Morrison plan shows who he thinks most deserves a tax cut

Scott Morrison wants this election to be all about his redoubled plan for lower taxes. But Treasurer Josh Frydenberg doesn’t want anyone saying it will stop income tax being “progressive”. He’s right. But his claim that the tax system will remain highly progressive is debatable.

In last year’s budget, Morrison announced a three-stage tax cut, spread over seven years. It had a cumulative cost to the government’s revenue of a massive $144 billion over 10 years, with most of that cost coming in the later years.

In the budget Frydenberg produced last week, he doubled down on last year’s plan. He doubled the early part and greatly increased the later parts, at an additional cost of $158 billion over 10 years, taking the total cost to more than $300 billion – an incredible sum in several senses.

I’ll explain the grand plan in a sec, but first let’s be clear on the meaning of three words you hear bandied about whenever tax changes are debated: progressive, regressive and (less commonly) proportional.

A tax is said to be progressive when it takes a progressively higher proportion of people’s income as incomes rise.

The key word here is proportion. You judge “progressivity” not by the dollar amount people pay, or the amount of the cut they get, but by how that amount compares with their income. When a tax takes a higher proportion of a higher income than it does of a lower income, it’s progressive.

Conversely, a tax that takes a higher proportion of lower incomes than it does of higher incomes is said to be regressive.

A tax that takes the same proportion of all incomes, whether high or low, is said to be (you won’t believe this) proportional. It marks the borderline between progressivity and regressivity.

The main progressive tax is personal income tax. The example of a regressive tax people always quote is the goods and services tax.

But, in fact, almost all other taxes are regressive – with the notable exception of tax on the value of land (such as council rates), which is progressive because people with high incomes tend to own more land and more valuable land.

What makes income tax progressive is that your income is taxed in slices, with each extra slice being taxed at a higher rate.

Under the present tax scale – which Morrison’s plan would change in coming years – the first $18,200 of your income goes untaxed, the next $18,800 is taxed at 19¢ in the dollar, the next $53,000 at 32.5¢, the next $90,000 at 37¢, and anything above that at 45¢ in the dollar. (All of which is before you add 2¢ in the dollar for the Medicare levy.)

The slice (or tax bracket) into which the last part of your income falls determines your “marginal” tax rate – the rate you pay on any increase in your income.

Your average tax rate is determined by adding up all the tax you pay on each slice, then dividing that total by your income. Your average tax rate will always be a lot lower than your marginal rate.

For an income tax to be proportional it must have only one rate and no first, tax-free slice. So any income tax scale with a tax-free threshold must be progressive, even if only mildly so.

Now the details of Morrison and Frydenberg’s grand plan. As I said, it cuts tax in three stages over seven years.

The first is an immediate, reasonably generous tax cut (equivalent to about $20 a week) to people on middle incomes, earning between $48,000 and $90,000 a year. Those below that range get a lot less, as do those above it.

The second stage, which comes in three years’ time, July 2022, offers nothing much for people earning below $90,000 a year. For those earning more, there’d be a new tax cut ranging from nothing to $26 a week for those on $120,000 and above.

The third stage, coming a further two years later, in July 2024, offers tax cuts for everyone earning over $45,000 a year, ranging from nothing to about $65 a week for those on incomes up to $180,000 a year – plus another saving of up to $58 a week for those earning up to $200,000 and above.

But here’s a tip. You can think of the first, immediate stage as almost certain to be received because, though it has been only partially legislated, Labor has pledged to put it through.

It’s uncertain, however, whether we’ll ever see the other two stages. It’s not just that they’re so far into the future. It’s also that, though last year’s stages two and three are legislated, Labor says it would repeal them. As for this year’s enhancements of stages two and three, they're not yet legislated, and Labor won’t have a bar of ’em.

But, assuming stages two and three actually come to pass, how would the plan change the tax scale’s progressivity?

Well, with marginal tax rates varying from zero on income up to $18,200 a year, to 45¢ in the dollar on income over $200,000 a year, there can be no doubt that income tax would remain progressive.

But Frydenberg’s claim it would remain “highly progressive” is debatable. Presumably, he bases this on the estimate that the top 6 per cent of taxpayers, those earning more than $200,000 a year, would still be paying 36 per cent of total income tax collections in 2024-25.

Given the (no doubt optimistic) assumptions about how fast wages grow between now and then, this may be arithmetically correct. But it ignores the way the introduction of a massive 30¢-in-the dollar tax bracket running from $45,000 a year to $200,000 would put a big kink in the tax scale, making it significantly less progressive than it was.

The proof: whereas people on incomes between $45,000 and $90,000 would have their average tax rate cut by about 2.5 percentage points, this then rises to a cut of 4.8 percentage points for those on $180,000, before jumping to a maximum cut of 5.8 points for those on $200,000 and above. It’s tough at the top.

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Why politicians only pretend to care about low income earners

It must be the Salvo still hidden inside me that makes my blood boil when Treasurer Josh Frydenberg claims to be delivering a tax cut worth $1080 a year to “low and middle income earners” and his claim is mindlessly repeated by journalists as though it’s a fact that doesn’t need checking.

I was brought up to care about people at the bottom. So, since we’re bound to spend most of the election campaign debating the complaints of the whingeing well-off, let’s spend just a moment thinking about “those less fortunate than ourselves”.

The $1080 – which Labor has promised to match should it win the election – will go to people earning between $48,000 and $90,000 a year, or about $920 to $1730 a week.

Does that sound like low and middle to you? It’s not hard to convince yourself it does. After all, the average earnings of adults working full-time are $93,300 a year.

Trouble is, the average (or mean) income is far from being typical. That’s because it’s pushed up by a relatively small number of people on very high incomes - the 1 per cent, if you like.

The typical income isn’t the mean, it’s the median – the one that, if you arranged all the incomes by size, is exactly in the middle, with 50 per cent of incomes above and 50 per cent below.

The median adult full-time worker is on $78,300 – 16 per cent lower than the mean. What makes the median “typical” is that a high proportion of all full-time workers will be clustered around it, a bit above or a bit below.

But about a third of all workers are part-time, two-thirds of whom are women. Shouldn’t they be included in any assessment of what’s “low and middle”?

When you do include them, the typical income of all workers drops to $57,900. That’s 21 per cent above $48,000 and 36 per cent below $90,000. So the government’s range does a better job of covering those above the middle than those below.

But how low is low? It’s hardly true that there are no workers on incomes below $48,000. Not even full-time workers. The federal minimum full-time wage is $37,400. How can anything called a “low and medium income” tax cut fail to include the many full-timers on the minimum wage?

It’s true, of course, that not everyone earning less than $48,000 a year misses out on a tax cut (known technically as a tax offset). Those earning $37,000 get not $1080 a year, but $255 – about a quarter of the full cut.

Why? Presumably, because their incomes are too low to qualify as officially low. Or maybe because, when your income’s that low, your need for a bit more money to spend is even lower. They might go crazy if you gave them as much as a thou.

For incomes between $37,000 and $48,000, the tax cut starts at $255 and rises at the rate of 7.5¢ in the dollar until it reaches $1080. This means those on the minimum full-time wage get a princely $285.

For incomes below $37,000, the tax cut will be up to $255 – though, for such an insignificant group, a mere 2.3 million people, the budget papers don’t bother saying how this will work.

