THE DISRUPTED ECONOMY

Uni of Newcastle Boardroom Lunch, Sydney Business Chamber, Thursday, August 23, 2018

I’m pleased to be invited back with fellow alumni of the university to talk about the disrupted economy. But though, as someone working for a newspaper, I’m only too well aware of just how disruptive digital disruption can be to whole industries and the people working in them - with, no doubt, much more disruption to come – if you’ve come today hoping for confident, detailed, spine-tingling predictions about which industries are next and how many thousands of jobs will be lost, I’m sorry to disappoint you.

Rather, I’m going to do roughly the opposite and give you the antidote to all the frighting predictions about how our world will be turned upside down and how disastrous it’s going to be. I’ll give you seven things to beware of.

First is, beware of futurists – supposed experts who speak with great confidence and specificity about what the future holds. Their forecasting record is even worse than economists’. Humans have an insatiable desire to know what the future holds, which gives us an unquenchable appetite for the output of all manner of soothsayers and witchdoctors. We keep forgetting the simple truth: no one, but no one, knows what the future holds. It follows that people who claim to know should be viewed with scepticism. If they’re genuine experts – scientific experts - their predictions will be hedged about with qualifications. Practitioners of futurology, however, are part of the entertainment industry. There’s great demand for their product and they know that the more confident they sound about their predictions, the more they’ll please their audience.

Second, beware of believing that “this time is different”. It’s always possible that this time really will be different, but just remember that people say that every time – during every boom in the economy or the sharemarket or the property market – and it almost never is. This is relevant to the proposition that digital disruption will be bigger and faster and more devastating to employment than we’ve ever seen, because the installation of labour-saving technology has been occurring continuously since the start of the Industrial Revolution more than 200 years ago, and in all that time we are yet experienced technology-caused mass unemployment. This time it may be different, but a betting man or woman would say the greatest likelihood is it won’t be.

Third, beware of believing urban myths. Futurology teems with confidently asserted, seemingly scientific predictions that are so widely repeated they take on the status of accepted facts. In the 1980s, when I first joined the debate about the employment effects of computerisation and the future of work, one of the assumed facts was that each word-processor that firms installed would replace the jobs of, I think it was, 12 typists. But where did this factoid come from? A Harvard study? A presidential report? Few of the people who repeated it ever knew – or bothered to inquire. But someone traced it back to an advertising claim made by a firm selling word-processors.

One current widely quoted factoid is that 40 per cent of Australian jobs are at high risk of automation in the next 10 to 15 years. Hear that one before? The origins of this one have been traced. CEDA commissioned some engineers to take the figures in a study of the American job market and simply modify them for Australia. The American study was made by some entrepreneurial academics at Oxford. But when economists examined the Oxford study – as some Australian and OECD economists did – they found the methodology rough and unconvincing. The OECD study said a more believable estimate for Oz was not 40 per cent but 13 per cent.

Another widely quoted factoid is that “today’s 15 year-olds will likely navigate 17 changes in employer across five different careers”. Heard that one before? I’ve seen it quoted in formal reports and footnoted, without being able to trace its supposedly academic origins. People who tell us how dramatically the world of work is going to change and how much education and training need to change in anticipation of that change say our youngsters need to be taught, among other things, the skill of “critical thinking”. I agree. So let’s apply a little critical thinking to that factoid. Did you note how remarkably numerically specific it is? That’s suspicious. Next, ask yourself how easy it is to believe those remarkable numbers? 17 different employers; five different careers. But the key question we should always ask of futurology is: how would you know? Do you have a time machine? I find it impossible to imagine how you could take all the children born 15 years ago, peer into each of their working lives over the next 55 years and decide how many jobs and careers they’ll have. And do it with such accuracy it could be summarised in two numbers, 17 and five. It’s literally in-credible. The one thing to say for it is that cramming that many employers and careers into just 45 years wouldn’t leave much time for unemployment.

Fourth, beware of assuming that whatever machines can do for us, we’ll want them to do for us. Futurists make themselves expert on what’s coming next from such things as artificial intelligence. What they don’t know much about is human nature. But leave out the human factor and your predictions about how our world will change stand a high chance of being off-beam. Take the confident predictions a decade or two back that, by now, we’d all be working from home. It’s certainly technologically possible, even cheap and easy to organise. But it’s happened to only a limited extent. Why? Because it doesn’t suit many bosses, and it doesn’t suit many workers.

Or, take the long-established move to online financial markets for shares, bonds and currencies. In principle, this means financial traders could be spread around all the cities and towns of Australia with decent internet links. In practice, almost all the traders remain crammed into two or three streets of the Sydney CBD. One of the unexpected features of the knowledge economy is that more and more of the nation’s GDP is being produced in the CBDs of Sydney, Melbourne, Brisbane and maybe Perth. Why? Because knowledge transfers better when people are face-to-face.

