Luckily Qld property prices never reached crazy levels that NSW’s and Victoria’s did – now less room to fall

Michael Janda at ABC News has a good summary of the residential property price data for December quarter published yesterday by the ABS:

Australia’s $133 billion property price slide rapidly becoming the worst in modern history

This correction has been a long time coming. Then RBA Governor Glenn Stevens warned about Sydney’s “crazy” house prices in mid-2015. Incidentally, following the Governor’s comments which were made at an ESA Queensland business lunch,  I set a UQ ECON2040 Macroeconomic Policy assignment on the implications for monetary policy of the housing price bubble. And in early 2017 I posted:

Sydney & Melbourne house prices defy rational explanation

As I’ve noted in a previous post, Howard Marks’s 2018 book Mastering the Market Cycle is recommended reading on economic cycles and the implications for investing, and he is especially lucid on real estate (on p. 169):

Much of investing is subject to gross generalizations and sweeping statements—usually stressing the positives, because of humans’ tendency toward greed and wishful thinking—and for some reason this seems particularly true in real estate. Over the course of my career I’ve heard investment in real estate rationalized by easily digested statements like “they’re not making any more” (in connection with land), “you can always live in it” (in connection with houses), and “it’s a hedge against inflation”…What people eventually learn is that regardless of the merit behind the statements, they won’t protect an investment that was made at too high a price.

A lot of investors in the Sydney and Melbourne markets are learning that now, and we are now seeing an adverse wealth effect drag on consumption spending. Luckily Queensland property prices never reached the crazy levels they did in Sydney and Melbourne and falls in local property prices have been slight so far (see chart below), with the exception of inner-Brisbane city apartments. Partly, that would have been because we have had more mixed economic circumstances than other states in recent years.

meanprices

As I’ve noted before, I undertake my data analysis and charting using R, the data science programming language, which I can’t recommend highly enough. I’m trying to convert others to using R and am running an upcoming course:

Data science with R: Introduction with a focus on ABS economic data

If you regularly analyse and chart ABS data, I would recommend attending my training day and learning how you can save huge amounts of time in your data analysis and charting. The early bird registration fee expires this Friday.

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The 7 habits of highly effective economists Part 2 – Habits 4 to 7: Public victory & renewal habits

7habitsI have previously posted Part 1 of the 7 habits of highly effective economists in which I covered the first three habits. This post covers the remaining four. The 7 habits were first defined by the late Stephen R. Covey in his brilliant 1989 book The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change.

Habit 4. Think Win/Win

The habit of thinking “win/win” should come naturally to economists, who regularly preach the gains from voluntary exchange between individuals and trade between nations. Earlier this week, former Trump economic adviser Gary Cohn made some newsworthy observations to Stephen Dubner on Freakonomics Radio about how the vast majority of economists support free trade, but alas one of the few who don’t, Peter Navarro, has the ear of President Trump. The interview is well worth listening to:

A free trade Democrat in the Trump White House

Regarding policy advice, thinking win/win, or recognising the gains from trade, economists should generally support policies that promote better economic performance, recognising that policies that enhance productivity can provide additional income that can partly be redistributed to compensate any losers from policy change. Literally, a rising tide lifts all boats, but that isn’t always the case when it comes to economic matters. Many policy changes will create losers as well as winners. But we can often find a set of policies that improve economic outcomes and compensates the losers so that most people are better off.

A good example of this is the introduction of the GST in 2000. Remembering that John Hewson lost the 1993 election campaigning for a GST, the Howard government was very careful in designing a tax reform package that would have wide appeal. John Kehoe wrote a good summary of the deliberations around the GST package in the AFR in 2010 in his article GST: the reform that divided a nation:

In the cabinet meetings, Treasury’s [Ken] Henry explained the distributional effects of the GST across all income groups, taking into account things like tax cuts and pension increases. The modelling was used to assure ministers that taxpayers would not be worse off.

