which is not just crimping living standards but is by far the greatest threat to the holiest of holies: Jobs and Growth.

Then there are such minor matters as the way the burden of our years of weak growth has fallen mainly on youth leaving education, the way the “gig economy” threatens to undermine decent working conditions, the appalling run of seemingly respectable firms accused of cheating their employees and the terrible hash federal and state governments have made of TAFE.

The misbehaviour of the banks is being following by growing evidence of the misbehaviour of for-profit providers of childcare, aged care and before long, no doubt, disability services. What makes these people think they can mistreat their government-supported clients with impunity?

But if few of these problems are likely to get much attention from our campaigning politicians, what will? They’ll be arguing about their tax cuts being better than the other crowd’s.

With the budget still in deficit and the public debt still rising a decade after the global financial crisis, you’d think a decade of tax cuts is the last thing we could afford, but let’s do it anyway.

Why the obsession with tax? Partly because a government behind in the polls is trying to buy some popularity, partly because the more we obsess about tax the more our attention is drawn away from problems the government can’t or won't fix, but also because a lot of powerful and highly paid men (and I do mean mainly men) will not rest until tax has been “reformed” in a way that means they pay less and others more.

These well-off men are convinced they’re asked to pay far too much. They convince themselves of this by focusing on income tax and seeing it as a “burden” we have to bear without anything coming back our way.

In truth, we pay plenty of other federal and state taxes, which usually fall more heavily on the poor than the rich. And the taxes we pay come back to us as government benefits in cash (pensions, the dole, family allowances) and kind - particularly healthcare (subsidised doctors and pharmaceuticals, free public hospitals, subsidised private insurance), subsidised aged care and childcare, plus pre-school, school, technical and university education.

Every six years the Australia Bureau of Statistics conducts a “fiscal incidence study” in which it allocates the federal and state taxes we pay between the nation’s 8 million households, then allocates federal and state government spending to those households. (Some taxes, such as company tax, it can’t attribute to particular households. Nor some classes of government spending, such as on defence and law and order. But these omissions should roughly cancel out.)

The bureau published its study for 2015-16 last month. It found that, on average, households received $76 a week more in government benefits than they paid in taxes.

Break the households up by life stage, however, and you get a very different picture. For our 1.3 million single-person households aged under 65, the taxes paid by those under 35 exceeded benefits received by $171 a week. For those aged 35 to 54, this increased to $204 a week.

Why? Because most of them had jobs and were in good health, but none had children, meaning they got no family payments nor government spending on school education.

Our 1.4 million couple-only households aged under 65 are the big net contributors. For those under 35, their taxes exceeded their benefits by $480 a week. For those 35 to 54, it rose to $618 a week.

Our 2.5 million couples with dependent children paid a lot of tax, but also got back a lot of benefits, particularly family allowance, a lot of education spending and a fair bit of healthcare. All told, they paid just $42 a week more than they got back.

Skipping half a million single-parent households with dependent children (big net gainers) and a further half million couple households with non-dependent children (modest net payers), we come to the 1.8 million single or couple households aged 65 and over.

The couples got back $452 a week more in benefits than they paid in tax. That’s because they pay little tax, get a lot in pensions and get huge spending on health and aged care. Single retirees get back a net $576 a week, thanks to even greater spending on health and aged care.

So, younger working singles and childless couples are big net payers, couples with children roughly break even, and oldies really clean up. Just as well we all get old.

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Memo Canberra: it's not taxes, it's wages, stupid

With the season of peak political bulldust already upon us, and the media holding a microphone to all the self-serving and often stupid arguments the politicians are having with each other, here’s a tip: if you want sense about our economic problems and their solutions, turn down the pollies’ blathering and turn up the considered contributions from the econocrats.

Reserve Bank governor Dr Philip Lowe, in particular, has more pertinent things to say than Malcolm Turnbull, Bill Shorten, Scott Morrison and Chris Bowen put together.

The sad truth is the pollies main concern is to say the things they hope with get them elected, rather than to outline a convincing strategy to improve our economic wellbeing.

The media’s main concern is to sell us politics as entertainment – “Oh, the pollies had a terrible set-to this week; the side that’s ahead the polls had a bad week, while the losers had a good one, it’s getting sooo exciting” – not to hold politicians to account when they make wrong or dubious claims.