To take a more prosaic example, it will soon be technologically possible for cafes and restaurants to be manned by robots rather than people. But I don’t see much of it happening. Why not? Because few people would enjoy eating in such impersonal circumstances. Let me make my own futurist prediction. I think it won’t be long before many firms bring their overseas call centres back on shore. Why? Because so many of their customers hate it.

Fifth, beware of assuming that what you see is all you get. What everyone sees with computerisation, automation, digitisation and the rise of AI (artificial insemination) is all the jobs being destroyed. Non-economists assume that’s the end of the story. Economists earn their living by knowing that it’s not. You have first to remember that some new jobs – not all that many - are created by the workers needed to sell, distribute, maintain, replace and modify all the robots. Much more significantly – but much harder to see – is the realisation that the instillation of labour-saving equipment – including robots – doesn’t destroy value, it increases it. That’s why it happens. It doesn’t reduce productivity, it increases it. And increased productivity equals increased income. Ideally, that increased income is manifest in higher wages for those who remain in the industry and lower prices for the industry’s customers. Failing that, the extra income stays in the hands of the owners of the firms in the industry. But wherever the gains from higher productivity end up, when they are spent somewhere in the economy they create new jobs. This is why economists say that new technology doesn’t destroy jobs, it “displaces” them. It reduces employment in the industry applying the new labour-saving technology, but increases employment in many other, often utterly unrelated industries – usually in the services sector and, if our experience over the past 30 years is any guide, particularly jobs suitable for women. This is why 200 years of labour-saving investment have yet to create significant levels of technological unemployment and why overall employment has continued to grow almost every year.

Sixth, beware of forgetting what economists, in their pompous way, call the “policy reaction function”. This is just a fancy way of saying there’s what the market does, and then there’s what the government does in response to what the market’s done. If it doesn’t like the outcomes the market has produced – or, more likely, if too many voters don’t like those outcomes - it will intervene to correct those outcomes.

Finally, beware of assuming from all I’ve said to put future technological disruption into a more realistic context that I think nothing much will change, or that there’s nothing to worry about. I think a lot will change and there’s a fair bit to worry about.  But these are things you can ask me about now.

Read more >>

Our concern about the drought isn’t fair dinkum

It’s taken him too long, but public concern and the looming election have finally obliged Malcolm Turnbull to do the right thing by our farmers struggling with severe drought.

In Forbes on Sunday, Turnbull announced a further $250 million in assistance to farmers and communities, including initial grants of $1 million each to 60 drought-affected councils in NSW, Queensland and Victoria, bringing Canberra’s direct handouts to $826 million.

Add a further $1 billion in concessional loans and the total outlay comes to $1.8 billion.

Well, about time.

Is that what you think? I don’t.

I think most of it will be a waste of taxpayers’ money. You’ve heard of being cruel to be kind, but the way we carry on every time there’s a drought is being kind to be cruel. Our sympathy, donations and taxpayer assistance just prolong the agony of farmers unable or unwilling to face the harsh reality of farming in a country with one of the most variable climates in the world.

We may not be able to predict their timing or their length, but we can be certain that, before too long, this drought will be followed by another. And the scientists tell us climate change is making it worse.

And yet we keep pretending no one could have predicted or prepared for the next drought. Nonsense.

Our attitude to drought is all soft heart and soft head. I have two objections. The first is the way our collective concern about drought and its consequences is always media-driven.

When I visited the country in mid-May, my host complained that no one in the city seemed to know or care about the drought that was ravaging the countryside.

But when, a few months later, the first media outlet got the message, it started the usual flood of heart-rending drought stories.

The media love drought stories because they know how much they stir their customers’ emotions. Most people like having the media give their heart-strings a regular workout. I don’t.

And the trouble is, our concern about the drought – or the tsunami or earthquake or bushfire – lasts only as long as it takes the media’s attention to shift to some newer source of concern.

It’s already happening. Turnbull’s big announcement in Forbes got little media coverage because the threat to his leadership was far more exciting.

My more substantial objection to the recurring carry-on about drought is that it makes the problem worse rather than better. We give the bush a fish to feed it for a day when we should be helping it learn better fishing techniques.

In their efforts to tug our emotions, the media invariably leave us with an exaggerated impression of the severity of the drought and the proportion of farmers who are suffering badly. They show us the very worst farms and the worst-off farmers.

To be blunt, they show us the bad managers, not the good ones. I can’t remember ever seeing a story where someone whose farm was in much better shape than his neighbours’ was asked how he did it.

