Gittins' Gospel: The Economics of Just About Everything

By Ross Gittins

Can any other economics guru claim to write the column in a daily newspaper that people turn to first?Or to pack the auditorium at a literary festival? Be it climate change, productivity, fairness, industrial relations, terrorism, media, the mining boom, the GFC, refugees, or even economists themselves, every thorny topic under the sun is covered in sane and rational fashion. Gittins' Gospel collects the best of Ross's dispatches and explains almost everything you need to know about how Australia and the world works. And where it's going.

• Language: English
• Publisher: Allen Unwin
• Release date: Feb 1, 2013
• ISBN: 9781743432457

Book preview

GITTINS’ GOSPEL

GITTINS’

GOSPEL

The economics of

just about everything

ROSS GITTINS

First published in Australia in 2012

Copyright © Ross Gittins 2012

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act.

Allen & Unwin

Sydney, Melbourne, Auckland, London

83 Alexander Street

Crows Nest NSW 2065

Cataloguing-in-Publication details are available from the National Library of Australia

www.trove.nla.gov.au

ISBN 978  1  74331  355  8

Typeset in 12.5/15pt Centaur by Midland Typesetters, Australia

Printed and bound in Australia by McPherson’s Printing Group

10  9  8  7  6  5  4  3  2  1

Contents

Chapter 1 Introduction: The gospel according to Gittins

Chapter 2 Vintage Gittins

Living longer, retiring later

Markets are good—but need regulating

Competition: a two-way street

Politicians trash their credibility

The sanctification of selfishness

Why political rivalry reduces voters’ options

We’re making ourselves ungovernable

Professed reformers condone nonsense on cost of living

The Poor Little Australia Party

Terrorism: vast cost to feel a little more secure

Chapter 3 We’re only human

A little self-deception makes the world go round

We’re all hypocrites

Getting in for your cut

How our brains work

Why we hate boat people

Evolution, scarcity and self-control

Why everything’s relative

We’re into co-operation as well as competition

Why we all pursue happiness

Holidays are a virtue

Chapter 4 A better way of working

More sensible capitalism

Don’t ask an economist how to motivate people

Memo managers: happier workers work better

Aristotle to the rescue

Chapter 5 We’re slipping on the fairness front

Income gap is widening

How the other half lives

CEOs are ripping it off. So?

