BANKING AND FINANCE IN AN UNCERTAIN FUTURE

Talk to dinner guests of Hall & Wilcox, lawyers, in association with the Wheeler Centre, Melbourne - Wednesday, July 29, 2015 in Sydney & Tuesday, August 4, 2015 in Melbourne

I’ve been invited to talk to you about the future of banking and finance which, being a journalist, I’m more than happy to do. As a great newspaper owner from the Victorian era, Lord Northcliffe, once said, journalism is a profession whose business is to explain to others what it personally doesn’t understand. I know a fair bit about the economy, a fair bit about budgets and monetary policy and a fair bit about the news media, but I’m no expert on banking and finance, and I’m certainly no techhead.

In preparing for tonight I faced two choices: I could give you a gee-whiz job about all the radical, amazing, frighten changes that are about to engulf us, or I could give you the benefit of the views of grumpy, somewhat cynical old man who’s been watching banking and finance from the sidelines for 40 years and, in particular, watching the process of economic and social change over that time. You can’t be a commentator without being a student of change. I’ve decided to give you a bit of both, but less of the gee-whiz and more of the sceptical old fart.

But before I get into it, let me say this: it never ceases to amaze me that people never tire of asking economists - or, in my case, economic journalists - to tell them what will happen in the future. They keep doing this even though they know full well that economists are hopeless at forecasting. Why? Because as humans we’re addicted to the desire to know what the future holds so we can do something about it: stop it, sidestep it or exploit it. Psychologists call this humans’ “illusion of control”. We have an ingrained belief that if we can find out what’s coming up we can control what happens to us. It’s an illusion, of course. No one knows what the future holds and our ability to change it is usually a lot more limited than we imagine.

It’s because our desire to know and influence the future is a product of our evolution as a species that no amount of bum forecasts in the past deters us from asking for another forecast. So let me oblige. But rather than getting down to a few sexy, gee-whiz examples, I’m going to give you a more top-down, analytical view.

Around the world, and in Australia, banking and financial markets have been changing continuously since the early 1980s - that is, for about 40 years, because of the interrelated forces of globalisation (including the increased integration of the world’s financial markets), changing attitudes to regulation (first deregulation and now a degree of reregulation), and technological advance (particularly greatly reduced costs of telecommunication and of the collection, analysis, transfer and storage of information).

The practice of banking involves “intermediation” - taking deposits from savers and lending the money to investors - and “maturity transformation”: borrowing money for short periods or at call, but lending money for long periods of up to 25 years. Australia’s banking system, like most countries’, has long been dominated by a small number of very large banks, engaged in providing the full range of financial services: facilitating payments, taking deposits and making loans, providing investment advice and the management of assets, and actively participating in most financial markets, for short-term money, securities, foreign exchange, shares, derivatives and so forth. Why is banking so oligopolistic? Because of high barriers to entry arising from economies of scale and the high cost of information.

At this point the main sources of change in banking and finance are, first, continuing changes in the regulation of banks and other major financial players as governments and financial regulators seek to prevent another global financial crisis and, second, continuing innovation as entrepreneurs seek to exploit the opportunities and greatly reduced information costs created by the digital revolution.

The main question we’re considering - the main imponderable - is the extent to which changes in regulatory requirements and in information costs will reduce the barriers to entry, break down the banks’ dominance in the provision of financial services and lead to a flowering alternative suppliers of those services.

The international regulators’ efforts to raise the capital and liquidity requirements imposed on the world’s banks will reduce their gearing and thus, as they frequently complain, increase their costs of intermediation. Whether these greater costs will be borne by the banks’ shareholders or passed on to their customers will be determined by the strength of competition in the relevant markets. But, either way, the higher cost of intermediation will make the banks vulnerable to unregulated suppliers of financial services. As witnessed by the growth of Australia’s corporate bond market, our big corporates are already borrowing directly from the market rather than from banks, and this practice is likely to move down to medium-sized corporates.

Of course, to the extent that the costs of tighter capital requirements shift transactions from the regulated to the unregulated sector, it will frustrate the regulators’ efforts to reduce the risk of another financial crisis. But don’t underestimate the regulators’ ability to fight back by using the digital revolution’s huge reduction in the cost of gathering and analysing financial information to impose much greater disclosure of transactions of non-banks as well as banks (see the speech by Andrew Haldane and others at the Bank of England, in March 2012).

At last we’re up to the sexy bit: all the amazing new products, and opportunities and new players that are likely to emerge as digital disruption reaches banking and financial services. As a journo I do know something about the way the digital revolution is hugely disrupting one industry after another, changing their face for ever. Whatever scepticism you may hear from me, be clear on this: I don’t for a moment doubt that major digital innovation is coming to banking and financial services.

For a full list of every presently conceivable innovation that may possibly disrupt banking as we know it, I refer you to the report on The Future of Financial Services, prepared by Deloitte and others for the World Economic Forum in June this year. But picking out the highlights, in payments system category we have mobile money and digital wallets, such as Apple Pay and Google wallet. This will continue the reduction in the use of cheques and cash, increasing the efficiency of the payments system to the benefit of all, but without much disruption to the banks. We can perhaps reduce the involvement of banks in the making of payments, but I don’t see how we can get away from holding our money in banks. If so, there’ll be a bank somewhere at either end of the payment, even if the transfer isn’t actually conducted by a bank.

Of course, we could keep our money in “crypto currencies” such as bitcoin, but so far the only people doing so seem to be crooks and a few geeks who love trying anything new. If you go back far enough you find we have a history of non-government money - of banks issuing their own banknotes - and it wasn’t a happy one, hence the ultimate outlawing of private money. Apart from any risk benefits from a government monopoly over the issue of fiat money, remember that governments and their central banks benefit greatly from seigniorage.

Turning from payments to intermediation, we come to peer-to-peer lending. The main point here, I think, is that you don’t need to be a bank to match a person or company wanting to lend a certain sum for six months or five years with a person or company wanting to borrow that sum for the same period. Nor do you have to be a bank to assess borrowers’ credit worthiness using advanced software. But matching is not intermediation; it’s not standing between the depositor and the borrower so that the depositor’s claim is against a big, regulated, virtually government-guaranteed bank, not against some puny borrower. Similarly, matching is not maturity transformation; it’s not using a thousand at-call deposits to issue one 20-year loan. Both intermediation and maturity transformation involve taking risks. If a digital upstart doesn’t take on those risks there wouldn’t be many people wanting to lend through them rather than a bank. Certainly, not after the first time the economy had turned down and caused many borrowers to be unable to repay their debts. Were the digital upstart to take on those risks it would either have to lay them off to a bank, or with help from a bank, or it would itself become a virtual bank - in which case it wouldn’t be long before the bank regulators began regulating it.

Turning from intermediation to investment management, much of which is done today by bank subsidiaries, it’s not hard to see that digital upstarts could have success in offering automated, and hence cheaper, advisory functions and actual asset management. But one question is how many punters - or even businesses - would be happy to hand their savings over to a financial robot rather than a human with a good bedside manner.

Summing up, it’s clear that digitisation gives new entrants to the financial services industry the potential to greatly reduce the costs of gathering, processing and transferring financial information. They also have the potential to create valuable new information from the analysis of that financial information. And they have the advantage of having no legacy assets or attitudes.

By the same token, incumbency also carries some advantages. The banks have deep pockets to match the upstarts on the digitisation of financial information or to buy out or copy innovators that succeed with new tricks. And they have a record of being early adopters of improved technology.

But banking is very different from news or books or records or shopping for sneakers. Banking is much more about managing of various forms of risk. And to me the key question is whether digital innovation offers any great advance in the management of risk in addition to its advantages in the management of information. If it doesn’t, I doubt if it will get far. If it does, the banks really will be given a run for their money. But remember that the regulators’ primary concern is systemic risk - the ability of failures in the banking system to inflict great damage on the rest of the economy. So if the digital upstarts do become bank-like - the banks you have when you’re not having banks - I don’t imagine the authorities would waste too much time in starting to regulate them as banks. Bill Gate’s famous saying that “we need banking but we don’t need banks” is a non-sequitur. Any rival outfit that steals the banks’ core business itself becomes a bank.

