How our economic prospects turn on wage growth

You know the world's behaving strangely when you hear a heavy from the central bank saying it's expecting more "progress" on the "turnaround in inflation", then realise they're hoping inflation will go higher.

That's just what Dr Luci Ellis, the Reserve Bank's third heaviest heavy, told a bunch of economists at a conference this week.

Why would anyone hope for prices to be rising faster than they are? Not so much because higher prices are a good thing in themselves, as because rising inflation is usually a sign of an economy that's growing strongly and keeping unemployment low.

By contrast, very low inflation – say, below 2 per cent – is usually a sign of an economy that's not growing strongly, with unemployment either rising or higher than it should be.

Ellis' remarks are a reminder that the economy's biggest problem at present is weak growth in wages. She knows that if prices started rising faster, the most likely explanation would be higher growth in wages, which employers were passing on to their customers by raising their prices.

What could oblige employers to increase the wages they pay? Their need to retain or attract more workers – particularly skilled workers – at a time when the demand for labour was rising, caused typically by increased demand for the goods and services businesses were employing people to produce.

The point to note here is that the Reserve's mental model of inflation is of what economists used to call "demand-pull" inflation. It's simple: the prices of goods and services rise when the demand for them is outpacing their supply.

Note, too, that this involves an inverse relationship between inflation and unemployment: when one goes up, the other goes down, and vice versa. Economists call this the "Phillips curve", named after its discoverer, Bill Phillips, a Kiwi economist.

Ellis confirmed that, although the economy (real gross domestic product) grew at a trend rate of just 2.4 per cent over the year to September, the Reserve's forecast that growth will pick up to about 3¼ per cent over this year and next remains unchanged.

This will involve a pick-up in wage growth and inflation, she said.

The Reserve is more confident of these forecasts than it was when it first made them in early November. Even so, Ellis admitted to some particular "uncertainties": how much production capacity in the economy is going spare at present, and how much, and how quickly, wage growth and inflation will pick up as spare capacity declines.

How much unused production capacity remains in the economy matters because, until it's used up, the economy can grow much faster than it can once the economy's at full capacity – full employment of labour and capital – without this causing inflation pressure to build.

Once the economy is at full employment, how fast rising demand can cause the economy to grow without also causing higher inflation is determined by the economy's "potential" growth rate – that is, by the rate at which rising participation in the labour force, increasing investment in capital equipment and improving productivity are adding to the economy's ability to produce more goods and services.

That is, how fast potential supply is growing. So the economy's potential growth rate sets the medium-term speed limit on how fast demand can grow before causing a build-up in inflation.

The Reserve's most recent estimate is that our potential growth rate has slowed to 2.75 per cent a year (mainly because of the retirement of the bulge of baby boomers).

But how do we measure how much spare production capacity we have at any time? We measure the spare capacity of our mines, factories and offices mainly by looking at answers to questions in the regular surveys of business confidence.

That's physical capital. In the labour market, idle production capacity is measured by the rate of unemployment.

But it's wrong to think full employment is reached when the unemployment rate falls to zero. That's partly because, at any point in time, there will always be some workers moving between jobs (called "frictional" unemployment).

Also because of a much higher rate of "structural" unemployment. The structure of the economy is always changing, with some industries expanding and some contracting. This increases the number of workers who don't have the particular skills employers are seeking, or who do have them but live far away from where the job vacancies are.

In the old days, there were a lot of low-skilled jobs that could be filled by people who had left school early and hadn't learnt much. These days, there a far fewer of those jobs, so people with inadequate skills are often out of a job.

Economists measure full employment by estimating the rate to which unemployment can fall before shortages of skilled labour cause employers to bid up wages and thus cause price inflation to accelerate.

They call this the NAIRU – the non-accelerating-inflation rate of unemployment – and the Reserve's latest estimate is that it's "around 5 per cent". It says "around" because every economist's estimate is different, so it's wrong to be too dogmatic.

This week's trend figures from the Australian Bureau of Statistics for the labour force in January show the unemployment rate has been steady at 5.5 per cent since July. That's well above the NAIRU.

Over the same six months, however, employment has grown by almost 180,000, or 1.5 per cent, causing the rate at which people are participating in the labour force to rise by 0.4 points to 65.6 per cent – its highest for seven years and a record high for participation by women.

If the laws of supply and demand still hold – a safe bet – this unusually strong growth in the demand for labour should lead to higher wages and then higher prices sooner or later. But Ellis warns it's likely to be "quite gradual".

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Private health insurance is a con job

You won't believe it, but my birthday was on Tuesday and I got a present from the federal government. I also got a card from my state member, sending his "very best wishes" for reaching such an "important milestone" in my life.

I almost wrote back asking him to alert the Queen to be standing by in 30 years' time. Instead, my ever-sceptical mind told me the pollies have awarded themselves privileged access to the private information we're obliged to give the electoral commission.

So, what was my fabulous federal birthday present? Apparently, I'm now so ancient and infirm I get a bigger private health insurance tax rebate.

I never tire of pointing out that, contrary to what people say, our cost of living, overall, has not been rising strongly, unless you regard 2 per cent a year as "soaring".

It is true, however, that a few, easily noticed prices have risen a lot – including the government-regulated price of private health insurance.

My "important milestone" reminds me that people have been complaining about – and I've been writing about – the high cost of private health insurance for as long as I've been an economic journalist.

And the opposition leader of the day – Bill Shorten, as it happens – hasn't resisted the temptation to exploit people's disaffection by putting it firmly on the agenda for this maybe-there'll-be-an-election year.

The popular view is that everyone needs private insurance – if only they could afford it. Which about half of us can't.

Opinion polling by Essential has found that, although a clear majority of people believe "health insurance isn't worth the money you pay for it", 83 per cent of people believe that "the government should do more to keep private health insurance affordable".

The former opinion is right; the latter is delusional. Governments have been trying to keep health insurance affordable on and off for decades, while its cost just keeps climbing.

Why? Because it's a self-defeating process. The more you do to make insurance affordable, the easier you make it for the people running the health funds, the owners of private hospitals and the surgeons and other procedural specialists who work in hospitals, to raise their prices and fatten their profits.

Which the pollies fully understand.

In the old days, health funds were owned by their members, except for the government-owned Medibank Private. These days, three of the biggest funds – Medibank Private, Bupa and NIB – are for-profit providers, thus increasing the pressure on the government to allow big price rises and reducing the chance of getting value for money.

As Ian McAuley, of Canberra University, has written, from a policy perspective health insurance is a high-cost and inequitable way to fund healthcare.

Only 85 cents of every dollar passing through private insurance makes its way to paying for healthcare. And only if you can afford it do you share in the government subsidies taxpayers provide.

From the customers' perspective, it's a con job. Most people under 60 get back only a fraction of what they pay. Often when you do claim you don't get what you expected, because you don't get choice of doctor or a private room, you're caught by ever-changing exclusions from your policy, or because no one warned you about a huge gap payment.

Many buy insurance to avoid waiting times for elective surgery. But if private insurance didn't exist, surgeons would have to earn more of their income from public hospitals and waiting times would be shorter. It creates the problem it purports to solve.

Health insurance is such bad value that, when John Howard sought to prop up the private system, he had to make it subject to a tax rebate. When that didn't work he imposed a Medicare levy surcharge on better-off people who don't have insurance, and imposed escalating prices for people who aren't in a fund by the time they're 31 (which is a con trick on the innumerate).

When the Hawke government reintroduced Medicare, it intended that the universal, taxpayer-funded provision of high quality hospital and medical care would make private insurance unnecessary. Those who preferred the snob status of private care could pay for it from their own pocket.

This is why Labor long opposed public support for private insurance. Shorten, however, has taken a populist line, carrying on about the big increases in premiums and promising to cap them at 2 per cent a year for two years.

Another con. The profit-driven funds would respond either by excluding more procedures from coverage, or by demanding catch-up increases once the cap was lifted (as happened last time).

Private insurance is so counter-productive and so unfair that the best thing would be to end the subsidies and use the saving to improve the performance of the public system. (Howard's claim that his tax rebate would reduce the pressure on public hospitals was always just a fig-leaf to hide his attempt to prop up the two-class system.)

A less politically controversial alternative was first proposed in an Abbott government federalism discussion paper: use the saving to introduce a commonwealth hospital benefit, where the same amount would be paid to the hospital someone chose to go to, whether public or private.

Private hospital beds would stay in the system – at a price fixed by the government – but the parasitic private funds would be out on their own.

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Economists do little to promote bank competition

The royal commission into banking, whose public hearings start on Monday, won't get a lot of help from the Productivity Commission's report on competition within the sector. It's very limp-wristed.

The report's inability to deny the obvious - that competition in banking is weak, that the big four banks have considerable pricing power, abuse the trust of their customers and are excessively profitable – won it an enthusiastic reception from the media.

Trouble is, its distorted explanation of why competitive pressure is so weak and its unconvincing suggestions for fixing the problem. It offered one good (but oversold) proposal, one fatuous proposal (to abolish the four pillars policy because other laws make it "redundant") and a lot of fiddling round the edges.

