Distracted: Is Digital To Blame For Low Productivity?

From Bank Underground.

Smartphone apps and newsfeeds are designed to constantly grab our attention. And research suggests we’re distracted nearly 50% of the time. Could this be weighing down on productivity? And why is the crisis of attention particularly concerning in the context of the rise of AI and the need, therefore, to cultivate distinctively human qualities?

Are we losing our attention?

In a world of information overload, what do we pay attention to?

This question has become increasingly relevant in the digital age. With the rise of smartphones in particular, the amount of stimuli competing for our attention throughout the day has exploded. A survey from 2013 found that we check our phones 150 times per day, or roughly once every 6½ mins; a more recent study found that the average smartphone user spends around 2½ hours each day on his or her phone, spread across 76 sessions.

In the context of this huge cultural shift, our attention emerges as a scarce and valuable resource and the ‘attention economy’ has become a growing area of study. Some models seek to explain how we allocate our attention online. The theory of rational inattention, meanwhile, starts with the assumption that information is costly to acquire, hence decision-makers may rationally take decisions based on incomplete information.

Another line of enquiry, and the focus for this post, stems from the claim that we are more distracted than ever as a result of the battle for our attention. One study, for example, finds that we are distracted nearly 50% of the time. This ‘crisis of attention’ is seen as one of the greatest problems of our time: after all, as the American philosopher William James noted, our life experience ultimately amounts to whatever we had paid attention to.

Might the crisis of attention be affecting the economy? The most obvious place to look would be in productivity growth, which has been persistently weak across advanced economies over the past decade (during which time, as it happens, global shipments of smartphones have risen roughly ten-fold).

How might distractions be weighing down on productivity?

The intuition is simple enough: our minds comprise the bulk of our human capital and what we direct our attention towards is integral to the ‘output’ of our mental activity. You would therefore expect the ability to pay attention to be a key input into productivity.

In the vast literature on the determinants of strong performance in the workplace, some studies consider the role of attention. But there is little linking these to productivity in the economy as a whole. Partly this is because observing inner states (attention) and mapping these to outcomes (productivity), taking account of other relevant factors, is inherently tricky.

Yet there is mounting research that can help us start to address this question. My aim here, rather than giving a definitive answer, is to set out a framework for thinking about this issue. My contention is that distractions at work – whether from work emails, smartphone notifications or office noise – might cause weaker productivity via two main channels.

Channel 1: The direct impact of distractions on the amount of effective time spent working

Surveys offer estimates of the time workers spend ‘cyberslacking’ – using the Internet and mobile technology during work hours for personal purposes. The US Chamber of Commerce Foundation finds that people typically spend one hour of their workday on social media – rising to 1.8 hours for millennials. Another survey, meanwhile, found that traffic to shopping sites surged between 2pm to 6pm on weekday afternoons.

The total lost time will likely be greater than the time spent slacking off, however, since office workers typically take around 25 minutes to recover from interruptions before returning to their original task. What’s more, distractions can directly reduce the quality of our work . An influx of emails and phone calls, for example, is estimated to reduce workers’ IQ by 10 points – equivalent to losing a night’s sleep.

Channel 2: Persistently lower productivity caused by habitually distracted minds

The idea here is that frequent distractions might lead to a persistently lower capacity to work, over and above the direct effects. What is the argument for this being the case?

First, there’s habit formation. As James Williams notes, distracted moments can quickly lead to distracted days. And our habits are shaped by the way that consumer technologies, such as smartphone apps, are designed to be as addictive as possible – to ‘hijack the mind’, as Tristan Harris puts it. Harris gives examples like the bottomless scrolling newsfeed, which is designed to make you want to scroll further in case something good turns up. The psychological mechanism at play here – “intermittent variable rewards” – is the same as the one that gets people hooked on slot machines.

In the workplace, there’s some evidence that distractions cause more distractions. Mark (2015) finds that workers who get interrupted by external stimuli (eg message notifications) are significantly more likely to later go on to ‘self-interrupt’ – stop what they’re doing and switch to something else before reaching a break point. In other words, if you keep getting distracted by external stimuli, your mind’s more likely to wander off on its own accord.

Second, the more we have different sources of notifications in the workplace competing for our attention, the more we’ll constantly scan different channels in an attempt to stay on top of things. The problem is that this mode of working – termed “continuous partial attention” – serves to fragment our attention, reducing our focus on the task at hand. In effect, this is a variation on multitasking – which is widely discredited as an effective mode of working. Cal Newport goes so far as saying that media like email, far from enhancing our productivity, serve to ultimately deskill the labour force.

How should we respond to the crisis of attention?

Individuals and organisations are exploring ways to counter the fall in attention spans. Some companies embrace single-tasking as a mode of working. Some experiment with doing away with email all together. Others help staff to train the mind, for instance offering courses in mindfulness, the practise of paying attention to the present moment, which has been shown to improve people’s focus.

In terms of avenues for future research, further empirical work could shed light on the size of the channels mentioned above to get an estimate of the drag on productivity. Ideally we would want to observe directly how ‘attention capital’ and productivity vary across firms and over time (and how this affects wages). Failing that, perhaps datasets exist that allow us measure the gains to productivity of firms that make use of strategies to enhance employees’ attention, compared to other firms in the same industry that don’t?