Now, at last, we come to the part where the grumpy old man comes out of his cave. People have been predicting the demise of the big banks since the advent of financial deregulation in the 1980s - so far to no avail. Can you remember when the entry of the foreign banks was going to do in our local banks? Can you remember when deregulation and the emergence of superior specialised rivals in the provision of particular financial services was going to dismember our big universal-provider banks? So far, whatever the challenge, our big four have gone from strength to strength. Moral: don’t write them off too cheaply.

Next, if you want advice on what the future holds for banking and finance, my advice is that you’ll do better talking to economic historians and the students of earlier waves of major technological innovation - from the railways to electricity to the internal combustion engine to radio - than listening to futurologists and tech-heads. One thing the students of economic history will tell you is that it can take decades for the full commercial potential of major advances to be uncovered and implemented. Another is that the hundred or more start-ups determined to make a killing out of producing automobiles (or whatever) will eventually pack down to just a handful of big, successful, long-lasting corporations - GM, Ford and Chrysler - but until the end it’s impossible to predict who the victors will be.

Even in terms of which gee-whiz new ideas will survive and prosper, and which won’t, the futurologists have a list of failed predictions as long as your arm. They impress us because they seem to know so much about the new technological wonders just over the horizon, but this is their downfall: they love the technological and they love novelty. What they don’t know much about is human nature. Consequently they fail to make the key distinction between what new technology could do for us and what we’ll want it to do for us. Only the stuff we want - the stuff that fits in with human nature - will survive and prosper. Consider the lack of interest in telecommuting. Or the continuing concentration of the financial markets despite the move to electronic trading. Predictors must never forget that humans are intensely social animals. We like to be with others. Urban economists studying the increasing concentration of GDP - value-adding - in CBDs are realising that we learn from being in contact with others. It seems conference calls, even Skype, are a poor substitute for face-to-face contact. MOOC - massive open online courses.

Next, what drives technological change is competition and the desire for profits; business outsiders trying to steal a march on the incumbents, or insiders on their fellow incumbents. I remember Bob Gottliebsen before the Tech Wreck banging on about the huge profits to be made from B2B. But if you study the major technological advances of the past you soon realise that what starts as business people out to make a killing ends up delivering its greatest benefit to customers. The way it works is that any player who comes up with a really successful innovation will soon be copied - by other outsiders and, eventually, by the incumbents- which forces down prices and profits, and shifts the benefit to customers. Apart from any history, I know this from the digital disruption of classified advertising in newspapers. The users of classified ads for houses, jobs and cars have ended up with an infinitely better product for a fraction of the price of an old newspaper classified.

This process by which well-functioning market economies deliver the benefits of digital disruption and other technological change to customers rather than capitalists is one of the great attractions of capitalism. Which is why, though I’m uncertain how much digital disruption will do knock the banks off their perch, I am confident the new or improved products we end up with will be of great benefit to the users of financial services.

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Job insecurity isn't as great as you imagine

As everyone knows, the world of work just gets tougher. For a start there's the ever-growing incidence of "precarious employment" – people in casual jobs, or on short-term contracts, or working for labour-hire companies or temping agencies, or being cast adrift by their employer without benefits as supposedly self-employed.

If you do have one of the ever-scarcer full-time, permanent jobs, you're probably working a lot longer hours than you used to. Unpaid, I'll be bound.

These days, no one stays in the same job – even the same occupation – for very long. More and more people are being made redundant. A young person leaving education can expect to have many different jobs before finally they retire at 70.

It won't be long before many people don't so much have a job as a portfolio of jobs – different things they do for different outfits in any week or month, hoping that when they add it all together it amounts to a reasonable living.

All pretty terrible, eh? There's just one problem – it might be what everyone knows, but none of it's true.

Two profs at the University of Melbourne's Melbourne Institute, Roger Wilkins and Mark Wooden, have looked at the figures and they question all we think we know. Their findings were published in the Australian Economic Review.

It is true we have a lot of part-time and casual employment in Australia – more than in most other rich countries – much of it done by mothers with young families and students who aren't wanting a full-time job. And, these days, by people in semi-retirement.

It's also true that the number of part-time and casual jobs grew rapidly for several decades. It's still growing, but much more slowly.

According to the authors' reading of the figures, over the 10 years to 2013 the proportion of men working part-time has increased by 2 percentage points to just under 18 per cent, while the portion of women has been steady at almost 48 per cent.

While most part-timers are also casuals, the two groups don't overlap completely. The Bureau of Statistics defines casual employment as not receiving paid annual leave and sick leave. Its figures show that, for men, the proportion of casuals has been relatively steady since the late 1990s, fluctuating about 20 per cent. Among women the share has fallen from about 31 per cent to less than 27 per cent.

The annual household, income and labour dynamics in Australia – HILDA – survey shows that more than two-thirds of workers were in permanent or ongoing employment in 2012, an increase of 1.5 percentage points since 2001, when the survey began.

HILDA suggests the share of labour-hire and temporary-employment agency jobs has fallen over that time from 3.7 per cent to 2.7 per cent. (It would be much higher than that in particular industries, of course.)

Nor can Wilkins and Wooden find any evidence that there's been a shift away from employment to greater use of self-employment. Indeed, the stats bureau's figures show the proportion of self-employed in the workforce has been steadily declining over the past 20 years, from 14 per cent to 10 per cent in 2013.

Turning to overwork, there was a time when it was increasing (which got a lot of media publicity), but since then it's been declining (which has got little).

Among men working full-time, the proportion working no more than 40 hours a week increased from 52 per cent to 58 per cent over the 10 years to 2013. The proportion working more than 50 hours fell from 31 per cent to 27 per cent.

That's still a lot, of course. But remember that the people you'd most expect to be working long hours are managers and highly skilled professionals, and these have long been the two fastest-growing occupations. Such people rarely get paid overtime. Rather, the long hours they work are reflected in their hefty annual salaries.

Then there's the widespread perception that these days people are always losing their jobs and having to move on. When employers announce mass layoffs it invariably gets much attention from the media. When there's nothing to announce it gets no attention.

The stats bureau's figures for average job duration and rates of job mobility show little sign that jobs have become less stable, the authors say. In February 2013, just 18 per cent of the employed had been in their job for less than a year, down from 22 per cent in 1994.

In the latest figures, just over one worker in four had been in their job for at least 10 years, up from 23.6 per cent in 1994.

Of course, how long people stay in the same jobs is determined by both dismissals and quits. If jobs are becoming less secure you'd expect dismissals to be up and voluntary departures down.

Both of these vary with the ups and downs of the business cycle but, even so, they've tended to decline. In February 2013, fewer than 3 per cent of all the people who'd had a job in the previous 12 months had been retrenched.

The proportion losing their jobs for any reason was 6 per cent. About 10 per cent of people had quit their jobs.

There are a lot of problems in the world, including the world of work, but let's not imagine more than actually exist.

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Why the economy's slow growth may last

The biggest economic story last week wasn't all the wishful thinking about raising the goods and services tax, it was Reserve Bank governor Glenn Stevens' warning that the economy's "potential" rate of growth may be lower than we've assumed.

Predictably, those commentators who did see the significance of this news were too busy putting their own spin on it to make sure what Stevens' said was widely taken in. So let me have a go.

The macro managers' long-standing belief that the economy's "trend" rate of growth is 3 per cent a year or a fraction more has been challenged by the Bureau of Statistics' labour force estimates showing that, over the past year, the rate of unemployment has stabilised at 6 per cent.