It placed most of the blame for weak competition on the Australian Prudential Regulation Authority, egged on by the Reserve Bank, for its ham-fisted implementation of international rules requiring banks to hold more capital, and for its use of "macro-prudential" measures to slow the housing boom by capping the banks' ability to issue interest-only loans on investment properties.

The banks had passed the costs of both measures straight on to their customers. It amounted to an overemphasis on financial stability (ensuring we avoid a financial crisis like the Americans and Europeans suffered) at the expense of reduced competitive pressure on the banks.

This argument is exaggerated. Even so, it's quite likely that, in their zeal to minimise the risk of a crisis, APRA and the Reserve don't worry as much as they should about keeping banking as competitive as possible.

The report's proposal that an outfit such as the Australian Competition and Consumer Commission be made the bureaucratic champion of banking competition, to act as a countervailing force on the committee that makes decisions about prudential supervision, is a good one.

The report's second most important explanation for weak competition is inadequacies in the information banks are required to provide to their customers. Really? That simple, eh?

See what's weird about this? It's blaming the banks' bad behaviour on the regulators, not the banks. If only the bureaucrats hadn't overregulated the banks, competition would be much stronger.

Why would the bureaucrats in the Productivity Commission be blaming other bureaucrats for the banks' misdeeds? Because this is the prejudiced, pseudo-economic ideology that has blighted the thinking of Canberra's "economic rationalist" econocrats for decades.

Whatever the problem in whatever market, it can never be blamed on business, because businesses merely respond rationally (that is, greedily) to whatever incentives they face. If those incentives produce bad outcomes, this can only be because market incentives have been distorted by faulty government intervention.

Market behaviour is always above criticism; government intervention in markets is always sus.

When the report asserted that the big banks had used the cap on interest-only loans as an excuse for raising interest rates, and would pass the new bank tax straight on to customers, there was no hint of criticism of them for doing so. They were merely doing what you'd expect.

In shifting the blame for these failures onto politicians and bureaucrats, the report fails to admit that the distortion that makes interest-only loans a worry in the first place is Australia's unusual tolerance of negative gearing and our excessive capital gains tax discount.

In criticising the bank tax, the report brushes aside the case for taxpayers' recouping from the banks the benefit the banks gain from their implicit government guarantee, and the case for taxing the big banks' super-normal profits (economic rent), doing so in a way that stops the impost being shunted from shareholders to customers.

Here we see a hint that the rationalists' private-good/public-bad prejudgement​ is only a step away from Treasury being "captured" by the bankers it's supposed to be regulating in the public's interest, in just the way it (rightly) accuses other departments of being captured.

The report's criticism of existing interventions would be music to the bankers' ears. Its fiddling-round-the-edges proposals for increasing competitive pressure have one thing in common: minimum annoyance to the bankers.

The Productivity Commission's rationalists can't admit that the fundamental reason for weak competition in banking comes from the market itself: as with many industries, the presence of huge economies of scale naturally (and sensibly) leads to markets dominated by a few big firms.

Market power and a studied ability to avoid price competition come with the territory of oligopoly. Have the rationalists spent much time thinking about sophisticated interventions to encourage price competition in oligopolies? Nope.

Have they learnt anything from 30 years of behavioural economics? Nope. When you've learnt the 101 textbook off by heart, what more do you need?

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Indigenous middle class arises despite slow closing of the gap

It's easy for prime ministers to make big promises at some emotion-charge moment of national attention, but a lot harder to keep those promises when the media spotlight (and that prime minister) are long gone.

I could be alluding to the promise Kevin Rudd made that the federal government would never forget the needs of the victims of Victoria's Black Saturday bushfires in 2009, but I'm referring to the promise he made a year earlier, at the time of his apology to the stolen generations, to Close the Gap between Indigenous and non-Indigenous Australians.

The gap needing to be closed – and the commitments Rudd made – referred particularly to health, education and employment.

But all of those gaps contribute to another one: the gap between Indigenous and non-Indigenous incomes. What's been happening there?

I'm glad you asked because Dr Nicholas Biddle and Francis Markham, of the Centre for Aboriginal Economic Policy Research at the Australian National University, have just written a paper on the subject.

And, on the face of it anyway, the news is reasonably good.

First, however, some background. You won't be surprised that there is a gap between the two group's incomes. But it's worth remembering that gap has existed since the early days of European settlement of the Wide Brown Land.

To be euphemistic, it's a product of our colonial history. To be franker, Indigenous people were systematically and violently deprived of access to economic resources, especially land, a process that continued until well into the second half of the 20th century.

And though Aboriginal and Torres Strait Islander people engaged with the settler-colonial economy in many ways, underpayment or theft of wages was systematic in many parts of the country until the 1950s and '60s.

This colonial legacy endures into the present, Markham and Biddle say.

They quote another academic saying that "Aboriginal people, families, households and communities do not just happen to be poor. Just like socioeconomic advantage, socioeconomic deprivation accrues and accumulates across and into the life and related health chances of individuals, families and communities" (my emphasis).

The authors use the censuses of 2006, 2011 and 2016 to study what's been happening to the level and distribution of incomes within the Indigenous population, and between it and the non-Indigenous population.

The good news is that the median (the one dead in the middle) disposable equivalised​ household income for the Indigenous population rose from 62 per cent of non-Indigenous income in 2011 to 66 per cent in 2016. ("Equivalised" just means adjusted to take account of differences in the size and composition of households.)

That's the highest the percentage has been since reliable data started in 1981. And, in fact, it's been trending up since then.

There's progress, too, on the Indigenous "cash poverty rate", which measures the proportion of Indigenous incomes falling below 50 per cent of the median disposable equivalised household income of the nation's entire population.

So, as is usual in rich countries, it's a measure of relative poverty (how some incomes compare with others) rather than absolute poverty (whether people's incomes are high enough to stop them being destitute).

It's called "cash poverty" in recognition of the truth that there's more to poverty than how much money you have. As well, it acknowledges that no account is taken of "non-cash income", such as the value of food gained by hunting and gathering in remote areas.

Remember, however, that there are also costs involved in hunting. And the prices of basic necessities are much higher in remote areas.

Measured this way, the Indigenous poverty rate has declined slowly over past decades. More recently, it's gone from 33.9 per cent in 2006 to 32.7 per cent in 2011 and 31.4 per cent in 2016.

Sorry, that's where the good news runs out.

For a start, the rate of improvement is far too slow. Markham and Biddle calculate that if the gap kept narrowing at the rate it did over the five years to 2016, the medians for Indigenous and non-Indigenous incomes would be equal by 2060. That fast, eh?

Now get this: while the gap between the two groups has been narrowing, the gap within the Indigenous group has been widening.

If you take the weekly disposable personal incomes of all Indigenous people aged 15 or older, adjust them for inflation, rank them from lowest to highest, then divide them all into 10 groups of 10 per cent each, you discover some disturbing things.

Between 2011 and 2016, the average income of those in the top decile rose by $75 a week, compared with $32 a week for those in the middle decile. Individuals in the bottom decile had no income (possibly because they were students or home minding kids), while those in the second and third lowest deciles saw their incomes fall.

But what explains this growing gap between the top and the bottom within the Indigenous population?

Turns out it's explained by where an Indigenous person lives. Household disposable incomes are highest – and have grown fastest - in the major cities, with a median of $647 a week, but then it's downhill all the way through inner regional areas, outer regional, and remote, until you get to "very remote", where the median income is $389 a week.

Over the five years to 2016, the real median income in remote areas hardly changed, and in very remote areas it actually fell by $12 a week.

Got your head around all that? Now try this: despite the weakness in median incomes in remote (but not very remote) areas, the incomes of the top 20 per cent are higher and have been growing relatively strongly.

Get it? However poorly we're doing on Closing the Gap, we are getting an Indigenous middle class.

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If we had more sense, we'd push early childhood education

Did I tell you that my grandson, fast approaching his second birthday and not many months away from losing his status as our one and only grandchild, is a budding genius?

His educational development is supervised by his father, who, being a doctor, started with identifying parts of the body. My grandson's always being quizzed, and loves showing off how much he knows.

Already he can count – provided you don't test him too closely above two or three – and, courtesy of Play School, can sing the alphabet song, whether or not he's invited to. He misses no more than a few of the letters, and is always careful to sing zed rather than zee.

Do I worry about how he'll manage to scratch out a living in the looming, frightening world of robots and artificial intelligence? No I don't. Not with the parents he's got.

For centuries the great advantage has been seen as inherited wealth. But, as The Economist magazine pointed out a few years ago, in the knowledge economy it's probably just as advantageous, maybe more, to inherit your intelligence from two highly educated, well-paid, education-conscious and bookish parents.

Of course, not every Aussie kid is as fortunate as any grandchild of mine. Which is why I worry a lot about the continuing high high-school dropout rate. Join the workforce without even a good grasp of the basics and the rest of your working life is likely to be "problematic", as mealy mouthed academics say.

It's also why I get so annoyed with politicians – and Treasury and Finance econocrats – who regard early education as just another of the outstretched hands that must be given something, but never enough to fully exploit its potential to improve our wellbeing, social as well as economic.

