‘Can-do capitalism’ is delivering less than it used to: 3 reasons why

The good news is supposed to be that when the government gets out of the way “can-do capitalism” will have us roaring back to where we were before.

That’s the prime minister’s newest slogan, and we had better hope for more.

The unpleasant truth is that before the pandemic Australia’s economy was disturbingly and unusually weak. Can-do capitalism wasn’t doing what it should.

Reserve Bank chief economist Luci Ellis put it this way a few days after Morrison talked about freeing the engines of the economy to do their work.

In the decade or so leading up to the pandemic, there was a nagging sense that these engines of prosperity were running out of steam – investment was low, productivity growth was lagging, and many of the behaviours we associate with business dynamism were on the decline.

Outside of mining, business investment had been shrinking as a share of the economy for more than a decade.

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Private non-mining business investment, share of nominal GDP

Net of second-hand asset transfers. ABS, RBA

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Outside of the ride-share industry, fewer businesses were being created and fewer businesses destroyed.

“For all the talk of disruption, the overall sense one gets from the data is of a bit less dynamism or inclination to shake things up,” Ellis said.

And we were in the middle of a “great resignation” of a different kind to the departures from jobs being seen in the United States.

Australians were increasingly resigned to staying in the jobs they had. Job switching had sunk to all-time lows.

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Proportion of employed Australians who switched jobs during the year

Australian Bureau of Statistics

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In short, despite technological revolutions, despite a government saying it was getting out of the way, and despite record low interest rates that made it cheap to invest and expand, in the lead-up to COVID-19 businesses weren’t doing that. By the time the pandemic arrived, annual economic growth had slid to 2.1%.

Government hasn’t been holding business back

One thing Ellis says can’t explain the pre-pandemic reluctance of businesses to invest is government regulation pushing up costs. She says if costs had been rising, inflation wouldn’t have fallen to near record lows.

And if labour costs had been rising, wage growth wouldn’t have fallen to unprecedented lows, and firms would have been investing more in machines to replace workers.

Businesses themselves have been unusually cautious

There’s evidence to suggest that in the decade since the global financial crisis Australian (and other) firms have become more risk-averse.

Instead of falling with the falling cost of borrowing, the “hurdle” rates of return that businesses tell the Reserve Bank they require in order to justify investments have remained stubbornly high.

It’s a “won’t do” rather than a “can do” mindset, and Ellis says it might be because Australian managers don’t want to be associated with projects that fail, or because their firms have only limited management capacities and don’t want to commit to projects in case better ones come along.

Except for some firms

Her most intriguing suggestion is that some firms are market leaders at installing new technologies (especially those driven by artificial intelligence) – so much so that their competitors can’t catch up.

Tip Top Bakeries produces more than one million loaves of bread a day and delivers to more than 18,000 locations Australia-wide.

It used to send out its trucks in hub-and-spoke patterns using schedules drawn up by humans.

Since it began using artificial intelligence and machine learning to route trucks in configurations no human would have thought of, it has cut its distribution costs 14% and lifted its gross profit after distribution 7%.

Ellis makes the point that earlier technological innovations such as laptops and spreadsheets were easy to use.

Artificial intelligence and machine learning might be the first new technologies to be actually harder to use and require a rarer set of skills than those they replace.

The few “superstar” firms that adopt these new technologies (such as Woolworths with its fully automated distribution centre) are becoming able to do things their smaller competitors cannot, locking those lesser firms into a “low-wage, low-investment groove”.

Ellis cites evidence that the spread of technological knowledge has slowed, leading to a “winner-takes-all world” of increasing industry concentration.

It might still be possible to convince a lender you’ll be Australia’s next big thing in an industry with a market leader, but it’s getting harder.

‘Can-do capitalism’ needs help

The third possible explanation advanced by Ellis for the growth of the “think carefully before attempting” mindset over the past decade is in sharp contrast to Morrison’s distinction between “can-do capitalism” and “don’t-do governments”.

It’s to do with long-term cycles.

When conditions are weak, Ellis says, firms focus on defending what they’ve got instead of pursuing new opportunities.

We’ve been in that cycle for a decade, possibly made worse by governments withdrawing support in order to get nearer to balancing their budgets.

Now that governments are spending big and abandoning caution to fight the pandemic there’s a chance the cycle will turn.

It would be great if she turns out to be right.

If she is, it won’t be because the prime minister was right. It’ll be because business needed a leg-up.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Why productivity growth has stalled since 2005 (and isn’t about to improve soon)

Not long ago it seemed as if the future was going to get better and better — not long ago at all.

For me the high point was around 2005, fifteen years ago.

I don’t know if you can remember how you felt at the time, but for me the surge in living standards, driven by an ever-building surge in output per working hour (“productivity”) suggested things were building on themselves: each new innovation was making use of the ones that had come before to the point where….

Ray Kurzweil, now the director of research at Google, summed it up in a book released in 2005 itself, titled The Singularity Is Near.

Singularity was “a future period during which the pace of technological change will be so rapid, its impact so deep, that human life will be irreversibly transformed”.

Changes would build on each other to the point where everything changed at once.

Kurzweil dubbed it the “law of accelerating returns”.

Year by year in the leadup to 2005, Australia’s productivity growth had accelerated to the point where in the 15 years to 2005 it had grown 37%.

If it kept accelerating…

In the 1930s economist John Maynard Keynes foresaw “ever larger and larger classes and groups of people from whom problems of economic necessity have been practically removed”. On average the working week might fall to 15 hours.

In the 1970s, futurologist Alvin Toffler spoke of a four-hour working day.

And then from 2005 on productivity growth collapsed. In the 15 years since, Australia’s output per working hour (productivity) has grown by just 17%.

Thirty seven per cent turned out to be the high point.

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Long-run productivity growth, Australia

Growth in GDP per hour worked over the previous 15 years. ABS

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And not only here. In the United States and other developed economies productivity growth is divided into “before 2005” when it was rapid, and “after 2005” when it collapsed.

2005 is when Apple got serious about developing the iPhone. It was when many of our technological innovations really did start building on themselves.

2005 is when things were meant to take off

In his impressive book The Rise and Fall of American Growth economist Robert Gordon rightly points out that things like the iPhone are nothing like as genuinely useful as the innovations in the leadup to the 1940s.

Gordon says not a single urban home was wired for electricity in 1880, but by 1940 nearly 100% had mains power, 94% had clean piped water, 80% had flush toilets and 56% had refrigerators.

He says whereas as all of us could quite happily travel back in time 60 years from today and enjoy a recognisable lifestyle, we couldn’t have done it if we travelled back 60 years from the 1940s.

Instead, they stagnated

It’s as if the innovation we’ve had has been less useful. As if, in the words of PayPal founder Peter Thiel, “we wanted flying cars, instead we got 140 characters”.

Or it might be that the things we do these days are harder to automate.

A century ago roughly half the Australian workforce worked in service jobs — doing things such as hairdressing and writing reports. Today it’s 80%.

