Tag: The Conversation

Don’t count your economic chickens before they hatch

From The Conversation.

 

After their customary two-day meeting, the Fed announced that they were holding interest rates at their current level, but would begin unwinding the massive bond-buying program they instituted in the wake of the financial crisis.

The Fed’s statement said:

In October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

This was met with whoops and hollers – from most quarters – and interpreted as a sign that the US economy is back on track.

For instance, the New York Times ran a headline “Confident Fed Sets Stage for December Rate Hike” and noted:

…[the Fed] would begin to withdraw some of the trillions of dollars that it invested in the American economy after the 2008 financial crisis. The widely expected announcement reflected the Fed’s confidence in continued economic growth. The current expansion is now in its ninth year, one of the longest periods of growth in American history.

Now, none of those words are wrong, but there’s more to this story.

The Fed is planning to shrink its US$4.5 trillion balance sheet by US$10 billion a month. That’s hardly a massive vote of confidence in the economy. In their statement, the Fed also expressed continued concern about stubbornly low inflation.

On top of all of that, we might be in the ninth year of economic expansion, but at what rate? Answer: well below historical levels.

So, as they say in showbusiness, hold the balloons.

Meanwhile in Australia, RBA assistant governor Luci Ellis issued an upbeat assessment of the economy in a speech to the Australian Business Economists forum. Her positive outlook is based on a textual reading of the IMF World Economic Outlook.

In 2016 about 6% of the “important” words were deemed positive and 10% were negative. This year 13% are positive and only 5% negative.

IMF word cloud. Reserve Bank of Australia

Let me add a few negative words to the count. First, it’s not as if the IMF is never wrong. Second, if one tries this kind of word-counting exercise in an academic seminar then people either giggle, cry, or start throwing things.

Economists (like those at the RBA) typically put little weight on chatter and a lot of weight on “revealed preference” – the decisions actually being made. For instance, the RBA continues to keep the cash rate at 1.5%. One can only surmise that they are concerned about what would happen if they did raise rates.

And with good reason. As the RBA themselves have pointed out, Australian households are deeply indebted. Moreover, the big four banks are extremely exposed to the housing market, and at least some of their chief executives seem rather naive about the risks they have taken on.

For instance, ANZ chief executive Shayne Elliot made the astonishing claim on ABC’s Four Corners recently that the bank’s risks are diversified because each mortgage was its own individual risk. This is exactly the kind of thinking that led to the financial crisis in 2008.

The RBA is in a bind, and they know it. So until they start raising rates it is wise to believe that the economy is more fragile than they often say it is.

Indeed, the one positive thing the US and Australia and Australia have in common is a relatively low unemployment rate. Yet wage growth is also very low.

All in all, the positive responses to the Fed’s announcement, and the happy sentiments in Luci Ellis’s speech, seem premature at best. The world economy may be picking up a little bit, but there is a long way to go before we can say that we are in a stable recovery.

Author: Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

What we can do once the banks give us back our data

From The Conversation.

Macquarie Bank has started a trial, giving customers access to the data the bank has collected on them. These might include the number and types of account held, average balances, regular payments and income and credit score information. This information helps to determine both the need for products and the risk of a customer.

This idea is called open banking and will see customers use their data in a whole range of ways – to ensure they are getting a good deal on their credit cards or mortgages, to see how they are faring financially against people in similar situations, and even to make paying taxes easier. Until recently our banks have had exclusive access to all of this data. The banks used it for marketing and product design. That is, your data was used to increase their profits.

The absence of sharing meant the data was a hurdle to customer switching. But the Productivity Commission has said consumers should be given a “comprehensive right” to their data.

In fact, you can already see some of use cases for your data in services the banks themselves provide. For example, Ubank has a tool that allows customers to work out a budget, and compare themselves to others of similar ages, household types etc. And many banks and credit card companies allow you to dive into your spending habits, to see where your money is going.