Trouble is, the latest national accounts show the economy growing by only 2.3 per cent over the year to March. This is well below the trend rate that, almost by definition, is the rate at which the economy must grow to hold the unemployment rate steady.

How is this discrepancy explained? Stevens ran through the range of possibilities. Maybe employment hasn't been growing as strongly as the figures say at present. Maybe the economy has been growing more strongly than the figures say at present.

Or maybe part of the surprisingly strong growth in employment is explained by the unusually slow growth in wage rates, which would be saving some jobs and creating others.

The final possibility – and the one to which Stevens gives most weight – is that the trend rate of growth is lower than we've assumed, thus allowing unemployment to stabilise at a lower rate of economic growth than we've assumed.

Economists use the term "trend" in both a backward-looking and a forward-looking sense. If you calculate our average actual rate of growth over the past 10 or 20 years, this must have been our "potential" growth during that period.

If nothing in the economy has changed over that time, it should also be our average, trend rate of growth in the coming five or 10 years.

However, things do change – the population ages, for instance – so economists have to make guesses about what our potential growth rate will be in the future.

Our potential growth rate is the maximum rate at which the economy can grow on average over the medium term without a causing a serious inflation problem. It's set by the economy's supply side.

It represents the average rate at which the economy's capacity to produce goods and services is growing. And this is usually thought of as being determined by the rate of growth in the working population plus the rate of improvement in the productivity of labour.

(Whether in any particular year the economy is growing at a rate below, at or above its potential growth rate is determined by the strength of demand at the time. However, the economy can grow faster than its potential "speed limit" only for as long as it has idle production capacity to use up.)

But this is where those commentators who cottoned on to the significance of Stevens' views jumped to their own conclusions about what was causing the suspected slowdown in potential growth. They assumed it must be caused by a slowdown in labour productivity improvement.

Why? Because this fits well with the economists' (including Stevens') long-running campaign to persuade us to undertake more micro-economic​ reform so as to raise productivity and, hence, material living standards.

What they missed in their missionary zeal was Stevens' clear indication that he thought the culprit was slower-than-expected population growth.

The econocrats' figuring suggest a potential growth rate of 3 per cent would be explained by population growth of 1.7 per cent to 1.8 per cent a year, plus growth in labour productivity of 1.2 per cent to 1.3 per cent a year.

So their expected rate of productivity improvement is already pretty low, while the end of the mining construction boom and slow growth generally have seen population growth slow to 1.5 per cent a year or less as the net intake of workers on temporary 457 visas falls and Kiwis go home to a faster-growing economy.

The other thing the missionaries missed was Stevens point that, to the extent the lower trend rate is caused by lower population growth, it shouldn't involve any slower rate of improvement in our material living standards, as measured by growth per person.

Missionary micro-economic reformers won't win lasting converts by misrepresenting our present position, nor the outlook for growth. Their pessimism about future productivity improvement isn't supported by our more recent performance. It's little more than a guess.

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We're not doing too badly on productivity

Rummaging through the media's rubbish bins this week, I happened upon some good news. According to the Productivity Commission's annual update, the productivity of labour improved by 1.4 per cent in 2013-14.

And get this: in the 12-industry "market sector" of the economy, it improved by 2.5 per cent in that year and by 3.7 per cent the year before.

To give you an idea, the 40-year average rate of market-sector productivity improvement is 2.3 per cent. So, despite all the worrying we've been doing in recent years about our poor productivity performance, it seems we're now doing quite well.

In which case, how come no one wanted to tell us? I can think of three reasons. First is the media's assumption that good news is of little interest to their customers.

Second is that the Productivity Commission's preference is for brushing aside the labour productivity figures and getting us to focus on the figures for "multi-factor productivity", which show an improvement of just 0.4 per cent in 2013-14 and 0.4 per cent the year before. This compares with the 40-year average of 0.8 per cent a year.

Third is that the nation's economists are engaged in a campaign to persuade us we need a lot more micro-economic reform so as to raise our rate of productivity improvement and, hence, the rate at which our material standard of living is rising.

They'd make the same argument whether our productivity performance was good, bad or indifferent, but it helps the selling job if they leave us with the impression our recent performance is poor.

Anyway, let's take a closer look at the commission's new figures. Productivity, which compares the growth in the output of goods and services with the growth in inputs of labour and capital, is a measure of the efficiency of our production. When outputs grow faster than inputs, the economy – the economic machine, so to speak – has become more efficient.

The simplest (and probably least inaccurate) way of measuring productivity is to take the increase in the quantity of goods and services produced during the year and divide it by the increase in the total number of hours worked to produce the stuff.

The main way to increase the productivity of workers is to give them more machines to work with. But the commission believes a more revealing measure is multi-factor productivity. You calculate this by dividing the increase in output by the increase in labour inputs plus the increase in capital inputs (use of machines and other equipment).

The main thing causing an increase in multi-factor productivity is technological advance – the invention of better machines plus improved ways of running businesses. But also improvements in "human capital" – the rising education and skill of the workforce.

That's all fine in theory, but it gets pretty ropey in practice. For a start, we have no way of measuring the productivity of the public sector (healthcare, education and public administration) because, for the most part, it doesn't sell its output in the market.

The market sector covers the financial services, mining, construction, manufacturing, transport, retail trade, wholesale trade, information media and telecommunications, electricity gas and water, agriculture, accommodation and food services, arts and recreation services, rental hiring and real estate services, professional scientific services, administrative support services, and "other" services industries.

That's 16 industries – though, for reasons it doesn't explain, the commission's 12-industry measure of market sector productivity doesn't include the last four industries on that list. Even so, the 12 industries account for 65 per cent of gross domestic product.

A much more serious problem is that the measurement of multi-factor productivity is quite dodgy. It's measured as a residual, meaning that any error in measuring the three other items in the sum will (and does) make the measurement of multi-factor productivity wrong.

More particularly, economists have no way of accurately measuring capital inputs. Just one of their problems is that they can't distinguish between more machines and better machines, meaning their so-called measure of multi-factor productivity excludes much of the technological advance it purports to measure.

The besetting sin of economists is the way they confidently quote their figures to a trusting public, without breathing a word about the data deficiencies and dubious assumptions that lie behind their calculations. When they fail to issue a product warning, it's the duty of the conscientious economic journalist to call them out.

In such circumstances, the commission's results need to be treated with scepticism – particular when, as was true in the noughties, they were so unprecedentedly low as to be implausible.

But let's look at the commission's breakdown of the latest year's supposedly weak result of 0.4 per cent. Half of the 12 industries – all of them in the services sector – achieved remarkably strong improvements, ranging between 1.1 per cent and 5.4 per cent.

Three industries – mining, construction, agriculture – had growing production but marginally declining multi-factor productivity. We know the problems in mining and construction are temporary. Agriculture's poor performance came mainly from drought.

The last three industries – utilities, manufacturing and transport – suffered declining production but lesser declines in inputs, meaning their multi-factor productivity deteriorated quite significantly.

We know the utilities, particularly electricity and gas, are coping with major structural changes, not helped by the earlier misregulation of poles and wires. We know manufacturing is still recovering from the high exchange rate caused by the resources boom. Whatever transport's problem is – we're not told – it will get over it.

That's the trouble with the supposedly worrying figures for multi-factor productivity. Apart from the ropiness of their calculation, when you investigate the stories for the particular industries involved you can't find anything major to worry about.

I'd say that, despite all the barrow-pushers wanting to use poor productivity figures to bolster whatever cause they're promoting, we're not doing too badly on productivity.

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Everyone wants a slice of a higher GST

Norman Lindsay called it the Magic Pudding. Economists call it opportunity cost. In the untiring campaign by some for an increase in the goods and services tax, a new magic pudding has been created. The trouble is, opportunity cost is real, but magic puddings aren't.

Put at its simplest, the concept of opportunity cost says that if you've got a dollar, you can only spend it once. This truth might be glaringly apparent, but it's surprising how often grown men (and, less commonly, grown women) forget it.