Back then, 45% of us worked in farming or manufacturing. Today it’s not even 10%

Services such as hairdressing, nursing and aged care are about as productive as they will ever be. It’s possible to cut hair or consult patients faster, but what’s lost is the time and personal attention spent doing it, which is part of the service.

We might be reaching hard limits

If productivity is output (the service) per unit of input (time spent), it doesn’t make sense to measure it where much of the output is the input.

That’s one of the reasons the Bureau of Statistics provides measures of what it calls multi-factor productivity for industries such as agriculture and mining, but not for “health and social assistance” which is Australia’s biggest employer.

The Bureau is working on a measure for health, but it thinks it will have to use as the output changed life expectancy or surveys of patient “satisfaction” with their treatment.

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Read more: Have we just stumbled on the biggest productivity increase of the century?

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In the US as many as 30% of workers now work in “persuasive industries” including advertising, public relations and the law.

It is almost impossible to measure their output — is it success in persuading people to change their minds?

For public servants and writers it is possible to measure output in terms of words produced, but deeply unhelpful. It is far from certain these workers would be more productive if they worked faster.

Technology might even be sending us backwards

Which is a way of saying that we might be coming up against hard limits in the amount we can squeeze out of each hour of paid work. Or perhaps not. The Singularity promises us robots that can talk to dementia patients and bots that can write political news.

And the application of technology might even be sending productivity backwards.

British economics writer Tim Harford points out that what drove the really big advances in productivity in manufacturing was specialisation.

The father of capitalist economics Adam Smith famously observed that a pin factory employing 10 specialists could produce 48,000 pins a day.

An individual who did all of those jobs working without specialised equipment could scarcely “with his utmost industry, make one pin in a day, and certainly could not make twenty”.

Harford says technology is turning us into generalists.

“Computers have made it easier to create and circulate messages, to book travel, to design web pages,” he says. “Instead of increasing productivity, these tools tempt highly skilled, highly paid people to noodle around making bad slides.”

It’ll matter for living standards

I could say worse about smartphones and the 140 (now 280) characters in Twitter.

They might be taking away more from our work-day output than they add to it.

This failure of ever increasing amounts of technology to do anything like what was expected matters because productivity growth is what we were counting on to drive economic growth and the ability of future generations to support increasing numbers of retirees.

Over four intergenerational reports the government has revised down its estimates of productivity growth and the size of the economy in four decades time. The next five-yearly report is due later this year.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Fast-growing job-generating companies harder to find

Just 9 per cent of Australian firms generate half of all net new jobs, fifteen per cent generate two thirds of net new sales.

Until now it's been hard to identify those highly-valuable so-called high-growth firms and find out what makes them special.

Now new cutting edge research from the Department of Industry has identified them and tracked them over time, using unique identifiers created from Tax Office business activity statements and pay as you go records. Linked to Bureau of Statistics survey data they paint a picture of what makes high-growth firms and what happens to them over time.

The most-important finding in the study released on Wednesday is that the 11,000 firms are typically younger than other firms (8 years old compared to 11) and much the same size and in most of the same industry sectors as other firms. They are not overwhelmingly high tech startups.

The firms whose high growth was in turnover spent more than others on research and development. The firms whose high growth was in employment spent less on research and development. While R&D had an ambiguous effect, the effect of innovation was clearly positive.

"Firms that are innovation-active are more likely to grow their revenue and profits, and they're more productive," said Department of Industry chief economist Mark Cully. "This association stands after controlling for a range of other factors, and we were also able to test and establish that the causality runs from innovation to growth."

"Introducing a new product or a marketing innovation had the greatest impact on a firm's revenue, boosting it by 3 and 4 percentage points. For high-growth firms these numbers were greater still. A focus on innovation as a business strategy increased their revenue growth by almost 10 percentage points, all else equal."

After four or so years, most high growth firms grow more slowly. The study concludes that high-growth firms are not a specific type, but "a phase that some firms go through during their life cycle".

Its most disturbing finding is that there are fewer such firms. It defines them as firms with an annual turnover of at least $75,000 employing at least five people with average annualised growth in sales or employment of more than 20 per cent a year over three years.

It says the number and persistence of high-growth firms has deteriorated since the global financial crisis, although in the last few years it seems to be stabilising. They are also growing more slowly.

Mr Cully said said it wasn't clear whether the slower growth was caused by the slower-growing economy or was a cause of it.

"It is higher in years when the economy is growing strongly, and lower in years when growth is weaker," he said. "The proportion of high-growth firms declined between 2005 and 2014, coinciding with the trend slowdown in Australian GDP growth after the global financial crisis."

In The Age and Sydney Morning Herald

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Turnbull's wrong, the future isn't what it used to be

What would you rather do without: the internet, or airconditioning?

Here's another one. What would you rather give up: smartphones, or plumbing?

They're questions that go to the heart of the myth at the centre of Malcolm Turnbull's Australia Day speech – that we live in "the most exciting time in human history".

According to our technologically-savvy Prime Minister "there has never been such rapid change".

Really? Try telling that to your great-grandparents.

In the late 1800s families bathed in tubs in the kitchen, often the only heated room in the house, after carrying in buckets of cold water and heating it by an open fire. They washed once a week if they were lucky, and in some cases once a month. Yet within decades, by 1940, they had running water and heating in every room. So says US economist Robert J. Gordon in an impressive, and somewhat depressing, new tome entitled The Rise and Fall of American Growth.

Gordon says not a single urban home was wired for electricity in 1880, but by 1940 nearly 100 per cent had mains power. By 1940 94 per cent had clean piped water, 80 per cent had flush toilets, 73 percent had gas for cooking and 56 per cent had refrigerators.

Houses went from being isolated to being networked, "most having the five connections of electricity, gas, telephone, water, and sewer".

Compare that to the changes we are living through now, the ones spruiked by our Prime Minister.

Gordon says until 1970 progress was broad, encompassing electricity, the internal combustion engine, health and networking. Since then it's been mainly in entertainment and communications. And its been evolutionary rather than revolutionary.

By 1970 television was old. Even our family had one. Since then we have had a move to colour (something that happened earlier in the US) and a move to both larger and smaller screens. By 1970 telephones were ubiquitous. That's when my family signed up. Since then they've become more portable, but they function in the same way. Computers are improved typewriters, email functions as a fax machine, and the internet as an encyclopaedia.

And away from communications, progress has been glacial...

"By 1970 the kitchen was fully equipped with large and small electric appliances, and the microwave oven was the only post-1970 home appliance to have a significant impact," Gordon writes. "Motor vehicles accomplish the same basic role as they did in 1970, albeit with greater convenience and safety. Air travel today is even less comfortable than it was in 1970, with seating configurations becoming ever tighter and long security lines making the departure process more time-consuming and stressful."