Petrol prices were politically sensitive, so the excise rate was cut to offset the GST to ensure pump prices “need not rise”.

This is a good example of how economists should look for and can help design “win/win” policy solutions.

Habit 5. Seek first to understand, then to be understood

This habit is important for economists, because there is a risk we can become narrowly focussed on economic issues in a discussion, and not realise that the reason we have trouble communicating with some readers or listeners is because they are placing a much higher weight on social or environmental criteria.

There is also a risk economists can fall in love with their models, and not realise that one of our elegant abstract models is not always applicable. I don’t fully agree with him, but it’s worth reading former PIMCO CEO Mohamed El-Erian’s latest criticism of the economics profession, Why economics must get broader before it gets better, because it does highlight how economists usually need to think more laterally than their existing models to engage meaningfully in policy debates and influence decision makers. El-Erian is particularly critical of economists for their contributions to the recent US-China trade war debate:

So far, the vast majority of economists have trotted out the conventional argument that tariffs (real or threatened) are always bad for everyone. In doing so, they have ignored work from their own profession showing how the promised benefits of trade, while substantial, can be undermined by market and institutional imperfections. Those who wanted to make a productive contribution to the debate should have taken a more nuanced approach, applying tools from game theory to distinguish between the “what” and the “how” of trade warfare.

While I don’t support Trump’s trade war, I would concede there is a need for economists promoting free trade to try to understand why Trump started the trade war in the first place. Maybe he will secure some concessions from China on intellectual property protection and market access. That said, it seems like a costly and risky way to try to achieve that outcome to me.

Habit 6. Synergise

Habit 6 has become a cliché in business now, so I won’t write too much on it. I’d simply observe that economists have the greatest opportunities to synergise when they work with non-economists and where both understand each other’s perspectives and learn from each other. A good example is economists working with engineers.

Economists and engineers need each other, more than they often think. The late great UK economist Ralph Turvey instructs economists on the importance of working with engineers in a working paper from 2000 What are marginal costs and how to estimate them?  He notes that the economist’s concept of marginal cost, the additional cost associated with an incremental change in output, is not as easy to measure as textbooks suggest, and that where operations involve significant capital equipment:

…marginal cost is an engineering estimate of the effect upon the future time stream of outlays of a postulated change in the future time stream of output. There are as many marginal costs as there are conceivable postulated changes. Estimating any of them usually requires engineering and, often, operational research skills. It rarely requires accounting skills.

So economists involved in water regulation and pricing for example need to work with engineers who know what future augmentations (e.g. dam upgrades, desalination plants, etc) could meet future demand requirements.

The role of the economist is to work with the engineers and advise decision makers on the most cost-effective way of satisfying future demands. To give a Queensland example, I recall how my former Marsden Jacob colleague and good friend the late Dr Tony Hand worked extensively with engineers (and with Peter Jacob) to produce the cost-benefit analysis for the Traveston Crossing Dam, which was identified as “the most cost effective and beneficial water storage option for South East Queensland” (see this Bligh government media release) during SEQ’s water crisis in the 2000s. The dam never went ahead, however, as the federal Environment Minister Peter Garrett was concerned about the proposed dam’s impacts on turtles and lungfish.

Habit 7. Sharpen the saw

The previous habits I’ve covered in this post are referred to by Covey as the habits of public victory, as they help us succeed in the public domain. The final habit reinforces the habits for public victory, as well as the habits for private victory. It is the habit of renewal or self-improvement: sharpen the saw.

Economists can sharpen the saw in various ways. We can keep up with current economic and financial issues, by reading local newspapers but also the Financial Times and the Economist, for example. Several blogs are also well worth reading and you can find some links on my QEW blogroll. Increasingly, one of the best ways to keep up with economic news and views is through podcasts, and my favourites are EconTalk, Macro Musings, Freakonomics Radio, and the Bulletin with UBS. I also find it useful to scan recent issues of economic journals, particularly the more policy oriented ones, like the Oxford Review of Economic Policy and Journal of Economic Perspectives, as well as the latest think tank (e.g. CIS, Grattan) publications.