Is that the bottom of those with low income incomes? Not really. About a third of households have incomes too low to pay income tax. Some of these people are the comfortably off alleged “self-funded retirees”, whose income from superannuation is exempt from income tax, but the rest are people dependent on some form of government welfare payment.

What do they get? Those on some form of pension get a one-off payment of $75 (or $125 for couples), which will be a huge help with their power bills.

What gets me is how we can claim to be worried about those with low incomes while excluding those whose income is low because they can’t find a job. They were ineligible for help because the lower taxes were only for, to quote the measure's official name, “hard-working Australians”.

Longing to be a hard worker doesn’t qualify, apparently. Frydenberg went to great length to justify the decision to exclude those on the dole even from the $75 payment – before the government belatedly included them, for fear the measure might be blocked in the Senate.

But if anyone really cared about the lowest of low incomes, they’d end the 25-year freeze on increasing the dole beyond the rise in consumer prices. It’s unconscionable for a nation as rich as we are to the give the jobless so little to live on it actually makes it harder for them to find work.

And that’s before you remember all the many instances where this government has sought to stigmatise and punish the unemployed for being jobless. For the jobless, it's all stick, no carrot.

Don’t kid yourself Labor would be much better, however. It’s seeking plaudits (and product differentiation) by raising the Liberals’ $255 cut to $350 – which will make all the difference.

And Labor is just as unwilling to increase the dole as the Coalition is. Why? Not because Labor thinks it possible to live decently on $40 a day, nor even because it would cost too much (which it wouldn’t).

No, as Labor shadow social services minister Linda Burney had the honesty to admit, it’s because too many voters – including Labor voters, no doubt – would disapprove. And we wouldn’t want that.

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Frydenberg's budget: if it looks too good to be true . . .

What a wonderful world we live in now our politicians have discovered the cure for opportunity cost. In his first budget, Josh Frydenberg is doing a Gladys: he wants us to believe “we can have it all”.

Over the next 10 years, he can give us: tax cuts worth $302 billion, new infrastructure worth $100 billion, sundry other goodies, and a budget that’s back in the black and stays there, so that the net debt falls to zero. Yeah? How?

But first, a flashback. Labor’s Wayne Swan ended up a laughing stock after he began his 2012 budget speech with the immortal words: “The four years of surpluses I announce tonight . . . this budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time.”

Here's what Frydenberg said seven years later: “Tonight, I am pleased to announce a budget surplus of $7.1 billion . . . In 2020-21, a surplus of $11 billion. In 2021-22, a surplus of $17.8 billion. In 2012-23, a surplus of $9.2 billion. A total of $45 billion of surpluses over the next four years.”

Oh dear. This year even the media knew not to fall into their usual trap of treating the government’s estimate of next year’s budget balance as an already accomplished fact. Actually, we won’t know the “actual” for another 18 months.

But, as usual, the media took little notice of the expected budget balance for the year just ending – a truth the Finance Department’s creative accountants have long exploited to improve the new year’s expected balance at the expense of the old year’s.

Some have questioned why Frydenberg didn’t try harder to turn the old year’s small deficit into a small surplus so that, should the Coalition lose the election, it would have avoided going into the history books as a government that was in power for six years without ever recording a surplus.

Short answer: it couldn’t afford to. Reading the budget papers’ fine print makes it clear the creative department had to put in much furniture shifting to come up with the predicted surplus of $7.1 billion – an amount Frydenberg has been able to assert is “substantial” rather than “wafer thin”.

Think about this: in the old year, government spending is expected to leap by 4.9 per cent in real terms, whereas in the new year it will grow by just 0.1 per cent real. Do you reckon that discontinuity happened by chance?

My colleague Shane Wright has noted the government’s decision to bring forward to the old year $1.3 billion in grants to local councils due to be made in the new year. He could have added that two new one-off cash grants, one to help recipients of residential aged care and another to help pensioners with their energy bills, with a total cost approaching $700 million, will be paid in the old year rather than the new.

The government’s been promising to have the budget “back in the black” by 2019-20 since Joe Hockey’s time. And for some years has been “reprofiling” the timing of payments and receipts to ensure this target is met.

Wright reminds us that a change in the timing of tobacco excise collections announced in last year’s budget will, purely by chance, yield a one-off boost of several billions in the new financial year.

Why are we so anxious to get the budget back in black? Because we want to start reducing the government’s debt. Trouble is, since Peter Costello’s day, successive treasurers have drawn our attention to the underlying cash deficit and away from the ironically named “headline” cash deficit.

That’s a problem because it’s actually the higher headline deficit that has to be funded by borrowing – or, if it’s in surplus, can be used to pay off debt. Guess what? The budget estimates that we’ll still be in headline deficit of $4.4 billion in the coming year, and won’t be in surplus until 2021-22.

The discrepancy is explained mainly by successive governments using an accounting loophole to exclude their spending on the NBN, the second Sydney airport, the inland railway and other projects from the underlying deficit.

Even so, Frydenberg assures us the government’s net debt will have been fully repaid by June 2030 – and he has a lovely graph that proves it. How is our path to a debtless Nirvana achieved?

By assuming that government spending grows with almost unprecedented slowness despite the ageing of the population, that the economy grows strongly for another 10 years without missing a beat and with productivity improving each year at a rate faster than we’ve achieved in decades, and – get this – that the government’s financial assets will grow by almost 3 percentage points to 12.8 per cent of gross domestic product.

When it comes to creativity, Australia’s politicians are second to none.

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Budget makes Frydenberg an unwitting Keynesian stimulator

Treasurer Josh Frydenberg doesn’t want anyone saying the budget he unveiled this week involves applying some “fiscal stimulus” to get the economy moving faster. He’d prefer to say his budget is “pro-growth”.

But what is fiscal stimulus? And does that label apply to this year’s budget? Only if you’re prepared to be called a “Keynesian” economist. Which Frydenberg isn’t.

Why not? Because in the hard right circles in which many Liberals move, the name of John Maynard Keynes (rhymes with Brains) has become a swearword. (That’s because their penchant for dividing people into political friends and foes exceeds their understanding of economics.)

The K-word isn’t one used a lot by the Reserve Bank. My guess is it would be quite pleased with what Frydenberg has done in coming up with his own version of what, when Kevin Rudd did it after the global financial crisis in 2008, was dubbed a “cash splash”.

But the Reserve would limit itself to saying Frydenberg has made the budget “less contractionary” than it would have been.

The “fiscal” in fiscal stimulus is just a flash word for anything to do with the budget. The managers of the macro economy often do things intended to stimulate it to grow faster, create more jobs and make us more prosperous.

In last year’s budget, Scott Morrison introduced a new “low and middle income tax offset” (known to aficionados as the lamington) worth $530 a year, to be received by workers earning between $48,000 and $90,000 a year, with those on lower or higher incomes getting lesser amounts, starting from last July.

The offset was equivalent to about $10 a week but, because it’s a “tax offset”, they don’t get it until they’ve submitted their annual tax return at the end of the financial year and received their tax refund cheque. That cheque (these days actually a transfer to their bank account) will include the offset.

So workers should receive their first offset payment as a lump sum sometime in the September quarter of this year.

But this week the government decided to increase the amount of the offset by $550 and to backdate it to last July. So about 4.5 million taxpayers will be given a cash grant of $1080 in a few months’ time. When they spend that money, it should give the economy a kick along.

First point to understand, however, is that though the motive for the policy changes politicians announce in budgets is usually political – they just want to buy our votes, for instance - that doesn’t stop those measures having an effect on the economy.