His graphs are shocking. They are rainbow-shaped. They show that in the 50 years before 1920 output per person grew at an annual rate of 1.8 per cent. For one glorious half-century between 1920 and 1970 it grew at 2.4 per cent, then it fell back to 1.8 per cent where it has been for the past half-century. The graph on effort is U-shaped. Before 1920 working hours per person rose. Between 1920 and 1970 they fell rapidly, and now they are climbing again, more quickly than they did before the glorious half century began.

It's as if the promised future didn't happen. Peter Thiel, the founder of PayPal, put it this way: We wanted flying cars, instead we got 140 characters".

There's a counter argument, one I find intuitively attractive. It's that new developments feed on other new developments to create game-changing transformations such as the driverless car or 3D printing. But they are not showing up in the figures. The US economist Robert Solow famously quipped in the late 1980s that he could see the computer age everywhere but in the productivity statistics. He was briefly wrong – productivity growth did climb for a few years, but then it fell back down. Moore's Law – the rule of thumb that said processing power would double every two years – has been failing to keep pace for a decade. In recent times it has taken four to six years for processing power to double.

Gordon's point is that should neither surprise nor worry us. Humanity's big advances were awesome. Whereas as all of us could quite happily travel back in time 50 years from today and enjoy a recognisable lifestyle, that wouldn't have been possible if we travelled back 50 years from the 1940s.

But those advances have already happened. They can't happen again. They made us better off, forever. We're living in that forever.

In The Age and Sydney Morning Herald

 

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Free to fail in Malcolm Turnbull's new $1.1 billion innovation plan

Businesses will be given the freedom to fail and get back up on their feet quickly under new US-style bankruptcy laws announced as part of Prime Minister Malcolm Turnbull's innovation statement. 

The changes will allow businesses to trade while insolvent and cut the period in which bankrupts cannot run other businesses to just one year.

Declaring that Australia placed too much emphasis on penalising and stigmatising failure and not enough on celebrating success, the $1.1 billion package acknowledges that "sometimes entrepreneurs will fail several times before they succeed and will usually learn more for failure than success".

At the moment most bankruptcies last three years, in which time the directors are unable to start another company. Directors are at present personally liable for insolvent trading. The new law would allow trading while insolvent where the business appoints a restructuring adviser to work on a turnaround plan.

Mr Turnbull said the change would take Australia "some way, but not all the way" to the American Chapter 11 bankruptcy code.

"It [Chapter 11] has a very heavy involvement of the courts," he said. "We generally don't want to be as legalistic or materialistic as the Americans, but this is something that's been very carefully considered over many years, most recently by the Productivity Commission."

The laws will also relax the "same business test" that denies tax losses if a company changes its business activities, introducing a more flexible "predominantly similar business test".

In an idea borrowed from the Cameron government's successful Seed Enterprise Investment Scheme in Britain, new laws will provide a 20 per cent non-refundable tax offset worth up to $200,000 for investors in startup businesses plus a 10-year exemption from capital gains tax if they hold shares in the company for three years. The changes will come into force in July 2016.

The government will also loosen the restrictions on tax breaks for so-called early stage venture capital limited partnerships, allowing investments of up to $200 million rather than $100 million and no longer requiring investors to sell when the company's value exceeds $250 million...

The Turnbull government will create a $200 million dollar CSIRO Innovation Fund that will more than restore the $110 million removed from the science agency's budget in 2014. It will also establish a Bio-medical Translation Fund to co-invest up to $250 million in partnership with the private sector.

The government will simplify university research funding by collapsing six funding programs into two. Equal weighting will now be given to potential income from commercialisation and research excellence.

In an attempt to deliver an "ideas boom"  the government will spend $84 million over four years, upgrading teachers' skills and introducing new computer coding programs for students in years 5 and 7.

It will set up a new independent statutory board known as Innovation and Science Australia that will report to Industry Minister Christopher Pyne, and a new innovation and science committee of the cabinet that will report directly to the Prime Minister.

Launching the statement, Mr Turnbull said Australia consistently ranked last or second last among OECD countries for collaboration between researchers and business.

"Companies that embrace innovation, that are agile and prepared to approach change confidently and with a sense of optimism are more competitive, more able to grow market share and more likely to increase their employment," he said. "We are absolutely committed to ensuring that our students have the skills to find high-wage and rewarding jobs regardless of their qualifications or career path."

About half of the $1.1 billion in funding over four years will be directed to restoring funding cuts and guaranteeing the future of long-term projects, among them the $520 million Australian Synchrotron nuclear facility and the $294 million Square Kilometre Array multi-nation radio telescope project. 

The government will direct $1.5 billion over 10 years to the National Collaborative Research Infrastructure Strategy, a grant that had been under a cloud as part of negotiations with the Senate over the higher education changes. Universities will receive an extra $127 million in research funding over the next four years.

Mr Turnbull said the government itself was taking a risk in attempting to encourage investors to take risks.

"One of the aspects of the political paradigm I am seeking to change is the old politics where politicians felt they had to guarantee that every policy would work; they had to water everything down so there was no element of risk," he said. "If some of these policies are not as successful as we like, we will change them. We will learn from them. Because that is what a 21st century government has got to be. It has got to be as agile as the start-up businesses it seeks to inspire."

In The Age and Sydney Morning Herald

 

 

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Slow ahead. Expect 'the equivalent of a recession' every ten years

If we were sleepwalking into a mess, would we know it? Our leaders wouldn't.

Tony Abbott opened last week's national reform summit with a self-congratulatory video in which he talked about cutting red tape, the China-Australia free trade agreement, and the need to protect mining from "vigilantism in the courts". Things were heading in the right direction.

Joe Hockey gave a speech that said even less, talking about the rise of the consumer and observing that his dad once told him, "ideas are free, but good ideas are gold nuggets".

Bill Shorten was better. The deficit had doubled. Wages growth was at record lows. Economic growth was nearly a full percentage point below trend. Australia's transition from the mining boom had been patchy.

Then the politicians left the room.

The summit was told that the economy was set to grow at a mere fraction of the officially projected pace, so slowly that the living standard expected in 2055 wouldn't be reached until 2075, when most of us would no longer be alive...

The intergenerational report had assumed average growth in real incomes of 1.4 per cent per year for each of the next 40 years. It would mean that by 2055 real income per person would be an impressive 75 per cent higher than it is today. We would easily be able to afford any extra tax we needed to fund higher pensions and health costs, and our incomes would be climbing so fast, we wouldn't much mind if the tax system was changed.

Even >in March, when the report was released, Treasury officials regarded the assumption as a stretch. Since then views about the future have changed. The Reserve Bank believes Australia's sustainable rate of economic growth may be lower than in the past, so low as to make the projections in the intergenerational report unachievable.

On Wednesday at the reform summit, economic modeller Janine Dixon from Victoria University put numbers on a rate of income growth she said was more realistic. Instead of growing by an average of 1.4 per cent per year, real income per person would grow by a bit less than 1 per cent, enough to leave us only 44 per cent better off by 2055. We would need to wait another 20 years to be as well off in 2075 as the intergenerational report said we would be in 2055.

