Australia’s productivity growth is weak and likely to weaken further the Productivity Commission has found. But it says Australia isn’t alone.
In the first of what it intends to be a series of annual updates the Commission says in the four years since 2006 so-called multifactor productivity slipped by an average of 1.1 per cent per year. In the previous decade it had climbed by an average of 0.6 per cent per year.
While the update attempts to identify local causes of the downturn it says Australia is “not unique”.
France, Sweden, Ireland, the United Kingdom, the United States, Canada and New Zealand also moved from positive to negative productivity growth in the same timeframe (although in the case of the US from positive to zero growth).
It says the downturn began before the global financial crisis for reasons which are not clear. It quotes the New York-based Conference Board as finding that one of the reasons it is continuing is labour hoarding, “as businesses refrain from making significant cutbacks in resources in the hope of a recovery in global demand”.
Australian multifactor productivity climbed 0.1 per cent in 2011-12 after sliding of 1.2 per cent in 2010-11, a result still well down on the long-term growth rate of 0.8 per cent.
Labor productivity climbed by a much faster 3.4 per cent as more machinery was deployed per worker in a process known as capital deepening.
The Commission concedes that neither measure of productivity is particularly useful...
Productivity isn't calculated for the “non-market” industries of health, education, public administration and security. Health and social assistance has become Australia’s biggest employer. And many of the outputs of the industries for which productivity are calculated are not measured, biasing down the published measures. As an example the Commission cites the electricity industry which has switched from stringing putting wires overhead to burying them underground “in response to concerns about visual amenity and safety”.
It says while the cost of putting the wires underground is counted on one side of the productivity equation, the extra benefit of putting them underground is not counted on the other.
Nevertheless the Commission reports woeful productivity performance in the mining and utilities industries with declines in 2011-12 of 10.5 per cent and 5.4 per cent per cent.
One immediate reason mining productivity is declining is a “mismatch” between inputs and outputs as money is spent developing new projects ahead of an expected payoff in production.
A longer-term reason is that easily obtained resources are becoming harder to find. High commodity prices have exacerbated the process, encouraging “even more rapid development of higher-cost less productive resource deposits than would otherwise be the case”. Improvements in mining technology have only partly offset the effect.
Productivity in the electricity industry is declining in part because of what the Commission suspects to have been “greater investment in distribution capacity than was socially optimal”. Productivity in the water industry is declining in part because Australians cut their use of water during the drought and have yet to lift it back to “pre-drought levels”.
The Australian Chamber of Commerce and Industry has recast itself as a champion of small business in the lead up to the election using a National Press Club address to launch a campaign called “The Big 4 You Can’t Ignore for Small Business”.
Wednesday’s address was silent about competition policy, where small businesses believe they are being monstered by the two big retailers, and silent about contract law, where small businesses say they are at the mercy of the shopping centre chains.
“I don’t want to attack the Chamber. It is doing a good job in an area it feels comfortable in,” said Council of Small Business executive director Peter Strong. “But it won’t address the supply chain issue because it also represents Coles and Woolworths. It won’t address tenancy issues because it also shopping centre landlords.”
“Our members face take-it-or-leave-it contracts from those landlords. They are forces to take on multinationals. We would like the same sort of protections in place for them as for consumers"...
The four concerns raised by the Chamber are red tape, an overly-complex tax system, unwieldy employment rules and inadequate roads, ports and railways.
The Chamber is especially concerned about planned changes to the fair work laws which will make “an unbalanced set of laws even worse”.
“Employers are frustrated, the small business people of Australia feel let down by the barracking and partisanship that has brought this about,” ACCI chief executive Peter Anderson told the press club.
Mr Anderson said he wanted more small business people in parliament and in the top echelon of the public service. His predecessor as chief executive, Peter Hendy is the endorsed Coalition candidate for the seat of Eden Monaro.
What would Tony Abbott do? As with all potential prime ministers there’s no way to be sure. But thanks to an unusual instance of history repeating we’ve been given an unusually clear idea of what he’ll be told to do.
It is also what he wants to be told to do.
Abbott himself set up the link last March when he promised the “swift establishment of a Commission of Audit”. It will “examine the detail of what the Commonwealth government does and whether it could be done better and more cost-effectively”.
Implicit in such a task will be determining what the Commonwealth should not do - whether there are entire areas of government that should be abandoned altogether. We know this because it has already happened. The Howard government set up a Commission of Audit on taking office in 1996. The Commission’s impressively non-political report wasted not a second dealing with alleged failures of the previous government and instead turned its attention to the more fundamental questions of the what the government should not be doing, how it could perform its remaining roles more cheaply, and how it could stop the costs of its biggest payments from skyrocketing.