Finally, I think economists should learn other skills, such as public speaking and a data science programming language (e.g. see my post How you can automate ABS data analysis and charting using R). I think Dilbert creator Scott Adams was spot on when he noted to Tim Ferriss who interviewed him for Tools of Titans (pp. 269-270) that:

Capitalism rewards things that are both rare and valuable. You make yourself rare by combining two or more “pretty goods” until no one else has your mix…At least one of the skills in your mixture should involve communication, either written or verbal…It sounds like generic advice, but you’d be hard pressed to find any successful person who didn’t have about three skills in the top 25%.

That’s great advice for economists wishing to become highly effective.

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Credit cycle in downswing phase

credit_total

There is a lot of disappointing economic data coming out for Australia lately. Today the ABS released its January 2019 Lending to households and businesses estimates which  confirmed the credit cycle is in the downswing phase (see chart above). This is related to a range of factors, including a weaker property market and falling house prices in Sydney and Melbourne, tighter lending standards possibly related to the banking Royal Commission, and slowing economic activity nationwide, and it will likely reinforce the slowing down of the economy. As legendary US investment fund manager Howard Marks explains in his latest book Mastering the Market Cycle (on p. 137):

…the credit cycle…is both highly responsive to economic developments and highly influential. Lastly it is also extremely volatile. Thus its movements are powerful and extreme, and they greatly affect activity in many other areas. And all these things are exacerbated by the swings of psychology…

When credit was growing strongly it supported residential construction and flowed into rising house prices and capital gains which supported consumption spending. But now that wealth effect on consumption spending has reversed and residential construction activity is falling.

Lending to households for both owner occupied and investment properties has fallen massively (see chart below).

credit_households

While business lending recorded strong growth of around 11% in seasonally adjusted terms in January, I don’t think that indicates any upswing in business lending as business lending is highly variable from month-to-month and the trend measure continued to decline in January (see chart below).

credit_businesses

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The 7 habits of highly effective economists – Part 1: Habits 1 to 3 for private victory

I’ve recently become a huge fan of Tim Ferriss’s extraordinary podcast The Tim Ferriss Show. One of the questions Tim regularly asks his super-successful guests is:

What is the book (or books) you’ve given most as a gift, and why? Or what are the one to three books that have greatly influenced your life?

One book I have lent to people in the past, and which has certainly had a great influence on me, is Stephen R. Covey’s The 7 Habits of Highly Effective People published in 1989. It was popular among commerce and economics students when I started studying at UQ in the early nineties, and I have periodically returned to the book ever since. I thought of 7 Habits when I heard Tim ask the question noted above on one of his podcast episodes, and I started thinking about what the seven habits of highly effective economists would be.

In this post and a subsequent post, I will provide my views on what the 7 Habits mean for economists. This post covers the first three habits, the habits for what Covey calls “private victory”, and I’ll cover the remainder in a future post.

7habits

Habit 1. Be proactive

The principle behind this habit is that, to a large extent, you are master of your own destiny. You have more potential influence than you realise. Recognising this can be very useful for economists, who can often become frustrated when decision makers such as government ministers or regulators don’t follow their advice. Think for example of economists or so-called “econocrats” in the Canberra public service, who were incredibly influential in the periods of micro-economic reform in the 1980s and National Competition Policy and tax reform in the 1990s, but who have since found the era of structural reform, for lack of a better term, is over. Since then, multiple grand economic policy schemes, including the Carbon Pollution Reduction Scheme, the Resource Super Profits Tax, and, more recently, the National Energy Guarantee, have failed to secure the political support they needed.

