The discussion thread on Are Australian banks and supermarkets killing the goose that laid the golden egg? took us in the direction of perceptions. Here I want to deal with one element, our perceptions of the economy. kvd introduced this with a comment on interest rate concerns:
I can see where you're going on bank margins, but would suggest the implacable march to oblivion coming from your comments is tempered in my mind by having lived through far higher, and far longer extended high interest rate conditions......... Not saying we never had it so good; just saying things aren't so bad.
In subsequent comments, kvd referred to Michael Pascoe's Business battles long-term memory loss and then to Adele Horin's piece Battered by rising prices? Nonsense, you've never had it so good, study reveals. Both pieces deal with the apparent divergences between people's perceptions of the state of the economy and the apparent reality revealed by the statistical data.
It is true that things are not so bad in Australia if we compare the current situation with past points. The present economic position cannot be compared, for example, with the position at the depths of Mr Keating's recession that we all had to have back in the early 1990s. It is equally true that the human memory tends to be present focused. Our current concerns dominate. That said, people aren't dumb. If you get a common expression of view, in this case a concern about the economy, that seems to be at divergence with reality, you have to ask why. Is it real? If it's not real, why are people reacting that way?
I suppose that I should say immediately that the evidence is now showing that the popular perceptions about the state of economic activity are right. I quote from Peter Martin's Reserve downgrades economy and paves way for more rate cuts:
The Reserve Bank has dramatically downgraded its assessment of the Australian economy ahead of the budget, slashing its forecasts for growth and inflation and opening the door to further interest rate cuts.
The bank's latest quarterly review, released yesterday, predicts "subdued" jobs growth, "weak" building activity, "soft" government spending, weak business investment away from the mining sector and inflation near the bottom of its target band.
GDP growth is still projected to be in the range 3 to 3.5%, but a third of this is expected to come from net exports. Domestic activity is soft and very variable across the country.
A while back, Westpac economist Bill Evans went against the trend to predict economic slowdown. I had been writing on related issues, also pointing to structural imbalances, cautioning about obsessive focus on the apparent golden egg offered by the mining boom. However, I thought and to a degree still do, that Mr Evan's projections overstated emerging problems. However, it seems that he was closer to the mark than I.
Here I want to introduce the first point about perceptions, one that I have talked about before, the impact of statistical constructs. The idea of gross domestic product is a statistical construct, a single figure that combines many different things. It can mislead. If one part of the economy is doing very well, another larger part not, the statistics may show growth. Yet those in the larger part can be forgiven for thinking that things are bad, or at least not as good as presented. To them, there is a growing gap between the statistics and their perceptions of what is happening in the world around them.
In Top of worry list: work, work, work, Melissa Davey reports on research released by Macquarie University. I quote from the start of her piece:
AUSTRALIANS spend more time worrying about work than war, the environment, politics or any other broader issue.
In the first major study of the everyday worries of Australians, researchers from Macquarie University found ''future career'' concerns created the greatest anxiety for both men and women, while fear about ''the future'' and ''achievements'' also ranked in the top five.
From my experience, I think that's about right. Australia has become a deeply insecure society, with much of that insecurity centered on work. To understand this, you need to understand the statistics, but also drill down below the statistics to the underlying feelings.
In April, the Australian Bureau of Statistics released statistics on Employee Earnings, Benefits and Trade Union Membership, Australia, August 2011. These showed increases in average weekly earnings. However, they also suggested that 24% of the workforce had no paid leave entitlements. The Bureau suggested that this was a proxy for casual work, but it actually also includes contractors notionally paid a higher hourly rate in place of leave entitlements. The Bureau also reported that 7% of the workforce were owner managers of incorporated enterprises.
By its nature, contract and casual work is insecure. You just can't be sure when things might end, how long it might take to put new work in place. Often, you can't even be sure of your immediate income since this depends on days worked. A simple thing such as a decision to give staff early leave for Christmas or Easter, and who could argue with that, means reduced income. The compulsory Christmas shutdowns enforced in some organisations means that contractors and casuals can be without any form of income for a longer period.
Now consider the 7% of the workforce who are owner managers. Generally, they are small business people whose income too can be variable. They are directly affected by economic circumstances in the sectors in which they work, and we already know that conditions are soft in the majority of sectors within the economy.
But what about the 69% who have the protection of leave entitlements, who are in more regular employment? Note, first, that this group includes temporary employees, as well as those on time limited contracts. It also includes a large group acting in other jobs, often for long periods, who formally belong in lower positions. They have job, but not income security. They may know that they will be employed in six months time, but cannot be sure of their income.
Even those in what used to be called "permanent employment" who have no other working complications such as acting up face insecurity. As I write, every government in Australia is in the process of cutting staff numbers, as are many major corporations. Few at ordinary working level can be sure that jobs or income are safe. I am only guessing, but I suspect that at least 70% of the Australian workforce has some fear of loss of income or even job. Few of us can say with absolute certainty what our income will be in even six months.
This fear has profound effects on perceptions and behaviour.
Economist Milton Friedman developed the permanent income hypothesis. Seeking to explain why people save or spend, Friedman argued that how people spend depends on their long term income expectations. I think that's right. I think it explains why people are trying to save more, to run down debt.
I saw a classic example of this type of effect at lunch with a work friend this week. She loves riding and wants to buy a horse. However, her current contract finishes at 30 June and she doesn't know what will happen after that. "I love riding", she explained. "I really want to do it. But I can't take the risk when I don't know what my income will be."
Insecurity in one core area of life feeds into insecurities in many areas of life. It leads to a growing desire to avoid risks or threats. We seek to control that which we can control or, even, what we deeply desire to control regardless of the facts.
The stats may show that Australians are becoming better off. But for most of us, whether or not we have more money in our pocket now counts for little in an uncertain world. We have to decide whether to buy a horse with its long term costs, whether we will be able to actually pay for rent in six month's time, whether will will be able to fund commitments already entered into. The answer for many of us is that we just don't know.