Treasury is currently examining how open banking should work in practice, and the Productivity Commission is looking at competition in the financial services sector. So this Macquarie Bank trial is just the beginning of open banking in Australia.

Is it safe?

You might be worried about how these other services will access you data. You don’t have to share your passwords or bank login, rather the data is shared using a standardised application programming interface or API.

An API creates a standard for connecting to a service, similar to how there is a standard for writing down your home address. To mail a letter you write down a street number, street name, suburb, state, postcode. If you write down the latitude and longitude of the person’s house then the letter won’t get there, because it doesn’t abide by the standard.

API’s have security standards as well, with two elements. One is authentication – making sure that the machine seeking access is the machine it says it is – and the other is authorisation – making sure that the machine is permitted to access the API. In practice, the authentication component could be done by a trusted third party, such as Facebook or Google.

An open banking API would need to allow enough information about a customer to be accessed to allow for service comparisons. However, the data must not contain enough information to identify an individual. This is essential under Australian privacy law and proposed standards would also need to comply with the European General Data Protection Regulation (GDPR).

What will I use the data for?

The fact that all this data has largely been held by the banks until now means there aren’t a lot of services for us to connect to immediately.

The most immediate example is to use your data to make sure you are getting the best deal you can on your loans. This is one of the reasons the British Competition and Markets Authority decided that open banking was necessary.

Under this scheme, if you want to compare service providers, you can download your anonymised data in a standard form and then upload it to a bank, a price comparison website or an app. In the case of the app, it would present to you your best options, given your current banking profile. This would include staying with your current bank or changing one or more accounts to a different institution.

This data could also be used to get approval for a new loan. Your anonymous data, in combination with identity information, includes enough material for a lender to decide whether to give you a loan for a specific purpose.

These tools will foster more competition between banks as customers will find it easier to compare services and switch, but it will also mean customers can make sure they are getting the best product available at the bank they are currently at.

But beyond comparison and switching, there are a number of interesting examples of how you can benefit from the data in your bank.

A budgeting app connected to your bank account, for example, can use your anonymous data to help you plan your finances. Using both your banking and “tap and go” payment history, it can help you analyse your spending and set goals. These services can even tap into outside data, such as interest rates, to help you determine what to do if rates go up. It’s that spooky moment when your phone becomes your conscience.

Online accounting software such as Xero or MYOB allows daily reconciliation of business accounts. These software systems already use APIs provided by the major banks to reconcile current accounts, loan accounts and credit card services. One variant on the open banking API could let customers “mark” transactions that are employment related expenses or health related expenses to simplify tax returns.

Going beyond fintech

But beyond these examples there are any number of possibilities for what we can do with this data. For instance, we could see an app that helps you make shopping decisions to increase the amount of loyalty points you earn. That is, using data on prices, goals and financial history to benefit consumers and not just sellers.

There are already limited examples of such schemes. The Coles “Fly Buys” scheme is connected to Virgin Velocity points. Both Coles and Velocity prompt members to earn points. Adding an overlay of which credit card to use at the checkout is currently up to you. However, it would be perfectly feasible for an app in your phone to choose which credit card the phone uses to pay at the supermarket to give you maximum points.

There’s also an opportunity here to connect your stream of financial data to what might seem like unrelated data. For example, what if your smart watch prompted you to walk home if you’ve spent more on eating out than your budget allowed? That is, open banking might actually improve your fitness, or at least make you feel guilty about overspending.

Author: Rob Nicholls, Senior lecturer in Business Law, UNSW

Who holds more than one job to make ends meet?

From The Conversation.

Women who work in the arts or services industries, and who are young, are the ones most likely to be working more than one job in Australia.

HILDA Survey data show that, in recent years, approximately 7% to 8% of employed people hold more than one job. And while this hasn’t been growing, the proportion of people using multiple jobs as a way of achieving full-time employment has been rising. This is when a worker combines two or more part-time jobs that add up to 35 or more hours per week.