Note that the focus here is on understanding the link from attention to productivity. This may include noting the role that (the design of) digital technologies play in causing shrinking attention spans. But of course the overall impact of digital technologies on productivity is a much wider issue (they will likely boost productivity, for instance, by reducing search costs).

Deeper issues: attention, choice and artificial intelligence

The crisis of attention also poses some deeper problems for society. To conclude this post, I note two of these because they have profound implications for the economy (and economics), even if they fall into the domains of political economy, philosophy and sociology.

The first issue is that the more our attention is ‘captured’ by the algorithms that underpin consumer technologies, the less our decisions – what to click on, what to buy – can be said to reveal our true, underlying preferences. Of course, adverts have been around for a long time but the argument is that the use of Big Data to exploit psychological vulnerabilities in a targeted way, using the latest insights from neuroscience, changes the game: it prevents us from “wanting what we want to want”. This should concern economists because models of consumer behaviour rest largely on the assumption of ‘revealed preferences’.

The second concerns the rise of artificial intelligence and machines that will be capable of an increasingly wide set of tasks. Views differ on what this will mean for future unemployment (see eg here and here). But most agree on the need to cultivate our distinctively human skills in order to differentiate ourselves from machines. And the human ability to empathise – central to the work of social workers, performers and nurses, among others – is cited in this regard by the likes of Klaus Schwab, Andy Haldane and Jim Kim.

How is the crisis of attention relevant here? Being able to pay attention (to tasks, to people) is a crucial input in the cultivation of empathy. Studies on mindfulness are instructive here: mindfulness practise gives explicit focus to cultivating attention, but research suggests that it also boosts individuals’ empathy – making it a potentially important part of a response to the impending wave of technological change.

 

Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.

People with disability at risk of financial and digital exclusion – ANZ

People living with disability are at particular risk of exploitation and financial abuse, and financial education may be a key to addressing the issue, a new ANZ study released today has found.

The ANZ-commissioned 2017 MoneyMinded Impact Report from RMIT University is one of the first in Australia to explore the issues related to financial wellbeing for people with disability and their carers.

The report found people with disability may miss out on opportunities to develop their financial capability and wellbeing because of lower levels of digital inclusion, lower participation rates in education and the workforce, and lower levels of socialisation.

It also highlighted a concern that people living with disability may face additional financial challenges under the National Insurance Disability Scheme (NDIS), including a potentially higher risk of financial exploitation by unscrupulous service providers.

Commenting on the findings in the report, ANZ Chief Executive Officer Shayne Elliott said: “This is an important study that helps us understand the nature and scale of the challenges some people with disability face in our community.

“Through community programs like MoneyMinded we can help provide access to financial education so people with disability and their carers can make better financial decisions and have confidence with everyday transactions that many of us take for granted

“We will continue to invest in improving the financial literacy of communities in which we operate; in 2017 we’re happy to have reached more than 76,000 people in Australia, New Zealand, Asia and the Pacific with MoneyMinded,” Mr Elliott said.

ANZ also supported a companion study from RMIT University and Autism CRC that provided additional focus on issues for autistic individuals who account for 29 per cent of current NDIS clients.

Principal Research Fellow at RMIT Professor Roslyn Russell said the financial capabilities and education needs of people with disability were varied and diverse, depending on the nature and extent of their disability.

“Those with cognitive and intellectual difficulties may have more complex challenges in using and understanding money. But everyone, regardless of their ability, should be given support to learn and participate in financial decisions that are appropriate to their goals,” Professor Russell said.

CEO of Autism CRC Andrew Davis said the companion report built on understanding of the financial experiences, attitudes, behaviours and needs of autistic adults, about which there is currently little knowledge.

“We need to have a stronger understanding of the financial barriers faced by autistic individuals, including how neurodiversity affects their financial wellbeing,” said Mr Davis.

“What we do know is that if autistic individuals are not given the opportunity to develop their financial skills and confidence, they are less likely to be able to live as independent consumers and develop the capability to identify financial opportunities and risks.”

 

Bank of Mum and Dad Also Funding Kids’ Businesses Too

We have  highlighted the fact that Young Home Buyers have been turning to the Bank of Mum and Dad to fund their transaction, on average to the tune of more than $85,000; despite the risks of eroding their parent’s retirement savings.

Now the Australian Small Business and Family Enterprise Ombudsman has released a study into factors impacting small to medium enterprise investment. And the Bank of Mum and Dad figures again; another sign of inter-generational wealth shifting and the two tier “have and have nots”.

Speaking at the Institute of Public Accountants national conference on the Gold Coast, Ombudsman Kate Carnell said barriers to investment included access to capital, red tape and energy prices.

Ms Carnell said removing barriers to investment would give small businesses confidence to grow and boost jobs.

Despite recent claims by bank executives that lending to small firms is booming, Ms Carnell said this wasn’t the case for borrowers who don’t have equity in property.

“Traditional bank loans are backed by real property mortgages and although alternatives are emerging, they are not currently mature and affordable,” she said.