The good news is that Simon Birmingham, federal Minister for Education and Training, announced over the weekend the government's decision to spend $440 million extending for a year the "national partnership agreement" on universal access by four-year-olds to early childhood education, while federal and state ministers continue "negotiating" (haggling over) a new long-term agreement.

The bad news is that, when it comes to making sure all children attend preschool, we started much later than most of the other rich countries, and aren't catching up nearly as fast as we would be if we had more sense.

Our politicians on both sides think their interests are best served by using the limited funds available to placate as many interest groups as possible, rather than spending money where it's likely to yield the most lasting benefit.

Our econocrats ought to be encouraging their masters to spend more wisely, but if they are it's news to me. They seem to think it their job to disapprove of all extra spending equally. Not working well so far, guys.

There are no magic bullets in government spending, but putting money into early education – whether by lifting the quality of childcare, or beefing up preschool – comes a lot closer than most of the other things governments spend on.

We've known it for decades, but the evidence keeps growing. According to the Ontario early learning study, "the early years from conception to age six have the most important influence of any time in the life cycle on brain development and subsequent learning, behaviour and health".

Early experiences and stimulating, positive interactions with adults and other children are far more important for brain development than previously realised, it says.

According to a paper on early childhood education, issued last year by Dr Stacey Fox and others, of the Mitchell Institute at Victoria University, "investing in early learning is a widely accepted approach, backed by extensive evidence, for governments and families to foster children's development, lay the foundations for future learning and wellbeing, and reduce downstream expenditure on health, welfare and justice".

While all children benefit from high-quality early learning, research also shows that children experiencing higher levels of disadvantage benefit the most, and can even catch up to their more advantaged peers, the paper says.

In an earlier Mitchell report, Fox says that nearly a quarter of Australian children arrive at school with significant vulnerabilities – in their knowledge and communication, their social skills and emotional wellbeing, or in their physical health.

Here's a surprise: a child's risk of being developmentally vulnerable is closely, but inversely, correlated with their socio-economic status.

After five or six years, we've got close to achieving universal access by four-year-olds to a potential 15 hours a week of preschool. The only state dragging the chain is NSW (yeah, but look how much bigger its budget surplus is).

But kids from disadvantaged homes are less likely to be getting the full 15 hours. And there's strong evidence that two years of preschool – that is, starting at three – yields more than twice the benefit.

British research shows 16 year olds who attended at least two years of preschool were three times more likely to take a higher academic pathway after leaving school.

It's easier to get kids up to speed in preschool than at any later level of education. Clearly, the smart way to improve the performance of the whole system is to start at the bottom. Make sure we get preschool right, and the benefits will flow on to schools, TAFE and uni.

Nah, too much trouble. Let's just give ourselves a tax cut. My grandkids will do fine.

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Next election will offer voters more genuine, wider choice

Even if we don't end up having a federal election this year, rest assured, it will feel like a year-long campaign. But whenever it occurs, it's likely to determine the fate of neo-liberalism, aka "bizonomics".

Though the two sides like to paint every election as a clear choice between good (us) and evil (them), many voters have concluded all politicians are the same – liars and cheats.

But that's truer of the way they behave than of the policies they espouse on some key issues.

The plain fact that neither side has enough committed supporters to guarantee it election means victory goes to the party that attracts more of the uncommitted voters in the middle.

This has long been a factor encouraging both sides away from extremes of left or right and towards the more moderate, "sensible centre". They've retained only enough pro-business or pro-worker positions to keep their voting, donating and polling-booth-staffing "base" motivated, as well as to provide some product differentiation.

The standard approach of recent decades has been for each side to seek to neutralise those issues where the other side is perceived by voters to have the advantage, by saying "me too", while trying to highlight those issues where it has the perceived advantage over its opponents.

Polling released last week by Essential, shows the Liberals' great perceived strengths are national security and terrorism, and management of the economy, whereas Labor's strengths are (in ascending order) education, health, housing affordability, the environment, industrial relations and climate change.

Note that almost all the contentious issues are economic, broadly defined. Voters see little to distinguish the two sides on population growth and asylum seekers. The government's already pushing hard on national security and terrorism, but Labor will run from any argument over these issues, where it starts well behind in voters' estimations.

Of late, however, the parties have departed from the standard script. Realising he lacked the charisma to get away with mimicking Tony Abbott's virtuoso performance of total negativity against the death-wish Rudd-Gillard-Rudd Labor, Bill Shorten thought he had little to lose by abandoning the small-target strategy of most oppositions, and went to the 2016 election with some relatively daring proposals on tax increases, particularly on restricting negative gearing and the capital gains tax discount.

Despite the conventional wisdom that touching negative gearing would be political suicide, Shorten's bravery was rewarded. Now look at the speeches Shorten and Malcolm Turnbull gave last week, and you see both sides planning to widen, rather than narrow, the policy distance between them.

Abbott was someone with conservative social values and hard-right economic views that fitted well with a party base that's be drifting to the right for many years. But he knew better than to highlight such views when seeking enough middle-ground votes to win the 2013 election.

Which leaves Turnbull with a big problem. His oft-stated position as a small-l liberal means much of his parliamentary party neither likes nor trusts him. To keep them behind him, he's had to loudly espouse policy positions – on big business tax cuts, weekend penalty rates and saving coal mines, for instance – that are far to the right of majority, middle-ground opinion.

The further Turnbull's party base has forced him away from the centre, the more Shorten has been emboldened to move his own policies further leftward from the centre than his predecessors would ever have dared.

It's clear Turnbull will go to the election offering no real plan to achieve Australia's Paris climate change commitments and making no more than sympathetic noises about the supposedly soaring cost of living, while claiming that big business tax cuts would trickle down and allow big pay rises.

In the meantime, the ever-continuing budget deficit won't stop the government also promising a tax cut for ordinary workers.

In echoes of Labor's winning policies at the 2007 election, Shorten will promise concrete action on climate change and on winding back the parts of Work Choices' attack on collective bargaining that Kevin Rudd and Julia Gillard weren't game to.

A rhetorical challenge for Shorten will be to shift the punters from their misconceived concern with the soaring cost of living, to the real problem: weak wage growth.

Despite that weak growth, I doubt many voters will be greatly tempted by the promise of modest tax cuts. A test of Shorten's leadership credentials will whether he has the courage to avoid matching Turnbull's promise.

But with Turnbull sticking to his plan for big-business tax cuts, and his resistance to reform of negative gearing and wage-fixing, this election may well determine the fate of the era of bizonomics.

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CPI a more accurate measure of living costs than we imagine

Ask any pollie, pollster or punter in the pub and they'll all tell you there are no political issues hotter than the soaring cost of living. But this week the Australian Bureau of Statistics issued its consumer price index for the December quarter.

Oh no. It showed prices rising by 0.6 per cent in the quarter and a mere 1.9 per cent over the year to December.

That's a soaring cost of living? What are these guys smoking? Has the government got to the statisticians? Or do the bureaucrats sit in some office in Canberra making up the numbers?

None of the above. In truth, the bureau puts an enormous amount of expertise, care and effort into making the CPI as accurate as possible. Which is not to say the indicator is without its limitations – nothing in the real world is.

The care is shown in an explanatory paper the bureau issued this week to accompany its latest six-yearly updating of the index.

The CPI is purpose-built to measure changes in the price of a fixed quantity of goods and services bought by people living in metropolitan households.

"Metropolitan" means the eight capital cities, and the households include wage-earners, the self-employed, self-funded retirees, age pensioners and social welfare beneficiaries. That covers almost two-thirds of all Australian households, leaving out only those in regional areas.

The index measures the change in the price of a metaphorical basket containing fixed quantities of goods and services bought in each of the capital cities. It looks at thousands of prices of individual items, divided into 87 expenditure classes, 33 sub-groups and 11 major groups.

These are: food and beverages (accounting for 16 per cent of the total basket), alcohol and tobacco (7 per cent), clothing and footwear (4 per cent), housing (23 per cent), furnishings, household equipment and services (9 per cent), health (5 per cent), transport (10 per cent), communication (3 per cent), recreation and culture (13 per cent), education (4 per cent), and insurance and financial services (6 per cent).

How does the bureau know which particular goods and services to include in the basket and, more especially, what "weight" (relative importance) to give each class of expenditure?

Every six years it conducts a survey of more than 10,000 households, asking them to keep diaries of the spending they do. As spending patterns change over time, it updates the contents and the weights given to the items in the basket.

This week it applied new weights derived from the household expenditure survey it conducted in 2015-16.  From now on, however, the weights will be updated yearly.

The bureau checks the prices consumers are being charged by regularly visiting shops and offices, by phoning businesses, and, increasingly, by checking online supermarket sites and records of scanner transactions in stores.

It checks the prices of items at least once a quarter, but more frequently if prices – petrol, for example – keep changing. It aims to show the average price charged during the quarter.

It measures the retail prices we actually pay, so prices include the goods and services tax, and excise taxes, embedded in them, but also any government price subsidies for items such as private health insurance or childcare.

It takes account of widespread "specials", provided the items are of normal quality. It seeks to measure "pure" price changes, meaning it tries to exclude price changes attributable to a change in the quality or quantity of the latest version.