It would be easy for economists to blame politicians, to blame them for being short-sighted and ignorant, but that would be (mostly) unfair, and it would also be unhelpful. If politicians or the community don’t accept your advice, as an economist you need to recognise that either:

  1. your facts and arguments were not strong enough and you need to do better next time, or
  2. the decision was influenced by important non-economic considerations (e.g. social or environmental) on which economists are not necessarily the right people to advise decision makers.

Once you recognise the reason why your advice was not followed, you may learn something that can help you influence decision makers in the future. Consider, for example, how many times the most famous economist of the 20th century, John Maynard Keynes, failed to convince decision makers on important economic issues. His advice not to punish Germany was rejected by Lloyd George at the Paris Peace Conference in 1919, and his advice against putting Britain back on the gold standard was rejected by Churchill, then Chancellor of the Exchequer, in 1925, with disastrous economic consequences. Keynes was right, but he failed to convince Churchill, who listened instead to the voices of conventional finance, particularly Montagu Norman of the Bank of England, who wanted Britain back on the gold standard.

After such huge failures, did Keynes give up? Of course not, he continued working and writing books and articles, for both his fellow academic economists and ordinary people, and eventually in 1936 he wrote the General Theory of Employment, Interest and Money, the book that changed everything. Keynes then won the most important debate of all, regarding how the government should manage the economy. The mixed economy we have today, with government accounting for one-third or more of GDP in advanced economies, was given intellectual justification by Keynes. He was the inspiration for what John Kenneth Galbraith called the “Mandarin Revolution” in Galbraith’s outstanding late 1970’s BBC television series The Age of Uncertainty.

For those who are averse to Keynes, you might like to think instead of Milton Friedman, who spent decades arguing for free market policies, and who saw the US federal government massively expand its influence in the sixties and seventies, before his ideas were adopted to varying degrees in the US, UK and many other economies. Of course, Friedman’s great contribution to macroeconomic policy, monetarism, was a complete failure, sending Thatcher’s Britain into deep recession in the early 1980s, although economists did learn a lot about how monetary policy actually works from the British monetarist experiment.

So, if you’re an economist and you feel you’re under-achieving, I would say that the habit of being proactive is a good place to start. Don’t wait for your employer, clients, politicians or journalists or whoever you want to influence to ask for your analysis and views. Do the work and publish it, in blogs or discussion papers, or record your thoughts in podcasts or videos. Seek out opportunities to assist people who need your help. So if you hear someone on the radio or see them on the TV, and you think they could benefit from some information or analysis you could provide, then get in touch with them and share your knowledge and wisdom.

Habit 2. Begin with the end in mind

This habit is equivalent to Simon Sinek’s instruction to Start with Why. (If you haven’t watched his amazing TED Talk yet I highly recommend it.) As an economist, you should recognise that you’re usually trying to either:

  1. write or say something useful and interesting about the economy or an aspect of the economy – e.g. whether Australia is on the brink of a recession or not, or
  2. assessing whether a project or policy measure is sensible from an economic perspective.

Generally, you’re trying to better understand economic issues and to communicate your understanding to an audience. While ongoing academic research in economics is important and essential, I believe that economists provide the most value by contributing to the public’s understanding of economic issues. As an economist you should aim to improve the community’s understanding of economic issues and to solve economic problems. To do this successfully, you will need to understand the relevant economic phenomena, project, or policy so well that you can clearly articulate your analysis and advice to any educated layperson, not just to your fellow economists. You may need to do much more research and data analysis than you expect, and you might like to discuss your findings and opinions with colleagues, to test your understanding, assumptions, and findings.

Regarding this habit, I would note that economists need to choose the tools that are best suited to the job in hand. Don’t use a theoretical or econometric model just because you think it’s elegant or clever, or because you want to show off. Use the most appropriate tool for the job. As Paul Krugman noted in his 2018 Oxford Review of Economic Policy article Good enough for government work?:

This paper argues that when the financial crisis came policy-makers relied on some version of the Hicksian sticky-price IS-LM as their default model; these models were ‘good enough for government work’. While there have been many incremental changes suggested to the DSGE model, there has been no single ‘big new idea’ because the even simpler IS-LM type models were what worked well. In particular, the policy responses based on IS-LM were appropriate.