Chapter 6 Lies, damned lies and independent modelling

They don’t come more blatant than this

Modeller works both sides of street

Let the punter beware of business carbon claims

Chapter 7 The media: love ’em and hate ’em

News isn’t normal

Too much economic news for our own good

Media add to cost of crime

Trust—and how it’s being lost

How economic reporting can mislead

Chapter 8 We’ve only got one planet

We can’t pretend climate change isn’t happening

The logic of the carbon tax package

Welcome to Planet O

We can’t ask nature to be reasonable

Treasury’s notion of wellbeing

Boffins working to fix GDP

Beware of economists selling high immigration

Growth without growth

Chapter 9 An economic espresso: strong but short

Economics in 10 points

Four rules to think like an economist

Foreign investment in Australia

The role of the sharemarket

Economists’ views more political than they admit

Economic edifice built on our moods

Chapter 10 Biggest boom since the gold rush

This boom will change us forever

Sure you’re getting your cut

We’ve got a lot more than mining going for us

Chapter 11 Change is accelerating

A century of structural change

Nouveau riche countries take over world economy

Why our saving rate has returned to normal

Consumers shifting from goods to services

The internet’s threat to retailers

Internet commerce will foster price competition

Internet is bringing big change and big benefits

Chapter 12 The never-ending GFC

What caused it

Economists part of America’s Inside Job

This time wasn’t different

We did have a recession, but here’s why it was so mild

Don’t even think it: independent advice can’t be bought

Europe is in trouble—but we don’t have to worry

Chapter 13 Budgets, deficits and debt

Deficit and debt are bogey-words

Tax reform: the last thing we want

How Australia keeps taxes low

No one’s trying to minimise government waste

Don’t make taxpayers subsidise status seeking

Chapter 14 Our productivity puzzle

We have stopped attending the economic church

We could get richer by beating ourselves up

Shouting slogans won’t advance Fair Work debate

Why economists don’t know much about productivity

Maybe economic reform is actually worsening productivity

Productivity performance is weak for good reasons

Afterword

Chapter 1

INTRODUCTION: THE GOSPEL ACCORDING TO GITTINS

You need to know my father was a preacher, and I take after him. For 45 years my father, a corps officer of the Salvation Army, preached sermons almost every Sunday morning and evening to the tiny congregations of a long succession of churches across Queensland and New South Wales. He wasn’t a fire-and-brimstone man, more a Bible teacher.

So it doesn’t really surprise me that I’ve ended up spending more than 30 years writing three columns a week for the Sydney Morning Herald and, more recently, The Age. I, too, am more teacher than preacher. But journalists aren’t supposed to teach, so I say I’m an exponent of ‘explanatory journalism’.

Economics—the study of the everyday business of life—is an obviously important subject, but many find its jargon and figures offputting, even incomprehensible. So I’ve spent my career trying to explain economics and the workings of the economy to my readers. As you’ll see in many of the columns in this collection, often I act as a translator, taking an article or speech by some economic authority and turning it into something I hope the educated reader finds accessible and interesting.

I’ve been explaining economics to myself, too. Although I have three years of economics in my commerce degree, I’d forgotten most of it before I left chartered accounting, became a cadet journalist and had the editor suggest I specialise in economic reporting. So I’ve been learning as I’ve gone along. Even today I continue exploring conventional—and, increasingly, unconventional—economics, so my views have evolved over the years.

In the early part of my career I acted as self-appointed missionary for the economics profession, not just explaining what it was on about—something I still do—but seeking to convert my readers to the economists’ way of thinking. These days—being older and, I hope, wiser—I take a more agnostic line, not necessarily endorsing all the propositions I explain.

It took me far too long to realise that all my loyalty was owed to my readers. These days I offer them not just an explanation of official economic policy but also—much like the paper’s theatre critic—a critique of economics, economists and economic arguments. Try to mislead my readers with a bit of pseudo-economic bulldust and it’s my duty to call you out.

But if I were going to criticise politicians and lobby groups my approach isn’t to keep shifting to the opposite position just for the sake of fault-finding. I prefer to assess their arguments and performance from a fixed position, one determined not by partisanship but by my (evolving) view of how the world works and my values concerning the way it should work. If you can detect signs of my upbringing in those values—particularly the columns in Chapter 2—it’s not something I’m ashamed of.

Despite my role as readers’ servant, I am expected to take a position—readers hate wishy-washy, two-handed economists—and over the years I have acquired some pretty firm views about how the world works and could work better. So this collection of my columns—covering just the past three years—has been chosen to include those I thought you wouldn’t mind reading again, but also to highlight the main messages I’ve been trying to get over.

That’s what I mean by Gittins’ Gospel. The continuing themes in my work. The essence of what I believe about economics, politics and life. But without any claim to divine inspiration (!) nor any implication that my best version of the truth could remotely be regarded as gospel truth.

What you’ll find in this book can be regarded as ‘good news’, however, in the sense that I’m no pessimist nor alarmist and stand against the media’s excessive preoccupation with bad news and their predilection for finding the worst in everything.

One tenet of my gospel is that conventional economics incorporates a quite inadequate and misleading model of human behaviour. Psychologists, sociologists, neuroscientists and evolutionary biologists have a much richer understanding of how we tick. Chapter 3, ‘We’re only human’, brings together many of the interesting things I’ve found as I’ve explored this wider scholarship.