“Young aspiring small business operators are particularly disadvantaged and increasingly rely on their parents to provide seed finance.”

Ms Carnell said this meant the “Bank of Mum and Dad” was often called on to help young entrepreneurs.

“This offers convenience and flexibility, but it puts people’s retirement savings at risk,” she said.

“It also raises social equity issues in that the children of affluent parents have greater opportunities to buy and grow businesses.”

Ms Carnell said a government-backed guarantee scheme could be the answer, similar to the British Business Bank.

The Ombudsman’s study also takes aim at red tape, saying past reduction efforts have largely been “window dressing”.

Ms Carnell said a successful pilot in Parramatta to make compliance requirements seamless should be extended to other areas.

“It was found there were more than 50 pieces of regulation which applied to setting up a hospitality business in Parramatta and that the regulation meant it took up to 18 months to commence trading,” she said.

“Regulation wasn’t removed, but was instead sped up and made invisible. Information provided once was used to automatically complete forms in other areas of bureaucracy.

“This is a smart way of using systems and technology to relieve regulatory burdens on business.”

Keep Me Posted calls on the industry to support the ban on paper fees

From KeepMePosted.

Are we finally heading towards the end of paper billing fees?

On Tuesday 21 November, Treasury launched the process that could see the end of paper billing fees for Australian consumers.

“There has been a significant shift away from paper billing in recent years,” Mr McCormack, Minister for Consumer Affairs, said. “Yet not every Australian consumer has the means to access digital billing and it is unfair to punish them for being unable to do so. Better outcomes and protections are needed for those consumers who do not have the option to transition to digital bills and who can least afford to be penalised.”

Keep Me Posted, which has been working tirelessly for the last 18 months to obtain legislative reform, worked with the Minister’s office in the lead up to the consultation and met with Treasury’s representatives on Thursday afternoon as part of the consultation process.

“We clearly stated Keep Me Posted’s position to support a total ban on all billing fees, which is option 2 of the consultation paper,” said Kellie Northwood, Executive Director, Keep Me Posted.

“We call on all Australians, industry stakeholders, interested groups and consumers to have their say and support the ban.”

Treasury’s consultation paper explores the costs and benefits of five (5) options, including the prohibition of paper fees, option 2. Keep Me Posted says it is the only option that can guarantee consumer protection against unfair and discriminatory charges.

Treasury is seeking submissions from consumers and consumer advocates, businesses and environmental groups. Individuals can leave an informal comment on the website or post a simple letter to Treasury.

According to Treasury’s estimates, the total annual cost of a ban would be between $80 and $93 million for the sixteen (16) Australian businesses with the largest customer base. As a comparison, it is expected that abolishing ATM fees, measure that was announced in September, will cost the big four banks $500 million a year. The relative cost to businesses doesn’t seem very high compared with the financial pressure that is put on vulnerable consumers.

Keep Me Posted doesn’t accept the idea that electronic bills are a ‘free’ option for consumers to receive their bills and statements. “When you opt-in to electronic bills and statements it means you need to possess and keep an electronic device, pay for an internet subscription or for mobile data, and more often than not you pay to print the bill at home,” commented Kellie Northwood.

According to the World Economic Forum’s Global Information Technology Report 2016, with a rank of 100 out of 139 countries for fixed broadband internet tariffs, Australia lags way behind in terms of internet affordability. More, the latest Deloitte report into mobile usage shows that 43% of smartphone owners regularly exceed their data allowance with a collective cost of $300 million a year in extra charges.

Further, the ACCC reported that Australians lost nearly $300 million to scams in 2016, $84 million in losses being reported to Scamwatch and nearly $216 million to ACORN and other scam disruption programs. The majority of these scams, 43%, were delivered by electronic means while only 4.1% came in the mail. In October, ACCC revealed that False billing is one of the top three (3) scams that Australians are most likely to encounter online.

Tim Hammond, Shadow Minister for Consumer Affairs and vocal supporter of the ban welcomed Treasury’s consultation paper and urged Australians who don’t want to pay extra to receive a bill by post to make a submission. Tim Hammond also criticised the Government for not tackling the issue sooner. Back in June, Tim Hammond moved a motion in Parliament to ask the Government to restore consumer protection. “We’ve got to restore the playing field for those who don’t have easy access online to make sure they are not getting stung for paper bills,” Tim commented.

“For Australians consumers, we really want the issue to be solved as soon as possible,” concluded Northwood. “It’s time for Government to apply a bit of good old fashioned common sense and make it clear to super profit companies that hidden or added costs along the way are not acceptable.”

Australians have until Friday 22nd December to make a submission.

Should You Pay For A Paper Bill?

Interesting consultation from the Treasury of the impact of digital migration of consumer bills, and the emerging trend to charge for a paper version, which may adversely be impacting those unable or unwilling to go digital.  They suggest 1.2 million households are digitally excluded.

NBN Co forecasts that 94 per cent of households will have internet access by 2020, and 100 per cent by 2030. However, there is still a sizeable minority – 1.3 million households as of 2015 – who do not have access to the internet. These consumers currently have no practical way to transition to digital billing.