Overall, the HILDA Survey data suggests there are two broad groups of multiple job holders. The first group is made up of those who supplement their full-time employment with a relatively small number of additional hours of employment, perhaps doing the same kind of work as their main job – such as private tutoring done by teachers and informal child care provided by child care workers.

The second group comprises those working part-time in their main job and using multiple jobs as a means to getting enough hours of work. For these people, it may be more likely that their second job is a different type of work to their main job.

This second group has grown in size since the global financial crisis, rising from approximately 54% of multiple job holders in 2008 to approximately 62% in 2015. Associated with this has been growth in people using multiple jobs as a route to full-time employment. In 2014 and 2015, approximately one in four multiple job holders were part-time in each of their jobs, but full-time in all jobs combined. This was up from approximately one in six multiple job holders in the mid-2000s.

This growth is likely to be strongly connected to the rise in underemployment – part-time employed people who want more hours of work – that has occurred since the global financial crisis.

When an increasing number of people can’t find a full-time job (or a part-time job with sufficient hours), it’s unsurprising that there is a rise in part-time employed people taking second jobs, as a solution to insufficient hours.

Women holding more than one job

It’s women who are more likely to hold more than one job. This is likely to be connected to the higher proportion of women than men who are employed part-time, since multiple job-holding is more common among part-time workers.

There are also substantial differences by age group. Employed people aged 15-24 are the most likely to hold multiple jobs, and employed people aged 65 and over are the least likely to hold multiple jobs. Women aged 45-54 are also relatively likely to have multiple jobs.

The differences by age group in part reflect the prevalence of part-time employment in each age group. People aged 15-24 are particularly likely to be employed part-time.

However, other factors are also likely to play a role. For example, a significant proportion of women aged 45-54 could be seeking to increase their hours of work as their children get older, and for some this will involve taking on a second job.

The types of work where more than one job is common

There may be some truth to the stereotype of the underemployed actor working as a waiter. Approximately 15% of employed people whose main job is in arts or recreation services industries have more than one job. People employed in education and training and health care and social assistance industries also have quite high rates of multiple job holding.

In these industries in particular, there are more opportunities for extra work in the same industry. For example, teachers may be able to privately tutor outside of school hours, and child care workers (who are in the health care and social assistance industry) can provide informal child care outside of child care centre operating hours.

Community and personal service workers, followed by professionals, have relatively high rates of multiple job holding. Managers, machinery operators and drivers and technicians and trades workers have relatively low rates of multiple job holding. These differences also reflect both rates of part-time employment and opportunities for supplemental work outside the main job.

The HILDA data further show that multiple job holding is typically not a long-term arrangement. On average, over 50% of multiple job holders in one year no longer hold more than one job in the following year. Whether this will continue to be the case if current high levels of underemployment persist remains to be seen.

Author: Roger Wilkins, Professorial Research Fellow and Deputy Director (Research), HILDA Survey, Melbourne Institute of Applied Economic and Social Research, University of Melbourne

Income inequality may be declining but financial vulnerability is increasing

From The Conversation.

If you needed A$2,000 in a hurry where would you get it? 70% of those we surveyed said they would ask friends or family, although almost half said that it’s very or fairly unlikely that their social connections could help.

This is just one of the takeaways from our new report, funded by NAB, that shows financial resilience is declining in Australia. Large numbers of Australians are struggling to meet expenses, pay bills and manage or recover from financial shocks despite two decades of GDP growth, declining income inequality and increasing financial capability.

And while more adults in Australia are reporting regular social contact, and fewer are reporting needing community or government support, the number of Australians needing support but not receiving it has increased from 3.2% to 5.3%.

The problem is especially acute for those on low incomes. A recent report found most low-income households are unable to afford a minimum and healthy standard of living, with their incomes falling short by between A$9 and A$89 a week.

In this week’s Household Expenditure Survey, the Australian Bureau of Statistics found that two in every five households are experiencing at least one indicator of financial stress. In households with incomes in the bottom 40%, this ratio increases to one in two.