By contrast, the original magic pudding allowed its owners to "cut and come again". No matter how many times they cut themselves a slice, the pudding would magically grow back.

Just the most recent proposal for a higher GST – of 15 per cent – comes from the Premier of NSW, Mike Baird. He wants it to help the state governments raise more taxation to help them pay for the ever-growing cost of their public hospitals and still balance their budgets.

But Baird and some of his fellow premiers aren't the only people with designs on the extra revenue a higher GST would bring. He's been spurred by the knowledge that, so far, Prime Minister Tony Abbott is sticking with the plan announced in last year's budget to move to a less generous way of indexing federal grants to the states for their public hospitals and schools from 2017, which would cause those grants to grow by $80 billion less than they would have, over the following decade.

There are people cynical enough to believe this cut was aimed at softening the premiers up and obliging them to agree to an increase in the GST as the only solution to their future funding problems.

But do you see what this means? It means a big slug of the extra revenue raised by a higher GST would go towards solving the feds' budget problems, not the states'. Suddenly, the pot of gold isn't looking so big.

But that's not all. There are a lot of economists and business people urging that the proceeds from the higher GST first be used to abolish various state taxes regarded as "inefficient" – that is, ones that have the effect of seriously distorting the choices people make.

Top of the list of inefficient state taxes is stamp duty on the transfer of commercial and domestic properties, and the tax on insurance policies. But some business people have their eye on using the GST to replace payroll tax. And a lot of landlords would like to get rid of land tax.

But why stop at eliminating state taxes? Why not use it to reduce a few federal taxes you don't like?

Big business is very anxious to "reform" the tax system by using a higher GST to cut the rate of company tax. And many high income-earners believe it vitally important to cut the top personal tax rate, lest all our top people migrate to countries where taxes are lower (Malaysia, say).

It's clear Treasurer Joe Hockey would very much like to cut company tax and the top tax rate for individuals, if only the boss could summon the courage (and Hockey's powers as a salesman were magically transformed).

But Hockey has another problem he'd no doubt like the GST's help with. He knows that the main thing he's using to allow him to project slowly declining budget deficits in coming years is ever-rising collections of income tax, caused mainly by "bracket creep" – inflation pushing people into higher tax brackets.

The trouble is, after a while, people notice the higher tax rate they're paying on any overtime or pay rise. When they do, they tend to get pretty stirred up and look for a politician to blame.

So Hockey knows that, before long, he'll need to have a tax cut that gets people on tax rates below the top one back into lower brackets. It would be nice if he could make up some of this lost revenue by increasing the GST.

See the magic pudding? There's a host of different groups pushing for higher GST, but they all want to use the proceeds to pay for something different. Between them they have plans to spend each extra GST dollar many times over.

That's true even if, as well as simply increasing the rate to, say, 15 per cent, we also extended it to cover food, education, health and financial services.

And don't forget this: because the GST is universally acknowledged to be a "regressive" tax – it takes a higher proportion of low incomes than of high incomes – it would have to come with a lot of "compensation" for low- to middle-income earners, in the form of increases in pensions and the family allowance and cuts in income tax at the bottom.

All this compensation would have a cost. In other words, the net proceeds from raising the GST would be a lot lower than the gross.

If you get the feeling the debate about increasing the GST has entered the realm of fantasy, you're not wrong. Once the more fanciful ways of using the proceeds had been eliminated, the number of people pushing for it would be greatly reduced.

If you get the feeling this means the GST won't be going up any time soon, you're not wrong, either. I won't be losing any sleep over it.

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Tax reform push doesn’t add up

For once the Business Council has said something those who don't champion the interests of big business can agree with. We have indeed reached a new low in the nation's political leadership.

The council's president, Catherine Livingstone, said last week that "at a time of great economic uncertainty, Australia needs and deserves strong leadership, and the opportunity to discuss reform options as a community".

"Our political representatives are elected and paid by the community to implement policies that will best serve the country. Their leadership responsibility is to ensure that there is a constructive, well-informed debate, leading to implementable outcomes; it is not to undermine the debate in the cause of party political positioning."

Livingstone's rebuke was rightly aimed at both sides of politics and both levels of government. But it must be said that Tony Abbott is the worst offender. Clearly, a government has greater responsibility to lead than an opposition.

The federal opposition's responsibility is not to descend to the level of destabilisation and automatic obstruction resorted to by the previous occupant of the position. Abbott is forging new lows on both sides of the Speaker's chair.

It was Abbott who, not long after Joe Hockey made his first call for a "sensible, mature debate about tax reform", summarily ruled out reform of negative gearing and superannuation tax concessions.

Why? Because Labor signalled its intention to propose such reforms and Abbott saw a chance to wedge Labor by portraying it as high taxing and the Coalition (with all its bracket creep) as low taxing.

Hence Livingstone's reference to "party political positioning". The sad truth is, these days governments rarely propose any "reform" without using it to attempt to wedge the other side. Kevin Rudd tried it with his failed carbon pollution reduction scheme, and Julia Gillard tried it with the Gonski education reforms and the national disability insurance scheme.

There's nothing Bill Shorten would like more than to wedge the Coalition on changes to the goods and services tax (apart from being given an excuse to proclaim the return of Work Choices), but Abbott lost no time in wriggling out of promising any serious change to the GST by imposing a condition he knew would not be fulfilled: every premier must first agree to the change before he endorsed it.

Those calling for greater bipartisanship on tax reform need to remember that, of all the areas of reform, taxation is the one where it's been least evident in the past. The Coalition (and the Business Council) opposed Paul Keating's introduction of capital gains tax and fringe benefits tax.

Labor opposed John Howard's introduction of the GST; the Coalition opposed Labor's introduction of the carbon tax and the mining tax. The only instance of bipartisanship I remember is Simon Crean (foolishly) waving through Howard's halving of the capital gains tax.

The parties divide on tax because there's no issue where the two sides' continuation of class warfare is more apparent. The Coalition seeks to favour the interests of business and high-income earners; Labor tends to favour middle and lower-income earners.

While in opposition, Abbott promised his big-business backers he'd take proposals for major changes in taxation and industrial relations to the 2016 election. But the public's rejection of his first budget as grossly unfair, and his subsequent poor showing the in polls means the government is fighting for survival, with no stomach for unpopular "reforms" of taxation or anything else.

Last week we had Hockey giving a speech that pretended the tax reform white-paper process was alive and well, even though we all know it's going nowhere.

He repeated his call for a mature debate about tax reform, while ruling out various reforms – changes to super tax concessions, negative gearing, the half tax rates on capital gains, the GST – and listing the changes he favoured (at some wonderful time in the future): a lower company tax rate, cutting the top personal tax rate and doing something about bracket creep.

The government's professed goal is lower taxes and no new taxes but, apart from the rise in GST we're not having, Hockey mentioned no tax he'd be prepared to increase to pay for all those he'd like to cut.

The only way to square that circle is another attempt at sweeping cuts in government spending, or to let budget deficits and debt go up rather than down. But who'd believe that?

The tax changes he fancies are from the Business Council wish-list​, shifting the tax burden from higher earners to lower earners. They'd be just as unfair as last year's budget.

Memo big business: no fairness, no deal. You should have learnt that last year.

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All we should be doing to protect land and water

You get the feeling Tony Abbott doesn't lie awake at night worrying about what our economic activity is doing to our natural environment.

In which case, those of us who do care about ecological sustainability – including many Coalition voters and, in all probability, Abbott's successor, whether Liberal or Labor – will have a lot of catching up to do.

This looks like being true of our excessive contribution to global greenhouse gas emissions. But it also applies to the more mundane problems of protecting and restoring our degraded land, water systems and native flora and fauna.

So what should we be doing, even if we aren't yet? The Wentworth Group of Concerned Scientists have produced a paper on Using Markets to Conserve Natural Capital. As the name implies, it has economists' fingerprints all over it.