Predictably, the pollies have fallen to arguing about . . . tax cuts. Think of an election, think of bribing voters with tax cuts. The budget’s still in deficit, with the debt still high and rising, but blow that, let’s have a decade of tax cuts.

Both sides believe voters are as venal as pollies are self-serving. But, as always, the pretence that vote-buying tax cuts will do wonders for Jobs and Growth.  Yeah, right.

If Turnbull can con Labor into spending most of the time until the election arguing about tax, he’ll have pulled off a fabulous diversion from the most pressing source of voters’ present hip-pocket discomfort: weak wage growth.

It’s clear the parties’ focus groups are telling them the punters perceive the problem to be the “high cost of living”. With the consumer price index stuck at 2 per cent, that’s an obvious misconception.

It’s a misperception that favours the Coalition, the party that engineered the cuts in penalty rates, has a visceral class hatred of the unions and zero desire to shift the balance of industrial power back in favour of employees.

So who’s the one public figure pointing to the megafauna in the room? Lowe. He’s been talking about weak wage growth for months, seeing the problem as largely cyclical (temporary) and urging us to be patient.

Trouble is, as each quarter passes without any sign of the wage price index stirring from 2 per cent a year, that argument weakens. And in a recent speech he shifted ground, acknowledging that the “norm” for annual wage rises had shifted from 3 to 4 per cent to about 2 per cent, for reasons that are both cyclical and structural (lasting).

Cyclically, wages are weak because, at about 5.5 per cent, unemployment is still above the “conventional estimates” that full employment – the NAIRU, or “non-accelerating-inflation rate of unemployment” - is about 5 per cent.

What’s more, Lowe says, we may find that, like the US and other advanced economies, the NAIRU is now a fair bit lower than we’ve hitherto assumed.

True, Phil. But that’s a significant acknowledgement. What is it that causes the NAIRU to shift? Changes in the structure of the labour market.

In his search for structural explanations for our four-year absence of real wage growth, Lowe says part of the story is likely to be the way globalisation - greater trade between rich and poor countries - has changed the bargaining power of workers by effectively increasing the global supply labour.

But another important part of the story, he says, lies in the nature of recent technological progress. It’s no longer just a matter of firms installing the latest generation of better machines. It’s about software and information technology; intangible capital, not physical capital.

One thing this means is that some firms are much further advanced in applying and exploiting these advances than others. Lowe’s theory is that the lagging firms are trying to keep up by resorting to cost control, making them reluctant increase wages.

But though Lowe is the most thoughtful, pertinent and frankest of our public figures, even he is not yet prepared to voice the unthinkable: when globalisation and digitisation were changing the economy in ways that diminished the bargaining power of most of our workers, maybe this was just the wrong time for us to have been “reforming” wage fixing by shackling employees’ ability to bargain collectively.

Adequate real growth in wages is the key to adequate real growth in consumer spending and, by extension, business investment spending.

And, as Lowe reminds us, many households have taken on big mortgages under the implicit assumption that real wage growth will lessen the burden over time, as it always has. If that doesn’t happen, there’ll be trouble.

But not to worry. Tax cuts will fix everything.

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Economic growth doesn't have to wreck environment

Do you care about the natural environment and the damage our economic activity is doing to it? What if an official agency published some good news on the subject? Would you be interested? Would you be pleased?

Apparently not. Two weeks ago the Australian Bureau of Statistics published its “Australian environmental-economic accounts” for 2015-16, which contained what certainly looks like good news, but they attracted minimal interest from the media and environmental groups.

Perhaps had the news been bad there’d have been more interest. Instead, the bureau found that, in 2015-16, the Australian population grew by 2 per cent and the economy – measured by the quantity of goods and services produced during the year – grew by 3 per cent.

But our emissions of greenhouse gases grew by just under 1 per cent, while our consumption of energy increased by less than 1 per cent and our consumption of water actually fell by 7 per cent.

Get it? We increased our output of goods and services – the amount of our economic activity – but increased our inputs of some key natural resources by less. Our generation of a particularly pernicious form of waste, greenhouse gas emissions, also increased by less.