If some producer tries to disguise a price increase by leaving the price of a can of baked beans unchanged, but reducing the amount of beans, the bureau uses the actual price increase per gram.

When the latest laptop or mobile phone is more powerful than the previous model, or does more tricks, the bureau tries to take account of this quality improvement by calculating the underlying or "pure" price change – often a price fall.

But if the bureau takes so much care to measure price changes accurately, why do its figures invariably seem much lower than our impression of the price rises we've experienced?

Short answer: because we don't take nearly as much care as it does. We don't keep meticulous records, but form impressions. And, as behavioural economists tell us, our memories of prices changes are subject to predictable biases.

Price changes we don't like stick in our minds, while those we don't mind are soon forgotten. We remember clearly a few big price increases – the shock we got when we saw our quarterly electricity bill – but don't remember price falls (of which there are far more in these days of digital disruption). And it never occurs to us to take account of all the many items whose prices hardly change.

As a statistician would say, we don't attach the right weights to the price changes (including zero changes) that come our way.

So, for instance, we carry on (justifiably) about ever-rising power prices, but forget that electricity accounts for just 2.2 per cent of the average household's total consumer spending.

Of course, no particular household's experience is likely to be perfectly represented by such a broad average. The index lumps together people in different cities, smokers and non-smokers, drinkers and non-drinkers, renters, mortgagees and outright home owners.

The bureau tries to reduce this problem by also publishing special living cost indexes for certain types of households. Over the year to September, in which the CPI rose by 1.8 per cent, living costs rose by 1.5 per cent for employee households, 1.6 per cent for self-funded retirees, 1.7 per cent for age pensioners, and by 2.1 per cent for unemployed households.

Sorry, but the notion that the prices I pay rose way more than other people's did is just another of our happy self-delusions.

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Wage growth the key to lasting economic strength in 2018

So, no train strike in Sydney because unionists were ordered to keep working by the Fair Work Commission. Is that good news or bad? Depends on the point from which you view it – but don't assume you have only one of 'em.

And if your viewpoint's from somewhere in Victoria, don't assume it's a matter of little relevance to your own pay packet.

A 24-hour train strike would have caused great inconvenience to commuters and disruption to many businesses – which is precisely why the unionists were ordered to abandon their strike. Thank goodness. Damage averted.

Or maybe not. The union wanted to strike for better wages and conditions during the very brief period following the end of an enterprise agreement when industrial action is legally protected.

I don't want to shock you, but all strikes are designed to impose financial costs on an employer – that's what gives bosses an incentive to agree to pay rises they don't fancy. Inconvenience to the employer's customers is usually unavoidable.

It's no bad thing that such disruption has become rare – always provided employers and their workers are able to reach agreement on reasonable wages and conditions without the need for disruption.

That's what gives the averted rail strike its wider significance. If the rail workers can't strike even during their brief "bargaining period", when can they? Maybe never. In which case, what's to stop employers driving ever more one-sided bargains?

The union movement's response is to claim that the right to strike is "very nearly dead". I'm not convinced. But, equally, I'm not certain it contains no element of truth.

And get this: if it is true that the past few decades of industrial relations "reform" have robbed the nation's workers of much of their power to bargain collectively, that's not just bad news for more than 12 million employees, and their dependents, it's bad news for the entire economy – including most of the nation's grossly overpaid chief executives.

This is an issue we'll keep hearing about this year. Much – even the fate of the Turnbull government – will turn on an issue it doesn't want to talk about: what happens to wages.

There's great optimism among economists and business people about a return to strong growth in the economy this year.

Everyone's convinced the world economy will grow faster than it has in years and, at home, the amazingly strong growth in employment last year – most of it in full-time jobs – is expected to continue.

What could be better calculated to lift the survival prospects of Malcolm Turnbull and his band of not-so-happy siblings, who must face an election by the middle of next year at the latest?

While economists and business people sing eternal praises to the great god of Growth in the size of the economy, voters care most about increased Jobs. The two usually go together, but they're not the same.

There's just one problem with the rosy prospects for Jobson Grothe this year: wages have grown no faster than consumer prices for the past four years. Employees have gained nothing from the improvement in productivity during that time, with all the lolly going to profits.

Does that sound like heaven on a stick for our business people? Many are yet to realise it's a fool's paradise. But, rest assured, if it keeps up for another year, light will dawn.

There are rival explanations for the weakness in wage growth. Some say it's temporary, others that it's lasting.

The econocrats – whose forecasts for wage growth have been way too high for years – say it's just a result of the economy's slow recovery from the resources boom, plus maybe a little digital disruption, and will go away if we're patient a bit longer.

They say it's simple supply-and-demand: as employment keeps growing, suitable labour becomes harder to find, obliging employers to pay higher wages to attract the staff they want.

Others fear the problem is deeper and long-lasting: it has been only the collective bargaining strength conferred on employees by industrial relations law that has allowed them to extract from employers the wage growth (above inflation) that has been their rightful share of improved productivity.

By now, however, years of "reform" have swung the industrial relations pendulum too far in favour of employers, thus allowing them to avoid sharing any of the productivity gains with their workers.

What do I think? My guess is it's a bit of both. It's too soon to be sure how much of the problem is temporary and how much is permanent, requiring governments to do more to roll back the Howard government's measures to discourage collective bargaining.

But time's running out for the not-to-worry brigade. If we don't see some quickening in wage growth as the year progresses, suspicions will increase that the economy's stopped working the way it's supposed to.

It's weak growth in wages that's really driving voters' complaints about the rising cost of living.

Worse, consumer spending is by far the biggest contributor to growth in the economy. Consumer spending is driven by the growth in household incomes, which in turn is driven partly by rising employment, but mainly by real wage rises.

Take away the real growth in wages and neither the economy nor jobs will stay growing strongly for long. If so, neither voters nor business people are likely to be happy.

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Who’s doing best in the rent-seeking business

Economists joke that, whereas they are taught that any barriers to new firms entering a market are bad, allowing profits to be too high, MBA students are taught that "barriers to entry" are good, and shown ways to raise them.

Economists have no quarrel with businesses making profits. The shareholder-owners who provide the financial capital needed to sustain those firms are entitled to a return on their investment, one that reflects not only the (opportunity) cost of their capital, but also the riskiness of the particular business they're in.

Economists call such a return on equity "normal profit". But sometimes the various barriers to new firms entering a market limit competition, allowing the incumbents to make profits in excess of those needed to induce them to stay in the industry.

These are called "super-normal" profits (super as in "above"). Now get this: the other name for super-normal profits is "rents" – economic rents, to be precise.

We're used to thinking of rent-seekers as businesses or industries that ask governments for special treatment. But it's common for rents to be sought in situations that have nothing to do with government favours.

One of the most informative pieces of economic research undertaken last year was conducted by Jim Minifie, of the Grattan Institute, who made detailed estimates of the economic rents being earned in particular industries – something no government agency would be game to do.

He focused on the two-thirds of the economy made up by the "non-tradable private sector", excluding export and import-competing industries and the public sector.

He found that the annual return on equity in the most competitive part of this sector averaged 10 per cent. That compares with returns exceeding 30 per cent in internet publishing, which includes online classified advertising of homes, jobs and cars.

Then came internet service providers on 25 per cent and wired telecom on a fraction less. Supermarkets were on about 23 per cent, sports betting on 22 per cent, liquor retailing on 19 per cent, and wireless telecom and (get this) private health insurance on about 18 per cent.

Delivery services and fuel retailing are on 15 per cent, with banking not far behind on 14 per cent, level pegging with electricity distribution and airport operations.

But the rate of an industry's super-normal profit or economic rent isn't the same as its absolute amount. Most industries with very high rates of profit are quite small.

Measured in dollar terms, the most rents are in banking, followed by supermarkets, electricity distribution (just the local poles and wires), wired and wireless telecom.

Minifie estimates that rents account for 20 per cent of the non-tradable private sector's total annual after-tax profits of $200 billion. This is equivalent to more than 2 per cent of gross domestic product.

Another way to judge the significance of super-normal profits is to express them as "mark-ups" – as proportions of total sales.

The average mark-up across the whole non-traded private sector is 2 per cent. So, if rents were eliminated, but costs didn't change, average prices would fall by 2 per cent.

Within that average, however, the mark-up in internet publishing is 26 per cent. Then come airport operations on 20 per cent, wired telecom on 19 per cent and electricity distribution on 12 per cent.

Further down the league table, electricity transmission – the high-voltage power lines, not the local poles and wires – has an estimated mark-up of 7 per cent.

But get this: the banks' mark-up is just 4 per cent and the supermarkets' is a bit over 3 per cent.

How come, when super-profits account for more than half the supermarkets' total profit? Because supermarkets are a high-volume, low-margin business (as are banks).

Minifie notes that Coles and Woolworths are so big they achieve huge economies of scale. And, as dairy farmers well know, they achieve further cost savings by using their market power to force down the prices they pay their suppliers.

Trick is, they pass much of these cost savings on to their customers, but keep enough of them to remain highly profitable.