In many cases the adverse environmental consequences of economic activity aren't reflected in the costs faced by producers and their customers, a classic instance of "market failure" – where the operation of market forces does not produce satisfactory outcomes for the community.

For instance, industries will continue to emit excessive greenhouse gases if there's no market value placed on retaining a stable climate system. And farming may cause land degradation if there's no market value placed on preserving the services the ecosystem provides to society by allowing us to grow food and fibre.

All this is a way of saying that the economy and the environment are inextricably linked but, left to its own devices, the market isn't capable of ensuring we don't stuff the environment and thereby stuff the economy.

Most economists accept this truth, but argue that the least economically costly way to fix the problem is to intervene in markets in ways that harness market forces to the service of the environment.

Often this can be done by getting the social (community-wide) costs of environmental damage incorporated into the private costs borne by producers and consumers. This was the rationale for the Gillard government's policy of using a hybrid carbon tax/emissions trading scheme to put a price on emissions of carbon dioxide and other greenhouse gases.

The concerned scientists accept this logic and propose four market-oriented interventions to reduce future damage to the nation's "environmental assets" and to fix past damage.

Their first proposal is to change the law to impose on all landowners, public or private, a "duty of care" to prevent further damage to their land and water resources. Developing codes of practice would give landowners greater certainty about their obligations.

This reflects the principle that the community's right to a clean and sustainable environment overrides the rights of individuals to unrestricted use of their private property.

Actions of great environmental value that go beyond the standard of care required – such as fixing damage done in the past – could be purchased by governments from private owners using programs that use market-based instruments, such as Victoria's BushTender​ program.

The scientists' second proposal is for the federal government to supplement our efforts to reduce carbon emissions by paying farmers, Indigenous communities and other landowners to engage in "carbon farming" – doing things that improve the rate at which carbon dioxide is removed from the atmosphere and converted to plant material or soil organic matter, where it stays.

If you do this right, it can also be used to restore degraded land. But it involves having a price on carbon so farmers can be rewarded with valuable "carbon offset" certificates.

However, there are risks if the market for carbon offsets isn't properly regulated. "Without complementary land-use controls and water accounting arrangements in place, carbon forests could take over large areas of high quality agricultural land and affect water availability," the paper warns.

"This could create adverse impacts on food and fibre production, and affect regional jobs that are dependent on these industries."

The scientists' third proposal is that we reform the tax system to make it one that doesn't encourage unsustainable practices, but rather encourages the conservation and repair of the natural environment.

"Subsidising or providing economic incentives for fossil fuels makes no sense because it results in increased costs to the environment, costs we will all have to bear sooner or later," the paper says.

It particularly makes no sense when at the same time we're using a tax on carbon to discourage the use of fossil fuels or, as now, spending taxpayers' money to pay for "direct action" to reduce emissions.

And yet our miners and farmers are exempt from paying petrol excise on fuel used off-road. It's the obvious tax break to get rid of – and save the government money.

The paper also recommends establishing a broad-based land tax to provide long-term, equitable funding for paying farmers, Indigenous communities and other land holders to restore and maintain environmental assets in a healthy condition.

Finally, the scientists propose government action to encourage sustainable farming practices. They say farmers need to receive a financial reward for managing their farms sustainably and suppliers, retailers and consumers need to have confidence that their products satisfy rigorous standards.

A farm is sustainable when environmental assets located on the farm are being maintained in a condition that contributes to the overall health and resilience of its surrounding region.

Environmental assets – not all of which will be on farms – include soil, native vegetation, native fauna, water resources (rivers, aquifers, wetlands, estuaries) and carbon.

The financial reward doesn't have to come from the government. Consumers will pay a premium for food that has been grown sustainably, provided they have some assurance this is so.

The government's role is to support the development of voluntary, industry-based sustainable certification of farms and to ensure such schemes are trustworthy. The government should also be active in the development of international sustainability standards so our exporting farmers can participate and benefit.

All very sensible stuff. Now we just need a sensible government.

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Increase property tax, not the GST

Let me tell you something neither side of politics will: we'll be paying a lot higher taxes over the next decade than we are today. And don't think you could have up to 10 years before that prediction comes to pass – it's already started.

It's happening because of bracket creep. This year's budget says the present intention is to let inflation push people into higher tax brackets for another five years before our next tax cut in 2020.

The more continuing falls in the prices of iron ore and other mineral exports slow the growth in company tax collections, the further into the future the timing of our next cut in income tax.

So much for the man who says he stands for lower taxes, whereas his opponents stand for higher taxes. It does seem that Labor may summon the courage to go to the next election promising to reduce superannuation tax breaks for the well-off and to do something about negative gearing.

But continuing bracket creep plus those small reforms – should we ever see them – won't be sufficient to stop budget deficits getting ever higher as government spending – federal and state – continues growing strongly. In particular, spending on health and education are almost certain to grow faster than the nation's income (gross domestic product) is growing.

Similarly, don't believe the team captain when he claims to stand for "smaller government". We have the inglorious retreat from last year's budget – which was intended fix the budget deficit for good and all, and do so almost solely by cuts in government spending – to convince us that the electorate simply won't tolerate the scale of cuts, nor the unfairness, needed to hold our spending down to the level that receipts from our present collection of taxes are able to cover.

Usually, this is the point where the question of raising collections from the goods and services tax is raised. Either raising its rate from 10 per cent, or broadening its net to include food, education and health. Or both.

Be under no illusion, the rich and powerful of this country have their hearts set on raising more from GST. They want it not to cover ever-rising government spending but to cover the cost of cutting the rate of company tax and the top rate of income tax.

They argue that globalisation has intensified the "tax competition" between countries. Financial capital is now a lot more mobile and if we tax it too heavily it will go elsewhere. So we need to cut our taxes on highly mobile resources (company tax and income tax on highly paid executives) and increase tax on less mobile resources (consumption tax paid by punters who can't move countries).

That this would shift the burden of taxation from the well-off to the less well-off is just an unfortunate but unavoidable consequence of a globalising world, we're told.

But this is where someone of consequence has said something new and different. In a paper to be released on Wednesday, the head of the Grattan Institute, John Daley, with help from Brendan Coates, argues that the obvious tax we need to raise is not GST but property tax.

He's right, and it's amazing it's taken so long for someone to say the obvious. Real estate is the ultimate immobile resource. A tax on land – with or without the improvements built on it – is very hard to avoid, even by foreign multinationals. It's also highly "efficient" in the economists' sense that it does little to distort people's behaviour. It doesn't discourage them from working, saving or investing.

Since it's the state governments that do most of the spending on health and education – and Abbott still has on the books his plan to cut his budget deficit by reducing federal grants for public hospitals and schools by $80 billion over a decade starting in 2017 – it's appropriate that the tax would be levied by the each of the states, which would keep the proceeds.

Politically, I don't imagine voters would view the prospect of higher property tax with any less hostility than they'd view higher GST. But there's one big difference: increasing property tax would much fairer.

GST is "regressive" – it takes a higher proportion of low incomes than high incomes – whereas property tax is "progressive", hitting the rich harder than the poor. It's actually a tax on one of the main forms in which we keep our wealth.

At present we pay three taxes on property: local government rates, stamp duty when properties are bought and land tax on property other than the family home.

Daley proposes leaving these taxes unchanged while adding a new "property levy" imposed on all property, including owner-occupied homes. The levy would be applied to the same tax base as used for local rates.

He estimates that an annual levy of just $2 for every $1000 of unimproved land value, or $1 for every $1000 of improved value (land plus building), would raise about $7 billion a year.

A homeowner would pay a levy of $772 a year on the median-priced Sydney home, valued at $772,000, or $560 a year on the median-priced Melbourne home, valued at $560,000.

What would we get for that? Mainly, more healthcare, giving us longer lives and less infirmity. Not a bad deal.