People on the lowest incomes are:

  • 12 times more likely to be unable to raise A$2,000 in a week for something important
  • Five times more likely to be unable to pay a utility bill on time
  • Ten times more likely to be unable to heat their homes than the highest income households.

The lowest income households are also more likely to be socially isolated than the highest income group. For example, they were at least ten times more likely to be unable to afford a special meal once a week or a night out once a month.

As you can see in the above graphic, the proportion of Australian adults who are financially secure has decreased significantly between 2015 and 2016, from 35.7% to 31.2%. One in eight Australians (12.6%) now experience severe or high financial stress, up from 11.1%.

In practical terms financial stress may mean a combination of limited or no savings; difficulties meeting everyday living expenses, managing debts and raising funds in an emergency; no direct access to a bank account; no access to appropriate and affordable credit and/or low levels of social support.

When you dig deeper into the data you see this is not a problem of behaviour or financial literacy. The decline in financial resilience has occurred despite a significant improvement in the proportion of people with moderate to high levels of financial knowledge and behaviour (from 50% to 55%).

This includes a knowledge of, and confidence using, financial products and services. And a willingness to seek financial advice and engage in proactive behaviours like saving, budgeting and paying more than required on debts.

This leads to the conclusion that the cause of the decrease in financial resilience is due to a decline in external resources. This means people having enough money to meet living expenses and manage debts, and having access to a bank account, appropriate credit, insurance and being able to access social and community supports when needed.

We can see this by looking at data on savings.

More Australians are saving (up to 60.2% in 2016 from 56.4%). However, as you can see in the chart below, the total amount of savings has declined. Only one in two people had three months or more of income saved (a drop from 51.9% in 2015 to 49.5% in 2016). And people with savings of a month or less increased from 27.3% to 31.6%.

More Australians are budgeting, too. With 51.6% following a budget in the latest survey as compared to 49.1% in 2015.

The data also shows us that an inability to access appropriate financial products and services affects a large number of Australians. This was mainly driven by increases in the number of people who only had indirect access to a bank account (from 1.2% in 2015 to 2.7% in 2016) and increases in the number of people who had no access to appropriate credit (20.2% in 2015 compared to 25.6% in 2016).

Appropriate and affordable credit is important to assist people who cannot draw on savings when they experience financial shocks, such as the sudden need to replace a washing machine or fridge, or to fix a car needed to get to work.

As we can see, stories of economic growth and declining income inequality aren’t capturing the whole picture. It is important that we don’t overlook the large number of people and households in Australia who are experiencing high levels of financial stress, who are struggling to pay the bills and meet basic living expenses.

Our research shows that large numbers of people and households are not prepared, or adequately supported, should a financial shock (such as an increase in interest rates or a recession) materialise.

While most people have strong social support; more appropriate, affordable and accessible financial support from the government, communities and financial institutions is required. This is along with appropriate mechanisms to help identify people most at risk and to cross refer where required.

Authors: Kristy Muir, Professor of Social Policy / Research Director, Centre for Social Impact, UNSW; Axelle Marjolin, Researcher at the Centre for Social Impact, UNSW

 

Where the accountability problems started at CBA

From The Conversation.

The heads or deputy heads of the three main banking regulators (the Australian Prudential Regulatory Authority, the Australian Securities and Investments Commission and the Reserve Bank of Australia) spoke at the annual regulators’ lunch last week. Guy Debelle, who is relatively new to his role as deputy governor at the RBA, summarised the feelings of the regulators at the lunch in regards to the public’s lack of trust in banks:

No one feels that anything particularly has changed, because even if the issue occurred a few years ago, it still generates the headlines today, and just reinforces the belief [that the banks cannot be trusted].

Unfortunately that’s because these problems were never actually resolved at the time, with regulators being palmed off with internal inquiries, until the scandal went off the front page. Of course the problems that have occurred recently at banks, especially CBA, are going to be dredged up again and again, because customers (unlike regulators) really suffered and no one was ever held to account.