Coles and Woolies have substantially higher profit margins than their smaller rival IGA, even though their average prices are lower than IGA's prices. So the big two's costs must be a lot lower than IGA's.

The list of industries with the highest super-profits reminds us how badly governments have stuffed-up the national electricity market, how much better they could be doing in controlling the prices of monopoly businesses such as Telstra, airports and port terminals, and in charging for liquor and gambling licences, not forgetting the indulgent treatment of private health funds.

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How Keynesianism came to Australia

Whenever you meet someone who uses the words Keynes or Keynesian as a swear word – or as synonyms for socialist – know that their adherence to neoliberal dogma far exceeds their understanding of mainstream economics.

Though John Maynard Keynes' (rhymes with gains) magnum opus, The General Theory of Employment, Interest and Money, was published in 1936, and he died 10 years later at 62, most economists – including many who wouldn't want to be called Keynesians – acknowledge him as the greatest economist of the 20th century.

It's true that the "monetarist" counter-attack on Keynesian orthodoxy led by Milton Friedman in the 1970s and early 1980s led to lasting changes in prevailing views about how the macro economy should be managed – mainly, that the primary instrument used to stabilise demand should be monetary policy (interest rates) rather than fiscal policy (the budget).

But the monetarists' advocacy of using control of the money supply to limit inflation was soon abandoned as unworkable, and these days few economists would want to be called monetarist.

What remains is a host of fundamentally Keynesian ideas. First is the distinction between micro-economics (study of particular markets) and macro-economics, study of the economy as a whole.

Then there's the idea that governments should seek to stabilise the fluctuations in aggregate (total) demand as the economy moves through the business cycle, a notion rejected by some "new classical" academic economists, but daily practised by the world's central banks and treasuries.

Macro-economists' obsession with fluctuations in gross domestic product is a product of Keynesian thinking, made possible by the development of "national income accounting" by Keynes' followers.

The General Theory was Keynes' attempt to explain how the Great Depression of the 1930s occurred – when the prevailing "neo-classical" orthodoxy said it couldn't occur – and how the world could return to healthy economic growth.

Eventually, it led to a revolution in the way economists thought about the macro economy. Neo-classical theory was out, Keynesian theory was in. Usually, radically different ideas can take years to be accepted – but this time, not so much in Australia.

In his book published earlier this year, A History of Australasian Economic Thought, Alex Millmow, an associate professor at Federation University in Ballarat, explains how Keynesianism​ came to Oz.

Although The General Theory laid out Keynes' new approach in all its exciting but confusing glory, the thinking of Keynes and his associates at Cambridge University in England had been developing since the start of the Depression in late 1929, and expressed in several of his earlier books and papers.

Australian academic economists had also been puzzling over the causes and cure of the international slump. They'd been closely involved in our initial policy response, to devalue the Australian pound, cut wages by 10 per cent and try to balance the budget.

Only slowly did the evolving thinking of Keynes and his circle in Cambridge cause them to doubt the wisdom of this deflationary approach, which made things worse, and shift to the opposite tack of using government spending on capital works to stimulate economic activity and create jobs at a time of mass unemployment.

Cambridge was then the Mecca of economics – especially for Australians – meaning our academics had plenty of contact. Our leading economist of the era was Lyndhurst Falkiner Giblin, a Tasmanian based at the University of Melbourne.

Anther leader was Douglas Copland, a Kiwi also at Melbourne Uni. They were early and influential, if cautious and qualified, supporters of the Keynesian approach.

Among the Australians who studied at Cambridge and brought back Keynesian thinking was E. Ronald Walker (later Sir Edward Walker; several of these people ended up as knights), based at the University of Sydney.

Over the years, Walker did most to inculcate Keynesian macro-economics among Australian academics and students. Another Aussie who returned from Cambridge as a convert was Syd Butlin, also at Sydney, who became our greatest economic historian.

Keynes was interested in how Australia had been hit by the Depression. Among his colleagues and students who made extended visits to Australia in the 1930s was Colin Clark, who stayed on after accepting an invitation to become a top bureaucrat in the Queensland government.

Clark was a brilliant economic statistician, who played a leading part in the development of what these days are known in every country as the national accounts.

When a Labor federal treasurer, Edward "Red Ted" Theodore, proposed a program of reflation in 1931, to counter the effects of the earlier deflationary measures, he quoted Keynes in his support. His plan was blocked by the Senate.

All this explains why Keynesian ideas were widely accepted by Australian economists even before the publication of The General Theory in 1936.

Publication came just as our first royal commission into "the monetary and banking systems" was getting under way. Many economists gave evidence, making a more influential contribution than the bankers, who defended the status quo.

The leading member of the commission, who wrote most of its report, was Richard Mills, an economics professor from Sydney University. Its other member of note was Ben Chifley, future Labor treasurer and prime minister, whose part in the commission caused his biographer to call him "a Keynesian of the first hour".

It's key finding was that "the Commonwealth Bank [then Australia's central bank, as well as a government-owned trading bank] should make its chief consideration the reduction of fluctuations in general economic activity in Australia".

The commission's recommendations shaped the regulation of Australian banking – including establishment of the Reserve Bank of Australia in 1959 – until the advent of financial deregulation in the mid-1980s.

As Millmow has observed elsewhere, the latest banking royal commission is unlikely to be nearly as influential as the first.

The federal government's national mobilisation following the outbreak of war in 1939, then the preparations for "postwar reconstruction and development", saw the full acceptance of Keynesian economics.

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Why going to a park is better than going to the beach

My father was always disapproving of people who excused their failure to turn up to his Sunday meeting by saying they'd been "worshipping God in the great outdoors". But the older I get, and the more I read, the more I think it's not such a bad idea.

I'm much attracted by the American biologist Edward O. Wilson's hypothesis of biophilia, that humans have an innate tendency to seek connection to nature, for its calming effects.

While most people will be heading for the beach in the next few weeks, I usually head for a national park, to lift my quota of trees, bush, grass and anything else that's green.

This time, however, we're heading for a jungle – otherwise known as Manhattan – to do babysitting duty. Ideally, this means I'd be virtually living in Central Park, but that may be a bit too snowy.

My regular reading of the universities' blogsite, The Conversation, has garnered a fair bit of evidence for biophilia.

According to a survey conducted by the Australian Bureau of Statistics in 2007, each year one in five Australians experiences a mental disorder. Most common are anxiety disorders, such as panic attacks or obsessive-compulsive disorder.

Zoe Myers, an urban design specialist at the University of Western Australia, says research shows that city dwellers have a 20 per cent higher chance of suffering anxiety and an almost 40 per cent greater likelihood of developing depression.

Fortunately, research also shows that people in urban areas who live closest to the greatest green space are significantly less likely to suffer poor mental health.

Myers says more than 40 years of research shows that exposure to nature increases calm and rumination, decreases agitation and aggression, and improves concentration, memory and creative thought.

But it's not emptiness or quiet that has these good effects, she says. "Nature in its messy, wild, loud, diverse, animal-inhabited glory has most impact on restoring a stressed mind to a calm and alert state.

"This provides a more complete sense of 'escape' from the urban world, however brief."

Many studies have attested to the restorative effects of forests but, though holidays in national parks are nice, we need something closer to home.

Melanie Davern, of RMIT University, with colleagues from Melbourne University, say recent research on the benefits of urban greening has found, for instance, lower rates of anti-depressant prescriptions in neighbourhoods close to woodlands in Britain, happier people living in areas with more birdlife, and better health in areas with increased neighbourhood tree coverage in the United States.

Planting trees in parks, gardens or streets has many benefits: cooler cities, slower stormwater run-off, filtering of air pollution, habitat for some animals (such as birds, bats and bees), making people happier and providing shade that encourages more walking.

Professor Pierre Horwitz, of Edith Cowan University, is a great advocate for urban bushland – a bush park of native trees, a wetland, or any native vegetation characteristic of the local region.

"With its undisturbed soils and associated wildlife, urban bushland is more diverse than other types of green spaces in our cities, like parks. The more unfragmented the landscape, or unaltered the bushland, the more likely it will be to retain its biodiversity," Horwitz says.

"Exposure to biodiversity from the air, water, soils, vegetation, wildlife and landscape, and all the microbes associated with them ... enhances our immunity. This is thought to be key to the health benefits of nature."

Horwitz says we know that wealthier people tend to live in greener suburbs, and that wealthier people tend to be healthier. So is it wealth rather than nature that's doing the good work?

Fortunately, no. Many studies have controlled for wealth but still found direct health benefits from exposure to biodiversity.

The benefits go not just to individuals, but to the wider city. Forests and woodlands clean our urban air by removing particles and absorbing carbon dioxide. This reduces premature death, acute respiratory symptoms and asthma across the city.

As well, urban bushland improves city water. Wetlands and the vegetation around them clean water by filtering, reducing exposure to pollutants carried in groundwater or surface run-off.

And not forgetting that vegetation moderates extremes of temperature, providing shade when it's hot and less exposure when it's cold, thus reducing heat- or cold-related illnesses.