In other words, we improved the economy’s ecological productivity. Is that not worth noting?

Actually, those figures need to be examined a lot more closely before we pop too many champagne corks. But first, we need to remember why, whether the news they bring is good or bad, it’s worth taking a lot more interest in the annual “national environmental-economic accounts” than we have been.

Which raises a less conspiratorial explanation for our lack of interest in the environmental-economic accounts: because, as associate professor Michael Vardon, of the Australian National University, has pointed out, they’re still a work in progress, with not many people knowing of their existence and even fewer knowing how to extract from their raw numbers the message they’re sending about how much progress we’ve made on the path to ecological sustainability.

That the economy exists within the natural environment, and depends on it for the renewable and non-renewable natural resources we put into our production process, for the “ecosystem services” that grow our food, among many other things, and even for somewhere to dump all the material and airborne waste we generate, is undeniable.

Yet from the moment people started thinking about “the economy”, they viewed it in isolation from the natural environment that sustains it.

A hundred years ago, this seemed sensible. The world’s human population was a fraction of what it is today and we were much poorer than we are now, so it seemed human activity was having only a small impact on the huge natural world.

We knew little about soil erosion and salinity, the wider effects of fertilisers, damming rivers and overfishing, let alone that too much burning of fossil fuels and land clearing could change the climate.

Our economic national accounts and their bottom line, gross domestic product, rest on the happy assumption that we can measure the economy without reference to the natural environment that sustains it.

As greenies never tire of pointing out, GDP takes little or no account of the environmental costs that come with the economic benefits. It even counts spending to remedy environmental damage as another benefit.

Little wonder so many people have been looking for ways to bring the two sides into reconciliation, getting them into the same box, putting their measurement on a comparable basis, so economic benefits can be weighed against environmental costs.

Under the auspices of the United Nations Statistical Commission, the world’s official statisticians have been working to expand the long-accepted rules for measuring GDP, the “system of national accounts”, into a “system of environmental-economic accounting”, or SEEA.

Our bureau of statistics has been active in this project and in 2012 the official SEEA “central framework” was published by the UN. The bureau has been working on the huge task of carrying out and integrating all the physical and monetary measurements needed to put flesh on that framework for Australia.

Progress has been slow, especially because the government’s extraction of annual alleged “efficiency dividends” from the bureau's budget has reduced the work it can do.

But now let’s examine the news that we increased our ecological productivity in 2015-16, presumably leaving us better off both economically and environmentally.

First, this is a caution for all those environmentalists who keep repeating that, in a natural world of fixed size, it’s impossible for the economy to keep growing every year forever.

They’re right, of course, but the economic growth they’re thinking of – growth in the throughput of natural resources – isn’t the growth that GDP measures. Much GDP growth comes not from increased physical throughput in the economic machine, but from increased efficiency in the machine’s conversion of inputs (the greatest of which is not natural resources, but human labour) into outputs of goods and services, aka improved productivity.

So it is conceptually possible for GDP to grow while the use of natural resources doesn’t, or even declines. If that happens, it’s good news all round.

Second, these relationships are far too complex for it to make sense to look just at the change over a period as short as a year. The accounts show that, over the nine years to 2015-16, our population grew by 16 per cent and real GDP by 28 per cent, while energy consumption increased by only 6 per cent and water consumption decreased by 2 per cent.

Emissions of greenhouse gases decreased by 13 per cent relative to 2006-07. But generation of material waste seemed to be growing at about the same rate as GDP. Not good.

Finally, we need to know a lot more about the factors driving these changes, and whether they’re lasting or temporary, before we can conclude we’re making ecological progress.

And remember we need our consumption of fossil fuel energy to be falling rapidly if we’re to make the contribution we should to global efforts to halt global warming.

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Things I've learnt in 40 years as an economics editor

Fortunately, I made the greatest misjudgment of my working life while I was still at university in Newcastle. I concluded that economics was hopelessly unrealistic and boring, whereas accounting was practical and fascinating.

The most disillusioning moment of my working life came soon after I heard that I’d passed the last exam to become a chartered accountant. For years I’d told myself that, once I was qualified, I’d be confident, capable and contented as an auditor.