Another tenet is that there’s more to life than the single-minded pursuit of an ever-higher material standard of living that many business people, economists and politicians seem to think is our raison d’être. Work can be seen as a necessary evil in pursuit of money, or as a source of enjoyment in its own right, given the right attitudes and arrangements. Chapter 4, ‘A better way of working’, explores the ways our working lives could be made more satisfying. This would not bring capitalism crashing to its knees, and could quite conceivably make workplaces more productive as well as more enjoyable.

I believe the fruits of our remarkably successful economy should be distributed reasonably fairly between us. In recent years, however, the distribution has become more unequal, as I explain in Chapter 5, ‘We’re slipping on the fairness front’.

It’s become fashionable for governments and interest groups to advance their case by quoting the results of economic modelling. But, paradoxically, modelling is both surprisingly primitive and hugely complicated. And most modelling exercises rest on carefully selected assumptions, meaning they don’t actually prove what their sponsors say they do. Chapter 6, ‘Lies, damned lies and independent modelling’, exposes four cases where modelling has been used to bamboozle non-economists. My conscience tells me I should do more of this.

I love being a journalist and the pulpit it gives me to shout my views to the world. Our lives—and our governance—would be much poorer without the media. But many people misunderstand what the news media do and the way they do it. The media need to come with a consumer warning, which is what I try to provide in Chapter 7, ‘The media: love ’em and hate ’em’.

The older I get the more convinced I become of the need to protect our natural environment. This should certainly be a core activity for economists. The ‘economic way of thinking’ puts the economy in one box and the environment in another. But the global economy is built on the global ecosystem, so they need to be in the same conceptual box. Economic activity adversely affects the ecosystem and, when that damage reaches a critical point, it can rebound on the economy, causing great loss and disruption. I explore this interrelationship in Chapter 8, ‘We’ve only got one planet’.

My critique of the inadequacies of conventional economics shouldn’t be taken to imply that I regard it as of little value. Quite the contrary. So in Chapter 9, ‘An economic espresso: strong but short’, I offer a primer on the key insights of the discipline.

In recent years—and in many years to come—no development has had more profound effects on the economy, favourable and unfavourable, than the resources boom. It’s a subject that fascinates me, but in Chapter 10, ‘Biggest boom since the gold rush’, I’ve selected just three articles from all those I’ve written. A point I’ve stressed is that, unlike earlier commodity booms, this one is more ‘structural’ (lasting) than ‘cyclical’ (temporary).

The resources boom will change the structure of our economy, but it is by no means the only structural change affecting us at present. As I argue in Chapter 11, ‘Change is accelerating’, our belated return to a more normal rate of household saving has implications for our retailers, as does consumers’ hastening shift from goods to services. Longer term, however, the rise of the internet will have much bigger implications, as it already is having for newspapers, books, movies and recorded music.

If the biggest shock to hit Australia in decades is the resources boom, the biggest to hit the world is the global financial crisis. Chapter 12, ‘The never-ending GFC’, limits to six the number of articles in which I attempt to assess its causes and consequences. But it’s far too soon to make a final assessment.

Sometimes even someone with his own gospel to preach can’t avoid being waylaid by the wrong-headed excitements of the moment. Chapter 13, ‘Budgets, deficits and debt’, tries to keep it short and sensible.

By contrast, the less-sensationalised debate about our weak rate of improvement in productivity—output per hour worked—and what should be done about it is far more worthy of attention. Ever-improving productivity lies at the very heart of the developed world’s ever-improving material standard of living. For those so committed to continuing that apparent progress, nothing could be more important. Surprisingly, however, most contributors to the debate have devoted little time to ascertaining the causes of our seemingly weak performance in their rush to use the presumed problem as a justification for their pet proposals. In Chapter 14, ‘Our productivity puzzle’, I collect together my own, far more sceptical and idiosyncratic contributions.

For my convenience, this book uses the versions of my columns I submitted to the Herald’s sub-editors, rather than the versions published. A few are a little longer than those published. I’ve also written my own, more descriptive, headlines. The figures quoted in the columns were accurate at the time when I wrote them, but may have changed (or been revised) since then.