Trouble is, urban bushland shrinks as new suburbs are developed on the outskirts of our cities. Worse, bigger houses and more high-rise living is causing backyards to be shrinking, too, even though they contribute to our health and our kids' development.

Not to worry. There's a lot of urban roof space, and we're getting more rooftop gardens. Sara Wilkinson and Fiona Orr, of the University of Technology Sydney, studied the use of a rooftop garden at St Vincent's Hospital in Sydney as part of two "horticultural therapy" programs for people recovering from mental illness.

Among the many benefits participants identified were regular connection with others, developing friendships, experiencing enjoyment and restoration of health.

And if you don't have a spare rooftop, you can join the latest trend and install a vertical garden.

Sorry, I'm getting a bit over-excited here. I wonder if "green space" still counts as green when its covered in snow? Hope the apartment we're renting at least has some indoor plants.

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How Trump's tax cuts will affect Australia

The Americans' decision to drop their company tax rate to 21 per cent from the start of next year is unlikely to overcome our Senate's resistance to cutting our company tax rate to 25 per cent for big business. Which is no bad thing.

It seems the forces behind the US end of neoliberalism – the distortion of mainstream economics I prefer to call bizonomics (giving big business whatever it wants will be best for all of us) – aren't giving up without a fight.

This US tax bill is a huge win for them, with the company tax rate greatly reduced, plus cuts in personal income tax biased heavily in favour of high-income earners.

To the extent the unthinking populism that helped elect a way-out character like Donald Trump has been provoked by economic factors, the obvious suspect is America's growing inequality.

But Trump's only great legislative achievement in his first year is an act that will worsen inequality.

That the populists have just shot themselves in the foot is no surprise, since the hallmark of populism is wanting to have your cake and eat it - failing to think things through.

Those American business people who aren't populists, but like the sound of Trump's tax cuts, also need to do some thinking through.

Their big problem is that the tax package will cost the US budget almost $2 trillion over 10 years.

Any consequent boost to US economic activity is likely to be short-lived, and any boost to tax collections far too small to much reduce the net cost to the budget, meaning a lot bigger deficits and debt.

The extra government borrowing needed to finance those bigger budget deficits – and to attract funds from foreign bondholders – will force up US interest rates and the US exchange rate. And, because the US is such a big part of the global economy (unlike us), also force up world interest rates.

Eventually, these higher rates will do what higher interest rates always do: discourage borrowing and spending, causing the US economy to slow.

The more so because it's already been growing fairly strongly for some years, with unemployment already down near the rate thought to represent full employment. It hardly needs more fiscal (budget) stimulus.

The US Federal Reserve will worry more about rising inflation pressure, so will start raising its short-term, policy interest rate faster than it has been.

Neoliberals treat it as a self-evident truth that cutting tax rates leads to increased business investment, consumer spending and employment. But only the most oversimplified economic analysis tells you that's guaranteed. In practice there are many other variables.

For instance, if they don't see many profitable opportunities, US companies could keep doing what many have been: returning their (higher) after-tax profits to their shareholders as share buybacks, rather than investing them in business expansion.

However, Trump seems to have guarded against this possibility by including in his package a temporary business investment incentive.

So my guess is that, as well as giving share prices a boost, his tax cuts will lead to some increase in "jobs and growth" – at least for a while.

Now turn back to Oz and whether cutting the US company tax rate to 21 per cent leaves us with no choice but to cut ours to 25 per cent so as to be "competitive", as the government and the Business Council claim.

The big complication in applying analysis from other countries to us is our full dividend imputation system, which means Australian shareholders pay no company tax on their dividends. They thus have little to gain from a cut in the company rate.

This means the cuts we have passed, for companies with annual turnover of less than $50 million a year, probably won't do much to change the behaviour of those companies, since most of their owner shareholders would be locals.

It also means cutting our company tax rate yields benefits only to the foreign shareholders in our companies.

Why would we do such a thing? Especially when our 80 per cent foreign-owned mining industry employs few people, and the company tax it pays (or avoids paying) constitutes a key part of our reward for letting foreigners exploit our natural resources.

The standard answer is that cutting our tax rate would attract more foreign capital, which would generate more Jobs and Growth. The government's own modelling, however, found that the extra jobs would be negligible, while the extra growth would be quite small, and spread over 10 or 20 years.

Now, however, the argument changes: with the Yanks cutting their rate so low, we're in danger of losing our inflow of foreign investment funds. So cutting now wouldn't make us better off, but would avoid us becoming worse off.

Worried? I'm not. This argument assumes the size of the nominal rate of tax a country imposes on foreign investors is pretty much the only factor they consider when deciding where in the world to invest.

This is just silly. For a start, it ignores all the special tax breaks countries offer. A US study has found that our effective rate of tax is much lower than our nominal rate of 30 per cent, and compares well with other countries.

In any case, investing in Oz has a lot of non-tax attractions: our huge endowment of natural resources, our lawfulness and respect for property rights, our rich and well-educated workforce, our English language, our good education system, our good weather and even our good beaches.

So far, we've had no trouble attracting lots of foreign investment, despite our seemingly high company tax rate.

We'd be mugs to start panicking and giving up a lot of tax revenue – and adding to the debt and deficits we used to say was so terrible – before there was any evidence we had a problem.

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We should change the culture of Christmas

Christmas, we're assured, brings out our best selves. We're full of goodwill to all men (and women). We get together with family and friends – even those we don't get on with – eat and drink and give each other presents.

We make an effort for the kiddies. Some of us even get a good feeling out of helping ensure the homeless get a decent feed on the day.

And this magnanimous spirit is owed to The Man Who Invented Christmas, Charles Dickens. (You weren't thinking of someone else, surely?)

According to a new survey of 1421 people, conducted by the Australia Institute, three-quarters of respondents like buying Christmas gifts.

Almost half – 47 per cent – like having people buy them gifts. And 41 per cent don't expect to get presents they'll never use.

Well, isn't that lovely. Merry Christmas, one and all!

Of course, there's a darker, less charitable, more Scrooge-like interpretation of what Christmas has become since A Christmas Carol.

Under the influence of more than a century of relentless advertising and commercialisation – including the soft-drink-company-created Santa – its original significance as a religious holy-day has been submerged beneath an orgy of consumerism, materialism and over-indulgence.

We rush from shop to shop, silently cursing those of our rellos who are hard to buy for. We attend party after party, stuffing ourselves with food and drinking more than we should.

All those children who can't wait to get up early on Christmas morning and tear open their small mountain of presents are being groomed as the next generation of consumerists. Next, try the joys of retail therapy, sonny.

But the survey also reveals a (growing?) minority of respondents who don't enjoy the indulgence and wastefulness of Christmas.

A fifth of respondents – more males than females – don't like buying gifts for people at Christmas. Almost a third expect to get gifts they won't use and 42 per cent – far more males and females – would prefer others not to buy them gifts.

The plain fact is that a hugely disproportionate share of economic activity – particularly consumer spending – occurs in one month of the year, December.

And just think of all the waste – not just the over-catering, but all the clothes and gadgets that sit around in cupboards until they're thrown out. All the stuff that could be returned to the store, but isn't.

At least the new practice of regifting helps. Unwanted gifts are passed from hand to hand, rather like an adult game of pass-the-parcel, until someone summons the moral courage to throw them out.

Still, buying things that don't get used is a good way to create jobs and improve the lives of Australians, no?

Not really. The survey finds only 23 per cent of respondents agree with this sentiment, while 62 per cent disagree.

One change since Scrooge's day is that those who worry most about waste – at Christmas or any other time – do so not for reasons of miserliness, but because of the avoidable cost to the natural environment.

Rich people like us need to reduce our demands on the environment to make room for the poorer people of the world to lift their material standard of living without our joint efforts wrecking the planet.

This doesn't require us to accept a significantly lower standard of living, just move to an economy where our energy comes from renewable sources and our use of natural resources – renewable and non-renewable – is much less profligate.

This is the thinking behind the book Curing Affluenza, by the Australia Institute's chief economist – and instigator of the survey – Dr Richard Denniss.

He says we can stay as materialists (lovers of things) so long as we give up being consumerists (lovers of buying new things). We can love our homes and cars and clothes and household equipment – so long as that love means we look after them, maintain and repair them, and delay replacing them for as long as we reasonably can.

The survey shows we're most likely to repair cars, bikes and tools and gardening equipment, but least likely to repair clothing, shoes and kitchen appliances, such as blenders, toasters and microwaves.

What would encourage us to get more things repaired? Almost two-thirds of respondents would do more if repairs were covered by a warranty. More than 60 per cent would do more if repairs were cheaper. And 46 per cent if repairs were more convenient – which I take to mean if it was easier to find a repairer.

How about making repair work cheaper by removing the 10 per cent goods and services tax on it? Two-thirds support the idea; only 19 per cent oppose.

Point is, there are straight-forward things the government could do to encourage us to repair more and waste less. Were it to do so, this would help restore older attitudes in favour of repairing rather than replacing.

Trouble is, politicians tend to be followers rather than leaders on such matters. So the first thing we need is a shift in the culture that makes more of us more conscious of the damage our everyday consumption is doing to the environment. That putting out the recycling once a week ain't enough.