Its recommendations were timeless. That most were not accepted makes them no less relevant. In fact events since have made them more compelling.
Most of the time finance minister Penny Wong gives the impression things are under control. But she let down her guard briefly in the leadup to the 2011 tax summit telling delegates that “without action to curtail spending growth, the overall level of government spending under existing programs would, over the medium to long term, become unsustainable.”
The age pension is the government’s most expensive payment. Generously benchmarked to 25 per cent of male total average earnings, accessed at least in part by most retirees and set to balloon as the retired population grows, it was to climb from 2.7 per cent of the total value of Australian production to 3.9 per cent by the middle of the century. Spending on health was set to triple.
“We have a big gap between what the community demands of government and what it is prepared to pay,” he told business economists. “We have to think about savings, or new sources of revenue.”
The 1996 Commission of Audit was on to the problem early. Its report will be the first place Abbott’s commission looks...
One of its simplest suggestions was to stop increasing the pension. It is traditionally lifted twice each year by either enough to keep it at the male earnings benchmark or by the increase in consumer prices, whichever is the greatest. The Commission suggested instead adjusting it only from time to time after reviews that would have to consider “all relevant circumstances, including budget pressures”.
Entire Commonwealth operations would be surrendered to the states. Health and aged care belong there, the report says. The states run the hospitals and their governments know the most about the quality of their aged care services. The Commonwealth would retain responsibility for Medicare and the pharmaceutical benefits scheme, but it would be more stingy, requiring all but the poorest to pay more to see the doctor and to pay more for prescriptions. Before surrendering aged care to the states the Commonwealth would defund the institutions, fund the users instead and jack up the users’ own (means tested) contribution.
Responsibility for education would go to the states, along with childcare. The exception would be tertiary education where Commonwealth would be notionally in charge but would be hands-off, funding the students rather than the institutions. It would hand out a limited number of scholarships to Year 12 students each year “redeemable at any accredited institution”.
The staff savings in the departments of health, education and environment (which would also go to the states) would be enormous. Targeted departments would be required to cut their running costs by at least 20 per cent over three years. All other departments (including the usually exempt defence department) would be required to cut their costs by 10 per cent.
The states would need more money. The 1996 Commission of Audit didn’t say much about where they would get it from but events since provide a ready made solution. The states have since been given the GST. They could lift it.
It would be tempting to think Tony Abbott wouldn’t necessarily welcome such a radical set of prescriptions. But it would be dead wrong.
When announcing plans for his own Commission of Audit last March he specifically charged it with examining questions such as “whether the federal health department really needs all 6000 of its current staff when the Commonwealth doesn’t actually run a single hospital”.
He knows what it will examine and he must know what it is likely to recommend. He is prepared to consider bold options.
Hands up if you like the idea of running chocolate through a 3D printer.
Hands up if you wish you had “invented” it?
That’s what four US inventors claim to have done. They say they also invented the (fairly obvious) related concept of keeping the chocolate at a constant temperature as it moves through the equipment. They’ve applied for a patent. If they get it they’ll make money every time someone builds a 3D printer that can make shapes out of chocolate. They thought of it first.
It raises an alarming prospect, that of 3D printing patents without end. One for each different material that can be melted and squeezed through a printing head before becoming solid - a different patent for for each different person who “invented” the idea.
Why do I think the idea is alarming? It’ll do the exact opposite of what the patent system is meant to do. It is meant to encourage innovation. But having to send off a cheque here, a cheque there to an unknown number of people who can claim to have “invented” a fairly obvious idea means some of the people who actually build things won’t bother.
You don’t need to have built something, or even know how to build something, to get a patent.
US patent 6025810 is a case in point. It is a method for transmitting information faster than the speed of light, using the fifth dimension.
All you need is to be able to claim that you thought of the idea first, and to describe it in complex language.
Jim Logan has a patent for a “system for disseminating media content representing episodes in a serialized sequence”. He is using it to demand money from podcasters. He says he invented the podcast. But he doesn’t podcast and he didn’t help develop podcasting software. His contribution was to distribute audio programs on cassette tapes in the mid-1990s and patent the idea. I distributed them while I was at high school in the mid-1970s, but I never thought of applying for a patent. Jim has already got a court to order Apple to pay him $8 million for (inadvertently) infringing his patent on the idea of a playlist...