Her thinking is that productivity (output per hour worked) will grow far more slowly than it has. To prepare the intergenerational report, the Treasury simply projected the growth rate of the past 40 years to the next 40. She said the past 40 years included "an exceptional period in Australia's economic history – a period which included the major economic reforms of the 1980s combined with unprecedented growth in computing and communications technology and the benefits of the stability brought about by a 23-year run of positive economic growth".

Assuming that we are unlikely to computerise once again, and knowing we can't cut high tariffs to near zero again, and that we are most unlikely to survive yet another generation without a recession, she has come up with a much lower estimate of normal productivity growth by excluding the exceptional years between 1994 and 2004.

Professor Ross Garnaut seized on the implications. On present settings, Australia had no chance of achieving the promised 2020 surplus, and instead faced "ever increasing budget deficits".

Dixon outlined other implications. If incomes don't rise as rapidly, we will need to save more in order to fund the things we could have once relied on income growth and future generations to fund. "Decisions about who should forgo consumption to fund investments become contentious," she said. Baby boomers and generations X and Y and Z will fight among themselves over who should pay the most. Rapidly rising incomes are a lubricant - they stop people rubbing up against each other.

The fighting has already started. Instead of embracing tax reform as our leaders used to, the present lot are frightened, knowing that unless incomes are rising rapidly, tax reform is close to a zero sum game. It isn't possible to make everyone better off.

The former treasury secretary Martin Parkinson said the enormity of what was in store amounted to a recession every decade, as each decade lost 5 percentage points of expected GDP. "It means willingly accepting the impact of a recession," he said. "We are actually going to find ourselves sleepwalking into a real mess."

We might get a foretaste on Wednesday when the Bureau of Statistics releases the June quarter national accounts. One bank is tipping economic growth of just 0.2 per cent in the quarter; another, 0.4 per cent. Either result is pitifully low by the standards we have come to expect and if sustained would drive annual growth below 2 per cent.

It might be something we will have to get used to. Highly aged societies such as Japan and Italy have long been used to low income growth. Highly aged individuals get used to it as well. The transition has probably been under way for some time. Until now it has been masked by the mining booms.

It won't be catastrophic, but it won't be pleasant. Things that have been easy will become more difficult. It would be nice if our leaders even acknowledged the possibility.

In The Age and Sydney Morning Herald

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Bringing Australia together. Rudd's new Accord?

Thirty years ago Labor switched leaders just before an election. Bob Hawke abandoned the rhetoric of class warfare and spoke instead of “bringing Australia together”. He romped home in a landslide.

Kevin Rudd has connected himself to Bob Hawke in an unbroken line. He told the press club Thursday it was Hawke and Keating that transitioned Australia from “the old closed post-war economy to the new internationalised economy that sets us up for the future.” It was Rudd that “did it again”, transitioning Australia through what Paul Keating recently and eloquently described as the valley of death of the 2008-09 great global recession”.

The line was unbroken in the press club speech because there was scarcely a mention of Howard or Gillard, or of the opposition leader Tony Abbott except to observe that he had turned down Rudd’s invitation to appear with him at the press club and to link him to the “slash and burn” policies of Campbell Newman in Queensland and David Cameron in the United Kingdom.

But whereas Hawke was vague about what he wanted achieve by bringing Australia together, Rudd was specific. He wants a pact with business and unions to lift productivity by 2 per cent per year, well above the long-term growth rate of 1.5 per cent per year.

Calculations by PricewaterhouseCoopers suggest a 2 per cent growth rate would boost gross domestic product by $48 billion by the end of the decade, lifting Commonwealth tax revenue by $12 billion and state revenue by $6 billion.

He was specific too about how he would do it, pinching Coalition policies for streamlined industrial agreements for greenfields sites and simplified environmental approvals for major projects...

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Some of his less clearly articulated proposals were winks and nods to business. He wants “the future availability of competitively priced domestic gas supplies high on the agenda”. It looks like an endorsement of a plea by the Australian Industry Group for a proportion of newly-discovered east coast natural gas to be reserved for Australian customers rather than sold overseas. Cabinet will “continue to work through a range of policy matters” including moving earlier to a floating rather than fixed carbon price as also demanded by business.

There might also be something for Newstart recipients barely surviving on $35 per day as asked for by business, unions and the unemployed themselves.

Boosting productivity will require much more than this, and productivity is a hard thing to measure. But its a start, and not a bad goal around which to bring Australia together.


In The Sydney Morning Herald and The Age


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What is productivity?

At times it's hard to tell, even for experts

If you don’t quite get all the talk about productivity, I’ll let you in on a secret - the Productivity Commission doesn’t quite get it either.

A few days back it published the first of what will be its regular productivity updates. The good news is it shows Australia getting (slightly) more productive. The bad news is it can’t be sure.

Productivity ought to be easy to calculate. It is a measure of how many units a nation or a firm gets out for each unit it puts in. Assessing the productivity of something such as car assembly is straightforward. If Holden or Toyota were to produce twice as many cars using no more labour and other inputs, they would have doubled their productivity.

But what about hairdressing? If the workers in a salon cut twice as many heads of hair per day would they really have lifted their productivity? That would depend in part on the quality of the hair cuts. But it would also depend on something else. Some of what they produce is the attention they give to each customer. It is an output as well as an input.

The phenomenon is especially important in aged care. The Bureau of Statistics recognises this by not calculating productivity for the “health care and social assistance” sector even though it’s Australia’s biggest employer.

Nor does it calculate productivity for “public administration and safety” workers or for “education and training” workers. Combined, those three industries account for one quarter per cent of all employment. Two decades ago they accounted for one-fifth. The hard-to-measure sectors are becoming more important.

An Australian Treasury economist Gerry Antioch this month published his estimate of the size of the so-called ‘persuasive industries’ in the United States. He has included lawyers, public relations specialists, advertising writers and ministers of religion. He has also part-counted workers such as police who spend only part of their time persuading. Previously regarded as making up 26 per cent of US employment, persuasive industry jobs now account for around 30 per cent of all employment. It is almost impossible to measure their productivity.

What is there to count? Conversions? Persuasions? Success in convincing buyers to switch from one brand to another?

It’s not only the persuasive and caring industries whose productivity is hard to measure. The Productivity Commission says the measured productivity of the electricity industry is unreliable in part because of the extra money it is spending burying cables underground. The extra spending has benefits - “visual amenity and safety” - but they doesn’t show up as increased output. It’s the same for sewage. It is now better disposed of, but that isn’t counted as output either...

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And some important inputs aren’t counted at all, leading to bizarre and otherwise unfathomable fluctuations in measured productivity.

Astoundingly, rainfall isn’t counted as an input to the water supply industry. Of course it should be - without rainfall there would be no water supply. But the omission means that during times of drought the measured productivity of the industry dives, even if its efficiency hasn’t changed.

Rainfall is also an input for farms. Without it they would produce little, but it also isn’t counted when calculating their productivity. As a result, according to a Commission research note, recorded productivity growth in the farm sector has at times been negative, “not because farmers became less technically efficient, but because it didn’t rain as much”.