Economists ignore the political motivations and focus on the likely economic effects.

Second point, while it’s easy to see that something as sexy as a tax cut could, when it’s spent, add to economic activity, that’s just as true of the government's spending to build new infrastructure, or add new medicines to the pharmaceutical benefits scheme, or spend more on education.

So what will stimulate the economy is all the new programs the government decides to spend on, less any cuts in government spending or new tax increases it makes.

The budget papers show that, since the midyear budget update in December, the government’s decisions to change tax and spending programs total $5.7 billion, spread over the present financial year and the coming year.

That total stimulus is equivalent to about 0.3 per cent of gross domestic product – meaning that, despite all the excitement, it’s not exactly huge.

Third point, while most people see immediately that the things governments do with their budgets affect the economy, it takes them longer to realise that, particularly because the economy (GDP) is about four times bigger than the budget, the things the economy does also affect the budget.

That is, there’s a two-way relationship between the budget and the economy.

As the economy grows during the upswing of the business cycle, this should improve the budget balance, as the progressivity of the income tax scale (aka bracket creep) causes income tax collections to grow faster than income itself, and government spending on dole payments falls as more people find jobs.

Alternatively, as the economy slows during the downswing of the business cycle, tax collections also slow down and dole payments grow as people lose their jobs.

Keynesian economists refer to this source of improvement or deterioration in the budget balance as the “cyclical” component.

In contrast, they refer to the improvement or deterioration in the budget balance caused by the explicit decisions of the government to change taxes and government spending as the “structural” component.

Keynesians judge the “stance of policy” adopted in the budget by the change in this structural component. And, as we’ve seen, they’d judge the stance this year to be mildly stimulatory.

The Reserve – which needs to know what effect changes in the budget are having on the strength of demand in the economy so it can decide what it needs to do about interest rates – makes no distinction between the cyclical and structural components of the budget balance.

It simply looks at the direction and size of the expected change in the overall budget balance, which it calls the “fiscal impact”.

As well as seeing that the balance was expected to swing from deficit to surplus, it would note from the budget papers that, since the midyear budget update in December, tax collections and spending underruns were expected to improve the budget balance by $9.7 billion over the present and coming financial years.

In other words, the budget was now expected to take a further $9.7 billion more out of the economy than it put back in. Such a fiscal impact would be contractionary, not stimulatory.

But Frydenberg’s new spending and tax cut, costing $5.7 billion, will make the budget a bit less contractionary than it could have been. Good.

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Budget does the right thing for the wrong reason

Set aside the politics, focus on the economy's immediate needs, and this is a good budget – though, with less politics and more economics, it could have been better.

Viewed through a political lens, this is the classic budget of a government that knows it has only a slim chance of winning the looming election but also knows it has little to lose by abandoning its stated policies and promising more government spending and yet more tax cuts.

Add an economic perspective, however, and it's a budget that does the right thing for the wrong reason.

The Coalition won office almost six years ago promising to make eliminating "Labor's debt and deficit" its highest priority.

It's taken all this time to get to the point of being able to budget for a surplus next financial year, during which time the debt has doubled.

The rules it set itself said there were to be no tax cuts until the surplus was much higher than the one it's expecting. Any unexpected improvement in tax collections should be "banked" not spent. Only by running the biggest surpluses possible could the debt be paid off quickly.

All that is now out the window. But, whatever the government's ulterior motive, that's a good thing.

Why? Because, despite the decade that's passed since the global financial crisis – and the Treasurer's repetition of the mantra "a stronger economy" – the economy is still surprisingly weak. A year ago, it looked like it might be moving into top gear, but since then we have seen it fall back to grinding along in second.

That being so, now is not the time to have the budget taking a lot more money out of the economy than it's putting back in.

Although employment has been growing more strongly than you would expect, the economy's growth has remained below-par. It's being held back mainly by weak consumer spending, which is weak mainly because wages aren't increasing much – a phenomenon both sides of politics prefer to call "cost of living pressures".

Treasurer Josh Frydenberg predicts that wages will grow by 2.75 per cent in the coming financial year and by 3.25 per cent the following year. That's likely to prove over-optimistic, as such forecasts have been throughout the Coalition's term.

The tax cuts he is promising are a poor substitute for a decent pay rise, but they will help consumers keep spending and turning the wheels of the economy.

People earning between $925 and $1730 a week will get a tax cut equivalent to about $20 a week, backdated to July last year. But it will come in the form of an annual tax refund cheque after submitting their return in a few months time, that is $1080 higher than otherwise.

People earning less that $925 a week, or more than $1730 a week, will get much lower refunds.

Likewise, the one-off cash grants to pensioners are a poor substitute for a lasting solution to the problems in the electricity market, but they're better than nothing.

And the planned big increase in the government's spending on infrastructure will also help.

One little-noticed reason for us to be less impatient to pay off government debt is that the interest rate on long-term government bonds has fallen below 2 per cent. That's less than the rate of inflation.

The problem with Frydenberg's tax cuts is that though he keeps saying (and the media dutifully keep repeating) they are aimed at "low and middle income-earners", in truth, most of the money will go to people whose incomes are way above the middle.

By far the most expensive change to last year's seven-year tax cut plan – the change that does most to double the cost of the cuts to a staggering $302 billion over 10 years – is the decision to cut the middle tax rate from 32.5¢ in every dollar to 30¢ from July 2024.

The consequent saving will range from zero for those earning less than $925 a week to $75 a week for those earning $3845 a week and above.

These top earners don't have a pressing problem with the cost of living and are likely to save rather than recirculate a lot of their tax cut.

Had Frydenberg done more to direct his generosity to the really hard-pressed – including the unemployed, living it up on $40 a day – it would all have gone straight to retailers, big and small.

But the size and shape of the tax cuts we'll end up with are far from decided. The bidding war between the parties isn't over.

When the government announced the first stage of its tax cuts last year, it took Labor two days to up the ante by 75 per cent. The Treasurer has now doubled the government's original offer. In two days' time we will hear if Bill Shorten intends to see Frydenberg – or raise him.

The difference between the two sides is that whereas the Coalition's tax cuts come at the expense of slower progress in paying off the debt, Labor's plans involve cutting tax breaks in a way that takes from high-saving, higher income-earners and gives to low-saving, lower income-earners.

With an election coming in six weeks, you choose.

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The budget's getting better, but the economy's getting worse

Why would a government that boasts of its superior economic management be entering an election campaign with a budget warning of harder economic times ahead? Because it has no choice.

It will turn this admission of a bleaker economic outlook – with a slowdown in the global economy and, domestically, the risk that falling house prices could further weaken consumer spending – into a warning that now is just the wrong time to turn the economy over to those bunglers in the Labor Party, but this will be making the best of a bad deal.

There’s nothing new about a big give-away pre-election budget, but the budget we’ll see on Tuesday night will be different in several respects. For one thing, it’s not often you get a full budget that’s timed to be the kick-off of a six-week election campaign.

It will be more like an election policy speech than a budget, since none of its measures will have been legislated, let alone put into effect. Unless the Coalition wins, it’s a budget we’ll never hear of again.

For another thing, it’s reasonable to expect that strong economies and strong budgets go together, as do weak economies and weak budgets. The state of economy determines the state of the budget balance.

Not this time. As Deloitte Access Economics’ Chris Richardson has observed, “the economy is getting worse, but the budget is getting better”. Let’s start with the budget.