The financial crisis was a huge blow to those technically brilliant economists who had spent many hours learning and building theoretically elegant but practically useless Dynamic Stochastic General Equilibrium (DSGE) models. I made a similar point in the discussion time after LSE Professor Mary Morgan’s public lecture on economic modelling at UQ in 2016. Similar to other professionals, economists need to focus on solving the problem in hand, as directly and efficiently as possible.

Habit 3. Put first things first

Some readers have probably been introduced to this habit in time management courses that have taught the time management matrix introduced in 7 Habits. You are implored to devote time to the non-urgent, important work that can really advance your career. You are to avoid any unimportant work.

In recent years, Georgetown computer science professor Cal Newport has shown us how to carve out big chunks of time to undertake the non-urgent, important work, such as research on important issues, writing a book, composing a symphony, or doing whatever is important to you. Newport talks about the importance of Deep Work and gives you tactics for doing it (e.g. avoiding the internet as much as possible, ignoring most emails which are usually inconsequential, or more radically giving up Facebook and other social media completely).

For economists, deep work involves such things as writing reports, articles and books, and doing the data analysis and thinking that support these outputs. Economics is a challenging discipline, and you need large amounts of uninterrupted time to do the work. That’s why I generally avoid meetings unless they are absolutely necessary for projects I’m working on, and I’ve tried to create as comfortable an office for myself as possible, so I’m happy to spend lots of time in it working on projects, articles and speeches (e.g. see photos below). If I didn’t have a quiet place where I can work without interruptions like my office, I doubt I ever would have finished my book Beautiful One Day, Broke the Next. Writing that book was a good example of how difficult it can be to complete big projects involving deep work. I originally thought I’d finish it in 3-4 months but it ended up taking me nearly two years, including lots of after-hours time in the office.

IMG_1431

A bit of greenery and natural light are essential in an office

The habit to put first things first also involves, according to Covey, such things as:

…building relationships, writing a personal mission statement, long-range planning, exercising, preventive maintenance, preparation—all those things we know we need to do, but somehow seldom get around to doing, because they aren’t urgent.

An example of how I’ve put this habit into practice in recent years is my development of a set of scripts, written in the freeware programming language R, to automate a lot of my data analysis. This has saved me many hours and avoided lots of frustration with notoriously unreliable and unstable Excel workbooks, as discussed in my recent post:

How you can automate ABS data analysis and charting using R – preview of my upcoming course

I’ve now discussed the first three of the seven habits. The remaining habits, which I’ll discuss in a future post are:

  1. Think win/win
  2. Seek first to understand, then to be understood
  3. Synergise
  4. Sharpen the saw

Office

A comfortable chair is a good place for long phone conversations, reading papers, and planning presentations and reports.

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Is it nonsense to talk about a “GDP per capita recession”?

My colleague Nick Behrens from QEAS is critical of recent references to Australia’s “GDP per capita recession” by the media and the federal Opposition in his latest post A GDP per capita recession is nonsense. Recall that the December quarter 2018 National Accounts data released by the ABS last week revealed that Australia has now recorded two consecutive quarters of declining GDP per capita (-0.1% in Sep-18 and -0.2% in Dec-18, as shown in the chart below).

gdp_pc

I agree with Nick to some extent. We should be careful calling a “recession” based on the GDP per capita numbers, as the economy may still pull out of this recent slowdown, but I do think it is useful to consider the GDP per capita numbers nonetheless. If an economy is not growing faster than the population, then it’s likely it’s not performing well.

Australian Treasury economists Robert Ewing and John Hawkins acknowledged the value of GDP per capita data in their outstanding 2006 Conference of Economists paper Business Cycles in Australia. Ewing and Hawkins recognised that GDP per capita is more relevant to individuals than GDP on p. 26:

We use GDP per capita partly as it is more related to welfare than is aggregate GDP.