The exception that proves the rule? Don’t be so sure. On average over the six years to 2007-08 – the Millennium drought – nearly 70 per cent of Australia’s broadacre and dairy farms in drought-declared areas managed without government assistance.

Many, maybe most, farmers prepare for drought. Some don’t. They’re the ones the media want us to feel sorry for. The ones who’ve overstocked their now badly degraded properties hoping it will rain before long or, failing that, the government and guilt-ridden city-slickers will give them a handout.

The trouble with our emergency assistance approach to drought is that it encourages farmers not to bother preparing for the inevitable. It encourages farmers whose farms are too small, or who lack the skills or spare capital to survive, to keep struggling on when they should give up.

And it does all that to the chagrin of the wise and careful farmers who’ve made expensive preparation for the next drought with little help from other taxpayers.

Australians have been leaving the farm and moving to the city for more than a century. They’ve done so because continuous advances in labour-saving technology have made small farms uneconomic and decimated the demand for rural labour. All while the nation’s agricultural production keeps growing.

This is my own family’s story. I was raised mainly in cities, but my father grew up on a dairy farm near Toowoomba and my mother on a cane farm in North Queensland.

Meaning that, were it not for my brush with economics, I too would share the city-slickers’ sense of guilt at having deserted the true Australian’s post on the land for a cushy life in the city. Would $50 be enough, do you think?

We are perpetrators of what Americans have dubbed the “hydro-illogical cycle”. As Dr Jacki Schirmer and others at the University of Canberra describe it, this occurs when “a severe drought triggers short-term concern and assistance, followed by a return to apathy and complacency once the rains return.

“When drought drops off the public and media radar, communities are often left with little or no support to invest in preparing for the next inevitable drought.”

Every government report on drought concludes the best response is for farmers to improve their self-reliance, preparedness and climate-change management. We could help them with their preparations, but we get a bigger emotional kick from giving them handouts when droughts are at their worst.

Read more >>

We could increase bank competition if we wanted to

Would you like to put your savings in a super scheme presently reserved for public servants? Would you like your bank account or mortgage to be with the Reserve Bank?

Impossible to imagine such a crazy idea? Well, that’s what the Productivity Commission thinks, but it’s neither as impossible nor as crazy as it may sound.

Everyone says they believe in innovation, but when we’re used to thinking and doing things one way and some bright spark argues we should be doing it the opposite way, they’re more likely to be dismissed than grappled with.

And our econocrats are no more receptive to innovative ideas than the rest of us, it seems.

The bright spark in question is Dr Nicholas Gruen, principal of consulting firm Lateral Economics. The Bank of England and Martin Wolf, of the Financial Times, think he’s worth taking seriously, but in the Productivity Commission’s final report on competition in the financial system his ideas are brushed off as though he’s a nut job.

So let’s have a look at them. In his submission to the commission’s inquiry, Gruen argued we needed to give a twist to a widely accepted principle of micro-economic reform, established in 1996, called “competitive neutrality”.

In those days there were a lot of (mainly state) government-owned businesses. Sometimes they had a natural monopoly over some network, sometimes it was an “unnatural” monopoly granted by legislation, sometimes it was a bit of both.

The reformers’ concern was that, being monopolies, these government businesses weren’t terribly efficient. They tended to be overstaffed and do “sweetheart” pay deals with their unions because they knew they could pass the cost straight on to their customers.

Clearly, it would be much better for customers if these outfits could be exposed to competition from private firms, to force their prices down. But this competition would emerge only if the public businesses were robbed of any special advantage arising from their government ownership.

Fine. Almost a quarter-century later, most of those businesses have been privatised – many of them with their anti-competitive advantages intact or restored, so as to boost their sale price.

Today, of course, the big problem is the lack of competition in, say, the oligopolised national electricity market or, as the commission’s inquiry acknowledged, in oligopolised banking. With super, the big problem is workers’ reluctance to engage with all those boring comparisons.

This is where Gruen’s twist on competitive neutrality comes in. If what we needed back then was to increase private competition with government businesses, surely an answer to our present problem of inadequate competition between private players is increased competition from public businesses.

In the case of banking, he asks why, in these days of online banking, the significant benefits of being able to bank with the central bank should be restricted to producers (the commercial banks) and denied to consumers (households and other businesses). What’s competitively neutral about that?

In the case of superannuation, why should savers be prevented from giving their money to funds managing the super savings of public servants? Surveys show public sector funds achieve returns to members even higher than the non-profit industry funds, let alone the for-profit “retail” funds run by banks and insurance companies.