Politically, this budget is built on a fiction: that its centrepiece, a further round of tax cuts (and possibly one-off cash grants to pensioners) on top of last year’s three-stage, seven-year tax cuts costing $144 billion over 10 years, is the fruit of the government’s success in returning the budget to surplus, not a sign of its political desperation.

In truth, the government’s budgetary record is hardly anything to boast about, particularly when you remember the confident promises it made while in opposition about how quickly and easily it could eliminate “debt and deficit”.

The deficit may be gone, but there's still a lot of debt - which the Coalition seems in no hurry to pay back.

We know the government will budget for a decent surplus in the coming financial year, but it’s so close to balance in the present year that it would take only minor creative accounting to produce a “surprise” surplus a year earlier than promised.

When you remember how close to balance Labor’s Wayne Swan got in 2012-13, however, it’s surprising it’s taken the Coalition all of two terms to get us to where we now are.

You can blame this on lack of political will, but it’s now more apparent than it has been that the delay is a product of the economy’s slowness to recover from the Great Recession we supposedly didn’t have.

Even since Swan’s day, the econocrats – including the Reserve Bank – have each year been forecasting an early return to strong economic growth and a greatly improved budget balance.

And, each year, their forecasts have proved way too optimistic, particularly for a return to strong wage growth. A return to economic business as usual has repeatedly eluded us.

It’s not the econocrats’ fault, it’s the slowness of all of us to realise that the “secular stagnation” that’s dogged the United States and the other advanced economies is also dogging us. But with the economy’s unexpected slowing to growth of just 2.3 per cent over 2018 – or 0.7 per cent when you subtract population growth – it’s now a lot harder not to realise.

Few remember that Tony Abbott’s ill-fated first budget in 2014 was carefully designed to do little to reduce the budget deficit for the first three years because the economy was still too weak withstand a move to contractionary fiscal policy.

The surprising fact is, little has changed in all the years since then. This is the macro-economic justification for Tuesday’s purely politically motivated announcement of further tax cuts. The economy’s still too weak to withstand contractionary fiscal policy as the budget heads into surplusland.

But, in that case, how have we finally got back to surplus? Partly, through surprisingly limited real growth in government spending. But, mainly, through years of bracket creep, the exhaustion of companies’ prior tax losses, more effective anti-avoidance measures and, above all, the good luck of a (probably temporary) recovery in coal and iron ore prices and, thus, mining company profits.

Treasurer Josh Frydenberg will be hoping to convince us the budget improvement is lasting, but the weak economy is temporary. It’s more likely to be the other way round.

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High immigration hiding the economy's long-running weakness

How’s our economy been doing in the five or six years since the Coalition returned to office? In the United States and other advanced economies there’s much talk of “secular stagnation”, but that doesn’t apply to us, surely?

After all, we’re now into our record-setting 28th year of continuous economic growth since the severe recession of the early 1990s. This means that, unlike the others, we escaped the Great Recession that followed the global financial crisis in 2008.

Recent years have seen employment growing strongly and the unemployment rate falling slowly to 5 per cent. And, of course, as Treasurer Josh Frydenberg never fails to remind us when we see the quarterly national accounts, our economy is among the fastest growing of all the rich economies.

So the talk of secular (meaning long-lasting, rather than worldly) stagnation can’t be our problem, can it? Don’t be so sure.

The argument that, since the global crisis, the developed world has fallen into a period of weak growth that looks likely to last quite a few years was first advanced by one of America’s leading economists, Professor Laurence Summers, of Harvard, a former secretary of the US Treasury in the Clinton administration.

He took the term from its earlier use during the Depression of the 1930s, using it to mean “a prolonged period in which satisfactory growth can only be achieved by unsustainable financial conditions”.

The Economist magazine explains that secular stagnation means “the chronically weak growth that comes from having too few investment opportunities to absorb available savings”.

Let me tell you about some comparisons of our performance by decade, calculated by independent economist Saul Eslake in a chapter he contributed to the book, The Wages Crisis in Australia.

In the first eight years of the present decade, consumer spending – which typically accounts for just under 60 per cent of gross domestic product – has been slower than in any decade in the past 60 years.

The major reason for this is that the present decade has seen household disposable income grow at an average real rate of just 2.2 per cent a year, which is less than in any of the previous five decades.

The biggest component of household income is income from wages. Its real growth in the present decade has been slower than in any of the five preceding decades.

So, as I may have mentioned once or twice before, weaker growth in wages seems to be at the heart of weaker consumer spending growth and growth in the economy overall.

But the growth in consumer spending would have been even slower had households not reduced the proportion of their income that they saved rather than spent by 4 percentage points – to its lowest level since before the financial crisis.

The slow growth in wages in the present decade has meant a decline in the share of national income going to wages, which (along with higher mineral commodity prices) has contributed to the higher share of income going to the profits of corporations.

This “gross operating surplus” (which, Eslake says, is roughly equivalent to the sharemarket’s EBITDA – earnings before interest, tax, depreciation and amortisation) has averaged 26.7 per cent of GDP since 2000 – which is 3.5 percentage points more than it did in the 1980s and 1990s.

But this isn’t as good for business as it sounds. Eslake points out that, “while the share of the national-income pie going to corporate profits has increased, the pie itself has been growing at a much slower rate – so much so that the growth rate of corporate profits [as measured by gross operating surplus] has thus far during the current decade been slower than in any decade since the 1970s”.

Since it’s the rate of growth that share investors and business managers focus on, this says even business profits haven’t been doing wonderfully.

Which brings us to the national accounts’ bottom line – growth in real GDP. It’s averaged 2.7 per cent a year so far in this decade, which is less than in any decade since the 1930s.

And get this. More than half the real GDP growth so far this decade is directly attributable to growth in the population. Growth in real GDP per person has averaged 1.1 per cent a year – equal to its performance during the 1930s, and slower that anything we’ve had in between.

Get it? Allow for population growth – so you’re focusing on whether economic growth is actually leaving us better off on average – and our weak growth since the financial crisis becomes even weaker.

If our economic performance seems better than the other advanced economies’, that’s just because our population is growing much faster than theirs.

The symptoms of secular stagnation that other rich countries complain of are: weak growth in consumption and business investment, slow improvement in productivity, only small increases in wages and prices, and interest rates that are low not just because inflation is low, but also because real interest rates are low.

(The long-running slide in real long-term interest rates around the world demonstrates The Economist’s point that, globally, we’re saving more than households, businesses and governments want to borrow.)

We tick all those boxes. Unsurprisingly in our ever-more-connected world, we too are locked into secular stagnation of a seriousness not seen since the 1930s. It’s just that our rapid population growth – plus the ups and downs of the resources boom – has hidden it from us.

I remind you of all this today because it’s highly relevant to Tuesday’s federal budget: what it should be aiming to do, and how we should judge what it does do.

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Generational conflict comes to a polling place near you

The most memorable news photo I’ve seen in ages is one from the first School Strike 4 Climate late last year. It shows a young woman holding a sign: MESS WITH OUR CLIMATE & WE’LL MESS WITH YOUR PENSION.

One minute we oldies are berating the younger generation for their seeming lack of interest in politics (although, having arrived on the scene at a time when our politicians are behaving so badly, who could blame them?), the next we’re criticising them for missing a day of school.