In mining, the key unmeasured inputs are the minerals being mined.

Yet as the research note puts it: “No amount of conventionally measured inputs - labour, capital, materials etc - can produce a tonne of coal or a barrel of oil without a coal seam or an oil deposit from which to extract it.”

The more resources that are extracted, the harder it is to find new easily accessible resources, and so the less productive the industry seems, even if it is operating just as efficiently as before.

The Productivity Commission research note is entitled: “On productivity - the influence of natural resource inputs”. The authors put forward calculations that suggest the mining industry has been getting more efficient even though resource depletion means its measured productivity has been standing still.

Sober economists don’t take seriously movements in the quarterly productivity numbers. They are weighed down by errors and likely to be revised. Only lobbyists and politicians habitually quote them. The prime minister did so on Monday.

There’s no denying that productivity matters. The Nobel prize winning economist Paul Krugman famously said: “Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

But he went on to say that many of the people who pontificate about productivity “don’t know what they are talking about”.

Cutting the wages of workers at Holden will help Holden survive, but it won’t make them more productive. Productivity is output per unit of input. Labour productivity is output per hour worked.

There are times when it would help us if measured productivity shrank, such as when employers hang on to their workers during downturns, when resource companies spend billions opening new mines and gas fields that won’t produce for years, or when the government spends billions on education reforms whose payoffs will be decades away and probably unmeasurable.

We need to grope towards higher productivity. But we need to accept that at times we will go backwards and that much of our groping will be in the dark.

In today's Sydney Morning Herald and Age


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Productivity. We can't really measure it - Productivity Commission

But what we can measure, we don't like

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...

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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”.

In today's Sydney Morning Herald and Age






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Miners complaining about high costs? Spare us. Henry

Australia's big mining companies have created the high-cost culture to which they are now objecting, former Treasury Secretary Ken Henry says.

They are complaining that Australia's costs are increasing at the same time as they pushing them up, he told an audience at the Academy of Social Science Tuesday night.

“Business people talk a lot about Australia being a high-cost low productivity country, but the fundamental reason labour costs have been increasing at the rate that they have is the mining boom, he said in answer to questions.

“Miners and energy producers are paying more for labour, because they want to.”

“In order get labour to work in the mines they have to pay handsome wages to attract the labour out of the places from which it has been attracted.”

“That's the fundamental reason why costs have been increasing in the sector. I'm not saying its the only reason, but it is the fundamental reason – strong demand for Australia's minerals and energy.”

“What can we do about it? We can find ways of boosting labour productivity without it flowing through into increased wages. We did this in the second half of the 1980s. It was a pretty unique period in Australian history.”

In today's Canberra Times and Sydney Morning Herald



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Oh. Productivity is up. What'll they moan about?

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Australia so far. What to Eat After the Low-Hanging Fruit?

Andrew Leigh reflects in this magnificent speech, not all of which reflects well on earlier positions adopted by his Australian Labor Party.

What Do We Eat After the Low-Hanging Fruit? A Brief Economic History of Australia, With Some Lessons for the Future*

Andrew Leigh MP, McKell Institute, Sydney May 18 2012

"In the Pacific Ocean, off the west coast of South America, sit the Galapagos Islands. Although they straddle the equator, the pattern of ocean currents have a cooling effect, making them an ideal breeding ground for tortoises, iguanas, penguins, finches, albatrosses, gulls, and pelicans.

Because the islands are volcanic, what’s striking about animal life on the Galapagos Islands is that all of it came originally by flying or floating nearly 1000 kilometres from Ecuador. And yet for the species that survived, life on the Galapagos Islands was perfect. Migrating birds lucky enough to be blown off course found an environment with few natural predators. Tortoises that floated here found beaches perfectly suited to their breeding environments. Life flourished.

Looking back across Australian economic history, I am often struck by the extent to which luck has similarly played a part in our success. Politicians are sometimes reluctant to talk about luck – preferring to focus on the things we can control than those we can’t. It is true that ‘chance favours the prepared mind’. But I think it’s still worth talking about the role that luck has played, if only to help understand what preparations we should be making. If we don’t do that, we’re like the Galapagos tortoise, which must have thought itself the luckiest species on earth, until British sailors discovered the islands in the late-eighteenth century, and ate them in their thousands.

Over the 2¼ centuries since European settlement, there have been half a dozen strokes of luck, each of which has tangibly boosted average living standards.[1] Let me take a moment to talk about them in turn.

Six Pieces of Low-Hanging Fruit

The first was plentiful land. By stealing land from Indigenous Australians, white settlers were able to be generous in handing out land to convicts and settlers alike... To them, land was so abundant that it was virtually free. Abundant land became particularly productive with Macarthur’s introduction of Merino wool: a high-value product that could be shipped back to Britain. While Europe was land-scarce in the early-1800s, Australia was labour-scarce. That meant wages were comparatively high, and created huge economic opportunities. For example, Samuel Terry, who was transported to Australia for stealing stockings, ended his life as the richest man in Australia, owning a fifth of all NSW mortgages. Free land (stolen from Indigenous Australians) provided social mobility that would have been undreamed of in nineteenth-century Europe.

Land also provided geographic mobility. Historian John Hirst points out that early Australia was characterised by squatters who journeyed inland, and bushmen who moved readily between country and city.[2] He contrasts this with the more static world of Europe by quoting the scene in Thomas Hardy’s The Mayor of Casterbridge. A young English couple are parting:

‘I’m sorry to leave ye, Nelly,’ said the young man with emotion. ‘But, you see, I can’t starve father, and he’s out o’ work at Lady-day. ’Tis only thirty-five mile.’ The girl’s lips quivered. ‘Thirty-five mile?’, she murmured. ‘Ah! ’tis enough! I shall never see ’ee again!’

Such a scene could never have been set in Australia.

Second came plentiful gold. When Edward Hargraves announced in 1851 that he had found gold in Bathurst, it started an avalanche. Over the next decade, the population nearly tripled and our national income almost quadrupled, as people flooded in to take advantage of Australia’s mineral wealth.[3] The changes were felt most keenly in Victoria, whose population increased by a factor of seven in a single decade.

In 1852, Victorian Lieutenant-Governor Charles Latrobe wrote:[4]

At this time the town and its suburbs, and the villages for several miles around Melbourne, notwithstanding the steady stream setting through it upon the road to the Gold Fields, are absolutely choked with the teeming population. The most extravagant rent is paid for the most indifferent accommodation, temporary or otherwise.

And yet it isn’t much of an exaggeration to say that central Melbourne is largely a product of the Gold Rushes, which continued until the late-1800s. The Royal Exhibition Building, opened in 1880, was modelled on the Duomo in Florence. By the end of the nineteenth century, Australians enjoyed the highest standard of living in the world.[5]

Third came plentiful inventions. As US economist Tyler Cowen has argued, the first half of the twentieth century saw a massive upsurge in inventions.[6] This era saw powerful motors and mass production; in transport, there were cars and airplanes; in communications, there were telephones and radios. In homes, domestic inventions included fridges, washing machines, while in offices there were typewriters and tape recorders. The combine harvester, invented in the late-nineteenth century and widely used in the early-twentieth century, caused Australian grain production to soar.