We could start by changing the culture of Christmas.

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Turnbull's economic luck: more forecast than actual

It's usually in the interests of us followers to have a leader who is lucky. Malcolm Turnbull has had his share of bad luck but, of late, his fortunes seem to have changed. Latest proof is the mid-year budget update.

According to Scott Morrison and Mathias Cormann, everything is much improved. Although previous mid-year updates have revealed less progress than expected at budget time, this time the budget deficit is expected to be $5.8 billion lower than forecast in May.

The overall budget balance is still expected to be back in (a slightly larger) surplus in 2020-21, and this financial year is expected to be the last one in which the government needs to borrow to cover the day-to-day activities of government (as opposed to its spending on infrastructure), a year earlier than expected.

This means the Commonwealth's gross public debt is now projected to be $23 billion lower than expected by June 2021.

As for the economy, the Turnbull government's unwavering pursuit of Jobs and Growth has turned this from slogan to reality, we are told.

The economy is steaming on, but growth in employment – particularly full-time jobs – has been remarkable.

Well, yes – up to a point. There's good luck in the hand, and there's forecast good luck. Federal governments have been forecasting good results since the days of Wayne Swan and Julia Gillard – so far without much luck.

I would say we can give a fair bit of credibility to what is expected to happen between now and June, but forecasts and projections out another three years to June 2021 remain just that – forecasts.

The fact is that the government has had to revise downward its forecasts for the economy this financial year, but has left its forecasts for the following three years largely unchanged. Well, maybe, maybe not.

The government's forecast in May of a return to budget surplus by 2020-21 rested heavily on its prediction that, despite the extraordinary weakness in wage growth over the past four years, over the coming four years it would steadily return to boom-time rates.

Now these highly optimistic expectations have been shaved back, but only a little. I hope they come to pass, but I wouldn't bet much on it.

But what of the government's attempt to claim credit for the remarkably strong growth in employment over the past year?

I hate to shock you, but governments have been known to claim the credit for improvements that came to pass on their watch, even though the seeds of that improvement were sown before their time.

The surge in full-time jobs is explained largely by the delayed rollout of the National Disability Insurance Scheme (initiated by Gillard) and by the NSW and Victorian governments' increased spending on road and rail infrastructure (for which Joe Hockey can share some credit).

But if some of Turnbull's newfound air of success and optimism rubs off on the rest of us that, at least, will be no bad thing.

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A bigger, better public sector will secure our future

There are important lessons to be learnt from the latest news about where our strong growth in employment is coming from. But if we listen to the nostrums of the Smaller Government brigade, we'll get them exactly wrong.

The (trend) figures we got from the Australian Bureau of Statistics last week showed employment growth of 370,000 – or 3.1 per cent – over the year to November. More than 80 per cent of the new jobs were full-time.

Great news.

But my esteemed colleague Peter Martin delved deeper and came upon a bigger story: the strong growth in employment has not been spread evenly across the economy, but is heavily concentrated in just two industries: "healthcare and social assistance" and construction.

It's also concentrated disproportionately in Victoria and NSW, and among women workers.

Why? Because, though employment in health and aged care has been growing strongly for years, the latest bout can be attributed mainly to the delayed rollout of the national disability insurance scheme initiated by Julia Gillard. Most of these extra workers would be female.

And because the strong growth in construction employment can be attributed mainly to a boom in infrastructure spending by the Victorian and NSW governments, much of it induced by Joe Hockey's incentive payment to state governments which engaged in "asset recycling" by using the proceeds from privatisation to build new infrastructure.

Oh no! You mean the growth in employment isn't the real deal? It's just some kind of temporary budget stimulus? It's not coming from the productive private sector, just from the unproductive, parasitical public sector, which wouldn't exist without the private sector's blood to suck upon?

Remember what I said last week about neoliberalism being ideology masquerading as economics? That last paragraph was a classic case.

It's true that, in some sense, the disability scheme and state infrastructure projects are instances of fiscal (budget) stimulus. But the notion that government deficit spending "crowds out" private sector spending is true only when the economy is booming and already at full employment – which we clearly aren't at present.

Just imagine how much weaker the economy would be now if government spending hadn't caused full-time employment to grow by up to 300,000 jobs over the past year.

The news that so much of the past year's employment growth has come from public deficit spending is actually vindication of the Reserve Bank's longstanding call for monetary policy (interest-rate) stimulus to be backed up by fiscal stimulus.

Note, too, that while even all full-time construction jobs are temporary in the sense that all projects end, employment associated with the disability scheme will continue indefinitely.

And, since governments tend to outsource both their construction projects and their disability care packages, most of the new jobs would actually be classed as in the private sector.

Of course, the notion that the private sector is productive but the public sector isn't is sheer economic illiteracy. We've long lived in a "mixed economy" in which most goods and services are produced by the private sector but, for good reason, some services are produced (or, at least, funded) by the public sector.

As I also wrote last week, economists are doing battle against the misapprehension scaring our youth that robots will reduce the amount of work needing to be done – the latest incarnation of what economists have long called the (fixed) "lump of labour fallacy".

While it's true new technology has been destroying jobs since the start of the Industrial Revolution, it's equally true that in those two centuries we've never yet run out of other jobs we'd like to pay someone to do for us.

Since the 1960s, a large share of these green-fields jobs has gone to women, facilitating their (continuing) mass movement back into the paid workforce after child-bearing.

But here's the most important lesson to learn from the news that most of the growth in good, full-time jobs in recent times has come from the government: much of the new demand for people to do new things for us will involve new jobs delivering services in, or funded by, the public sector.

That's because almost all the services best provided or funded by the public sector are "superior goods" – things we want more of as we get richer: education and training, healthcare, aged care, disability care and much else, even law and order.

So the greatest threat to continued growth in the "lump of labour" comes not from robots, but from those wanting to put some arbitrary cap on the size of government – and, of course, on the amount of tax we pay.

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Who's ripping it off? Competition theory and reality

Puzzling over the rich economies' poor productivity improvement and weak wage growth (but healthy profits), American economists are pointing the finger at reduced competition between firms. But can this explain Australia's similar story?

Jim Minifie, of the Grattan Institute, set out to answer this in his report, Competition in Australia.

Economists regard strong competition between businesses as essential to ensuring market economies function well, to the benefit of consumers and workers.

Competition is what economic theory says stops us being ripped off by the capitalists. Firms that overcharge for their products lose business to firms that undercut them.

So competition pushes prices down towards costs (which economists – but not accountants – define as including the "cost of capital", or "normal profit", the minimum rate of profit needed to induce firms to stay in the market).

Competition helps ensure that economic resources - land, labour and (physical) capital – move to the uses most valued by consumers.

Competition also encourages firms to come up with new or better products – or less costly ways of producing a product – in the hope of higher profits. But those that succeed in this soon find their competitors copying their ideas, and bidding down the price to get a bigger slice of the action.

The innovations improve the economy's productivity (output per unit of input), but competition soon takes away the higher profits, delivering them into the hands of consumers, who often get better products for lower prices.

That's the theory. Question is, to what extent does it hold in practice? And does it hold less in recent years than it used to?

The simple theory assumes any market has a large number of sellers, each too small to be able to influence the market price. In practice, however, many of our markets are dominated by two, three or four big firms.

Why? Mainly because of the presence of economies of scale. It's very common that the more you produce of something – up to a point – the less each unit costs.

So, it makes great sense to have a small number of big firms doing much of the production – provided competition ensures most of the cost saving is passed on to customers in lower prices. Which, as a general rule, it has been over the decades.

Trouble is, big firms do have some degree of control over prices. And it's common for the few big firms in an industry to come to an unspoken agreement to compete using advertising or product differentiation, but not price.

Firms can increase their pricing power by taking over their competitors to get a bigger share of the market. It's the role of "competition policy" – run in our case by the Australian Competition and Consumer Commission – to prevent overt collusion between firms, and takeovers intended to increase market power. But how well is that working?

"Natural monopolies" – where it simply wouldn't make economic sense for more than one firm to serve a particular market, such as rival sets of power lines running down a street, or two service stations in a small town - are another common departure from the theoretical model.

So, what did Minifie find in his study of competition in practice? He found evidence it had lessened in the United States, but not here.

He found plenty of markets where a few firms did most of the business. But "the market shares of large firms in concentrated sectors are not much higher in Australia than in other countries [of comparable size], and they have not grown much lately," he says.

Nor have their revenues (sales) grown faster than gross domestic product. The profitability of firms – profits relative to funds invested - hasn't risen much since 2000.

Minifie identifies eight industries characterised by natural monopoly (in descending order of size): electricity transmission and distribution, wired telecom, rail freight, airports, toll roads, water transport terminals, ports and pipelines.

Then there are nine industries where large economies of scale mean they're dominated by a few firms: supermarkets, wireless telecom, domestic airlines, then (of roughly equal size) internet service providers, pathology services, newspapers, petrol retailing, liquor retailing and diagnostic imaging.

Next are eight industries subject to heavy regulation by government: banks, residential aged care, general insurance, life insurance, taxis, pharmacies, health insurance and casinos.