When you remember how many days of uni the baby boomers missed with all their marches against the Vietnam war, the odd day off school hardly signifies. (Not that I’d want to discourage the ageing climate-change deniers from criticising the school-dodgers. When you’re growing up, defying adult authority is a big part of the motivation.)

Whenever I get the chance, I have a simple message for youngsters: you’d better start taking an interest in politics because it’s the people who aren’t watching that the pollies end up screwing.

The truth is our young people are interested in political issues, but that interest is unfashionably idealistic. They really care about fairness to the LGBTI community, climate change and the environment more broadly.

They’re not yet sufficiently old and cynical to have realised that politics has devolved into a self-centred free-for-all, where you jump into the ring to advance and protect your own interests at the expense of those with less muscle.

When last my colleague Jessica Irvine expressed support for Labor’s plan to end the refunding of unused dividend imputation credits to all except those receiving an age pension or part-pension, an angry reader accused her of “continuing to fuel the fire of inter-generational envy”.

Sorry, that argument doesn’t wash. It’s one the well-off and their champions have used for ages. What it’s really saying is, “it’s a sin for you to envy the fruits of my greed”.

When people accuse others of “the politics of envy” or inciting “class warfare”, their true message is: I’m winning, you’re losing, so why won’t you just accept it? Just be nice and stop trying to make things fairer.

(Speaking of sin, when last I supported the reform of imputation credits, a reader accused me of “preaching”. Sorry, when your father spent his life preaching two sermons a Sunday, it’s only to be expected. And I’m old enough to regard being likened to my father as a compliment, not an insult.)

Stripping away the religious overtones, there is, always has been and probably always will be plenty of scope for conflict between the generations. The solution is for the generation presently in power
to put its children’s interests ahead of its own (see climate change above).

Almost all of us do this in our private lives (it’s clear a lot of the well-off retired fighting to retain imputation credits are motivated by maximising their kids’ inheritance, and we’re happy for the bank of mum and dad to help our children into home-ownership), but when it comes to public policy we’re easily seduced by politicians seeking our votes with promises of short-term gain for long-term pain.

Not enough people realise that our system of taxes and benefits is explicitly designed to move money between the generations.

People – mainly younger people - with jobs and no kids pay a lot more in taxes (all taxes) than they get back in benefits (whether in cash or kind, such as education and healthcare), whereas families with kids get back a lot more than they pay. Couples whose kids have grown up but who are still working pay more than they get back, and then the retired get back a lot more than they pay.

Since almost all of us will progress through each of these stages, this money-shifting should pretty much even out over our lives. So, until relatively recently, it’s been seen as fair. It’s the basis for the oldies’ eternal sense of entitlement: “I’ve paid taxes all my life . . .”

But this has changed. As our leading independent think tank, the Grattan Institute, has demonstrated, tax changes over the past two decades have been “hugely generous” to older Australians.

“Older households pay $7500 [a year] less in income tax in real terms today than older households 20 years ago, despite high increases in average incomes,” it found. “Taxes on working-age households have risen over the same period.”

Most of this is explained by changes made by John Howard to benefit the alleged “self-funded retirees” (including making unused imputation credits refundable) and similar changes to superannuation tax breaks made by Peter Costello.

Add in Howard’s more favourable tax treatment of negatively geared property investments, and the young are dead right to believe the tax system has been biased against them and in favour of the better-off old (including me).

They’d also be right to see the looming federal election campaign as a battle between one side seeking to reduce the system’s bias against the young and the other fighting to protect the recently conferred perks of the well-off aged.

But a note to outraged Millennials: Howard is no baby boomer and the intended beneficiaries of his munificence were his own and earlier generations. Only some of the world’s evils were installed by my privileged generation.

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Economists: lonely, misunderstood angels in shining armour

If you’re tempted by the shocking thought that economists end up as handmaidens to the rich and powerful – as I’m tempted – Dr Martin Parkinson wishes to remind us that’s not how it’s supposed to be. The first mission of economists is to make this world a better world, he says. But don’t expect it to make you popular.

Let me tell you about a talk he gave on Friday night. It was a pep talk to the first of what’s hoped to be a regular social gathering for young economists come to Canberra to study, teach or work in government or consulting.

Apparently, working in Canberra can be a tough gig if you don’t know many economist mates to be assortative with.

Parkinson’s own career has had its downs and ups. He was sacked as Treasury secretary by Tony Abbott – who feared he actually believed in the climate change policy the Rudd government had him designing – then resurrected by Malcolm Turnbull as secretary of the Department of Prime Minister and Cabinet, the Treasury secretary’s bureaucratic boss.

He began the pep talk with a story about the woman with only six months to live, who’s advised by her doctor to marry an economist so as to make it seem like a lifetime.

That may be because, as Parko says, economists are trained to be analytical. To be rigorously logical and rational in their thinking. (I define an economist as someone who thinks their partner is the only irrational person in the economy.)

“Economics gives you insights into the way the world works that other professions cannot,” he says. Economists see things that others can’t. Sometimes that’s because the others have incentives not to see them.

As Upton Sinclair famously put it, it’s difficult to get someone to understand something when their salary depends on them not understanding it.

Ain’t that the truth. The endless bickering between our politicians explained in a single quote. And the economists’ limited success in persuading people to take their advice.

Economists are trained to see “opportunity cost” which, according to Parko, is “the core tenet of the profession”. “This under underlies everything we do.

“This leads us to positions that are often counter-intuitive [the opposite of common sense] and unpopular – but are right.”

True. It may amaze you that so much of what economists bang on about boils down to no more than yet another application of opportunity cost: be careful how you spend your money, because you can only spend it once.

It’s a pathetically obvious insight, but it’s part of the human condition to always be forgetting it. So it’s the economist’s role to be the one who keeps reminding us of the obvious. If economists do no more than that, they’ll have made an invaluable contribution to society – to making this world a better world - and earned their keep.

But here’s the bit I found most inspiring in Parko’s pep talk. “Economists are not ‘for capital’ or ‘for labour’ . . . We do not see the world through constructs of power or identity, even though we see the importance of them.

“We are ‘for’ individual wellbeing regardless of race, gender, sexual orientation or capabilities. Because of this, we are often against entrenched interests and for those without a seat at the decision table.

“Economists view the past as ‘sunk’ [there’s nothing you can do to change it] and argue for decisions about the future to be made free of sentiment and in opposition to special interests. Now, this is in sharp contrast to the incentives in our political system, which favour producer interests over that of consumers.”

Ah, that’s the point. The ethic of neo-classical economics is that the customer is king (or queen). Consumer interests come first, whereas “producer interests” (which include unions as well as business) matter only because they are a means to the ultimate end of the consumers’ greater good.

Economists believe in exposing business to intense competition, to keep prices no higher than costs (including a reasonable rate of return on capital) and profits no higher than necessary. Competition should spur innovation and technological advance, while ensuring the benefits flow through to customers rather staying with business.

Business doesn’t see it that way, of course. Unlike some, my policy is to tell business what it needs to know, not what it wants to hear. Some people – suffering from a touch of the Upton Sinclairs – tell themselves this makes me anti-business. No, it makes me pro-consumer. That’s the ethic we so often fall short of.

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Forget what’s happening in the economy, just find a scary label

If you want the unvarnished truth, the economy’s rate of growth slowed surprisingly sharply in the second half of last year. If you prefer titillating silliness, we’ve entered a “per capita recession”.