If it strikes you as odd to say that there was more global innovation in the first half of the twentieth century than today, then consider this thought experiment. Which would you give up first: your iPad, or your indoor toilet? Would you prefer to live in a world without Facebook, or one without Penicillin? In the United States, where most leading-edge inventions are registered, the number of patents per researcher has been falling for most of the twentieth century.[7] Physicist Jonathan Huebner estimates that global innovation per person plummeted after the 1955.[8] But for the first half of the twentieth century, Australia surfed the wave of global innovation to increase our standard of living.

Fourth came plentiful migrants. Prior to World War II, Australia took too few migrants. Our migration program excluded those of ‘yellow’ skin, and to our shame, we accepted just 5000 Jewish refugees. But after the war ended, the floodgates opened. At its peak, in 1949, Australia accepted 185,000 migrants into a population of 7.9 million.[9] On today’s population, that would be equivalent to a migrant inflow of more than half a million people. Well over half of these migrants were from non-English speaking countries.[10]

This was an extraordinary program. Relative to population, Australia’s post-war migration program was the largest sustained migration in the world – bigger than the US peak immigration era at the turn of the twentieth century.[11] Many were sent to work on the Snowy Mountains scheme, which employed 10,000 men at its peak.

Political games were played. Visiting the European displaced persons camps in 1947, Immigration Minister Arthur Calwell reported that ‘Australia would be interested in the more youthful types of Baltic peoples who were capable of doing hard work… We preferred the horny hand of the sons of toil’.[12] He was particularly keen that those on the first ship were blonde and blue-eyed, and so instructions were given to the Department of Immigration to select people from Latvia, Estonia and Lithuania.

For all the racial games that were played with public opinion, the simple fact remains that Australia benefited hugely from post-war migration. For once, the ‘tyranny of distance’ worked in our favour, as people who would never have otherwise moved thousands of kilometres from the country of their birth now wanted to flee as far as possible from the horror that had engulfed Europe.

In other cases, coming to Australia was accidental. The father of a friend of mine was born in a refugee camp in Germany in 1946, the son of Polish and Russian refugees. He was a few years old when his family hoped to emigrate to the United States. The Red Cross moved them by train down to Naples, and he was so excited that he constantly stuck his head out the window. A piece of soot got stuck in his eye, and when they got to Naples, the US immigration officials were worried that he had an eye infection that could be contagious, so they refused to take the family. ‘You might try the Australians’, he said, gesturing to officials in the other corner of the room. And that’s why my friend – some thirty years later – was born in Queensland rather than New Jersey. Like her, half of all Australians either have a parent who was born overseas or were born overseas themselves.

The fifth form of low-hanging fruit that Australia plucked was education. In 1900, education was not taken particularly seriously. The bulk of schools were one-teacher schools. Compulsory attendance laws had only just been enacted in some jurisdictions, and were poorly applied. On an average day, 3 out of every 10 children who were supposed to be at school were absent. Some states charged secondary school fees at the turn of the century, and in an appalling policy mistake, most states increased or reintroduced school fees in the 1930s. Even in 1946, less than 1 in 15 young Australians completed secondary school.[13] Hardly anyone went to university. Today, around 4 in 5 young people complete secondary school.[14] Among Australians aged 25-34, 35 percent have a university degree.[15]

One way that labour economists like to summarise educational attainment is in terms of years of education. For example, someone who has finished primary school has 6 years; someone who has finished high school has 12 years, someone with a diploma has 13 years, and someone who has attended university has 15 years. On this measure, the average number of years of education among the working age population rose from 7 years in 1900 to 9 in 1950 to 13 in 1990.[16] Since then, it’s increased modestly.

Rising education represents low-hanging fruit because education has such a large payoff. On average, another year of education boosts earnings by 10 percent, and there’s no evidence that the economic returns to education have declined as the level of education has risen.[17] We also have good evidence that education pays off in non-economic ways, such as through better health, more happiness, less crime, and more civic activity.[18]

The sixth form of low-hanging fruit is the twenty-first century mining boom. So much ink has been spilled on this topic that I won’t say much today. For reasons entirely outside the control of our miners, world commodity prices have tripled over the past decade. The terms of trade recently reached a 140-year high. Urbanising China and India need steel to make their skyscrapers, and Australia happens to be the world’s biggest producer of iron ore, and a major producer of coking coal. At present, we export iron ore at the rate of 4 tonnes a second.

Treasury official David Gruen recently noted:[19]

The mining and mining-related sectors, which together account for around 20 per cent of the economy currently, were expected to contribute more than two-thirds of this real GDP growth in 2011-12, while the 70 per cent of the economy not directly benefitting from the resources boom was expected to contribute less than a third. … Therefore, while the 2011-12 Budget forecasts imply quite good aggregate real GDP growth, around 70 per cent of the economy is expected to grow at around 1 per cent.

And yet compared with the 1970s terms of trade shock, the benefits of this mining boom are flowing more broadly through the economy. Inflation is low, unemployment has dropped during the mining boom, and even the dispersion of unemployment has fallen. Moving from the old royalty regime to a profits-based mining tax means that when prices rise, tax revenue goes up too. In an environment where parts of the non-mining sector are suffering from ‘Dutch Disease’, this seems a reasonable approach.

The New Productivity Agenda

So Australia picked six pieces of low-hanging fruit: plentiful land, the Gold Rush, abundant inventions, post-war migration, mass education, and the current mining boom. These weren’t all dumb luck; we also made some good policy decisions along the way. In the post-war era, Australia benefited greatly from far-sighted economic reforms such as the scrapping of White Australia, the HECS-funded expansion of universities, floating the dollar, tearing down the tariff wall, enterprise bargaining, and replacing a patchwork of sales taxes with a GST.

The question now is: what next? How do we make sure that our nation continues to prosper economically?

In my view, the only way of ensuring that Australia continues to enjoy rising living standards, is to find ways of raising our productivity.[20] To most economists, the relationship between productivity and growth is as natural as the link between clouds and rainfall. We regard productivity – producing more output with the same inputs – as the main driver of long-run growth.

But from my experience, that’s not the way some of my non-economist friends regard productivity. Scarred by a bad boss who said ‘you should work smarter’ when he meant ‘you should work harder’, some of my friends hear the word ‘productivity’, and immediately feel the hackles rise on the back of their necks.[21]

Yet there’s nothing perverse in the idea of productivity. Productivity simply means being able to do tasks more effectively. In this sense, we’ve all become more productive over our lives. As children, we learn to become better readers – absorbing more information in the same amount of time. When we move into our own homes for the first time, we quickly become better at doing household chores. And after a decade in the workforce, most of us make fewer mistakes in our jobs than we did in the first year.