On the same day, APRA chairman Wayne Byers also announced the makeup of the inquiry panel to which it has outsourced its job. The agency also released the terms of reference that will govern the conduct of the inquiry over the next six months.

Way way down the list of things to do is assessing the CBA’s “accountability framework” and whether it conflicts with “sound risk management and compliance outcomes”.

Note the terms of reference do not discuss “accountability”, per se, merely whether the framework (i.e. organisation charts and policies) is effective or not. Instead, the terms of reference discuss whether it conflicts with other policies and organisation charts. It is Olympic standard navel gazing, rather than action on the part of APRA, and a very minor part of the panel’s work.

But, accountability is not only about “what” but about the “who” and, as the French philosopher Molière wrote, “it is not only what we do, but also what we do not do, for which we are accountable”.

Inquiry panel member, John Laker, is also chairman of the Banking Finance Oath initiative, which works to promote “moral and ethical standards in the banking and finance profession”. He will be well placed then to remind CBA directors and managers of one of the key tenets of that oath:

I will accept responsibility for my actions [and] in these and all other matters; My word is my bond.

Responsibility and accountability are personal not commercial constructs and, notwithstanding the latest knee-jerk reaction to the money laundering scandal, these values have been in very short supply in CBA, over the last decade.

In fact, while there have been belated apologies for some of the scandals, no one in a senior position at CBA has actually taken personal accountability for any of the sequence of scandals that have recently beset the bank.

A detailed description of the many failures of accountability at CBA would take many thousands of words, but one scandal stands out above all others, not least because it involved the largest fine ever visited on CBA’s long-suffering shareholders. It set the scene for how the CBA board would handle future scandals, that is to obfuscate, prevaricate and litigate.

On December 23, 2009, the CBA board announced a payment of some NZ$264 million to one of New Zealand’s public service departments, New Zealand Inland Revenue.

The NZ High Court found that CBA had been using ASB Bank, its NZ subsidiary, as a laundromat through which it washed a number of dodgy transactions each year with the purpose of avoiding NZ taxes, which fed directly into CBA group profits. It was tax avoidance on an industrial scale.

It should be noted that three other major banks were also fined in a total settlement of NZ$2.2 billion (about A$1.7 billion at the time), the largest fines ever paid by Australian banks.

The banks had fought the NZ Commissioner of Inland Revenue for several years all the way to the High Court, until Justice Harrison ruled the transactions were “tax avoidance arrangement(s) entered into for a purpose of avoiding tax”.

Why such a small number of transactions? Because they were huge Interest Rate Swaps (IRS) transactions, created at the highest levels of the organisations with the purpose of turning expenses into income, a clever idea that some tax accountant had dreamed up around 1995.

During the extensive and expensive litigation, the CBA board kept maintaining that they had rock solid advice that their actions were legally watertight. But they were very wrong.

So, did anyone take responsibility for this embarrassing, unethical and expensive failure of management and corporate governance?

No board member or senior manager ever took responsibility for being found to have tried to avoid huge amounts of tax in one of the bank’s key markets. In fact the opposite, Sir Ralph Norris, who had been CEO of ASB during the wash and spin cycle, was made CEO of the CBA group in 2005.

What message does such disgraceful and ultimately unproductive behaviour send to staff?

First it says, don’t take responsibility for anything, bluff and dissemble and, if found out, never ever admit to anything. If board members refuse to be accountable for their mistakes, why should anyone else, especially if whistleblowers are treated appallingly?

And the NZ scandal was only the first of many scandals.

While CEO, Ian Narev, has expressed “disappointment” at customers being treated shabbily, no senior leader has been held directly accountable for the financial planning scandal, the CommInsure scandal, the manipulation of BBSW and Foreign Exchange benchmarks, and now the money laundering action being taken by AUSTRAC.

Making belated apologies is not taking responsibility for misconduct unless corrective actions follow. But, in CBA the scandals keep coming, as the apologies appear to have changed nothing in the organisation.