My thanks to Patrick Gallagher of Allen & Unwin for seeing the potential of such a collection long before I did. And thanks to my succession of long-suffering editors at the Herald: Alan Oakley, Peter Fray and Amanda Wilson.

Chapter 2

VINTAGE GITTINS

Wednesday, 27 May 2009

Living longer, retiring later

Work till you drop. John Howard talked about it, now Kevin Rudd’s done it. If you’re appalled by the decision to raise the age pension to 67 years, my advice is to get used to it. There’s more of it to come because a lot of factors are pushing in that direction.

Governments throughout the developed world are edging up the pension age. The United States, Germany, Iceland, Norway and Denmark are moving their retirement age to 67, if they’re not there already. Britain is moving its pension age to 68.

Are they all doing it to save the taxpayer money? Of course. But that doesn’t stop it being a sensible move. If we—and, more particularly, our children and grandchildren—were prepared to pay a lot more in taxation it wouldn’t be necessary but, since they will be no keener on that idea than we are, it is.

We had the first inkling that things were moving in this direction as long ago as 1993, when Paul Keating decided to slowly raise the pension age for women from 60 to 65.

The pension age for men hasn’t changed from 65 since the age pension was introduced 100 years ago. Then, only about half of all men reached the pension age. Those who did could have expected to spend 11 years in retirement. These days, more that 85 per cent of males make it to 65, and those who do can expect to spend more than 19 years in retirement.

Those comparisons give you some idea of how much more expensive to taxpayers the age pension has become. But they also demonstrate how much longer we’re living.

Increased longevity is the first reason the average age of the population is rising. The long-term decline in the fertility rate is the other reason. So we have the proportion of the population in retirement growing while the proportion of working age declines. (And then you have the imminent retirement of the bulge of baby-boomers to make the problem of population ageing acute as well as chronic.)

When you think about it, it doesn’t make much sense for all of our increasing longevity to be spent in retirement. Especially not when, along with our longer lives, we’re also healthier.

When my father was the age I am now, I was 19. And, like all teenage sons, I was casting a keen and critical eye over my dad. I’ve realised only lately that by then my father was long past his prime, on the downhill run to retirement.

It was only when my older sisters told me of the lengths to which he had gone to help the itinerant unemployed who flocked to the back door of his Salvation Army quarters in country Queensland during the Depression that I realised how much I had underestimated him.

By contrast, I like to think that, at 61, I’m still in my prime, neither old nor tired (but, in truth, not as physically fit as he was, nor as saintly).

If these days we’re in better shape than our parents were at the same age, it makes sense for us to retire later—especially since increased education means we’re joining the workforce ever later.

Our growing affluence could allow us to work less and enjoy more leisure, it’s true. But it makes more sense for us to do that by working fewer hours each week than by devoting fewer years of our life to paid work. (The fact that in recent decades we haven’t chosen to take our increased productivity in the form of leisure rather than income is a sign of our greater materialism.)

I’m a great believer in the virtue of work. Humans are a working animal; we derive much satisfaction, meaning and self-identity from our work. It’s a common delusion to imagine our lives will suddenly be a lot happier once we’re able to stop working. Happiness and healthiness in retirement seem to turn heavily on our ability to keep active—both physically and mentally. It wouldn’t surprise me if it could be shown that those who retire later end up living longer. Humans are a working animal.

The fact that we’re in better shape for work than our parents were at the same age—and that our kids will be in better shape than we are—is partly a product of higher levels of general health, but also a product of the less arduous work we do, thanks to technological advances. Even those of us who continue to do physical labour would these days do it with the aid of a lot more labour-saving equipment.

But what then of the bitter objections from some unions that their members, having been doing heavy work since they left school at 15, just couldn’t keep it up for another two years without many accidents and much expense? I suspect that, as always when interest groups are seeking public sympathy in their efforts to lobby government, the unions are laying it on a bit thick.

