Here’s an example of why what passes for economic debate in this country, basically, sucks.
Two datasets came out yesterday: a consumer confidence index from Westpac, and the ABS’ quarterly Wage Price Index data. But they received very different media treatment.
The Westpac release was analysed by the media with all the forensic scrutiny of an ancient priest examining the entrails of the sacrificial offering. The Wage Price Index, which tracks changes in wages and salaries, sunk virtually without trace, apart from an AAP report, Alan Kohler using it as a chart (below the Westpac data) and a brief mention in The Australian Financial Review, buried in a story about the better consumer sentiment figures, under the headline “Confidence up despite low wages growth” (no mention of past claims of a “wages explosion” and how inflationary the resources investment boom was proving to be, or how industrial relations changes are needed to bring this supposedly terrible situation under control).
Now, the Westpac Consumer Confidence survey (Roy Morgan also does a long-standing one) is fine as far as it goes — it’s statistically rigorous and tracks an important factor in the economy. The problem is, however, that outside periods when there are major economic crises like the GFC, it doesn’t tell us a great deal about what people are actually doing — it’s merely what they feel (Greg Jericho wrote about this last year). Both the Westpac and Morgan indices bounce around, prompting detailed explanations of why there have been substantial shifts — but there’s virtually no correlation between the index and retail activity, for example, and little if any correlation between the separate “time to make major purchase” decisions and car and home sales.
In short, “consumer confidence” only tells us what people are saying they thinking. As Michael Pascoe pointed out, this means all sorts of other factors come into play — like the oft-observed impact of voting intention on people’s views of the economy. Consumer confidence indices don’t tell us what people are really thinking via their actions, which actually affect economic activity. US economist Paul Krugman disparagingly calls them the Expectations (for inflation) and Confidence fairies, or not very meaningful measures of anything substantial.
The Wage Cost Index, however, tells us what’s been happening in the real world, in workplaces across the country as employers look for staff and people look for work. It’s not what people think or feel, it’s real. And yesterday’s index was the equal lowest on record: in the year to June 30, wages grew on average at 2.9%, or 3% in trend terms.
That result confirms a couple of things: we are indeed growing below trend, as the RBA and Treasury claim. That is not the sort of outcome consistent with an economy performing well.
“… it’s a bit hard having a sensible economic debate when we’re not even interested in the actual evidence about how the economy is performing.”
Second, it yet again demonstrates that the business argument that Labor’s Fair Work Act is some sort of handbrake on the economy simply isn’t backed up by the facts. The Fair Work Act has delivered strong labour productivity growth and restrained wage growth for 18 months. Why does the Coalition and business want to change it? Why does the Business Council of Australia complain so much about Australia being a “high-cost, low-productivity” place to do business? It wouldn’t be partisanship in the face of reality, would it?
And by the way, for those like the Coalition and its cheerleaders at The Australian who want the return of the Australian Building and Construction Commission, with its abolition of the right to silence and powers to secretly interrogate any citizen, what does the WPI data reveal about construction? Wages in that industry grew by 3.6% over the last year — a period that includes the peak of the mining investment boom, during which mining companies sucked in as many construction workers as they could find to build new production capacity and major gas and mineral projects. Sound like an industry out of control?
If the WPI data had shown that wage costs had dramatically increased over the last quarter, do you think it would have got the offhand treatment from the media it received? No way. It would have been front-page news in the AFR, with an editorial hailing it as further evidence of the need for IR reform, with quotes from the BCA, the Australian Chamber of Commerce and Industry et al.
In its third Statement of Monetary Policy for the year last Friday, the Reserve Bank forecast “slower growth of wages and somewhat subdued employment growth are also expected to continue to restrain growth in labour income”.
“… the ongoing subdued conditions in the labour market and continued productivity growth are expected to exert some downward pressure on inflation. Unit labour cost growth has slowed significantly over the past year or so, and growth is expected to remain contained over the forecast horizon. Accordingly, domestically generated inflationary pressures are likely to remain moderate, contributing to lower inflation in non-tradable items in particular.”
So slow and low wage growth, the carbon tax hasn’t boosted inflation like the alarmists claimed it would and inflation isn’t the end of boom destroyer, as it has been in past booms.
But the media obsess over the minutiae of consumer confidence figures that tell us little about the actual state of the economy, and blithely ignore actual data because it doesn’t fit the preferred narrative. Then again, the Westpac consumer confidence index is promoted by a major bank, and if you want you can grill the bank’s excellent chief economist Bill Evans about it. The ABS just dumps its data out at 11.30 and leaves it for the media to pick up, or not.
Still, it’s a bit hard having a sensible economic debate when we’re not even interested in the actual evidence about how the economy is performing.