Surely someone, somewhere in the huge CBA organisation has the ethical grounding to stand up and say – “yes, we did make mistakes and, yes, we should bear the consequences, and to start the ball rolling, I resign”. Actions speak much louder than mere words.

The APRA inquiry will undoubtedly find that the bank’s “accountability framework” was deficient but unless names are revealed, its conclusions will be suspect.

However, it is not up to the panel to name and shame, but to convince the senior management of CBA that only true accountability will restore trust in the bank and that someone has to step up and take responsibility for their actions and inaction, otherwise staff will never know the right thing to do.

The CBA inquiry panel is due to hand down an interim report by December but by then we should know if the inquiry has any teeth by any admissions of accountability coming from the CBA board and management. But don’t hold your breath!

Author: Pat McConnell, Honorary Fellow, Macquarie University Applied Finance Centre, Macquarie University

Income inequality ticks down as the rich see their incomes fall: ABS

From The Conversation.

Income inequality has dropped slightly in Australia, largely driven by a fall in incomes for the richest 20% of the population, according to the latest Australian Bureau of Statistics (ABS) Survey of Household Income and Wealth.

The richest 20% of the population have seen their real disposable incomes (adjusted for the number of people living in the household) fall by nearly 5%, or close to A$100 per week. Most other households have seen no real increase in their incomes over the two years since the previous survey was released.

Our recent public debate over whether inequality is rising or falling ran into the problem that the two most important sources of data were showing different trends. The ABS survey continues to show a higher level of income inequality than the HILDA survey, but the latest trends now look more similar.

Possibly the best characterisation of the latest ABS figures is that they show inequality remains higher than at any period before 2007-08, but in the short term it is unclear what to expect.

As you can see in the following chart, there has been a slight fall in income inequality between 2013-14 and 2015-16, with the Gini coefficient for “Equivalised Disposable Household Income” falling from 0.333 to 0.323. The Gini coefficient is a measure between zero (where all households have the same income) and one (where only one household claims all the income).Equivalised Disposable Household Income is the total income of the household from all sources including social security payments, minus direct taxes, and then adjusted for the number of people living in the household. For example, a household of a couple with two children under the age of 15 is assumed to need 2.1 times the income of a household of a single adult to achieve the same standard of living.

So what explains these most recent trends? At this stage, it’s difficult to be definitive. It should also be borne in mind that it has only been two years since the last survey, the overall change is not large, and so we should be cautious in unpacking the trends.

But it is worth noting that this small reduction in income inequality has come at the same time as a small fall in both median and mean disposable incomes for Australian households.

The average taxes paid by households have also risen slightly in real terms (adjusted for inflation) since 2013-14, while the average social security benefits have stayed the same in real terms. This masks a significant drop in the real level of family payments (such as the family tax benefit) received by households, and increases in age pensions and “other payments” (overseas pensions and benefits, partner allowance, sickness allowance, special benefit, war widow pension (DVA), widow allowance, and wife pensions etc.).

However, where there does appear to be large changes are in the sources of income for households. If we compare incomes between the 2013-14 and 2015-16 surveys, we find that the only group that has enjoyed real increases in incomes are those whose main source of income is social security benefits. But these have risen by only A$6 per week, or about 1.3%, and they remain by far the lowest income households in Australia, with their average incomes remaining less than half of all other household groups.

Households who mainly rely on wages and salaries have seen their average real disposable incomes fall by about A$17 per week, or about 1.4%.

The biggest declines are among those who mainly rely on self-employment income from unincorporated businesses – usually a small business which has not incorporated as a registered company – and people whose main source of income is “other”.

“Other” includes many things, such as income received as a result of ownership of financial assets (interest, dividends), and of non-financial assets (rent, royalties), as well as from sources such as incorporated business income (i.e. companies), superannuation, child support, workers’ compensation and scholarships.

This group is fairly small – about 8% of households, but they are both the group with the highest and most unequal incomes and by far the highest level of net worth (assets minus liabilities). Their average incomes have fallen by around A$93 a week in real terms, or around 8%, but their median real incomes rose by around A$11 per week, suggesting that the loss in income was concentrated among higher income households in this group.