More fundamentally, we simply can’t design an economy-wide pension system for the 21st century around the peculiar needs of an ever-diminishing minority of manual labourers.

What you do in such cases is make special arrangements to deal with the minority’s problem. In this case, those arrangements have long existed. When physical workers’ bodies are so broken they can no longer be gainfully employed, they go onto the disability support pension (which is little different to the age pension) until they reach the age pension age.

I don’t doubt that, assuming life expectancy continues to increase over the 21st century, the pension age will be raised further. In the meantime, the government has before it a far more controversial recommendation that the age at which people may gain access to their superannuation savings be raised from the present 55 (or, on a tax-free basis, 60) to the new 67.

Raising the retirement age gives both taxpayers and the individual a double benefit: more years to save in preparation for fewer years without income from a wage.

And remember that lifting the pension age only partly covers the huge long-term cost of Rudd’s related decision to raise the base rate of the age pension.

Wednesday, 9 September 2009

Markets are good—but need regulating

One of the things you’re supposed to learn in economics is to avoid extremes. It’s never all or nothing. Everything has advantages and disadvantages. And any way you jump has an opportunity cost, because there are lots of things you’d like to do with your limited means. So life is about trade-offs between rival objectives, and you should optimise rather than maximise.

That’s what economics teaches, but it’s not always what economists do. A big part of the reason for the global financial crisis—which reached its apogee almost a year ago—was the dominance of an extreme view that the market system could work well with minimal government supervision.

Although we in Australia seem to have escaped the worst consequences of the financial crisis, we suffered the same intellectual delusion, which was manifest in other, thankfully less important, areas. So, just as the Americans and Europeans need to learn a lesson, we do too.

Humans have been buying and selling goods in markets for millennia and we’ll probably go on doing so for as long as the planet lasts. Markets are undoubtedly an efficient way to conduct economic activity and they do impose their own discipline on their participants.

The problem comes when markets are seen as a ‘system’ possessed of almost magical powers to never run off the rails and always deliver satisfactory outcomes without government interference.

There’s no such thing as a ‘free market’—all markets are regulated by governments to a greater or lesser extent. It’s just that, over the past 30 years, the intellectual fashion swung heavily in the direction of minimising regulation. We dismantled a lot of the safety rails. And we had regulators who doubted the wisdom of regulation.

The events of the global financial crisis were a stark reminder that markets are populated by fallible human beings, subject to greed, envy and fear, short-sightedness, gullibility and rapaciousness. So markets are far from perfect. They need to operate within a government-imposed framework and be diligently regulated to ensure rules are obeyed.

This is particularly true of financial markets, which are capable of blowing up huge bubbles in real estate, share and other markets. The sudden bursting of these bubbles is capable of bringing the whole economy to its knees.

To avert utter collapse, governments in the United States, Britain and Europe swung from one extreme to the other, stepping into the market to rescue failing banks and other financial institutions and give blanket guarantees on bank borrowings.

Australia managed to avoid most of this financial turmoil because our financial regulators never bought the full markets-can-do-no-wrong package. Successive federal governments’ prohibition on mergers between our big four banks had the side-benefit of stopping them getting into much trouble.

The severe recession of the early 1990s, which was caused to a fair extent by the excessive borrowing and lending that followed the deregulation of our financial system, was still fresh in the minds of our econocrats. For good measure, the caning our chief financial regulator, the Australian Prudential Regulation Authority, got following the collapse of the HIH insurance group left it very much in vigilance mode.

Even so, Australia has had its share of excessive faith in markets. One manifestation has been to turn over to market forces aspects of life that were formerly outside the market’s sphere. The commercialisation of sport is an obvious example.

But a more telling one was the decision to turn child care into a market by extending government subsidies to for-profit providers. What a disaster that proved to be. The authorities watched on with mute approval while ABC Learning found ways to exploit the system and establish itself as the dominant player, before overreaching itself and collapsing in a heap at great inconvenience to