The national accounts for the December quarter, issued by the Australian Bureau of Statistics this week, show real gross domestic product growing by only 0.2 per cent during the quarter, following growth of only 0.3 per cent in the September quarter.

That compares with growth in the first half of 2018 of 0.8 in the June quarter and 1.1 per cent in the March quarter. Six months ago, it looked like the economy was moving into top gear. Now we realise it was changing down.

You’d think that would be bad enough for those tireless in their search for bad news. But, no, they delved around in the fine print and discovered that real GDP per person actually fell by 0.2 per cent in the December quarter and by 0.2 per cent in the previous quarter.

So, that must mean we’re in a “GPD per capita recession”. Eureka! Much scarier. (And saying it in Latin rather than English makes it even more so.)

Making it more entertaining obscures the truth, of course, but you can’t have everything.

Speaking of truth, let me give you a tip: any “recession” that has to be qualified by an adjective ain’t the real deal.

The more excitable end of the economy-watchers – the financial markets and the media – is always looking for an excuse to shock mum by using the ultimate in economic bad language, the r-word. Over the years they’ve given us “technical” recessions, “manufacturing” recessions, “growth” recessions and now “per capita” recessions.

There is no science behind the notion that two successive quarters of “negative growth” – contraction – equal a God-given licence to use the r-word. It’s no more than a rule of thumb, whose one virtue is that it allows the over-excitable to shout Recession! within seconds of seeing a new set of figures, when they really should look and wait for more convincing information.

It’s no more than circumstantial evidence, when you can’t find the body or the murder weapon. No economist I know is comfortable with it as a way of judging whether we really are in recession.

What they know is that, as a test, it delivers too many false readings. Because it’s so arbitrary, it can tell you you’ve got a recession when you don’t, or tell you you don’t when you do.

The national accounts’ first stab at measuring the growth during a quarter is so rough and ready, and will be changed so many times before it stabilises, that two successive negative quarters can easily be revised out of existence.

The real world is too messy for such simple rules of thumb to be reliable.

Treasurer Josh Frydenberg tweeted that “in 2000 and 2006 the Howard government had consecutive quarters of negative GDP per capita growth, and Rudd and Gillard had five negative quarters”.

And all this while our record period of continuous economic growth – now up to 27 years – remained unbroken. See what I mean about false positives?

But even if you do use the successive-quarters test, you’re supposed to apply it to the whole economy, not just to the bit that happens to qualify.

That’s why Scott Morrison was justified in dismissing the “per capita recession” as “made-up statistics”. The figures may have been calculated by the bureau, but it didn’t say anything about recession. That notion was spread by the media.

The bureau calculates about eight different versions of GDP (page 21 of the release). The excitables ignored the six that didn’t show two successive minuses, and zeroed in on one of the two that did. It was a contrivance in search of a headline.

The various versions of GDP are calculated to answer different questions. GDP per person is not designed to tell us whether we’re in recession. It’s designed to show how much of the growth in the economy is coming just from population increase rather than rising prosperity.

Making it a useful indicator. For instance, Frydenberg boasted that “Australia continues to grow faster than all of the G7 nations except the United States”.

True, but GDP per person tells us why. It’s because our population’s growing so much faster than theirs. (Of course, if you’re looking for a job, the growth caused by a higher population should make it easier.)

Admittedly, GDP per person is often used as a measure of what’s happening to the standard of living. But it’s a terribly crude measure. Which is why economists agree that one of the other measures, “real net national disposable income per person”, is the best you’ll get just by modifying GDP itself.

Trouble is, it shows the income of households growing by 0.8 per cent in December and by 2.1 per cent over the year. Wouldn’t get a headline out of that.

Time for a reality check: why is it that the r-word strikes fear into the minds of ordinary people? Because they know that genuine recessions involve falling employment and rapidly rising unemployment. Businesses fail, people lose their jobs, and the rest of us fear we’ll be next.

Any sign of that happening? No. The reverse, in fact. Using the bureau’s “trend” (smoothed) figures, over the six months to December, employment increased by 175,000, with 87 per cent of the extra jobs being full-time, and the proportion of people aged 15 and over with jobs at a record 62.4 per cent.

The unemployment rate fell by 0.3 percentage points to 5.1 per cent and the under-employment rate fell 0.2 points 8.7 per cent.

That’s how terrible a per capita recession is.

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AN ECONOMY FIT FOR HUMANS

Balmoral Lectures, Queenwood school, Wednesday, March 6, 2019

Some of you may remember Jill Tuffley, who was for many years in charge of economics teaching at Abbotsleigh. In 1988, Jill wrote a textbook to go with the new syllabus in HSC economics, which she asked me to launch. I complimented her on her choice of title, Our Economy, though I noted that, had I written the book, I’d have called it My Economy.

But Jill was right, of course. It is our economy, it belongs to all of us because we are the economy. It disturbs me to find people who feel alienated from The Economy, as though it belongs to other people – the rich and powerful, I suppose – who impose their will on us without us having any influence over what it does to us. In truth, though there may well be powerful people who have more influence than we do as individuals, it is our economy for two reasons. The first is that if, as they say, the Church of England is the Tory party at prayer, the economy is all of us at work and play. Or, as the first great economics textbook writer, Alfred Marshall, famously put it, economics is the study of humankind in “the ordinary business of life”. The second reason it’s our economy is that we live in a democracy, we each have a vote, and governments know that, if we get too dissatisfied with how the economy is working, we’re perfectly capable of tossing them out of office – as we’ve done many times before.

This is the point of my title, An Economy Fit for Humans. Ordinary people in the economy far outnumber the “1 per cent” of rich and powerful people, so it’s the job of governments to ensure the economy is run for the benefit of the ordinary people. The needs and preferences of the business class can’t be disregarded – it is a market economy, after all, which leaves most of us reliant on the private sector for our employment and our consumption – but business should be seen as just a means to an end. Its needs and wishes should be catered to only to the extent necessary to ensure the economy satisfies the public’s needs and wishes.

That’s what I mean by saying we should be fashioning an economy that’s fit for humans – for the people who make up the economy, and for whom it exists to serve. To that end, I think we’ve got a fair way to go. Many of us aren’t getting as much satisfaction as we should be. I don’t have any magic answers to all our discontents to offer tonight. Rather, I hope to offer some clarifying observations, drawn from some of the conclusions I’ve reach in more than 40 years of observing, thinking and writing about the economy.

That experience has made me aware there are fashions in economic thinking, and left me a strong believer in the pendulum theory of history. After World War II there was a strong view in Britain that the economy wasn’t working well and that the answer was to nationalise the key industries so governments could ensure good decision-making in the public interest. Even in Australia we nationalised the utilities – electricity and water with, in NSW, a privately-owned gas monopoly whose prices were so tightly regulated that it might as well have been publicly owned.

By the time of Margaret Thatcher in the late 1970s and Ronald Reagan in the early 1980s, the post-war pendulum had begun swinging back the opposite way. There was a strong view that the economy wasn’t working well and the answer was to privatise government-owned businesses, deregulate industries and outsource the provision of government services so market forces could bring about greater competition and efficiency in the economy’s functioning.

Today, with all the dissatisfaction over the way people have been mistreated and over-charged by the deregulated banks, the privatised electricity market, as well as the way “contestability” for vocational education and training was rorted, young people and those on temporary visas have been paid less than their legal entitlements, and much else, I think it’s now clear that, after about 35 years of what its critics now call “neo-liberalism”, the pendulum is now swinging back the other way, towards re-regulation of industries, more government intervention in markets and more vigorous policing of the laws applying to businesses.