Due to our high rate of immigration, Australia has a relatively high population growth rate for an advanced economy. This is good for Australia’s GDP growth rate, a point Nick Behrens makes in his interesting post, but it’s not necessarily good for Australians, in my view. We need to consider the pressures that high population growth places on infrastructure, for example. Too high population growth could lead to greater congestion, a fall in productivity growth, and lower GDP per capita growth than otherwise. Population growth is not necessarily a good thing just because it boosts GDP.

We shouldn’t fool ourselves into thinking our economy is performing better than it is by ignoring the contribution of population growth to GDP growth. And now, when GDP growth is falling below population growth, we should recognise the economy is not performing well at all.

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Grattan 2019 Budget panel discussion I’m participating in at Qld State Library

I’m really pleased to have been invited to be one of the panelists in the Grattan Institute’s upcoming panel discussion on the 2019 federal budget on the evening of Tuesday 9 April, one week after the budget, at the Queensland State Library in South Brisbane. The other panelists are Danielle Wood, a program director at the Grattan Institute, and Sarah Amos, a Director in PwC’s Brisbane office. Here is the blurb:

Set to take place a week after the federal budget (and on the cusp of a federal election), this State of Affairs event will ask what does it all mean? Will the budget finally get to surplus and does it matter? What will be the longer-term economic implications for Queensland and the nation? And what impact might it have on the imminent federal election? Join our panel of experts to hear their analysis and insights.

You can register via the Grattan website:

2019 Federal Budget: unpacking the economics and politics for Queensland and Australia

I hope to see a few of my Brisbane-based readers there.

perspectives-treasury-building-post-486x324

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My question to Chris Bowen on Treasury

Former Westpac CEO David Morgan’s interview with the Financial Review, in which he laments political interference with the Treasury, reminded me that I asked Shadow Treasurer Chris Bowen a question at his McKell Institute speech on Wednesday regarding how he would deal with the Treasury. In his speech, Bowen had said he was concerned about the independence of Treasury under the current government. At this point, I should note the real issue is whether Treasury is non-partisan. It is certainly not independent of the government, as it has to work for the government of the day.

I asked Chris Bowen whether his concerns about Treasury relate solely to the appointment of Phil Gaetjens, Peter Costello’s former chief of staff, as Treasury Secretary? He said it was more than that, and he was concerned about all the Treasury analysis of Labor’s policies appearing in the media (this Guardian article may be an example of this), and he said Labor never did that while in government. Bowen’s claim may well be correct. I recall from the year and a half I was in the Treasury during the Rudd government that the Treasury was flat out working on the Rudd government’s massive agenda rather than analysing Opposition policies, but I’m sure we would have analysed them if the government requested such analysis. After all, Treasury works for the government of the day. So I’m unsure Bowen has a legitimate complaint here. I’m also unsure why the Opposition is so opposed to Phil Gaetjens, who always struck me as extremely professional. Possibly it’s because he was too good at his job while Costello’s chief of staff.

In his response to my question, the Shadow Treasurer said he would visit the Treasury on his first working day in the job and tell the Treasury staff he will respect them and he wants them to be frank and fearless. I suspect that prior to that he would probably ring up Phil Gaetjens and tell him his services were no longer required.

So who will be the new Treasury Secretary in a Shorten government? In my view, the likely short list includes my old boss and current Treasury Deputy Secretary Maryanne Mrakovcic, former Queensland Treasurer Andrew Fraser, who acts as Bowen’s debating practise partner, former Rudd economic adviser Andrew Charlton, and IMF economist and former Swan adviser Amanda Sayegh.

GT@Deloitte

Asking Chris Bowen my question regarding Treasury at the McKell Institute function at Deloitte, Brisbane, Wednesday 6 March 2019

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