Nothing changed. I had to admit to myself I neither enjoyed being an accountant nor was much good at it. A year or so later I washed up at The Sydney Morning Herald to offer my services as an over-aged graduate cadet, at a much lower wage.

The news editor who hired me said he didn’t imagine I’d last, but it was worth a try. It was only at the man’s wake a year or two ago that his widow explained what he meant. Knowing I was an accountant, he’d tried to persuade Fairfax to pay me more than a cadet’s wage, but failed.

The editor soon suggested I try my hand at economic journalism. “Accountant, economist – pretty much the same thing, surely?” I bit my tongue and took his advice. Smartest move in my working life.

This month is the 40th anniversary of my appointment as the Herald’s economics editor – surely some kind of record. I’ve been writing for The Age for much of that time.

My survival is owed to a great extent to the trouble I had recovering all the economics I was supposed to have learnt at uni – and to the many hours people who ultimately became professors, Treasury secretaries and Reserve Bank governors spent on the phone with me, explaining the facts of economic life.

Whatever I learnt I immediately explained to the readers. For all those years I’ve seen my role as explaining how the economy works, why economists take the attitudes they do and what the government is seeking to achieve with its policies.

Four decades as an opinion writer leave you with a lot of strongly held opinions. In the early years I preached the prevailing gospel of economic reform; lately I’ve been more like a theatre critic, helping readers decide whether they agree with particular policies.

And, like many old journos, these days I don’t have much faith in either side of politics.

Economic life – and that’s what economics is, the study of “the ordinary business of life” – has changed hugely while I’ve been in this job. All the deregulation and privatisation of the Hawke-Keating years have greatly increased the degree of competitive pressure facing our businesses – from imports and other businesses – much of which they have passed through to their employees.

It’s a long time since anyone thought of Australia as The Land of the Long Weekend.

The world changes more frequently than it used to. The value of our dollar now changes by the minute; the Reserve Bank reviews the level of interest rates once a month. Jobs – even full-time, permanent jobs – have become less permanent.

Much of this change stems not from governments but from the rapid pace of technological change and globalisation (itself to a large extent the product of advances in telecommunications and information processing).

Our standard of living has risen greatly over the years, and we’re surrounded by gadgets that do amazing tricks, though it’s no longer certain that children will end up richer than their parents. Youngsters stay much longer in education, but will have to work until they’re 70.

Home loans have become much easier to get, but infinitely harder to afford.

Pay rises have to be bargained for – often less via unions than directly with the boss - and, over the past four years, have become tiny to non-existent. Rises used to be doled out several times a year by a bench of judges in Melbourne.

My enthusiasm for my topic – for my 43rd federal budget, for instance – is undiminished. Why? Because I keep learning more economics and because the economy, and economic fashions, keep changing.

One “learning” I've acquired is that, while economics - the business of producing and consuming, earning and spending – is and always will be vitally important, it needs to be kept in its place. An economics-obsessed nation isn’t likely to be a happy, fulfilled nation.

Malcolm Turnbull now portrays himself as the great champion of “aspiration”. He’s right. All of us should aspire to something better. But there are plenty of goals more worthy and likely to be more satisfying than gaining a higher income.

What would be wrong with aspiring to make life better for others rather than ourselves?

It’s the same with that great god, economic growth. It’s a good thing to grow. But why must the economy grow bigger rather than better?

I aspire to an economy where bosses are less obsessed with earning more and less convinced that being tough on their employees and customers is the way to get there. Why are they so sure making more money under those conditions will make them happy?

I aspire to an economy where bosses (and politicians) calm down and realise that working with an engaged and satisfied staff to give customers value for money is a more genuinely rewarding way to work and live. I can’t believe such an economy would do badly.

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Economists: male, upper class, out of touch

Could there ever be a shortage of economists? And if there were, would that be a bad thing?

At the risk of being drummed out of the economists’ union, it wouldn’t be a big worry of mine.

What I do find of concern is the decline in the number of students studying economics at school and university, as outlined by the Reserve Bank’s Dr  Jacqui Dwyer in a recent speech.

Why should people study economics? Well, as the world’s greatest female economist, Joan Robinson – a contemporary of Keynes – famously said, “the purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.”