Individuals surveyed provided a variety of reasons for not accessing the internet. Many of the reasons provided do not suggest that the individuals fall into disadvantaged groups. However many cite a lack confidence or knowledge to access the internet or cost as the main reason for not accessing the internet. Based on the number of households who indicated cost or knowledge as their reason for not accessing the internet, Treasury estimates there are approximately 1.2 million Australians who do not have internet access at home because they either cannot afford it or because they believe they do not have sufficient technical skills. Given the relatively low cost and large benefits associated with having internet access, Treasury assumes a majority of the consumers who indicated cost as coming from one of the disadvantaged groups described. Additionally, in digital inclusion suggest many consumers who indicated lack of knowledge as a reason not to access the internet also likely come from one of the disadvantaged groups identified above.

In addition to those with no internet access there are also many Australians who lack the technical skills or appropriate technology to enable them to pay bills online. Digital inclusion is a measure of groups and individuals ability to access and use information and provides some insight into the makeup of this group.

Digital inclusion tends to decline with age and is lower among Australians with a disability and Indigenous Australians. Additionally, one in five Australians only has access to the internet through a mobile device. Modern mobile devices allow users to complete a majority of tasks that previously required a laptop or desktop, however some users may have difficulty reviewing their bills on a three to five inch screen. Mobile only internet access has been linked with socioeconomic factors including low income and low education levels.

Consumers who elect to receive paper bills and pay fees due to fear of online scams are an important subset of this group, although paper bills may also lead to identity fraud through mailbox theft. Unfamiliarity with the internet has been raised by many stakeholders as key reason why consumers do not want to transition to digital billing and justification for opposing paper billing fees.

Some consumers with lower levels of digital inclusion will still chose to receive digital bills. However a subset of this group will face significant barriers that may prevent them from accessing bills online and will instead pay paper billing fees. This suggests that there are likely disadvantaged consumers who have access to the internet, but still have no choice but to pay paper billing fees.

The provision of bills in a digital format, when compared to paper billing is often seen as a simpler, lower-cost and more environmentally friendly option for businesses and a more convenient option for consumers. Digital bills can also be integrated with other digital services and information such as electronic reminders or notifications, access to previous billing information, and online changes to personal details. For these reasons, it is viewed by some as being in the interest of business and the broader community to transition customers to digital bills. Paper billing fees – a charge for customers who elect to receive a paper bill – are a common mechanism used to encourage consumers to make the change to digital bills.

While many consumers may have the option to transition to digital bills, but choose to pay paper billing fees due to personal preference, there is a concern that this is not the case for all consumers. These consumers may pay paper billing fees out of necessity, because they do not have the ability to access digital bills.

There may be scope for the Government to take action to protect these consumers.

The policy options analysed in this RIS are:

  • Option 1 — the status quo, with an industry led consumer education campaign;
  • Option 2 — prohibition (ban) on paper billing fees;
  • Option 3 — prohibiting essential service providers from charging consumers to receive paper bills;
  • Option 4 — limiting paper billing fees to a cost recovery basis;
  • Option 5 – promoting exemptions through behavioural approaches.

Further evidence on the likely impact of all options is required to conduct an informed evaluation of the options and to determine which approach should be pursued. The views of stakeholders will inform a final, Decision Making Council of Australian Governments (COAG) RIS.

 

Housing – All About Supply and Demand; But Not What You Think

The Government view is high home prices is ultimately driven by lack of supply, relative to demand, including from migration. So the solution is to build more (flick pass to the States!). It has nothing to do with excessive debt, nor does the fact the average number of people per home is falling signify anything.  And tax policy is not the problem.

However, a new working paper “Regional housing supply and demand
in Australia” from the ANU Center for Social Research and Methods blows a mighty hole in that mantra.  They suggest that demand factors (availability of loans, tax concessions etc.) have a significant impact, while demand and supply equilibrium varies significantly across different regions, with some hot spots, and some where vacant property exists (yet prices remain high, because of these demand factors). Significantly, much of the surplus is in areas where high-rise development has been strong. We think this may signal further downward pressure on prices in these areas.

Over the year to June 2017 Australia built nearly 220,000 dwellings.  Construction rates of units and other attached housing have more than doubled this decade, with around 103,000 units, townhouses and terrace houses completed in the latest financial year. Most of these completions are high-rise units in Australia’s capital cities (which is why the average home size is falling). Detached house completions have also trended up in recent years, but the growth has been more modest. This paper accounts for differential in the type of stock being built, with detached housing supporting a greater number of persons per dwelling than units and townhouses.

The paper measures the gap between housing supply and demand at
a regional level in Australia. They have taken into account a range of complicating factors such as changing demographics, building types and the increase in unoccupied dwellings at the regional level.

Previous research efforts in Australia focus on national estimates of the housing ‘gap’ or shortage but here we recognise that housing markets tend to be regional and that house price movements and affordability are likely to be as influenced by local demand and supply conditions as by broad national conditions.

Between the years 2001 and 2017, we estimate the Australian housing market experienced an oversupply of 164,000 dwellings. However, there are significant regional differences with some regions experiencing significant undersupply while others have significant housing surpluses.