Gruen notes that public sector funds would offer only modern, defined-contribution super and involve no subsidies – that is, they’d be competitively neural. (More radical reformers would say, so what if public providers had a government-related advantage they could pass on to customers? If the government can give the public a better deal, why shouldn’t it?)

Sometimes public providers would have an advantage because they were so big. But that’s not an unfair advantage. It’s exploitation of economies of scale that mean so many private industries are dominated by only a few firms. Only problem is insufficient price competition between them to ensure the cost savings are passed to customers, not owners.

In response to Gruen’s idea of opening up access to central banks, the commission raised practical objections that could be solved if you really wanted to.

In brushing off the idea of public super providers, the commission quoted the case of the Swedes doing something similar. Bad idea, apparently. More than two-thirds of new contributors defaulted into the public fund – perhaps because it earned better returns than the private sector funds.

Of course, you wouldn’t expect privately own banks or super funds to welcome reform that could cost them customers or force down their profit margins. Perhaps this explains the commission’s lack of interest in the idea – it knew the proposal wouldn’t appeal to a Coalition government.

But it's more likely the econocrats are just stuck in an ideological rut. Economic reform was always about reducing public and increasing private. Going the other way is so obviously wrong it doesn’t need thinking about.

Read more >>

Immigration is sharply slowing the ageing of our population

Reserve Bank governor Dr Philip Lowe thinks Australia’s strong population growth in recent years is a wonderful thing, and he sings its praises in a speech this week.

I’m not sure he’s right. Like most economists and business people, Lowe is a lot more conscious of the economic benefits of population growth than the economic costs. As for the social and environmental costs, they’re for someone else to worry about.

But whatever your views, you’ll be heaps better informed after you’ve seen what he says about our changing “population dynamics” and absorbed his tutorial on demography.

Over the past decade, our population has grown at an average rate of about 1.6 per cent a year. This is faster than in previous decades. It’s also faster than every advanced economy bar Singapore.

Most other rich countries – including the US and Britain – grew by well under 1 per cent a year over the period. The populations of Italy, Russia and Germany were stagnant, and fell in Japan and Greece. China’s annual growth averaged only 0.5 per cent.

What’s driving our growth is increased immigration, of course. Over recent times, net overseas migration has added about 1 per cent a year to the population, with “natural increase” (births minus deaths) adding only about 0.7 per cent.

Our rate of natural increase is pretty steady. It perked up a bit a decade ago, but quickly resumed its slow decline, as more couples have smaller families and some have none.

Net migration, by contrast, goes through a lot of peaks and troughs – which, not by chance, correlate well with the ups and downs of the business cycle.

We think of the government controlling immigration with a big lever (making it “exogenous” or coming from outside the system, as economists say, pinching the word from medicos) but many demographers see immigration as “endogenous” or determined within the system.

This has become truer as permanent migration becomes dominated by workers with skills we need, rather than by family reunion, and there’s more temporary migration by overseas students and skilled workers brought in by employers to fill a temporary shortage.

The resources boom showed temporary skilled migration was great at helping us control (wage-driven) inflation, one of Lowe’s primary concerns as boss of the central bank.

But I worry our young people are paying the price for this greater macro-economic flexibility. We’re schooling our employers not to bother training plenty of apprentices ready for the next shortage because it’s easier to wait until the shortage emerges and then pull in a tradesperson or three from overseas.

Sorry, back to Lowe’s speech. He notes that growth in the number of people here on temporary visas adds to the size of our population. For instance, there are now more than half a million overseas students studying in Australia.

Here’s a stat you probably didn’t know: about a sixth of foreign students are permitted to stay and work here after finishing their studies. This boosts our population. Always a man to look on the bright side, Lowe reminds us it also boosts the nation’s “human capital”.

Plus, he’s too polite to say, it does so free of charge. It’s a neat trick: we charge foreign parents in developing countries full freight to educate their children, then allow the best of 'em to stay on.

But wait, there’s more: we also benefit from our stronger overseas connections when foreign students return home, Lowe says.

Now for his big reveal. Particularly because of our emphasis on skilled workers and students (as opposed to bringing out nonna and nonno), the median age of new migrants is between 20 and 25, more that 10 years younger than the median age of the rest of us.

At the time of Treasury’s first intergenerational report in 2002, our present median age of 37 was expected to rise rapidly to more than 45 by 2040. But after the past decade of increased immigration of young people, the latest estimate is that the median age will be only about 40 by then.

“This is a big change in a relatively short period of time, and reminds us that demographic trends are not set in stone,” Lowe says.

This means that, on the question of population ageing, and looking at the latest projections over the next quarter of a century, we compare well with other advanced economies, he says.