Productivity growth was lousy in the 2000s, but we can learn something from the previous decade. During the 1990s, Australia managed to double our rate of productivity growth. According to the Productivity Commission’s Dean Parham, there were three main drivers of this increase: 50 percent was due to us having a more open economy, 30 percent to more research and development, and 20 percent to the information technology revolution.[22]

Today, two major productivity challenges for Australia are to keep our economy open to the world, and to boost the quality of our education system.

Australia must pursue openness because our future lies in economic engagement with the world. In terms of migration, Australia benefits when new migrants bring their ideas. But we also benefit when people born in Australia spend time overseas and then return. For the brief period when I headed the economics program at the Research School of Social Sciences, I remember noticing that only one of the approximately 30 researchers was born and had studied in Australia. Everyone else was either foreign-born, or had completed their PhD overseas.

In terms of trade, Australia needs to continue to pursue open markets internationally. Just as we benefited by taking the rocks out of our harbours, we need to encourage others to do likewise. In the 1980s, we established the Cairns Group of agricultural free-trading nations, and in the 1990s, we set up the APEC leaders’ meetings. Now, because momentum has stalled in the consensus-based World Trade Organisation, Prime Minister Julia Gillard and Trade Minister Craig Emerson are working on a new pathway to progress the Doha Round: a Trans-Pacific Partnership. A stepping stone to the APEC goal of a Free Trade Area of the Asia Pacific, the Trans-Pacific Partnership allows other countries to ‘bolt on’ at a later date.

We also need to be honest with Australians about foreign investment. While at least one National Party Senator has claimed that there has been ‘an exponential increase’ in agricultural foreign investment, the facts show otherwise. Between 1984 and 2010, the area of farmland that is foreign-owned rose from 5.9 percent to 6 percent.[23] Rural Australians enjoy more jobs and better pay as a result of foreign investment – just as they have done since CSR helped establish our sugar industry in 1855.

The other challenge is to boost the performance of Australia’s educational institutions, particularly our schools. In research with Chris Ryan, we found that Australian literacy and numeracy scores had failed to improve from 1964 to 2003.[24] Since then, Australia’s scores on the international PISA test have fallen. At the same time, the academic aptitude of new teachers – relative to their classmates – has declined.[25] One possible reason for this is that Australia chose to focus on reducing class sizes rather than attracting the best teachers. Over the past quarter-century, class sizes have been cut by about 10 percent, while teacher salaries relative to other professional salaries have also been cut by about 10 percent.

I said earlier that increasing the quantity of education was low-hanging fruit. By contrast, increasing the quality of education is fruit that’s on a higher branch. But it’s a particularly attractive goal, because it doesn’t involve the same sacrifice. More time in school means less time doing other things. But raising the quality of schooling means packing more learning into every year.

If we’re learned anything from the economics of education over the past few decades, it’s that the relationship between spending and outcomes is extremely weak. You can see this over time in Australia (where spending has risen but scores have flatlined), and you can also observe it by using the MySchool data to compare spending and results. More money creates the potential for improvement, but the relationship is far from automatic.

So the most interesting questions in education are about how money is spent. Among the reforms that Education Minister Peter Garrett has been pursuing in this area are principal autonomy (through the Empowering Local Schools program), Trade Training Centres to teach new skills and boost retention rates, and performance pay to reward the best teachers. I have a particular interest in performance pay, having given a keynote address at an economics of education conference in Munich, in which I summarised what we know about the economics and politics of merit pay.[26] From that, I concluded that anyone who says that merit pay ‘always works’ or ‘never works’ hasn’t spent enough time engaging with the literature. There are clearly merit pay models that are successful, and those that are unsuccessful. The challenge is to build the evidence base to the point where we can confidently tell the difference.

Conclusion

Writer George Megalogenis describes populist politicians who oppose economic reform as ‘playing with the kryptonite’. Both sides of Australian politics must take our share of blame for populist policies. In the 1980s and 1990s, there were those (including the current Leader of the Opposition) who opposed the float of the dollar. And yet without a floating dollar acting as a shock absorber to international events, it’s easy to imagine that the Asian Financial Crisis, the US tech wreck or the mining boom could have had a disastrous impact on the domestic economy.

The same can be said of Labor’s flirtation with populism in the 1990s. In the 1998 election campaign, we promised to abolish the Productivity Commission – the very same body that has now done the essential groundwork for a National Disability Insurance Scheme. In 1999, we also opposed the Goods and Services Tax, a reform that Paul Keating had supported the previous decade. I can’t imagine Labor now promising to go to an election to untax services and reinstate the patchwork of sales taxes that existed in that era.

We can also see more than a hint of populism in Tony Abbott’s campaign against market-based mechanisms such as water buybacks in the Murray-Darling Basin and a price on carbon pollution. And yet we shouldn’t be surprised that these campaigns are finding some receptive ears. In public life, it has always been easier to scare people than honestly inform them. It’s just that most of us choose not to walk the fear road.

Today, animal life on the Galapagos Islands is thriving again. Three decades after receiving World Heritage Listing, the World Heritage Committee has removed the Galapagos Islands from its list of precious sites endangered by environmental threats or overuse. This didn’t happen by chance: it has been due to the hard work of the park service, the Charles Darwin Foundation and the Ecuadorian Government. There are still invasive species, but there are good programs in place to manage them.

After a lucky start, nature on the Galapagos Islands now thrives because of good management, and planning with an eye to the future. Perhaps there’s a lesson in that for the Lucky Country too.


* I am grateful to Peter Bentley for inviting me to give this talk, to the Parliamentary Library for valuable research assistance, and to Macgregor Duncan, John Edwards, Rick Kalowski, John Quiggin and others for insightful comments on an earlier draft. Naturally, they should not be assumed to agree with all its conclusions. The notion of ‘low-hanging fruit’ draws on Tyler Cowen’s excellent book The Great Stagnation.

[1] This section draws on Tyler Cowen (2011), The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, Kindle Edition.

[2] John Hirst, 2009, Sense and Nonsense in Australian History, Black Inc, Melbourne, p.27

[3] Angus Maddison, The world economy, Organisation for Economic Co-operation and Development. Development Centre, Vol 1, pp.449 and 462

[4] C.M.H Clark (ed). 1962, Select Documents in Australian History 1851-1900, Angus and Robertson, Sydney, pp.89-90. Another interesting document in this volume is a letter by Tasmanian Lieutenant Governor William Denison, expressing his concerns that the Gold Rush would result in the mass emigration of Tasmanian agricultural labourers. It goes to show that all mining booms create multi-speed economies.

[5] Angus Maddison, 2010, Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD (Horizontal file), University of Groningen

[6] Tyler Cowen (2011), The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, Kindle Edition.

[7] Tyler Cowen (2011), The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, Kindle Edition, Location 200.

[8] Jonathan Huebner, 2005, ‘A Possible Declining Trend for Worldwide Innovation’, Technological Forecasting and Social Change, 72, p.982 (quoted by Tyler Cowen).