Nationally, we do find periods of significant undersuppy, particularly between 2007 and 2014 but for other periods beyond 2001 we find oversupply more than compensated.

The majority of Australia’s housing surplus is situated in the inner-city areas of its major capitals, with Inner Brisbane, Melbourne and Sydney all oversupplied due to recent strong growth in unit developments. Many regional centres, particularly those in mining-sensitive areas such as North
Queensland and Western Australia, also retain housing surpluses.

Many regions in the middle and outer rings of our major capital cities, particularly Sydney, face modest housing shortages.

The modelling suggests that there is some evidence, albeit relatively weak, that a housing shortage is associated with higher house price growth.

The analysis exclusively concerns the concept of underlying demand, recognising that this may not be representative of the demand for housing in a traditional economics sense. The paper also acknowledges the limitations of the analysis in terms of both its conceptual basis and the data it relies on.

This paper does not conclude that people’s housing needs are being met or that what is being supplied is at an affordable price point for all families.

The lack of a housing shortage may have significant implications for housing policy in Australia and the economy more broadly. If Australia’s current record home-building levels are not balanced by a large housing shortage, then there is the risk that these current levels will reduce in the near future. Policy makers will also need to place greater emphasis on other potential drivers of house price growth and housing affordability, such as a range of demand influences.

The Incredible Shrinking Home

Interesting research from CommSec, who commissioned the ABS to look at trends in the size of Australian homes. They says the average floor size of an Australian home (houses and apartments) has fallen to a 20-year low, the average new home is 189.8 square metres, down 2.7 per cent over the past year and the smallest since 1997.

Australians continue to build some of the biggest houses in the world. But an increasing proportion of Australians – especially in Sydney, Melbourne and Brisbane – also want smaller homes like apartments, semi-detached homes and town houses. As a result, the average home size continues to fall – now at 20-year lows.

Generation Y, Millennials, couples and small families want to live closer to work, cafes, restaurants, shopping and airports and are giving up living space for better proximity to the desirable amenities.

So consolidation is occurring in the eastern states. Older free-standing houses are making way for apartments. And while building completions hit record highs in the year to March, approvals to build homes are rising again.

It is important to note that there are differences in house size across Australia. In the past year the average size of houses built in both South Australia and Western Australia has lifted. In fact South Australia built the biggest homes on records going back 30 years. And on average Western Australian houses built in 2016/17 were just short of record highs for the state.

Clearly the changes in housing demand and supply, and the differences across the country, have major implications for builders, developers, investors, building material companies, financiers and all levels of Government.

OCCUPANCY RATES

Since the first Census was conducted in 1911, and up to 2006, the number of persons per dwelling consistently fell. In 1911 there was an average of 4.5 people in every home. But by 2006 this ratio had almost halved to around 2.4 people in every home. Not only were more homes being built but other factors like families with fewer children, more divorces fewer marriages taking place had resulted in smaller families.

From 2006 to 2013, the number of people per dwelling rose. At face value, the modest increase in average household size may not seem significant. But it was the first increase in household size – and as a consequence, the average number of people in Australian homes – in at least a century.

Children were staying home longer with their parents – no doubt the cost of homes and rising rents being key influences. With the ageing population, more generations were choosing to stick together in the one dwelling – a trend that is a consequence of the increased size and quality of homes. New migrants also chose to stay with family or friends. And given the increased preference to attend universities and colleges, Generation Y was forced to share accommodation and save longer to buy a home.

But according to quarterly ABS data, since 2014 the number of people per dwelling has again been falling. Lower interest rates and the increased supply of cheaper apartments (compared with houses) have prompted older couples to down-size. More Generation Y have been looking to move out of home and take ownership of accommodation more appropriate to their needs.

In part, the decline in household size explains some of the lift in home building. Higher population growth – especially in NSW and Victoria – also explains the lift in home building. The question is whether household size continues to fall over the next few years or whether higher home prices acts to stall demand, again prompting greater co-habitation of dwellings.

STATE DATA

Victorians are building the biggest houses in Australia. In 2016/17 the average floor area of houses built in Victoria was 242.8m², ahead of Western Australia (242.5m²), NSW (230.0m²) and Queensland (227.3m²).

The smallest new houses built were in Tasmania (195.5m²) and the ACT (197.0m²).

In 2016/27 the biggest apartments could be found in the Northern Territory (154.5m²). However, the data may be distorted by the small number of completions in the year (1,173).

Of the states, South Australia built the biggest apartments in 2016/17 with the average floor area at 152.3m², ahead of Victoria (131.0m²) and Tasmania (129.8m²).

Of all homes built in 2016/17, the average floor area was biggest in Western Australia (214.3m²), then South Australia (201m²). In Western Australia over 69 per cent of homes built were free-standing houses, and in South Australia houses were 73.2 per cent of the total. By comparison, only 43.6 per cent of homes built in NSW were free-standing or detached houses.