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Lower dollar boosts services exports

Did you know that when the value of our dollar falls, imports become dearer? When the Business Bible learnt this last week, it got so excited it led the paper with the news.

Every smarty knows that the economic turmoil in Greece and China must spell bad news for us, so when the turmoil caused the Aussie dollar to fall below US75¢, this was obviously the start of the badness.

Apparently, it means the "global purchasing power" of Australian households has fallen. Who knew?

Immediately, our ever-vigilant media sprang into action to determine which purchases were likely to be more expensive. Don't you love the way the media can find the downside in any piece of economic news?

The fact that for months the nation's macro-economists and many of our business people have had their tongues hanging out, thirsting after a lower exchange rate, was something no one considered worth mentioning.

Nor that Reserve Bank governor Glenn Stevens' wish to see the dollar fall to US75¢ had finally come true.

It's true that if you view the position solely from the perspective of consumers, a higher dollar is good news and a lower dollar is bad.

However, from the perspective of Australia's trade-exposed industries and their employees, it's the other way around.

A high dollar means you get fewer Aussie dollars for anything you export, whereas the imports you compete against in the local market are now cheaper than they were.

So a higher dollar means Australian tradeable industries suffer a loss of international price competitiveness, which almost always leads to them reducing their production and their job opportunities.

In other words, a higher dollar has a contractionary effect on economic activity (which at least has the advantage of reducing inflation pressure). And that's been our story since the mining boom caused the Aussie to appreciate so strongly.

However, with mineral commodity prices having been falling since mid-2011 and mining construction projects winding up since the end of 2012, the dollar finally began falling back; though, thanks to the advanced economies' resort to "quantitative easing" (creating money), not by as much as the fall in commodity prices implied should happen.

It follows that a lower dollar has an expansionary effect on economic activity. Since our exporters now get more Aussie cents for each US dollar they earn, they're able to export more. And, since imports are now more expensive to their domestic customers, they're able to recapture a larger share of the local market.

The consequence is that our tradeable industries increase their production and the job opportunities they provide.

In our attempts to explain why relatively strong growth in employment – particularly since the start of this year – has caused the official unemployment rate to stay steady at 6 per cent, you'd have to give the lower dollar a fair bit of the credit.

That's particularly evident in the strong growth in employment in the services sector and in exports of services. Historically, services were regarded as non-tradeable, but globalisation and advances in transportation, telecommunications and digitisation are making that less true every year.

The tradeable services sector's improved price competitiveness comes at a time when Asia's middle-class is growing in size and income, with its consumption preferences shifting towards Western goods, services and destinations.

No service industry better demonstrates the lower dollar's beneficial effect on production and jobs than tourism: an industry where import replacement is just as important as exporting. The lower dollar not only attracts more foreigner visitors, it encourages Australians to holiday at home rather than abroad.

Estimates from Paul Bloxham, of HSBC bank, show spending on tourism accounts for about 3 per cent of gross domestic product, with about a third of this coming from foreign tourists.
The industry employs more than 500,000 people.

Overall, the value of tourism exports reached $14 billion in 2014, up 8 per cent. Tourist arrivals from China over the year to May were up 21 per cent on the previous year, Bloxham says. Chinese visits to Oz have increased to 920,000 over the past year, up from 370,000 five years ago.

Turning to education exports, Bloxham says international student enrolments reached a new high of almost 147,000 at the start of this year. Last year, the value of education exports reached $17 billion, surpassing the previous record in 2009.

And Joe Hockey has reminded us that the value of all services exports over the year to March was up 8 per cent, their fastest growth since 2007.

So if the fallout from the present international turmoil involves further falls in the Aussie, don't let anyone tell you it's a bad thing.

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Slower immigration keeps unemployment steady

While we're busy scaring ourselves silly imagining all the terrible consequences that may or may not flow from the turbulence in the eurozone and China, forgive me for intruding with some good news closer to home: unemployment has stopped rising.

The employment figures we got from the Bureau of Statistics this week confirm – and so make a lot more believable – the amazing figures we got a month ago saying the official rate of unemployment had stabilised at 6 per cent.

Barring some unexpected disaster, it's now looking less likely the Reserve Bank's forecast that unemployment will rise to 6.5 per cent by June next year will be realised.

Let's cut through the month-to-month volatility that so many in the markets and media love by sticking to the smoothed seasonally adjusted estimates known as the "trend" figures.

They show that total employment grew by 215,000 over the year to June, an increase of 1.9 per cent. More than half these extra jobs were full-time.

Since the labour force – all those people either in a job or actively seeking one – grew at about the same rate as employment, this was sufficient to get the rate of unemployment back down to where it was in June last year – 6 per cent.

And this happened despite the rate of participation in the labour force – the proportion of the population aged 15 or over who were either employed or unemployed – rising from 64.7 per cent to 64.8 per cent during the year. Not bad considering the retirement of the baby-boomer bulge is working to lower the participation rate.

As I say, this is the same story the figures were telling us a month ago. So where have the extra jobs come from? Well, Kieran Davies, of Barclays bank, has used somewhat different figures – they say we had employment growth of 240,000 over the year to May – to tell us.

He follows the Reserve Bank's practice of splitting the economy into five broad sectors: household services (including accommodation and food services, education, health, recreation and other services), business services (information technology, media and communication, finance, real estate services, professional services and administrative services), goods (farming, mining, manufacturing, utilities and construction), distribution (retail and wholesale trade and transport and storage), and public administration.

Davies found very strong jobs growth in household services of, in round figures, 180,000, with strength in healthcare (90,000), accommodation and food services (50,000), and recreation and arts (40,000).

He makes the point that household services account for a third of total employment, and have driven total jobs growth since the global financial crisis.

Business services, which account for almost a fifth of total employment, have been the next most important sector, with growth of about 80,000. This was driven by professional services, up 90,000, offset by falls in employment in other categories, such as real estate services (20,000) and finance (10,000), but small gains in other categories.

Modest contributions to total jobs growth came from goods distribution (20,000) and public administration (10,000).

Against this, however, there were job losses in mining (30,000), farming (30,000), manufacturing (5000) and utilities (5000), which more than offset jobs gains of 20,000 in construction.

As you see, as well as this quite strong growth in employment overall, there's been a change in the composition of employment, with relatively small contractions in various goods industries more than offset by big increases in service industries.

If this news of strong overall employment growth comes as a shock to you, that's hardly surprising. The economy's been growing at below its "trend" (medium-term potential) growth rate of 3 per cent for a number of years.

And it's often repeated that the economy has to grow at its trend or potential rate of 3 per cent a year just to stop unemployment rising.  (This 3 per cent rate of growth in the economy's potential capacity to produce goods and services comes from labour force growth of 1.7 or 1.8 per cent a year, plus growth in the productivity of labour of 1.3 or 1.2 per cent a year).

So, with real gross domestic product growing by just 2.3 per cent over the year to March (and needing to achieve an unlikely 0.8 per cent growth in the June quarter to achieved the Abbott government's budget-time forecast of average growth of 2.5 per cent in 2014-15), how on earth is it possible for employment to be growing fast enough to hold unemployment steady?

Well, one possibility is that the economy's actually growing a lot faster than the national accounts say it is, but this doesn't seem likely.

A more likely explanation is that the economy's potential rate of growth is no longer as high as 3 per cent a year. It's more likely to have fallen to 2.75 per cent – or even 2.5 per cent, as some are suggesting.

Why? Because slower growth in the population than we've had in recent years –  slower than the econocrats were expecting – is causing slower growth in the labour force.

Population growth is slower because fewer Kiwis are coming to Oz and more are going back home where, for the moment anyway, the economy's prospects are brighter. As well, the end of the mining construction boom means fewer workers and their families are coming in under temporary 457 visas.

If the economy's potential growth rate is lower, that means we can stabilise unemployment at a lower rate of actual growth. In our present circumstances, employment growth is probably being encouraged by the lower dollar and the exceptionally slow growth in wage rates.