Jim is a patent troll. He doesn’t like the term, and you can hear him quibble with it in the latest edition of the US National Public Radio podcast Planet Money. A troll is someone who neither makes the product nor provides the service but who makes money threatening legal action against people who do.
MPHJ Technology Investments and an array of shell companies has been sending out thousands of letters to small businesses across the US demanding they pay $1000 per worker because they use scanners to email documents. Almost every business uses scanners to email documents. Many have paid up.
President Obama this week published a report defining trolls as firms that “focus on aggressive litigation using such tactics as threatening to sue thousands of companies at once without specific evidence of infringement against any of them, creating shell companies that make it difficult for defendants to know who is suing them, and asserting that their patents cover inventions not imagined at the time they were granted.”
It says lawsuits by trolls have tripled in the past two years, accounting for two thirds of of all infringement suits. Obama went on the offensive, asking Congress to limit lawsuits to people who make rather than people who use technology. He also wants courts to award “loser pays” judgements where the trolls have to pay their intended victims for wasting their money and their time.
But I am not sure it is enough. I am not sure we shouldn’t abolish patents altogether. It’d do little to slow innovation in the information technology industry, almost certainly quickening it. The authors of a Federal Reserve Bank of St Louis study The Case Against Patents argue that James Watt’s patents on the steam engine held back Britain's industrial progress for decades.
They say during the thirty years of Watt’s patents they the UK added just 750 horsepower of steam engines per year. In the thirty years after they expired it added more than 4000 per year. And the engines became much more efficient. Watt had used his patents to block the development of the high-pressure steam engine.
Rather than hacking away at patents Australia has been extending them. In 1994 at the request of the World Trade Organisation Australia retrospectively extended the life of existing patents from 16 to 20 years. An Industry Commission study found the decision could have cost the economy $2 billion.
The health minister has before her a report recommending winding back the practice of extending drug patents. It’d be a start.
The head of the Treasury says the Reserve Bank should be prepared to cut interest rates further as the Australian dollar falls, if necessary temporarily breaching its target and allowing inflation to climb beyond 3 per cent.
Dr Martin Parkinson is a member of the Reserve Bank board. The Bank’s governor Glenn Stevens has signed an agreement with the Treasurer to keep inflation between 2 and 3 per cent “on average over the cycle”.
As the Australian dollar slid below 95 US cents for the first time in 30 months on Thursday Dr Parkinson told a Senate hearing the Bank should “look through” the inflation consequences of the sliding dollar and continue to keep interest rates low or cut them further even as the falling dollar pushed up prices.
“I wouldn’t wish to speak on the governor’s behalf and as a board member it is always a slightly difficult situation,” he said.
“But they could basically keep interest rates at a particular point, or they could lower them further, and just accept that inflation went out of the band for a period. Then, you know, they could try and stop the second round effects.”
He was backed up by his deputy David Gruen who said the Reserve Bank’s “flexible” target meant it could allow inflation to climb above the top of the 2 to 3 per cent target band so long as it did not spark a wage-price spiral. Inflation is at present 2.5 per cent. A sudden increase in rates in order to contain inflation as the dollar fell could harm the economy and prevent the dollar from falling further. It has slid from 102 US cents to 94.6 US cents in the past five weeks.
Dr Parkinson conceded that some of the assumptions that underlay the Budget forecasts were out of date when the budget was delivered on May 14 and said he took “full responsibility”...
“When we were bedding down the budget there were movements in commodity prices and we had to say, well what do we do? Do we respond to what has happened, or do we sit? We chose to sit, and I take full responsibility.”
The decision means the forecasts in the Treasury’s pre-election outlook will be different to those in the budget, taking into account what will most likely be lower commodity prices and a lower dollar. The likely difference backs the Coalition's contention that it won’t be in a position to release its policy costings until after the Treasury update when the campaign is underway.
Dr Parkinson and Dr Gruen savaged reports in each of Australia’s leading newspapers suggesting that Western Australia was in a demand recession.
“The idea that in the face of the largest export boom we have ever seen you ignore exports and focus on one piece of the economy, demand and claim that that is a recession, it belongs in the comic books,” Dr Gruen said.
State final demand in Western Australia slid 1.5 per cent in the March quarter after sliding 0.7 per cent in the December quarter.
Dr Parkinson said he would would never describe either a state a national economy as being in recession “by counting quarters of negative growth.”
“In Australia it is often said the official definition of a recession is two quarters of negative growth. I don’t know who the official is,” he told the hearing.