First, our median age of 37 makes Australia one of the youngest countries. We are ageing more slowly than most of the others, meaning we’re projected to stay relatively young. This is better than earlier projections suggesting we’d move to the middle of the pack.

Second, we have a higher fertility rate than most rich countries. Australians tend to have larger families than those in many other countries. (Note, not large, but larger than the others.)

Third, our average life expectancy is at the higher end of the range, and is expected to keep rising.

Fourth, our old-age dependency ratio – people 65 and older, compared to people of working age, 15 to 64 – is rising, but less quickly than in most other countries.

And our relative youth and higher fertility rate means our dependency ratio is expect to stay lower than other countries’ for the next 25 years or so. Only then is it projected to rise rapidly.

The first intergenerational report expected that the disproportionate bulge of baby boomers reaching normal retirement age would lead to a steady decline in the proportion of people participating in the labour force.

It hasn’t happened. The reverse, in fact – for fascinating reasons I’ll save for another day.

To economists, this slower rate of population ageing – that is, slower rise in the old-age dependency ratio – is great news. It means the economy’s growth in coming years won’t slow as much as they were expecting (see point above about the participation rate).

It also means ageing will put less pressure on future federal and state budgets. But let me give you a tip: there are so many other pressures we probably won’t notice its absence.

Read more >>

This country is run for home owners, by home owners

Name a group that accounts for about a third of the population and rising, is much more likely to suffer stress in affording their housing than other groups, and yet has never had much sympathy from politicians, voters or the media.

Ironically, the bit of sympathy they’ve had in recent days hasn’t been warranted.

They’re the forgotten minority – more forgotten than the forgotten people we keep being reminded about. They’re renters.

They get forgotten because we live in a land where home ownership is the only recognised real estate religion. This country is run for home owners, by home owners.

Now, it may have occurred to you that a supposedly sacred group known as “first home buyers” – actually, would-be home buyers - are renters. Surely a fair bit of sympathy exists for them?

Well, not really. We profess to be sympathetic, but we aren’t. That’s because, as economists get tired of pointing out, all the things we do in the name of helping would-be home owners – first home buyer grants or stamp duty concessions, capital gains tax exemptions for owner-occupiers, even negative gearing – actually benefit existing home owners at the expense of aspiring home owners.

These things add to the demand for homes, relative to supply, and thus push up their prices, making them harder to afford.

Politicians are almost always unwilling to help aspiring home owners by reversing these concessions because they know how angry existing owners would be if they did.

But getting back to renters generally, why do we take so little interest in them and their problems?

Partly because, in a world that values home ownership above all else, renting is assumed to be just a brief transitional state while young people get together the money for a deposit.

Unfortunately, that assumption gets less true as each year passes. When I became a journo in the mid-1970s, we were particularly proud of Australia’s 70 per cent rate of home ownership. It’s been declining, slowly but inexorably, ever since.

Meaning the proportion of renters has been growing ever since. A lot of people still attain home ownership, of course, but it takes them many years longer.

The other reason we take so little interest in renters is that, since almost all of us aspire to own our home, those who never make it – those who stay renting all their lives – are those never able to afford it. And who spends much time worrying about the poor?

But this, too, is becoming less true as the years pass, with a lot more middle-income earners spending a lot more of their lives in rented accommodation.

In the day, we used to rely on “the housing commission” to take the poor off our conscience. In the years since then, the enthusiasm of governments, federal and state, for what we now euphemistically call “social housing”, including “affordable housing”, has steadily diminished – further demonstrating our lack of interest in renters.

The latest report from HILDA – the long-running, government-funded survey of Household, Income and Labour Dynamics in Australia – includes a most informative chapter on renters, by Professor Roger Wilkins, of the Melbourne Institute at Melbourne University.

Wilkins confirms that renters of social housing are 10 percentage points more likely to experience financial hardship than people who own their homes outright. But renters of private housing are 15 percentage points more likely.

HILDA defines “housing stress” as households in the bottom 40 per cent of the distribution of household incomes who spend more than 30 per cent of their income on mortgage payments or rent. (Plenty of high-income households spend more than 30 per cent, but that’s a choice they can afford.)

The proportion of private renters suffering housing stress rose from almost 18 per cent after the turn of the century to 20 per cent by the end of the decade, but hasn’t increased since then.

Of late, some sympathy has been expressed for renters, who must be suffering huge increases in their rent as house prices in Sydney and Melbourne have soared.

Sorry, I’ve looked up the consumer price figures and they don’t compute. In Sydney, over the four years to June this year, the prices of newly built dwellings bought by owner-occupiers rose by almost 20 per cent, whereas rents rose by less than 10 per cent – not a lot higher than the rise in all consumer prices of 7.5 per cent.