 

Housing Affordability, A Complex Equation

Industry Super Australia, a research and advocacy body for Industry super funds, has published an excellent discussion paper on “Assisting Housing Affordability” which endeavors to identify the underlying causes of affordability issues, and to consider some useful policy responses in the current and historical context. They rightly consider both supply and demand related issues.

They call out specifically the impact of incoming migration, especially around university suburbs in the major centres as one major factor.

More broadly, they articulate the problem facing many, in that access to affordable housing – a basic need – is now more difficult than ever and the issue is affecting household spending decisions:

  • Key workers like police officers, teachers and nurses can’t afford to live near the communities they serve.
  • Children are staying at home for longer, marrying later and taking longer to save for a home deposit.
  • Many older Australians are locked into big houses that no longer suit their needs while a greater number of near retirees are renting or paying off a mortgage.
  • Commuters spend too much time on congested roads and trains which are now the norm in certain Australian cities.
  • More Australians are renting.

This has been a long standing issue, but they say from 2013 the problem of housing affordability became more serious.

Many property developers (small and large) entered the market, chasing short-term speculative capital gains. This coincided with a ramping up of student arrivals who drew on their parents’ savings (a safe haven strategy) to acquire bricks and mortar, usually near centres of education. Alarm bells did not ring for Australian governments, even though most new arrivals were settling in a limited number of localities. These factors and market dynamics combined to drive record house prices in key centres. The key drivers of low housing affordability are due to imbalances in demand and supply in certain key markets.

  • On the demand side, key factors include the extent of unanticipated or uncoordinated immigration flows to growth centres; the relationship between international student intake and the dynamics of foreign investment in established dwellings; the interaction between record low interest rates and investors chasing future capital gains via gearing-oriented tax concessions; and lax lending practices.
  • On the supply side, key factors include poorly coordinated land release and infills approvals and the outright restriction of supply by state governments; private land developers stockpiling tracks of land around the urban fringe, and restrictive town planning and zoning rules by local governments that have produced very long lead-times for the construction of new, denser housing stock in areas where affordability is worsening.

There are significant risks attached to ignoring affordability issues.

The lack of coordination in housing policy across all levels of Australian government has generated hotspots in property markets that have undermined macroeconomic stability. Destabilising wealth effects and the continuing expansion of household debt are feeding an unsustainable cycle of property price inflation. Net foreign indebtedness has risen to concerning levels for a small open economy that lacks a diversified economic structure and runs persistent current account deficits. Australia is far too dependent on property and pits (extraction of iron ore, coal and now liquefied natural gas) as the launch pad of its economic advance. This is very risky and may end in tears.

Booming house prices are good news for existing owners and bad news for those entering the market for the first time. Prospective buyers paying 2017 prices must have faith, at a time when even investment professionals believe a purchase now is, over the short to medium term, ill-advised. They must also have faith in their capacity to maintain an adequate income to service their debt, or hope that prices will just keep rising. In Sydney, where prices have risen 87 per cent over five years, whilst incomes have risen around 15 per cent on average, that is a tough call. Yet so many people (mostly Australians below age 35) have been prepared to take out home loans valued at over six times their income, facilitated by the relatively lax lending standards of banks.

The paper confirms the complexity which is housing affordability, and that there are no simple single point solutions.

The key findings of the paper are:

  • Australia’s housing affordability problem has developed over several decades and will require a long-term commitment by all levels of government to resolve.
  • Destabilising wealth effects and the continuing expansion of household debt are feeding a cycle of property price inflation which looks unsustainable.
  • Policy responses that increase the buying power of households (for example, through grants, or reduced taxes) will only increase demand, and therefore prices.
  • Ignoring the emerging crisis in assisted housing (affordable, public and community) now risks major future social and productivity costs.
  • Simply increasing overall housing stock will not ensure that more assisted housing becomes available. Instead, increasing the supply of assisted housing specifically is required.
  • Waitlists for social housing remain intractable and this system no longer serves as a safety net.
  • Achieving the necessary growth in assisted supply is beyond the capacity of Australian governments, and private investment is required.

To resolve the issues in assisted housing, Federal, state and local governments need to coordinate their activity without duplication or political interference. The core elements of any strategy will require:

  • A central body to provide rigorous housing supply forecasting, which will assist with planning.
  • Developing appropriate incentives (for example, tax policy) to encourage institutional investment in a new assisted housing asset class.
  • Expanding the capacity and professionalism of the community housing sector to deal with larger scale developments and tenant administration.

Additionally, some general policy suggestions to address broader housing affordability issues are as follows:

  • Explicitly linking state and local government planning and housing approvals to estimates of regional housing supply gaps.
  • Encouraging more work and student visa holders to reside outside of property market hot-spots.
  • Directing all foreign investment in residential property to new buildings.
  • Streamlining town planning procedures by mandating the removal of unreasonable height restrictions within urban infill development zones (including ‘inner’ and ‘middle-ring’ suburbs).
  • Discouraging land hoarding by identifying underutilised assets for redevelopment (including assisted housing), and providing recycling bonuses to incentivise the release of public and private sites.
  • Reorienting some current tax concessions for existing property towards investment in new housing and institutional investment in new assisted housing.
  • Reforming land taxes in Australia via the abolition of stamp duties and replacing them with a mix of land and betterment taxes.
  • Promoting stability around property – the largest asset class held by ordinary Australians.