Why does the pendulum keep swinging from over-regulation to under-regulation and now back the other way? I think it’s because “the truth is somewhere in the middle”. Trouble is, that’s not an emotionally satisfying position to espouse. It’s too vague and offers little illusion of certainty. We find it much easier and more attractive to gravitate to one extreme or the other. I don’t want to live in a heavily regulated economy and deal with government-owned businesses run like take-it-or-leave-it, get-back-in-the-queue monopolies. But nor do I want to live in an economy so lightly regulated that big businesses feel entitled to mistreat or overcharge their customers and think obeying the law is optional. We learnt from the GFC that market economies can’t be left to their own devices and do need to operate within a set of rules laid down by government. But setting rules that actually achieve their intended objectives without unintended consequences is much harder than many people realise. The truth may be somewhere in the middle, but putting your finger on it – finding the sweet spot - is devilishly hard.

Economics focuses on the material aspects of our lives – the production of goods and services and the consumption of those goods and services; the getting of money and the spending of it. It’s idle to deny the importance of the material aspect of our lives. I’m never impressed by people who claim to have a soul above money and the material. The great danger of our age, however, is falling into the habit of thinking the material is the only aspect of our lives that matters. Of attaching too little importance to all the other aspects: to our family lives, our relationships and social interactions, to the importance of leisure, re-creation, music, culture and spirituality. Over-emphasising the material is an occupational hazard for economists, because it’s their special area of expertise. It’s a great temptation for business people because how much money you make is the great metric of success, the objective measure of how well you’re doing in the comp. And it’s a pitfall for politicians because they mistakenly conclude it’s the main thing we want from them. This means it’s up to us to keep economics in context and stand up to people who want to make us richer at the expense of our relationships and cultural interests.

I think we’ve put too much emphasis on achieving economic growth. It’s stated aim is to raise our material standard of living at a faster rate, but usually offers no guarantee that the proceeds of that growth – the extra income – is distributed reasonably fairly between the bottom, the middle and the top. The business people who urge growth most strongly are probably hoping their income will grow a lot faster than yours. I think we’d do well to put more emphasis on better quality than greater quantity. There’s a tendency for those keenest to see faster growth to ignore the non-monetary costs it brings – the congestion, stress, anxiety and sometimes depression people suffer. If our material standard of living rises at the expense of our quality of life, why is that a good deal?

Politicians on both sides strive for economic growth because they believe a higher material standard of living will make us happier. I think that assumption’s far too narrow as a summary of what we want from governments. Sometimes I think the politicians would do more to increase “aggregate happiness” by trying to reduce un-happiness. The national disability insurance scheme is costing a lot of money, and it’s still got a lot of bugs in it, but it must surely be doing a lot to make the disabled and their families happier than they were. Unemployment – especially among the young – causes a lot of unhappiness and we ought to care more about it. We could be doing better on helping people with mental health problems. And, of course, doing better on eliminating domestic violence.

Before we leave the question of economic growth, however, I do have to remind you that, if we choose to have a growing population then, with a growing number of people needing jobs, we do need growth in the size of the economy to accommodate them.

We do need to accept that, economic activity can do damage to the natural environment – the ecosystem, if you like – especially if we do that activity the way we’ve long been doing it. It would be extremely short-sighted for us to continue practices that are damaging the environment we all live in and depend on. To use a word we use so often it’s lost its punch, such foolhardiness is unsustainable. If we keep doing what we’ve been doing, the time will come when the natural environment is so degraded it stops functioning. Then it will be too late to reverse the damage. I’m thinking of climate change, but much more than that. If we continue taking too much irrigation water out of the Murray-Darling because there are farmers and towns whose present existence depends on that water, eventually the river will dry up and there will be no more water to over-use. So I see our environmental arguments as being about short-sightedness. Our reluctance to pay short-term costs in return for the avoidance of much higher costs at some indeterminate point in the future. People worry about leaving government debt to their grandchildren, but not about leaving them a natural environment that’s stopped working.

If we became less gung-ho about economic growth, one of the potential benefits could be fewer bosses cracking the whip at work. I don’t see why being pressured and mistreated at work is a cheap price to pay for having our real wages grow by 2 per cent a year rather than 1 per cent. Actually, I don’t see that treating your staff unreasonably is the way to get the best out of them. One of the biggest things I care about – though you don’t see me writing about as often as I’d like to – is the need for us to get more satisfaction from our working lives. We spend so much of our lives at work that a big pay packet is poor recompense for doing a job you hate or for putting up with always being given a hard time. As individuals, it’s worth us moving around until we find a job we enjoy and a company we like working for, even if that does involve less pay. There’s much more I could say, but organisational psychologists have long understood the way to structure job responsibilities so as to make them more satisfying. There is some evidence that happy, fulfilled workers lead to higher profits. But, even if that weren’t true, I don’t understand bosses who don’t much care how unhappy their workers are.

But having said all that about governments doing more to reduce unhappiness and bosses doing more to ensure their troops get more satisfaction at work, I don’t want to leave you with the impression I think the economy can be like a Sunday school run by loving and infinitely forgiving mums, where nothing unpleasant ever happens and all is sweetness and light. The main source of pain and unhappiness is change. But we can’t have – and wouldn’t want – an economy where nothing changed. Change is inevitable because we’re affected by changes coming from overseas, which are beyond our control. We can’t build a wall that protects us from all external influences on us. But the greatest source of change is advances in technology, which bring us many benefits but, as we’re seeing with the digital revolution, often involve upending industries, my own among them. Generally speaking, consumers get better products, while producers get turned upside down. Some change is social - for instance, the long campaign to reduce discrimination on the basis of race, ethnicity, religion, sexual preference and, of course, discrimination against women, which has come a long way during my lifetime and has further to go. Yet another important source of change stems from our growing understanding of the damage we’re doing to the natural environment by the fossil fuels we burn, our farming practices, our disposable society and much else. So, while just about all change is disruptive, that doesn’t mean all of it is bad. Much of it is for the best. Similarly with change initiated by governments – invariably labelled “reform” – which often is necessary, but may not always be wise or well done. Certainly, it’s government-initiated change we feel freest to resist. Too often we resist change for selfish, short-sighted, NIMBI reasons. We can’t hope to live in an economy where the industry structure never changes, where old industries decline and new industries expand, where people lose their jobs and suffer a lot until they find new ones. We ought to be giving those people more help than we are to make the transition, but we shouldn’t be attempting to stop progress in its tracks.

However, that’s not to say some change shouldn’t be resisted. It should. Take, for instance, the notion that the rise of the “gig economy” means the end of stable, full-time jobs for our children. I think that notion is wrong and defeatist and must be resisted. It’s wrong because it’s not what most employers would ever want and, in any case, it wouldn’t happen because, under pressure from the electorate, governments won’t allow it to happen. It should be resisted because it would lead us to an economy that wasn’t fit for humans.

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How to lose water, waste money and wreck the environment

If you want a salutary example of the taxpayers’ money that can be wasted and the harm that can be done when governments yield to the temptation to prop up declining – and, in this case, environmentally damaging – industries, look no further than Melbourne’s water supply.

The industry in question is the tiny native-forest logging industry in Victoria’s Central Highlands. The value it adds to national production of goods and services is a mere $12 million a year (using figures for 2013-14).