In Melbourne, new home prices rose by more than 16 per cent, whereas rents rose by less than half that – only a fraction more than consumer prices generally.

But if soaring rents don’t explain renters’ high rates of financial and housing stress, what does? Their generally low and lower-middle incomes, which have probably worsened somewhat, relative to the rest of us, so far this century.

Note that housing stress is surprisingly low among people of retirement age. That’s because this is the group with by far the highest rate of outright home ownership. The modest level of the age pension takes this fact into account.

But that means those relatively few pensioners who rent privately do suffer much hardship. When a spate of complaints about the inadequacy of the single age pension prompted an investigation, it found that only single pensioners in private rental were doing it tough.

Kevin Rudd responded with a big one-off increase for all single pensioners, plus an increase for married pensioners so they wouldn’t feel left out. As I say, renters don’t count.

Read more >>

How to lift our schools’ performance

We’re at it again. Every time education or healthcare pops up in the news, it’s almost always people arguing about money and how much of it they’re getting. Rarely is it people discussing how the billions we’re already spending could be used more effectively.

There’s nothing the media love more than a fight. And when it comes to government spending, there’s never a shortage of interest groups demanding more or predicting death and destruction if their funding’s cut.

Now “Gonski” is back in the news, but it’s people still arguing the toss about David Gonski's first report on needs-based funding, not Gonski 2.0 on how we can improve a school system that’s failing far too many of its students.

Inevitably, the latest fight is sectarian. The Catholics are trying to extract special deals from both Labor and the Coalition before the election, while the largely Protestant “independent” sector is threatening to arc up if the Catholics succeed.

Hope Jesus is pleased with the example you’re setting your students, guys.

The Melbourne-based Grattan Institute takes pride in focusing on more substantive policy issues. And it got through a public discussion of Gonski 2.0 in Sydney last week without once mentioning funding.

Gonski’s second bite at the education cherry confirmed that, since 2000, Australian student outcomes have declined in key areas such as reading, science and maths. There’s a wide gap between our best and worst performers.

It’s a gap that won’t be magically removed by needs-based funding. So what does Gonski suggest?

The first of his three priorities is to “deliver at least one year’s growth in learning for every student every year”. Our achievement gap shows that many of our kids get through a year without learning all the curriculum assumes they have.

Gonski says we still have a 20th century industrial-style model of schooling where students are grouped by grade and age, learn or don’t learnt what they’re supposed to, then move in lockstep to the next grade.

At the end of the half-year or year they’re tested to see how much they’ve learnt, mainly so they can be ranked according to how well they performed in the competition.

Gonski wants to move to a model that focuses on measuring “growth” – the progress each individual student is making along a defined “learning progression”, which is an empirically determined list of the sequence in which most students learn the steps to acquiring, say, literacy or numeracy.

Teachers make regular assessments of each individual’s progress, so they know what the kid’s ready to learn next. This helps prevent the slower students falling hopelessly behind, but also makes sure the brighter students are stretched.

These regular assessments are diagnostic rather than how you’re going in the comp. Students are applauded for their growth, not for coming top. As Paul Cahill, of the Catholic Schools system, said to the Sydney gathering, we need more growth in learning and less ranking and sorting.

Just as well, because all those diagnostic assessments will be time-consuming. Gonski says education authorities should develop an online and on-demand student learning assessment tool for teachers and also “limit the burden of non-core activities such as administrative tasks”.

This move to “targeted teaching” is being practiced in some schools and is endorsed by much research. It just needs to be used much more widely.

Gonski’s second priority is to “equip every child to be a creative, connected and engaged learner in a rapidly changing world”.

“As routine manual and administrative activities are increasingly automated, more jobs will require a higher level of skill, and more school-leavers will need skills that are not easily replicated by machines, such as problem-solving, interactive and social skills, and critical and creative thinking,” his report says.

People call these “soft skills” or “21st century skills”, but the educationists’ term is “general capabilities”. There’s wide agreement that these things warrant greater attention, and has been for a decade. What’s missing is the will to get on with it.

But some worry that more emphasis on soft skills means dumbing down the syllabus. More touchy-feely means less knowledge of facts and concepts.

At last week’s gathering, however, Leslie Loble, of the NSW Education Department, insisted there need be no conflict. General capabilities and hard knowledge must always go together; you gain your general capabilities while learning the traditional subjects.

Grattan’s highly influential school education expert, Dr Peter Goss, noted that Gonski 2.0’s greatest strength – it wasn’t urging the Feds to impose its priorities on the states and territories – is also its great weakness. As I’d put it, now we have to wait for Brown’s cows to get their acts together.