Increasing wages would make the Australian economy safer

From The Conversation.

Australian wages have again failed to meet expectations – rising by just 2% on an annual basis. This is bad not just for workers, but for the economy in general. Wages need to rise, especially for those on low to middle incomes.

Research shows that even a small increase in interest rates disproportionately harms borrowers who are on lower incomes, and especially those at the start of the debt repayment process.

The Bank of England recently raised interest rates for the first time in a decade. The US Federal Reserve and European Central Bank will eventually follow suit. And as interest rates rise across the developed world, Australia will also be forced to follow.

Around 29% of Australian households are “over-indebted”. As interest rates rise, many of these households will be unable to meet their mortgage repayments. An increase in mortgage defaults will hit banks’ balance sheets, and will spread through the financial system.

Increasing wages would not only ease some of this financial stress, but would also jolt inflation as these newly enriched workers buy themselves things. Rising inflation will erode some of the debt repayment the household sector faces over the coming years.

Warning signs

A study in Ireland (which has similar household debt levels to Australia) found that a 1-2% increase in interest rates leads to a 2-4% reduction in a typical borrower’s disposable income after debt repayments.

Households are considered “vulnerable” if their debt service ratio (the share of debt repayments to income) is over 30%. If you earn A$1,500 after taxes every week, but are barely making a A$850 mortgage repayment, you’re going to be in trouble if repayments rise to $A900.

Part of the reason for the increased household debt is that the “labour share” of the Australian economy has been declining.

In 1960, Australian workers took home 62% of the value of what they produced. Australian owners of capital got 38%. This split was similar in the rest of the developed world.

In 2018, workers will most likely take home less than 50% of the value of what they produce. The average drop in the labour share as a percentage of GDP since 1960 is 12% across the OECD.

Wages have been growing at less than 2% a year since 2014. This is despite the fact that unemployment is 5.5% and falling, which is around the level where we would expect to see wages rise because workers can command a premium in the market.

But the Australian labour market is also changing. Underemployment (workers who would like to work more hours) is a key problem in many households. Underemployment is relatively high among 15-24-year-olds and is projected to rise.

According to the Oxford Internet Institute’s online labour index, Australia is number three in the world for “gig economy” jobs, behind Britain and the United States. These jobs provide cash flow but no security. They also build up other vulnerabilities – many Uber drivers will be short on Super, for example.

As you can see from the previous chart, Australian corporations aren’t doing too badly even as the labour share declines. The chart shows the gross profits, compared to the last month of 2008 – pretty much the peak of the crisis. This comparison allows us to see the changes in profits before and after the crisis more clearly.

The raw data show the same pattern.

You can see clearly a drop after the global financial crisis hits, and then a very sharp recovery in 2015 and 2016. Gross operating surplus, our rough measure of the profits of the private sector, are more than 24% higher than they were in 2008. One important reason for the increase in profits is the lack of wage growth for households.

What should be done?

In the longer term the ratio of debt to income and assets will have to fall. This could happen via write-offs, sell-ons and bankruptcies, or via increases in incomes. But we don’t live in the longer term.

Right now, middle-income workers need more cash in their pockets. There are a couple of options available.

The first is to reduce the burden of debt repayment on those new entrants to the mortgage market. One solution is to provide tax relief on the interest that a household pays in the first few years of a mortgage (as Ireland and the United Kingdom do). This will keep the property market working well and support younger borrowers, if only temporarily. But it could also bid up house prices if not properly targeted.

The second is the simplest approach – reduce taxes, combined with tax reform. But the federal government is already running a budget deficit of around 2% of GDP, so this doesn’t work in the short term.

The third option is to reduce the cost of living by making public transport easier to access, improving early education, and reducing energy prices. But research shows that the “worst” infrastructure projects are the ones that generally get built, so this isn’t advisable either.

The solution, then, is to increase wages, especially at the middle of the income distribution. Minimum wages have already gone up by more than 3% this year, but this is unlikely to help those on middle incomes, who have access to enough credit to afford current house prices and so have become stretched.

There are models Australia can learn from internationally. In Germany, the Variable Payment System links pay increases to profit sharing and bonuses. When the company or the sector does well, the worker does well. The reverse is also true.

A survey of 23 different wage-increasing mechanisms found almost all countries bar the US, Hungary and Poland have some collective bargaining and minimum wages. These range from hard wage indexation enforced by law, to intra-associational coordination (roughly what we have here in Australia). The right model for the 21st century and the changing nature of work may be very different, however.

As we’ve seen, private sector is doing very well and can afford a wage hike. And productivity increases in the Australian workforce has long outpaced wage increases. A wage increase is not only feasible and justified, it is in the national interest.

The world is in economic, political and environmental gridlock – here’s why

From The Conversation.

The crisis of contemporary democracy has become a major subject of political science in recent years. Despite this, the symptoms of this crisis – the vote for Brexit and Trump, among others – were not foreseen. Nor were the underlying causes of this new constellation of politics.