Asked what would constitute a recession, Dr Parkinson said he did “not tend to utilise a definition”.
“I reckon a recession is something, you know it when you’ve got it,” he said.
"I think the whole idea of saying, you’ve got this thing called the economy which is totally interlinked and saying well today what I am interested in is ‘is there a recession in the housing sector or is their a recession in Victoria’, you may as well say ‘is there a recession in houses that are built out of red brick with tin roof, as against ‘is there a recession Ballarat as against Bendigo’."
The composers of the iconic song “Land Down Under” might never have been taken to court for allegedly stealing notes from the tune “Kookaburra Sits on the Old Gum Tree” had a new law proposed by the Australian Law Reform Commission been in force at the time.
The Commission has proposed scrapping the existing piecemeal exemptions from the Copyright Act and replacing them with a simple exemption allowing “fair use”.
The “creative quotation” of copyrighted works would become legal as would “non consumptive use” where copyrighted material is incidentally copied in the process of transferring legally-aquired files from one storage medium to another.
At the moment both fall foul of Australian law even though both are allowed in the United States which specifically protects “fair use”.
“This would bring us into line with the United States with whom we have a free trade agreement,” said Australian National University intellectual property expert Matthew Rimmer.
“It would give people rights when it comes to technologies such as 3D printing which can’t possibly be provided for by specific exemptions because the shape of the technologies is not yet clear.”
“Men at Work and EMI could have used it as a defence in the Kookaburra case. I think what they did was fair use. It would have been allowed as a creative quotation"...
The Reserve Bank has left the door open to further interest rate cuts, declaring it has “scope for further easing, should that be required”.
The Bank board decided to leave its cash rate on hold at the half-century low of 2.75 per cent Tuesday in part because it saw some signs its earlier cuts were boosting economic activity and wanted to wait and see if there were more.
It was also pleased that since it last met the Australian dollar had slipped below 100 US cents, providing the first boost from a lower exchange rate in more than a year.
Souring the Bank’s view of the decline in the dollar was the knowledge that in the month in which the dollar fell commodity prices slipped 3 per cent, depriving exporters of the much of the boost from the lower dollar.
The Bank will watch movements in the dollar and commodity prices particularly closely in the next few weeks in order to form an opinion as to whether the recent slide in the dollar is a small one-off adjustment or part of move back to the more normal exchange rate it thinks Australia needs.
The Bank’s focus on the exchange rate means that each monthly board meeting is “live”, with the board prepared to cut rates if needed without waiting for the quarterly inflation result.
Governor Stevens said inflation was under control and “expected to remain so over the next one to two years”.
Economic growth was “a bit below trend,” providing another reason to cut rates again “should that be required to support demand”.
Treasurer Wayne Swan said the Bank had “the flexibility to cut” should it need to...
The economy was in a transition which would “not be seamless, particularly with the dollar still at high levels”.
As the board met Australia’s biggest wholesale mortgage broker AFG reported that it had processed a record number of mortgages in May, $3.6 billion worth, up 13 per cent from the record $3.2 billion processed in April. AFG makes up ten per cent of the market.
Mark Hewitt, AGF’s general manager of operations said there had been a marked lift in borrowing since February.
“Borrowers of all types were encouraged by the further rate reduction in early May and the expectation that we are in a low rate environment for some time to come,” he said.
“Reassuringly, the growth looks sustainable . We are not seeing the normal characteristics of a boom. The average new loan size is the same as it was over a year ago.”
The increase applies to all types of mortgages: loans for purchasing houses, loans for first home buyers, loans for investors and refinancing.
Futures market prices late Tuesday implied a 100 per cent probability of a further interest rate cut by October. The chance of a cut at the Bank’s July meeting was 32 per cent.
Wednesday’s national accounts are regarded as unlikely to alter the Reserve Bank’s thinking. Forecasts centre around economic growth in the March quarter of 0.8 per cent and annual growth of 2.7 per cent.
Job advertisements have plunged to their lowest point since the global financial crisis, wages are climbing at their slowest pace this decade and spending in shops is barely moving, but the Reserve Bank board is expected to keep interest rates on hold when it meets on Tuesday.
The Bank believes the lower Australian dollar will help boost the economy in much the same way as would have happened had it cut rates.
When the board last met on May 7 it cost 102 US cents to buy an Australian dollar. It now costs close to 96 US cents, a slide of 6 per cent. Against a broader mix of currencies the Australian dollar has slipped 4 per cent.