Note that when the economy grows more slowly because the population is growing more slowly, we're not left worse off in terms of growth in income per person. But lower immigration does make it easier to get on top of unemployment – something economists prefer not to mention.

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Material success is coming at a social price

While there's been much worry of late that the economy isn't growing fast enough to get unemployment down, it remains true that our economic performance since the global financial crisis has been the envy of most other rich countries.

But it's old news that, while economic growth matters for employment – especially with our immigration-fuelled population growth – gross domestic product is a quite inadequate measure of the nation's wellbeing.

No doubt it was such criticism that, in 2002, prompted the Bureau of Statistics to introduce a four-yearly "general social survey" of about 13,000 households to give us more information on how Australians are faring from a personal and social perspective.

The bureau has now released the results of its fourth survey, for 2014. So what is this more humanistic second guess telling us about whether we're making progress?

On the face of it, we're doing fine. Look deeper, however, and cracks are apparent.

The survey measured our "subjective wellbeing" by asking people to assess their overall satisfaction with life – not how they feel at the moment, or how they feel about particular aspects of their life – on a scale of nought to 10.

Our average answer was 7.6, which is significantly higher than the average of 6.6 for all the countries in the Organisation for Economic Co-operation and Development. It was also up on what we said four years ago.

But the most useful thing to note is the categories of people whose ratings were well below the nationwide average: people with a disability (7.2), one-parent families with children (7.0), the unemployed (6.8) and people with a mental health problem, 6.6. Governments wanting to raise the nation's wellbeing now know where to start.

And when the bureau delved deeper, areas of slippage became apparent. One important factor affecting us that's ignored in the calculation of GDP – and in the thinking of most economists, politicians and business people – has been dubbed "social capital".

Social capital is seen as a resource available to both individuals and communities, arising from such things as networks of mutual support, reciprocity and trust. You can break it down into more measurable components, such as community support, social participation, trust and trustworthiness, the size of people's networks and people's ability to have some control over issues important to them.

There's plenty of research showing these things are strongly linked to the wellbeing of individuals and communities. But the survey reveals all is not well with various aspects of our social capital.

One indicator of how much we support each other is the amount of voluntary work we do for organisations. This has declined for the first time since the bureau began measuring it in 1995.

By 2010, the proportion of people aged over 18 who were volunteering had reached 36 per cent. But by last year it had fallen back to 31 per cent. There's also been a decline in the proportion of people providing informal help to neighbours and the like.

Voluntary work not only helps the people who are helped, of course, it also helps increase the wellbeing of the helpers. Not a good sign.

On social participation, the survey shows people are now less likely to be involved in social groups such as sport or physical recreation, arts or heritage groups and religious groups.

Civic participation – involvement in a union, professional association, political party, environmental or animal welfare group, human or civil rights group, or even a body corporate or tenants' association – is also down.

Of course, as the bureau notes, the way people meet and interact is changing. Some people suggest that young people in particular prefer to engage in politics by means of online activism – joining online advocacy groups or using social media to collect and disseminate information.

Other ways people support each other have been stable. In 2014, the proportion of people caring for someone with a disability, illness or old age was 19 per cent, little changed from previous years.

The proportion of people providing support to relatives living outside the carer's home, 31 per cent, was also little changed. This is likely to reflect the ageing of the population.

Last year nearly everyone – 95 per cent – felt able to get support from outside their home in a time of crisis, unchanged from earlier years. Similarly, weekly electronic contact with family and friends by telephone, text message or video link remained high at 92 per cent.

By contrast, face-to-face contact fell from 79 per cent to 76 per cent.

And people were less likely than they were in 2010 to feel able to have a say within their community all or most of the time – 25 per cent compared with 29 per cent.

There's been no change in the proportion of people agreeing that most people can be trusted – 54 per cent – but, to me, that seems a lot lower than it should be.

On the question of work-life balance, Australians are feeling time-poor, with 45 per cent of women and 36 per cent of men saying they were always or often pressed for time. This is higher than for other rich countries.

We may be doing better in the GDP stakes than most other advanced countries are, but we seem to be paying a high social price for our greater material success.

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How growth can make us worse off

Just about every economist, politician and business person is a great believer in a high rate of immigration and a Big Australia. But few of them think about the consequences of that attitude – which does a lot to explain our economic problems.

The latest figures from the Bureau of Statistics show our population grew by 1.4 per cent to 23.6 million in 2014. Less than half this growth came from natural increase (births exceeding deaths), with most of it coming from net migration.

When I saw the 1.4 per cent growth figure, I thought it much of a piece with the 1.5 per cent growth over the year to September. It confirmed us as having one of the fastest growing populations among the advanced economies.

But, the Business Bible assured us, growth of 1.42 per cent was a big worry. It was clearly less than the 1.49 per cent average rate of the past 15 years and was, indeed, our weakest growth in eight years.

Slower population growth meant slower growth in real gross domestic product and this would also make it harder to get the federal budget back into surplus, we were told.

Really? This is crazy talk. It shows even our economists have turned off their brains on the question of immigration and lost their way between means and ends. Now they believe in growth for its own sake, not for any benefits it may bring us.

Of course slower growth in the population means slower growth in the size of the economy. But what of it? What do we lose?

The economic rationale for economic growth is that it raises our material standard of living. But this happens only if GDP grows faster than the population grows. So it doesn't follow that slower GDP growth caused by slower population growth leaves us worse off materially.

That would be true only if slower population growth caused slower growth in GDP per person. I suspect many people unconsciously assume it does, but where's the evidence?

I doubt there is any. The most significant recent study, conducted by the Productivity Commission in 2006, concluded that even skilled migration would do little to increase income per person. And what little growth the commission could find was appropriated by the new arrivals.

I doubt it's by chance that economists rarely, if ever, adjust the GDP figures they obsess about for population growth. Meaning we're constantly being given an exaggerated impression of how well we're doing in the materialism stakes. I can't remember GDP per person rating a mention in the budget papers.

Politicians are always boasting about record government spending on this or that, but they never make allowance for population growth in making such claims. (Why would they when often they don't even allow for the effect of inflation?)

As for the claim that slower population growth will make it harder to reduce the budget deficit, it reveals just how unthinking we've become on immigration. It's true enough that slower growth in the workforce means slower growth in tax collections.

But is that all there is to it? What about the other side of the budget? Aren't we assuming a bigger population is costless? Skilled immigrants and their dependents never use the health system? They don't have kids needing to be educated?

They don't add to traffic congestion, wear and tear on roads and 100 other taxpayer-provided services? Since there's often a delay while they find jobs, who's to say budgets, federal and state, wouldn't be better off with fewer immigrants?

But what's strangest about the economic elite's unthinking commitment to high immigration is the way they wring their hands over our weak productivity growth and all the "reform" we should be making to fix it, without it crossing their minds that the prime suspect is rapid population growth.

It's simple: when you increase the population while leaving our stock of household, business and public capital unchanged, you "dilute" that capital. You have less capital per person, meaning you've automatically reduced the productivity of labour.

So you have to do a lot more investing in housing, business structures and equipment and all manner of public infrastructure – a lot more "capital widening" – just to stop labour productivity falling.

The drive for smaller government – and the refusal to distinguish between capital and recurrent government spending – simply doesn't fit with a commitment to rapid population growth and a rising material standard of living.

Lower immigration would help reduce a lot of our economic problems – not to mention our environmental problems (but who cares about them?).

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Two other ways globalisation is changing things

We're still learning to cope with a globalised world. Things work a bit differently now, and we have to adjust our thinking accordingly.

Globalisation – the breaking down of barriers between countries – is leading to increased trade between economies and increased flows of financial capital around the world, not to mention greater flows of people.

Another dimension of globalisation that's having big effects without being widely noted is the globalisation of news.

News of important happenings somewhere around the world now reaches most people in the rest of the world with a delay of maybe only a few minutes.