The industry's employment in the region was 430 to 660 people in 2012 – though it would be less than that by now. Few of those jobs would be permanent, with the rest being people working for contractors, who could be deployed elsewhere.

Successive state governments have kept the native-timber industry alive by undercharging it for logs taken from state forests. The state-owned logging company, VicForests, operates at a loss, which is hidden by grants from other parts of the government.

Coalition governments are urged to keep propping up the industry by the National Party; Labor governments by the Construction Forestry Maritime Mining and Energy Union.

What’s this got to do with Melbourne’s water supply? Ah, that’s the beauty of a case study by David Lindenmayer, Heather Keith, Michael Vardon, John Stein and Chris Taylor and others from the Australian National University’s Fenner School of Environment and Society.

I’ve written before in praise of the United Nations’ system of economic and environmental accounts (SEEA), which extends our long-standing way of measuring the economy (to reach gross domestic product) to include our use of natural resources and “ecosystem services” – the many benefits humans get from nature, such as photosynthesis.

Lindenmayer and co’s case study is one of the first to use the SEEA framework to join the dots between the economy (in this case, native forestry) and the environment (Melbourne’s water supply).

Melbourne’s population of 5 million is growing so rapidly it won’t be long before it overtakes Sydney as the nation’s largest city.

So many people require a lot of clean water, a need that can only grow. Almost all of Melbourne’s water comes from water catchments to the city’s north-east.

Logging of native forests has been banned in all those catchments except the biggest, the Thomson catchment, which holds about 59 per cent of Melbourne’s water storage.

Trouble is, the water that runs off native forests is significantly reduced by bushfires – and logging.

This is the consequence of an ecosystem service scientists call “evapo-transpiration” – the product of leaf transpiration and interception and soil evaporation losses.

This means the oldest forests produce the most water run-off. When old trees are lost through fire or logging, the regrowth that takes their place absorbs much more water.

Logging done many years ago can still reduce a forest’s water run-off yield today. The Fenner people calculate that past logging of the Thomson catchment has reduced its present water yield by 26 per cent, or more than 15,000 megalitres a year. They calculate that, should logging continue to 2050, this loss would increase to about 35,000 megalitres a year.

Assuming the average person uses 161 litres of water a day, the loss of water yield resulting from logging would have met the needs of nearly 600,000 people by 2050.

The SEEA-based case study shows the economic value of the water in all of Melbourne’s catchments is more than 25 times the economic value of the timber, woodchips and pulp produced from all Victoria’s native forests.

This is partly because, thanks to past fires and overcutting, only one-eighth of the native timber logged in Victoria is good enough for valuable sawlogs, with the remainder turned into low-value pulp and woodchips for making paper. (This is true even though the trees being logged include lovely mountain ash, alpine ash and shining gums.)

Turning to the Central Highlands alone, in 2013-14 the annual economic value of water supply to Melbourne was $310 million, about the same as the value of its agriculture. Its tourism was worth $260 million – all compared to its native timber production worth $12 million.

But the main thing to note is the trade-off between the different uses to which land can be put. Use it to produce water supply, and it’s very valuable. Use it to produce water supply and native timber, however, and you reduce the value of the water by far more than the chips and pulp are worth.

And why? To save a relative handful of workers the pain of moving to a different industry in a different town. And save the mill owners the expense of adapting their mills to chipping plantation wood rather than native wood. When did they deserve the kid-glove treatment the rest of us don’t get?

As for all the water that won’t be available to meet Melbourne’s growing needs, how will we replace it? Not to worry. We’ll get it from the desalination plant. It will cost $1650 more per megalitre than catchment water, but the Nats and the CFMMEU know we won’t mind paying through the nose to continue wrecking our native forests.

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Beware of groupthink on why the economy’s growth is so weak

According to our top econocrats, the underlying cause of the economy’s greatest vulnerability – weak real wage growth – is obvious: weak improvement in productivity. But I fear they’ve got that the wrong way round.

We all agree that, in a well-functioning economy, the growth in wage rates exceeds the rise in prices by a percentage point or two each year. On average over a few years, this “real” growth in wages is not inflationary, but is justified by the improvement in the productivity of the workers’ labour.

If this real growth in wages doesn’t happen, then real growth in gross domestic product will be chronically weak. That’s because consumer spending accounts for about 60 per cent of GDP.

Consumer spending is driven by household disposable income which, in turn, is driven mainly by wage growth.

We would get some growth in GDP, however, because our rate of population growth is so high. But look at growth per person, and you find it’s growing by only about 1 per cent a year.

It’s long been believed that real wages and productivity are kept in line by some underlying (but unexplained) equilibrating force built into the market economy.

Since the two have kept pretty much in line over the decades, few economists have doubted the existence of this magical force, nor wondered how it worked.

In America, however, real wages haven’t kept up with productivity improvement for the past 30 years or more.

And, as Reserve Bank governor Dr Philip Lowe acknowledged while appearing before a parliamentary committee recently, for the past five years nor have they in Australia.

Unlike the unions, which see the weakness in wage growth as the result of past industrial relations “reform” shifting the balance of wage-bargaining power too far in favour of employers, Lowe remains confident the problem is temporary rather than structural.

“Workers and firms right around the world feel like there’s more competition, and they feel more uncertain about the future because of technology and competition,” he said.

So, be patient. As the economy continues to grow and unemployment falls further, workers and their bosses will become more confident, wages will start growing faster than inflation and everything will be back to normal.

To be fair, Lowe is saying we have had “reasonable” productivity improvement over the past five years, which hasn’t been passed on to wages.

It would be better if productivity was stronger, of course, and “there’s been no shortage of reports giving . . . ideas of what could be done” to strengthen it.

But last week the newish chairman of the Productivity Commission, Michael Brennan, broke his public silence to give an exclusive statement to the Australian Financial Review.

“Productivity growth has been disappointing over the last few years in Australia, as it has been in many countries. There are no magic wands . . . but there are some clear remedies for Australia that should start with a focus on governments’ capacity to influence economic dynamism and productivity,” he said.

Oh, no, not that tired old line again. If wages aren’t growing satisfactorily, that’s because productivity isn’t improving satisfactorily, and the only way to improve productivity is for governments to instigate “more micro-economic reform”.

So, weak wage growth turns out to be the workers’ own fault. Their electoral opposition to “more micro reform” is making governments too afraid to do the thing that would raise their real wages.

We’ve become so used our econocrats’ neo-classical way of thinking that we don’t see its weaknesses.

It’s saying that, if the problem is weak demand, the cause must be weak supply, and the solution must be faster productivity improvement, which can be brought about only by “more micro reform”.

This ignores the alternative, more Keynesian way of analysing the problem: if the problem is weak demand, the obvious solution is to fix demand, not improve supply.

Since the global financial crisis, the developed countries, including us, have suffered a decade of exceptionally weak growth.

We’ve had weak consumer spending because of weak wage growth, the product of globalisation and skill-biased technological change, which has diverted much income to those with a lower propensity to consume.

With weak growth in consumer spending, there’s been little incentive to increase business investment rather than return capital to shareholders.

It’s this weakness in business investment spending that’s the most obvious explanation for weak productivity improvement.

That’s because it’s when businesses replace their equipment with the latest model that advances in technology are disseminated through the economy.

Our econocrats are like the drunk searching for his keys under the lamppost because that’s where the supply-side light shines brightest.

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