Too true. But Dwyer offers a more positive sales pitch: “Economics is relevant to us all. Every day our lives are affected by economic decisions – ones we make personally and ones that are made by others.

“Economics is about how individuals and societies choose to allocate their limited resources to meet their needs and wants. It’s about how we respond to incentives, make trade-offs, weigh up costs and benefits – and how we decide what is efficient and [sometimes] what is fair.”

I’ve been known to find fault with the performance of economists on the odd occasion, but Dwyer is dead right to say economics “contains some powerful concepts and useful frameworks”.

At its best, economics “can help us better understand the choices involved in many personal decisions we make, and better understand the economic conditions and policies that affect our lives”.

If economics is relevant to daily life, and economic literacy brings benefits to society, how widely is it studied at school and university? Short answer: much less than it was.

Dwyer says that year 12 enrolments in economics have fallen by about 70 per cent over the past 25 years. In NSW the decline has been greater, beginning in the early 1990s when economics was displaced by the introduction of business studies, a subject Dwyer diplomatically refers to as “less analytically demanding”. The name of a Disney character comes to mind.

In 1991, economics was the third most popular subject choice in NSW, surpassed only by English and maths. It was taught in nearly all high schools. These days, it’s taught in less than a third of NSW government schools (many of them selective schools) and a little over half of non-government schools (particularly independent schools).

Back in the day, there were roughly equal numbers of males and females, whereas today males outnumber females roughly two to one. Dwyer says this gender imbalance is worse even than for the STEM subjects – science, technology, engineering and maths.

“So over the course of a generation, there has been a pronounced fall in the size and diversity of the economics student population at Australian high schools,” Dwyer says.

At university, Dwyer’s figures are, on their face, better news: the number of economics enrolments have been fairly constant since the early 1990s, falling only slightly since 2001.

But this isn’t so reassuring when you remember that, over the 15 years to 2016, total under-grad and post-graduate enrolments have grown at the average rate of more than 3 per cent a year.


The average annual rate of growth in enrolments has been about 3.6 per cent for banking and finance, 2.75 per cent for management and commerce, and even about 2.5 per cent for STEM, but a small negative for economics.

It’s not known whether this decline represents reduced demand for economists in the job market. But for those who are economically literate, a clue is that graduate starting salaries are higher for economics students than for those taking business-oriented subjects.

I wonder if the apparent decline in economics is partly just the unis’ greater marketing emphasis in naming their degrees. “Finance”, for instance, is actually a specialisation within economics. And banking, management, commerce and accounting are so theory-light that many such degrees would be beefed up intellectually with a fair bit of economics (as was my own commerce degree).

One strange fact is that of the many fewer unis still offering economics, more than half of those that do are in NSW and the ACT.

But the biggest cause for concern are the signs of diminishing diversity among uni students of economics. The proportion of females has fallen to about a third. And well over half of uni economics students are in the top quarter of socio-economic status, with only about 10 per cent in the bottom quarter. It’s similar, but not quite so extreme, for high school economics students.

If you rank the relevant uni degrees according to the proportion of students from high socio-economic status families, economics comes well ahead of banking and finance, then management and commerce, which is well ahead of STEM.

Oh, dearie me. This may explain a lot.

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Sorry Scott, it's not clear the economy now has lift-off

It’s been the week of an economic miracle. Three months’ ago we were told the economy’s annual growth was a pathetic 2.4 per cent, but this week’s news is it’s now a very healthy 3.1 per cent. And wasn’t Treasurer Scott Morrison cock-a-hoop.

This is the vindication of everything he’s ever told us. It’s the proof the government’s plan for Jobs and Growth  is working a treat.

Last calendar year saw the strongest jobs growth on record, with more than 1000 jobs created on average every day.

Like a favourite footy team, Australia has “climbed back to the top of the global leaderboard”, growing faster than all seven of the biggest rich countries.

“Importantly,” he said, “today’s results validate our budget forecasts and confirm the strengthening economic outlook we presented in the budget just a few weeks ago.”

Sorry to rain on ScoMo’s parade, but each of those happy claims is misleading.

The national accounts for the March quarter, issued by the Australian Bureau of Statistics this week, showed that real gross domestic product grew by 1 per cent during the quarter and by 3.1 per cent over the year to March.