The longer it takes, the more of our young people get off to a bad start in life.

Read more >>

It's weak investment that’s crimping productivity and prospects

US President Donald Trump said his big cut in company tax would do wonders for the economy. It’s certainly done wonders for company share buybacks. Which may be a clue to why America’s rate of improvement in productivity is so pathetic.

The continuing puzzle for the rich world’s economists is explaining the unusually weak rate of productivity improvement throughout the advanced economies. In Oz we’re not doing so badly, though we used to do a lot better.

Productivity measures the quantity of the economy’s (or just a particular business’s) output of goods and services relative to its inputs of raw materials, labour and capital equipment.

Productivity improves when a given quantity of inputs to the production process is able to produce a greater quantity of goods and services than before. It’s most commonly measured by reference to just one of the inputs, labour. So it’s output per unit of labour, usually per hour worked.

You still see people assuming that some politician or business person saying we need to increase our productivity is really saying we should work harder.

Wrong. The main way to make workers more productive is to give them more or better machines and structures to work with. That is, to invest in more physical capital.

Increasing workers’ education and training – “human capital” – also makes them more productive: better able to work with more sophisticated machines, to think of ways to make machines do better tricks, and think of more efficient ways to organise the work that’s done in a mine, farm, factory, office or shop.

Often, what the better machines and ways of organising things are intended to do is further exploit economies of scale.

Point is, it’s the almost continuous improvement in productivity, year after year, that does most to explain why we are so much more prosperous than our ancestors.

Hence economists’ consternation over the rich world’s unusually weak rate of productivity improvement for the past decade or so, and their search for explanations.

The most popular explanation among them, advanced by Professor Bob Gordon, of Northwestern University in Illinois, is one the rest of us would find hard to credit.

It’s that the present information and communication technology revolution isn’t transforming the economy to the extent that earlier general-purpose technologies – such as electricity, the internal combustion engine, the automated production line, and even running water and indoor toilets – did.

A different, but probably only partial, explanation is that much of the benefits coming from the digital revolution are going unrecognised by a system of national accounts (gross domestic product) designed to measure the industrial economy.

A month ago, I argued that another partial explanation was that the innovations of too many of our brightest and best brains were being used for nothing more productive than finding new ways to get around inconvenient laws and taxes.

Then there’s the notion of “secular stagnation” from Professor Lawrence Summers, of Harvard. Among other things, it says that the ageing of the population and very slow population growth in the rich countries (though not in Australia) means they face a future of weaker growth in consumer spending, thus diminishing the incentive for firms to invest in expansion.

Which links to the much more straightforward – and thus persuasive – explanation offered by former senior econocrat Dr Michael Keating and Professor Stephen Bell, of the University of Queensland, in their book Fair Share.

They argue that the key to productivity improvement is investment – particularly investment by businesses – and the spur to business investment is economic growth and the expectation it will continue.

Innovation is fine, but the main way some new technology is “diffused” throughout the economy is by firms replacing their old machines and structures with new ones that incorporate the latest advances.

Investment is also an essential part of the continuous process of change in the industry structure of the economy, where changes in consumers’ preferences and other developments cause some industries to contract while others expand and new industries emerge.

If firms are reluctant to invest, you don’t get enough expansion to offset the contraction.

What is businesses’ main motive for investing? Their expectations of increased demand for whatever they’re selling, Keating and Bell say.

But this is where the global financial crisis and the Great Recession come in. It was by far the deepest recession the developed world has suffered since the 1930s. The crisis was 10 years ago next month, and the recovery has been particularly weak.

Things in America may look pretty good today – unemployment is very low, profits are high and the economy grew at an annualised rate of 4.1 per cent in the June quarter.

But all is not as it seems. The latest amazing growth is the product of fiscal stimulus from Trump's income tax cuts and won’t last.

Low unemployment conceals a marked fall in the proportion of the population (particularly less-skilled middle-aged men) participating in the labour force.

Many people who lost their job during the recession have given up looking for another one. Their skills have “atrophied” – wasted away – and are a loss of human capital to the US economy.

Keating and Bell show that business investment fell more in this recession than previous ones and has been remarkably slow to recover.

Seeing no great reason to expand, US businesses have been using their profits not to reinvest but to pay big dividends and to buy back their shares on the stockmarket, hoping to boost their price. Trump’s company tax cut has pushed buybacks to record levels.

Get it? Weak economic growth in the advanced economies is discouraging businesses from investing. Weak investment means weak productivity improvement and skills atrophy. But weak productivity means more weak growth.

The authors note that business investment in physical capital, and growth in human capital, are key drivers of the economy’s “potential” growth rate in future years. Neglect them and the economy loses its ability to speed up.