Focusing on the internal development of national polities alone, as has typically been the trend in academia, does not help us unlock the deep drivers of change. It is only at the intersection of the national and international, of the nation-state and the global, that the real reasons can be found for the retreat to nationalism and authoritarianism.

In 2013, we argued that the concept of “gridlock” is the key to understanding why we are at a crossroads in global politics. Gridlock, we contended, threatens the hold and reach of the post-World War II settlement and, alongside it, the principles of the democratic project and global cooperation. Four years on, we have published a new book exploring how we might tackle this situation.

But before we look into this, what exactly is gridlock?

Gridlock

The post-war institutions, put in place to create a peaceful and prosperous world order, established conditions under which a plethora of other social and economic processes associated with globalisation could thrive. This allowed interdependence to deepen as new countries joined the global economy, companies expanded multinationally, and once distant people and places found themselves increasingly — and, on average, beneficially — intertwined.

But the virtuous circle between deepening interdependence and expanding global governance could not last: it set in motion trends that ultimately undermined its effectiveness.

In the first instance, reaching agreement in international negotiations is made more complicated by the rise of new powers like India, China and Brazil, because a more diverse array of interests have to be hammered into agreement for any global deal to be made. On the one hand, multipolarity is a positive sign of development; on the other, it brings both more voices and interests to the table. These are hard to weave into coherent outcomes.

The General Debate of the 71st Session of the General Assembly of the United Nations. Golden Brown / Shutterstock.com

Next, the problems we are facing on a global scale have grown more complex, penetrating deep into domestic policies. Issues like climate change or the cross-border control of personal data deeply affect our daily lives. They are often extremely difficult to resolve. Multipolarity coincides with complexity, making negotiations tougher and harder.

In addition, the core multilateral institutions created 70 years ago, the UN Security Council for example, have proven resistant to adapting to the times. Established interests cling to outmoded decision-making rules that fail to reflect current conditions.

Finally, in many areas, transnational institutions, such as the Global Fund to Fight AIDS, Tuberculosis and Malaria, have proliferated with overlapping and contradictory mandates. This has created a confusing fragmentation of authority.

To manage the global economy, prevent runaway environmental destruction, reign in nuclear proliferation, or confront other global challenges, we must cooperate. But many of our tools for global policy making are breaking down or inadequate – chiefly, state-to-state negotiations over treaties and international institutions – at a time when our fates are acutely interwoven.

Crisis of democracy

Compounding these problems, gridlock today has set in motion a self-reinforcing element, which contributes to the crisis of democracy.

We face a multilateral, gridlocked system, as previously noted, that is less and less able to manage global challenges, even as growing interdependence increases our need for such management.

This has led to real and, in many cases, serious harm to major sectors of the global population, often creating complex and disruptive knock-on effects. Perhaps the most spectacular recent example was the 2008–9 global financial crisis, which wrought havoc on the world economy in general, and on many countries in particular.

These developments have been a major impetus to significant political destabilisation. Rising economic inequality, a long-term trend in many economies, has been made more salient by the financial crisis. A stark political cleavage between those who have benefited from the globalisation, digitisation, and automation of the economy, and those who feel left behind, including many working-class voters in industrialised countries, has been reinforced. This division is particularly acute in spatial terms: in the schism between global cities and their hinterlands.

The financial crisis is only one area where gridlock has undercut the management of global challenges. For example, the failure to manage terrorism, and to bring to an end the wars in the Middle East more generally, have also had a particularly destructive impact on the global governance of migration. With millions of refugees fleeing their homelands, many recipient countries have experienced a potent political backlash from right-wing national groups and disgruntled populations.

This further reduces the ability of countries to generate effective solutions to problems at the regional and global level. The resulting erosion of global cooperation is the fourth and final element of self-reinforcing gridlock, starting the whole cycle anew.

The vicious gridlock cycle. The Conversation

Beyond Gridlock

Modern democracy was supported by the post-World War II institutional breakthroughs that provided the momentum for decades of sustained economic growth and geopolitical stability, even though there were, of course, proxy wars fought out in the Global South. But what worked then does not work now. Gridlock freezes problem-solving capacity in global politics. This has engendered a crisis of democracy, as the politics of compromise and accommodation gives way to populism and authoritarianism.

While this remains a trend which is not yet set in stone, it is a dangerous development.

In our new book, Beyond Gridlock, we explore these dynamics at much greater length as well as how we might begin to move through and beyond gridlock. While there are no easy solutions, this does not mean there are no ways forward. There are some systematic means to avoid or resist these forces and turn them into collective solutions.

Different actors and agencies are devising new ways to solve global challenges, be it philanthropies teaming up with governments to tackle disease, cities teaming up across borders to fight climate change, or local communities taking in migrants. Ambitious agreements like the Paris Agreement or the UN Sustainable Development Goals point toward common projects. And in some countries, politicians are even winning elections by promising greater cooperation on shared challenges.

If we succeed in building a better global governance in the future, we will sap a key impetus behind the new nationalism. If we fail, we fuel the nationalist fire.

Authors: David Held, Professor of Politics and International Relations, Durham University; Thomas Hale, Associate Professor in Public Policy, University of Oxford