(Often, these industries are heavily regulated for sound public policy reasons, but the regulation often acts as a barrier to new firms entering the market, thus allowing them to be dominated by a few firms.)

But note this: by Minifie's calculations, natural monopolies account for only about 3 per cent of "gross value added" (a variant of GDP), while high scale-economies industries account for 5 per cent and heavily regulated industries for 7 per cent.

So that means the parts of the economy where "barriers to entry" limit competitive pressure make up about 15 per cent of the economy. Then there are 29 industries with low barriers to entry making up the rest of the "non-tradables" private sector, and about half the whole economy.

That leaves the tradables sector (export and import-competing industries) accounting for 14 per cent of the economy and the public sector making up the last 20 per cent.

Even so, Minifie confirms that, in industries dominated by a few firms, many firms make "super-normal" profits – those in excess of what's needed to keep them in the industry.

By his estimates, up to half the total profits in the supermarket industry are super-normal. In banking it's about 17 per cent.

Other companies and sectors with substantial super profits include Telstra, some big-city airports, liquor retailers, internet service providers, sports betting agencies and private health insurers.

Comparing this last list with the lists of natural monopolies and heavily regulated industries suggests governments could be doing a much better job of ensuring the regulators haven't been captured by the companies being regulated.

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Robots won't reduce the amount of work we need to do

For me, one of the most significant economic developments of this year was realising how pessimistic many of our youth have become about their prospects of ever landing a decent full-time job.

To be sure, some degree of frustration on their part is understandable. Although it's true we avoided a severe recession following the global financial crisis of 2008, it's equally true that, until recently, employment growth has been weaker than usual in the years since then.

And the burden of this weaker growth has fallen disproportionately on young people leaving education to look for their first full-time job.

What's less understandable is the way older, and supposedly more knowledgeable, people have sought to demonstrate how with-it and future-focused they are by spreading wildly exaggerated predictions about how many jobs will be taken by robots, scaring the pants off our youth and convincing them they're doomed to a life of "precarious employment" in the "gig economy".

I'm sorry to say that the otherwise-worthy Committee for Economic Development of Australia was responsible for writing on many young minds the near certitude that 40 per cent of jobs in Australia are likely to be automated in the next 10 to 15 years.

The good news, however, is that, for once, economists were moved by all the amateur analysis they were hearing to join the debate about the future of work. Dr Alexandra Heath, of the Reserve Bank, dug out the hard evidence about how the nature of work is changing and Dr David Gruen, of the Department of Prime Minister and Cabinet, put worries about the shrinking number of jobs into their historical context.

But the charge has been led by Professor Jeff Borland, of the University of Melbourne, one of our top labour-market economists.

With a colleague, Dr Michael Coelli, Borland examined the papers behind the claim of 40 per cent of jobs being lost to robots, and found it built on questionable foundations. In their figuring, the 40 per cent was likely to be nearer 9 per cent.

And last week Gruen rejoined the fray, giving a big speech about it in, of all places, Jakarta.

Predictions about what will happen in the economy can be based on the belief that it will respond to new developments in much the same way it responded in the past to similar developments, or on the belief that "this time is different".

People who know little economic history are always tempted, as many people are now, to assume this time is different.

But economists have learnt the hard way that this time is rarely very different. The fact is, people have been predicting that the latest technology would reduce the number of jobs since the Luddites at the start of the Industrial Revolution.

Gruen reminds us that, in 1953, the great Russian-American economist Wassily Leontief wrote that "labour will become less and less important ... More and more workers will be replaced by machines."

Borland notes that, in the 1960s, Lyndon Johnson established a presidential commission to investigate fears that automation was permanently reducing the amount of work available.

In 1978, Monash University held a symposium on the implications of new technologies, with the convenor predicting that, by 1988, at least a quarter of the Australian workforce would be made redundant by technological change.

Then there was Labor legend Barry Jones' prediction in his best-selling Sleepers Wake! that "in the 1980s, new technologies can decimate labour force in the goods producing sectors of the economy".

Gruen admits that "there is no doubt that, over the past two centuries, waves of technological change have eliminated jobs, and rendered some occupations obsolete.

"But they have also facilitated the creation of new jobs to take their place – either directly, or indirectly as a result of rising standards of living generating new demands."

There are two processes at work, he says. One is that technology takes jobs away – this is the bit we can all see. What we can't see is the second process, the invention of new complex tasks, leading to new jobs.

The history of technological advance over the past 200 years has shown the second process has broadly kept pace with the first.

Computers have been changing the way businesses do their business – and destroying jobs – since the early 1980s. If that's all there was to it, there ought to be far fewer jobs today.

But the number of Australians with jobs has increased by a factor of 2.7 since the mid-1960s, while the average number of hours worked per person has remained broadly stable. Fact.

Like the economists, I find it hard to believe this relationship is about to break down because "this time is different".

What's true is that the nature of work has been changing – slowly – for the past 30 years or so, and this trend is likely to continue. It may accelerate, but it hasn't yet.

Using research by Heath, Gruen says routine cognitive jobs (such as office assistants, sales agents, brokers and drivers) and routine manual jobs (factory workers, construction, mechanics) are in less demand, whereas non-routine manual jobs (nurses, waiters, security staff) and non-routine cognitive jobs (engineers, management, healthcare, designers) are in increasing demand.

It's the changing nature of work, not a fall in the amount of it, we should be preparing for.

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We should rescue economics from the folly of neoliberalism

There's no swear word in politics today worse than "neoliberalism". It's badly on the nose, and the reaction against it has a long way to run. But what is it, exactly? Where does mainstream economics stop and neoliberalism begin?

The term means different things to different people. Professor Dani Rodrik, of Harvard, says in the Boston Review the term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal (budgetary) austerity.

I've always thought of it as a fundamentalist, oversimplified, dogmatic version of conventional economics, one from an elementary textbook, not a third-year text that adds the complications of market power, externalities​ (costs or benefits not captured in market prices), economies of scale, incomplete and asymmetric (lop-sided) information, and irrational behaviour.

Rodrik's conception of the term isn't very different. He thinks mainstream economics needs to be rescued from neoliberalism because, as people heap scorn on it, we risk throwing out some of economics' useful ideas.

Which are? That the efficiency with which an economy's resources are allocated is a critical determinant of its performance. That efficiency, in turn, requires aligning the incentives of households and businesses with "social" costs and benefits (so as to internalise the externalities).


That the incentives faced by entrepreneurs, investors and producers are particularly important when it comes to economic growth. Growth needs a system of property rights and contract enforcement that will ensure those who invest can retain the returns on their investments.

And that the economy must be open to ideas and innovations from the rest of the world. Of course, economies also need the macro-economic stability produced by sound monetary policy (low inflation) and budgetary sustainability (manageable levels of public debt).

Does all that smack more of neoliberalism than mainstream economics to you? If it does it's because mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions.

"A proper understanding of the economics that lies behind neoliberalism would allow us to identify – and to reject – ideology when it masquerades as economic science. Most importantly, it would help us develop the institutional imagination we badly need to redesign capitalism for the 21st century."

There's nothing wrong with markets, private entrepreneurship, or incentives, Rodrik says, provided they're deployed appropriately. Their creative use lies behind the most significant economic achievements of our time.

The central conceit and fatal flaw of neoliberalism is "the belief that first-order economic principles map onto a unique set of policies, approximated by a Thatcher-Reagan-style agenda" – also known as the "Washington consensus".

Take intellectual property rights. They're good when they protect innovators from free-riders, but bad when they protect them from competition (as they often do when the US Congress has finished with 'em).

Consider China's phenomenal economic success. It's largely due to its orthodoxy-defying tinkering with economic institutions. "China turned to markets, but did not copy Western practices in property rights. Its reforms produced market-based incentives through a series of unusual institutional arrangements that were better adapted to local context," Rodrik says.

Some may say China's institutional innovations are purely transitional. Soon enough it will have to converge on Western-style institutions if it's to maintain its economic progress. Well, maybe, maybe not.

What neoliberal proponents of the single route to economic prosperity keep forgetting is that none of the economic miracles that preceded China's – in South Korea, Taiwan and Japan – followed the Western formula. And each did it differently.

Even among the rich countries we see much variance from the neoliberal cookie cutter. The size of the public sector, for instance, varies from a third of the economy in Korea, to nearly 60 per cent in Finland.

In Iceland, 86 per cent of workers are in a trade union; in Switzerland it's 16 per cent. In America firms can fire workers almost at will; in France they must jump through many hoops.

Rodrik repeats an old economists' saying, one forgotten by the neoliberal oversimplifiers. "Good economists know that the correct answer to any question in economics is: it depends."

It depends on the particular circumstances, on how well your economic "institutions" (laws, official bodies, norms of behaviour) fit with those the model assumes to exist, on what you're trying to achieve, on your priorities, and on the political constraints you face.

As the Chief Scientist, Dr Alan Finkel, said when asked if he preferred his own emissions intensity scheme to Malcolm Turnbull's national energy guarantee: "There are a lot of ways to skin a cat."

Economics has many useful insights to offer the community. It must be rescued from neoliberalism because neoliberalism is simply bad economics.

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