[9] Andrew Leigh, 2010, Australian Social Capital Database (Excel file), available at www.andrewleigh.org.

[10] Andrew Leigh, 2010, Australian Social Capital Database (Excel file), available at www.andrewleigh.org.

[11] Brad Collis, Snowy, the Making of Modern Australia, 1990, Hodder & Stoughton, Sydney, p.195

[12] Quoted in ABC, 2001, ‘100 Years: The Australian Story’, Episode 2: Rise And Fall Of White Australia, http://www.abc.net.au/100years/EP2_4.htm

[13] Statistics in this paragraph are drawn from Gerald Burke and Andrew Spaull, 2001, ‘Australian Schools: Participation and Funding 1901 to 2000’, Year Book Australia, 2001, ABS, Canberra (available at http://www.abs.gov.au/Ausstats/abs@.nsf/0/A75909A2108CECAACA2569DE002539FB?Open). Estimate for 1946 is based on an ACER survey, which found that 7 percent of youth aged 16-17 were enrolled in school. This suggests a year 12 graduation rate of less than 1 in 14.

[14] ABS, 2011, ‘Year 12 Attainment’, Australian Social Trends, Mar 2011, Cat No 4102.0, ABS, Canberra.

[15] ABS, 2011, Education and Work, Australia, Cat No 6227.0, ABS, Canberra, Supplementary Table 8.

[16] Christian Morrisson and Fabrice Murtin, 2009, ‘The Century of Education’, Journal of Human Capital 3(1): 1-42

[17] Andrew Leigh, 2008, ‘Returns to Education in Australia’, Economic Papers: A journal of applied economics and policy, 27: 233–249; Mick Coelli and Roger Wilkins, 2009, ‘Credential Changes and Education Earnings Premia in Australia’, Economic Record, 85(270): 239-259.

[18] See for example Philip Oreopoulos, 2007, ‘Do dropouts drop out too soon? Wealth, health and happiness from compulsory schooling’, Journal of Public Economics, 91(11–12): 2213–29.

[19] David Gruen, 2011, ‘The macroeconomic and structural implications of a once-in-a-lifetime boom in the terms of trade’, Australian Business Economists, 24 November 2011. Eagle-eyed readers will notice that 20 and 70 do not add to 100 percent. This is because Gruen is discussing the 90 percent of the economy that is non-agricultural.

[20] For statistics on Australian productivity growth since the 1960s, see House of Representatives Standing Committee on Economics, 2010, Inquiry into raising the productivity growth rate in the Australian economy, House of Representatives, Canberra, Figure 5.1. Over a longer period, see Broadberry, S. N. and Irwin, Douglas A., 1962- (2007) ‘Lost exceptionalism? : comparative income and productivity in Australia and the United Kingdom, 1861-1948’. Economic Record, Vol.83 (No.262). pp. 262-274.

[21] One economist who shares this view is John Quiggin, who contends that the 1990s were a productivity ‘mirage’, on the basis that output rose only through an increase in effort (see Quiggin, ‘The Lost Golden Age of Productivity Growth?’). The difficulty with this argument is that shifting the denominator from hours to effort introduces significant new measurement problems.

[22] Dean Parham, 2004, ‘Sources of Australia’s Productivity Revival’, Economic Record, 80(249): 239-257.

[23] Craig Emerson, 2012, ‘Australia China Business Council 2012 Report Launch - Benefits to Australian Households of Trade with China’, National Press Club, 3 April 2012.

[24] Leigh, A. and Ryan, C. (2011) 'Long-run trends in school productivity: Evidence from Australia', Education Finance and Policy. 6(1): 105-135. For example, one question asked of year 8 students was ‘In the division 24.56/0.04, the correct answer is: (a)0.614 (b)6.14 (c)61.4 (d)614 (e)6140’. The share of students who correctly answered (d) was 39% in 1964, 38% in 1978 and 23% in 1995.

[25] Leigh, A. and Ryan, C. 2008, 'How and why has teacher quality changed in Australia?', Australian Economic Review, June 2008, vol. 41, no. 2, pp. 141–59.

[26] Andrew Leigh. 2012. ‘The Economics and Politics of Teacher Merit Pay’ CESifo Economic Studies, forthcoming http://cesifo.oxfordjournals.org/content/early/2012/03/07/cesifo.ifs007.abstract


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Europe ought to be a wake up call. David Murray on the future

Future Fund chief David Murray has backed Qantas in its dispute with its workforce saying unless it and companies like it tackle entrenched union privilege Australia risks the same fate as Europe. And he says the government is aping Europe by borrowing to buy votes.

“My European banking counterparts tell me they can’t cut jobs without offering three years redundancy,” he told an forecasting conference in Sydney. “We are creeping towards that in the new industrial relations framework. It gives unions a right to bargain in areas traditionally the management's prerogative.”

“Australia started out after the second world war making work arrangements a little bit more reliable, introducing the rule of law, but the process has gone too far - it gets to the point of unaffordability.”

“Qantas management have no option but to do what they are doing. They are running an unviable airline. With terrible productivity internationally they are hostage to competitors domestically.”

“The stakes are high. Qantas is not the only companies,” Mr Murray told the business economists.

Appointed chairman of the Future Fund in 2004 by Coalition Treasurer Peter Costello the former Commonwealth Bank chief steps down in April. He has already accepted a part-time role with the global investment bank Credit Suisse.

“I don’t see anything concrete on productivity,” he said. “I don’t see governments trying to wind back their debt positions rapidly, I don’t see people coming off subsidy arrangements for industry, in fact new arrangements are more the norm.”

“I would have thought what is happening in Europe would be one of the most timely wake up calls in Australia's history... Yet it is being completely ignored because we’ve had twenty years of growth. The size of complacency here is outrightly dangerous.”

“What is it that’s wrong? It is the process by which public debt is used to buy votes with the promises of entitlements. If you borrow to buy votes you are expropriating the savings of other people.”

Asked whether now was the right time to slash spending and cut back on debt Mr Murray said it was better to do it when unemployment was around 5 per cent than later when it went higher.

The carbon tax and the mining tax were also badly timed.

“Irrespective of what you believe about climate change, given what’s happening in the world the timing of the the policy response is not good at all. The timing of introduction of a mining tax when the terms of trade boom was just about to end is not good at all either.”

Mr Murray said a simpler way of redistributing mining income would have been to end the tax deductibility of royalty payments and use the proceeds to cut company tax. “It could be done in two lines of code, a few lines of legislation,” he said.

Mr Murray acknowledged that government debt was low by world standards, but he said Australia’s net foreign liabilities were high by world standards. “And its the second one that matters, because it’s all got to be repaid.”

Treasury chief economist David Gruen disagreed telling the conference later Australia had high foreign liabilities because it was investing a huge amount in order to “most likely generate future export earnings”.

“We have yet to get the output from the mining boom that we expect to see. Some of our productivity will recover naturally as those investments coming to fruition,” he said.

Published in today's SMH and Age


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