This group in 2013-14 had by far the highest level of income inequality with a Gini coefficient of 0.474. This has fallen to 0.423 in 2015-16. But because a lot of this income comes from the stockmarket, we can expect it to be more volatile.

The group who appear to have lost by far the most, however, are households whose main source of income is unincorporated business income. This is an even smaller group – around 4.6% of all households in 2015-16. Their real average incomes have fallen by more than A$160 per week, or around 16%. They also have a high level of inequality within their group, with a Gini coefficient of 0.353 in 2015-16, down from 0.389 two years previously.

But the overall change in income inequality is not large, and it does not significantly change Australia’s international ranking.

Writing in the Australian yesterday, Nick Cater of the Menzies Research Centre asserted that Australia is “one of the most equal and socially mobile nations on earth”. But even with the slight reduction in inequality, we are slightly above the OECD average, and there are around 20 OECD countries who are likely to have lower levels of income inequality than Australia.

Overall, the data shows a relatively small change in incomes for employee households and for households whose main source of income is social security payments. Together, these account for 87% of all households in Australia.

The reduction in overall income inequality in this period is therefore explained by the falls in income for the self-employed and for the “other” group – the group with the highest incomes and wealth.

Understanding what exactly has been happening for these groups and why will require further time and analysis. The volatility of the income sources for these groups is another reason to be cautious about projecting future trends.

Author: Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University

Banking sector will be ground zero for job losses from AI and robotics

From The Conversation.

Deutsche Bank CEO John Cryan has predicted a bonfire of industry jobs as automation takes hold across the finance sector. Every signal is that he will be proved right very soon.

Those roles in finance where the knowledge required is systematic will soon disappear. And it will happen irrespective of how high a level, how highly trained or how experienced the human equivalent may currently be. Regular and repetitive tasks at all levels of an organisation already do not need to be done by humans. The more a job is solely or largely composed of these routines the higher the risk of being replaced by computing power.

The warning signs have been out there for a number of years as enthusiastic reports about artificial intelligence have been tempered with fears about significant job losses in most sectors of the economy.

Many roles have already all but disappeared in the march towards a fully digital economy. Older readers may recall typesetters, typists, and increasingly, switchboard operators and back room postal workers, as work of the last century. And the changing nature of work is relentless.

Cryan shame? Deutsche Bank’s CEO. EPA/ARMANDO BABANI

Banking on jobs

The finance sector was once driven by human judgement and decision making. But slowly, it has changed. One-to-one conversations with your local bank manager were replaced by scripted call centre interactions during the 1990s. Today, increased processing power, massive cloud storage, strong encryption and an increase in the use of blockchain make possible tasks that had previously been seen as too complex for automation to be done quickly and consistently without any human intervention.

Artificial intelligence reduces the need for human work that requires analysis, consistent applications of decisions and judgement calls. These are pivotal actions for many legal and financial activities. Combined, in the background, with blockchain – essentially a publicly shared automated ledger of agreed contracts – arrangements that require some form of trust between two parties will also be able to be completed with little or no human intervention.

Blockchain is the basis of every cryptocurrency – forms of money exchanged online. Banks are slowly working towards ways of embracing these alternative systems. While alternative forms of money attract popular headlines it is the automation behind the scenes that is most compelling aspect for the finance sector. By removing the influence of human decision making from as many processes as possible, a fully digital supply chain can be created. As artificial intelligence learns more about the impact and influence of every process each time it happens, a bank’s efficiency should continuously improve, and profits increase, with fewer and fewer employees.

Protected

In this atmosphere of change to the world of work in banking, however, there are some roles that will prove more resistant to change. Work that is unpredictable or inherently people-focused will survive. Customer service staff will still need to tackle the inevitably complex queries that are the product of the human mind rather than the outcome of algorithms. AI will deal with most enquiries, but will inevitably need to transfer the most cryptic to a human interlocutor. Mortgage decisions, for example, will come as an automatically generated message; more intricate questions will still require face-to-face conversations.