The Organisation for Economic Co-operation and Development calls this a “low-growth trap”. Not an encouraging thought.

Read more >>

Young people bearing the brunt of a weak economy

Without wanting to be branded a class traitor, I have to admit that we Baby Boomers have enjoyed a rails-run in the race of life.

Most of us had little trouble getting ourselves set up in the jobs market and then the housing market. I look at today’s bright and bushy-tailed youngsters, just starting out in both markets, and don’t envy them one bit (except, of course, their instinctive understanding of the right place to click on a webpage).

(Just to protect my back: those Baby Boomers who were conscripted, or ended up in Vietnam, didn’t have it easy. Nor should those who’ve come after us imagine all Baby Boomers are rolling in it, have never been unemployed, never paid uni fees nor suffered bad luck.)

In the decade since the global financial crisis and the recession we supposedly didn’t have, the supply of people wanting to work has been stronger than employers’ demand for work to be done.

That’s true even though the rate of unemployment never got very high and isn’t all that high today. But a study by Zoya Dhillon and Natasha Cassidy, of the Reserve Bank, confirms what I’ve long suspected: the reason the position overall hasn’t looked so bad is the brunt of the weakness in employers’ demand for labour has been borne by young people leaving school and university.

Whatever you’ve heard in the media, not a lot of workers have been laid off since the shock in September 2008. Employer behaviour has changed, the study confirms. Firms have been less inclined to get rid of people and more inclined to reduce the total amount of hours they’re paying for.

This has become easier for them to do because of their greater ability to employ people on a part-time or casual basis.

On balance, and from an economy-wide perspective, this change of behaviour is an improvement, a shift to a lesser evil. It’s a terrible blow to suddenly lose your job. Better to have some paid work than none.

But the price for this marginal improvement has been paid mainly by the young. Established workers have tended to keep their jobs, but employers haven’t recruited as many people at entry-level. And more of the jobs they’ve offered young people have been part-time.

A new twist on last in, first out.

The result is that education-leavers have had greater trouble – and suffered longer delays – in finding a full-time job suited to their education.

“Over the past decade,” the study says, “increases in the unemployment and underemployment rates for younger people have been twice as large as for the overall labour market. The share of 20 to 24 year-olds that have become disengaged from either study or work has also increased.”

“Younger people” means those aged 15 to 24, though remember that those aged 15 to 19 will mainly be still at school, while many of those aged 20 to 24 will be at university or TAFE.

Some younger people have part-time jobs while still at school, and most higher education students in full-time study also work part-time.

Nothing new or worrying about that. But “in recent years there has been a pronounced increase in the share of 20 to 24 year-olds working part-time who are not studying full-time”.

You’ve heard, no doubt, that while the official unemployment rate has been edging down, the rate of underemployment – people working part-time who want to work more hours – has been edging up (until lately, as we’ll see).

What’s less well known is that underemployment is dominated by younger workers, and it’s they who’ve done most to drive the rate up over recent years. A lot of this would be people finishing uni but having trouble finding a full-time job and taking a part-time job while they keep searching.

In the mid-1990s, about 80 per cent of all bachelor-degree graduates found a full-time job within four months of graduating. By last year, that had fallen to just over 70 per cent – about the same as it got down to during our last severe recession in the early 1990s.

Remember, it’s like a traffic jam. It takes a lot longer than it should, but you do get through eventually.

The most worrying thing is the “NEET rate” – the proportion of younger people who are “not in education, employment or training”. The NEET rate has fallen over the decades as we’ve done better at getting more of our young people into education and training.

But the rate for 20 to 24 year-olds has increased in recent years and is back to where it was in 2005.

The study says prolonged spells of disengagement from the labour market are known to have lasting ill-effects. “Poor labour market outcomes early on not only affect an individual’s future employability, but also have persistent negative effects on lifetime earnings.”

All this says the difficulties younger people are encountering in finding decent full-time jobs are better explained by the economy’s prolonged period of below-par growth since the financial crisis than by the sexier and more frightening explanation that it’s caused by the rise of the “gig economy”.

Which brings me to a little good news. The trend rate of underemployment for all ages has fallen a little to 8.4 per cent over the past year. And the rate of unemployment for younger people has fallen from 12.4 per cent to 11.6 per cent in just the past four months.

Read more >>

Why so much spending on infrastructure is misspent

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Economy’s health requires reform of earlier wage reforms

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Decades of economic success have come at high social cost

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sounds good to me.

Read more >>

Budget office fills vacuum left by politicised Treasury

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Jobs growth goes from extraordinary to ordinary

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

Corporate crime is far too common

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Read more >>