Because humans have evolved to continuously monitor their environment in search of threats, the news that interests us most is bad news. The news media are only too happy to oblige. They ignore all the good things that are happening, and all the everyday things as well, to give us a concentrated dose of any highly unusual, bad thing that's happening anywhere in the world.

The question is whether we're capable of absorbing this quite unrepresentative picture of what's happening around us without unconsciously reaching the conclusion that the world is in much worse shape than it actually is.

One lesson we've learnt is that everything in different parts of the world is now much more interconnected. That's true – particularly in the global economy – but we can take it too far.

The classic example of the heightened economic effects of globalised news was the global financial crisis of 2008, when news of crashing sharemarkets and teetering banks in America and Europe was beamed into living rooms all around the world every night for a month.

Ordinary people in distant countries such as Australia had to judge how this absolutely frightening news might affect them. They assumed the worst. Business and consumer confidence plunged and households and businesses began battening down the hatches, moving money between banks and cutting their spending.

It turned out all our banks were safe. Thanks to our tight supervision of them, they had no "toxic debt". But the government did have to help them when the international financial markets in which they borrowed stopped operating briefly.

The point is, our consumers and businesses were so frightened by all they'd heard about troubles overseas that we could have had a local recession anyway, had the Rudd government – and the Reserve Bank – not acted so quickly and effectively to calm people down with "cash splashes" and news of its plans for stimulus spending.

Now the big news is Greece's financial troubles, about which the media assume our curiosity knows no bounds. The obvious question for news consumers to ask is, how will this affect me?

Short answer: probably it won't. We can feel sorry for the Greeks, or not, but we need to remember Greece is a country of just 11 million people, with an economy representing about 0.4 per cent of the world economy and the tiniest share of our exports.

It is true that, should Greece exit the eurozone, this would raise uncertainly about pressure on the other weak and heavily indebted member countries, and this could lead to the euro currency union coming to a messy end.

If that were to happen – which wouldn't be any time soon – it would have flow-on implications for every country. But you'd have to say that, just as living on a Greek island would be a good way to get as far away as possible from any problem in Australia you were trying to escape, the reverse also applies.

Another way we're still adjusting to how globalisation is changing things concerns the way we've always measured international trade. This story is told in the Productivity Commission's annual report on trade and assistance.

Every country has always measured the "gross" value of its trade. The full value of each exported good or service has been attributed to the last industry that handled the item and to the country it was sent to.

But the advent of "global value chains" – where the production of manufactured goods in particular is spread between countries, with parts coming from various countries to be finally assembled in another country – has made this gross value approach ever more misleading.

So the World Trade Organisation is now making more use of individual countries' "input-output tables" to measure exports on a "value-added" basis. That is, each industry sector that contributed to the production of an export item gets the credit for the value it contributed to the final price.

Doing the numbers on this more accurate basis makes a big difference. The final price of manufactured goods, for instance, includes the value of raw materials provided by agriculture or mining, plus the value provided by service industries such as transport and providers of professional and scientific services.

Looking globally, manufactured goods' share of total world exports drops from 67 per cent to 40 per cent, while services' share doubles to 40 per cent. The shares of agriculture and mining increase from 13 per cent to 20 per cent.

The new story for Australia is different because our exports are dominated by primary products. Using the most recent figures available, for 2008, the commission estimates that manufacturing's share of our total exports drops from 36 per cent to 14 per cent, while services' share jumps from 18 per cent to 42 per cent.

Agriculture's share is unchanged at about 4 per cent, while mining's share drops only a little to 40 per cent.

As for the destination of our exports, looking at the period from 2002 to 2011, North America and Europe's share rose from 23 per cent, measured on a gross basis, to 32 per cent on value-added. The shares of our Asian customers fell.

One lesson: we should worry less about the decline of manufacturing and think more about the rise of the services economy.

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Security scare intended to hide economic failure

Am I the only person who isn't cringing in fear, looking for a rock to hide under and hoping Tony Abbott and Peter Dutton will save us from the tide of terrorism surging towards our shores?

As is their wont, the media are enthusiastically indulging our desire to dwell on all the gruesome details of a spate of terrorist acts in faraway countries of which we know little.

But this seemingly innocent nosiness is leaving us with a quite exaggerated impression of the chances of our ever coming into contact with such an event.

Apparently, all you have to do to be in mortal danger is attend the making of an ABC current affairs program. It's a field day for any attention-seeking nut of Middle Eastern background.

Would you say our Prime Minister is seeking to calm our overblown fears or is playing them for all he's worth?

Precisely. And I'll tell you why. Because he's discovered he's not much chop at leadership - at inspiring us with a vision of a better future, at explaining and justifying necessary but unpopular measures - but he is good at running scare campaigns, to which the Aussie punter seems particularly susceptible.

But, above all, because he wants to divert our attention from the hash he's making of managing the economy.

In opposition, and facing a Labor government that lacked all confidence in its own ability as an economic manager, Abbott assured us the Liberals had good management in their DNA. I thought he had a point, but what we didn't discover until too late was that he and his chosen Treasurer just didn't have that gene in their bodies.

They started by telling us that, apart from the immense damage being done by Labor's carbon and mining taxes, the economy's big problem was the budget, something they, being Libs, could fix in a jiffy.

They had one go at fixing the budget, got themselves into terrible trouble in the polls, then gave up. Pretty much the sole purpose of this year's budget was to reverse their poor political standing by ditching or modifying many of their unpopular policies.

From that day to this, we've heard little more of the evils of debt and deficit. Almost all of what little improvement in the budget deficit is expected will come from bracket creep.

Fortunately, the budget deficit and the still-small level of public debt to which it has given rise was never the central, pressing problem for the economy the oppositional Abbott & Co made it out to be.

We will have to deal with the deficit eventually, but it's not pressing. And fortunately, thanks to the good offices of Peter Costello, primary responsibility for the day-to-day management of the economy was long ago shifted from the politicians to the econocrats of the Reserve Bank.

Trouble is, no matter how many more times the Reserve cuts interest rates, it's having little success in getting the economy moving at a satisfactory clip. And with more mining construction projects being completed as each day passes, the economy is in danger of drifting into recession.

It may not happen, but the possibility that it will is too high for comfort. The Reserve has been calling out for help from Canberra, but Abbott and Hockey have been turning a deaf ear, far too busy coping with the confected national security crisis.

Now we've received a very could-do-better annual report card from the International Monetary Fund. Far from urging Abbott and Hockey to redouble their efforts to reduce deficit and debt, it's telling them they have plenty of "fiscal space" relative to other advanced economies - room to increase debt - and should be doing more to encourage spending on infrastructure by the state governments.

The problem is that while the Reserve has been using too-low interest rates to get the "non-mining" private sector moving, the public sector has been doing nothing to help. Indeed, despite the incessant talk - federal and state - about the greater efforts being made to ensure the adequacy of our infrastructure, nationwide public capital expenditure actually fell by 8 per cent over the year to March.

The decline came from the state governments, not Canberra. But since it's the national government that's primarily responsible for the health of the national economy, this provides Abbott and Hockey with no excuse.

That covers the Abbott government's poor performance in the immediate management of the economy. But it's just as ineffectual in dealing with the less pressing, more structural need for us to lift our economic game if our continued material prosperity is to be assured.

Despite the ever-growing pile of reports it has commissioned on the financial system, competition, industrial relations, taxation and federalism, it's becoming increasingly clear that, having wounded itself so badly in last year's budget and still being behind a weak-led opposition in the polls, the government has no stomach for taking reform proposals to next year's election.

Economists, business people and even the government's own intergenerational report are warning that our productivity isn't likely to grow fast enough in coming years without further reform, but to no avail.

If the Liberals do have good economic management in their DNA you'd think by now they'd be turning to others among their number with greater leadership skills. But not, apparently, while they can hide behind the charade of concern about threats to national security.

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