If sustained the cut will give Australian exporters 4 per cent more for their overseas sales than before the dollar fell and will pressure the importers who compete with them to charge 4 per cent more in Australia.
Treasury Secretary Martin Parkinson told an economists conference after the May budget that, “as a crude rule of thumb, a cut of 5 or 6 cents on the US dollar exchange rate probably boosts real gross domestic product by about a quarter of a percentage point over a year”.
Dr Parkinson is a member of the Reserve Bank board.
The ANZ’s count of job advertisements slid a further 2.4 per cent in May to be down 10 per cent since the start of the year. An average of 132,500 job advertisements were posted per week in May, well down on the average of 188,600 posted in late 2010. It is the weakest reading since the 2009 global financial crisis...
“It is a relatively moderate rate of decline, but it is one that is unfortunately likely to be consistent with a continuing moderate rise in Australia’s unemployment rate,” ANZ economist Ivan Colhoun said.
In a further sign of a softening labour market the Bureau of Statistics reported on Monday that wages grew just 0.7 per cent in the first quarter of the year after climbing 0.7 pc in the December quarter, the slowest pace since late 2009.
Company profits were up a better than expected 3 per cent in the quarter, but when mining profits were stripped out the remaining non-mining profits climbed just 0.4 per cent. Manufacturing profits slid 6.6 per cent in the quarter and 8.2 per cent over the year.
The Australian Industry Group performance of manufacturing index remained weak in May, climbing 7.1 points to 43.8 on a scale where anything less than 50 points means the sector is shrinking.
Separately-released retail sales figures showed spending growing, climbing 0.2 per cent in April after falling 0.4 per cent in March.
“After a burst in January and February sales flattened out,” said Westpac economist Matthew Hassan. “It is broadly in line with consumer confidence which began the year with a promising rally, but then faltered in April, turning negative in May.”
Spending on household goods jumped 3.8 pc in the first two months of the year, but then slipped 2.4 per cent in March and April. Spending in department stores climbed 1.3 per cent before sliding 2.3 per cent.
Spending is growing at a trend rate of 0.6 per cent per month in NSW, 0.4 per cent in Victoria and Queensland and just 0.1 per cent in Western Australia. Spending remains very strong in the Australian Capital Territory, climbing at a trend rate of 0.9 per cent per month.
RP Data reports that home prices turned down again in May, slipping 1 per cent in Sydney, 3 per cent in Melbourne and 1.3 per cent in Brisbane.
The next Australian government should be prepared to push the budget even further into deficit if the economy weakens, the OECD says.
In a new assessment of Australia the Paris-based organisation says confidence is “fragile”, the business situation “relatively discouraging” and growth outside the mining sector “timid”.
“If activity worsens significantly, the authorities should not hesitate to ease fiscal policy,” it says in its latest economic outlook released Wednesday.
The pronouncements of the Organisation for Economic Co-operation and Development are widely thought to reflect the views of the Australian Treasury. The Treasury stations an officer in Paris to work with the OECD full time and consults closely with OECD staff when they visit Australia.
The Australian chapter of the report paints a picture of an economy transitioning away from growth driven by mining investment. But it says “the new drivers of growth are yet to emerge”.
In the meantime the outlook is uncertain. Economic growth should slip to 2.6 per cent this year before recovering to 3.2 per cent next year. But if the new drivers of growth do not emerge the government should ease the budget conditions that are themselves weighing on economic growth.
In another potential insight into the Treasury’s thinking the OECD says Australia would be well advised to boost the goods and services tax, cut the company tax rate and “improve the effectiveness of housing taxation,” an apparent reference to the tax-free status of the family home and to negative gearing...
Opposition leader Tony Abbott has promised to commission a taxation white paper with no topic off limits should he win office. The terms of reference for the Rudd government’s Henry Tax Review precluded discussion of the goods and services tax.
The OECD says the advanced economies should strengthen throughout 2013 and 2014 helped by very low interest rates, improving financial market conditions and slowly recovering confidence.
The United States is likely to recover the fastest recording economic growth of 3.2 per cent by the end of 2014. The so-called eurozone will grow by only 0.1 per cent in 2013 and 1.5 per cent in 2014.
Japan should grow unevenly, recording unusually fast growth of 3 per cent in 2013 followed by a return to tepid growth of 0.5 per cent in 2014.
“The global economy is moving forward at multiple speeds,” OECD chief economist Pier Carlo Padoan says in the report. “Each path carries its own mix of risks”.
Australia’s productivity growth is weak and likely to weaken further the Productivity Commission has found. But it says Australia isn’t alone.