Trouble is, initial quarterly national accounts come in two kinds: “not as bad as they look” and “not as good as they look”. Three months’ ago they were the former and now they’re the latter.

For the past two years they’ve had an almost perfect pattern of implausibly weak one quarter and implausibly strong the next. The problem is that it’s almost impossible for the bureau to measure the economy’s growth from quarter to quarter with any accuracy.

This is why sensible people – which excludes the media, the financial markets and many macro-economists – take the bureau’s advice and focus on its “trend” (or smoothed) estimates.

Three months’ ago they showed annual growth of 2.6 per cent (since revised up to 2.7 per cent) and now they’re showing 2.8 per cent – which is probably as close to the truth as we’re likely to come.

What ScoMo says about employment growth in 2017 is perfectly true and genuinely impressive. About three-quarters of the extra 400,000 jobs created were full-time – one in the eye for those supposed experts who depress our youth by telling them the era of good jobs is over.

But 2017 is receding into history. And in the first four months of this year, the average rate of job creation has slowed from more than 1000 a day to nearer 600.

As for our economy growing faster than the bigger developed countries’ economies, it’s not hard when our population’s growing faster than theirs. Our population grew by 1.6 per cent over the year to March, which explains why growth of 3.1 per cent in the economy turned into growth of 1.5 per cent per person.

As for the latest figures validating the budget’s optimistic forecasts out to 2019-20 (let alone its power-of-positive-thinking projections out to 2028-29), that’s a big call.

The budget forecasts growth in real GDP in 2017-18 of 2.75 per cent. You may think growth of 3.1 per cent over the year to March puts achieving that forecast beyond doubt, but you’d be bamboozled by the different ways of measuring growth.

It’s 3.1 per cent “through the year” from March 2017 to March 2018, whereas the budget forecast is for a “year average” of 2.75 per cent (that is, the whole of 2017-18 compared with the whole of 2016-17).

By my figuring, and assuming no further revisions, real GDP will need to grow by another 1 per cent in the June quarter for the budget forecast to be reached – which is possible, but unlikely.

Similarly, the budget forecasts that the increase in the wage price index will quicken to 2.25 per cent through the year to June 2018. But the figures for the March quarter showed it treading water at 2.1 per cent.

Turning to the detail, about half the 1 per cent growth in real GDP came from a surge in the volume exports, though increased imports cut the contribution of net exports (exports minus imports) to 0.3 percentage points.

Trouble is, part of the surge was explained by a catch-up after production problems in the middle of last year, and part by a new natural gas export facility coming on line, suggesting exports are unlikely to continue growing so strongly.

Growth in public sector spending contributed 0.4 percentage points to the overall GDP growth in the March quarter, with strong public consumption spending (probably mainly the roll-out of the national disability insurance scheme) in the quarter, plus state government spending on transport infrastructure explaining the strength of public investment spending in earlier quarters.

New housing construction made a small contribution to growth in the quarter, but it’s clear the housing boom is waning and so is likely to make little further contribution.

Business investment spending made only a small contribution to quarterly growth, with a fall of 6 per cent in mining investment (and 16.4 per cent over the year) largely offsetting the 3.6 per cent growth (and 14 per cent over the year) in the much-bigger non-mining investment.

So business investment is slowly recovering from the end of the resources boom as we’ve long hoped it would, but the biggest worry in the accounts is the lack of good news on the single most important driver of GDP growth, consumer spending.

It grew by a reasonable 2.9 per cent over the year but, after strengthening in the December quarter, grew by a pathetic 0.3 per cent in the March quarter.

And that required a further fall in households’ rate of saving, from 2.3 per cent to 2.1 per cent of their disposable income, with that rate down from a peak of 10 per cent after the global financial crisis in 2008.

With household debt already so high, not many families will want to borrow more to boost their consumption. And the falls in Sydney and Melbourne house prices mean no encouragement to consume from the "wealth effect" - the higher value of my home means I can afford to spend.

The big problem is the absence of real growth in wages to drive consumer spending. It may or may not come.

Apart from ScoMo’s boundless optimism, there’s no certainty we’ve now achieved lift-off.

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