At the other end of the (pay) scale senior executives will continue to steer the direction of their individual organisations, although the nature of their work will subtly change to become technology-based decisions. Executives will find themselves choosing an algorithm instead of directly making a high-risk investment decision, or they may end up selecting an artificial intelligence machine rather than interviewing people to become employees. Reduction in the wage bill at other levels of the business and the increasing significance of the few human decisions that need to be made may even assist in justifying their annual bonuses.

Inevitable change

The traditional banking sector is an obvious area for artificial intelligence and automation to generate competitive advantages for companies. This is a result, in part, of previous reluctance to embrace change. In the late 1990s there was a collective hysteria around the Y2K bug and fear of a wholesale shutdown of computers which failed to cope with the millennium date change. That highlighted the sector’s uneasy relationship with fast-moving technological change. But even this public panic prompted few immediate, practical changes.

Now, mobile app-only banks, with no branches, such as N26 and Monzo, challenge the traditional banking sector and its human resources legacy. Traditional banks are still largely oriented towards humans doing most of its work. In 2016, over 1m people, or 3.1% of the UK workforce, were employed in the finance services sector, which is the biggest tax contributor to the UK economy and the country’s largest exporter. Most predictions claim around 50% of the jobs in the sector will be lost. Depending on who you listen to, this process will take between five and 20 years.

The impact of these changes will be felt across the entire economy. There exists a genuine fear that artificial intelligence, robotics and fully digital businesses may contribute to a significant increase in the gap between rich and poor.

Deutsche Bank’s CEO is being frank about a future where jobs in banking and elsewhere will become ever more scarce as digital business becomes a reality. This realisation has reinvigorated calls for a universal basic income (UBI) or a social dividend in the UK and elsewhere. The proposal has found support with some MEPs as a means to maintain personal levels of prosperity in this new world. Crucially too, the UBI would seek to maintain the foundations of the current Western economy in an era of increasingly fully automated digital businesses – a goal, if achieved, which might also just about keep the current finance and banking sector in business.

Authors: Gordon Fletcher, Co-director, Centre for Digital Business, University of Salford; David Kreps, Senior Lecturer in Centre for Digital Business, University of Salford

How market forces and weakened institutions are keeping our wages low

From The Conversation.

Within the political class there is a low level moral panic about low wages growth. The irony is that those lamenting this situation are simply witnessing the ultimate outcome of policies they have long advocated.

While Australia still has systems like Industrial Tribunals and Awards – given how they interact with market forces today, these institutions now work to entrench wage inequality rather than reduce it.

Wage rates and movements are determined by a combination of market and institutional forces. Technology, human capital, levels of labour supply and the profitability of companies in laggard and leading set the lower and upper bounds for sustainable wage levels.

As economist and philosopher Adam Smith noted, the income workers require to survive sets what’s called a “market floor” for wages – the lowest acceptable limit. Rates of profit in the best performing firms set the upper limit, as Australia’s executive class has shown very clearly for over three decades now. What rates actually prevail within these very broad limits are determined by institutional forces – in Australia, the award system of minimum wages and unions collective bargaining rights.

Historically Australia has had the great benefit of having institutional arrangements that balanced these forces well. The key elements of this were a network of industrial tribunals that regularly assessed the overall economic and social situation and determined what rates and movements in pay were sustainable.

These rates were not set unilaterally, but in coordination with what employers and organised workers indicated was possible, in industry level collective agreements.

The defacto rule was that wage movements should equate to movements in productivity plus the cost of living. The standards set in the leading profitable sectors then spread to the entire workforce through the maintenance of award relativities (ie standard comparative rates of pay set by reference to benchmark occupations like metal fitter, carpenter and truck driver). During this time awards rates approximated pretty closely to going rates of pay.

These underlying principles were not unique to Australia. In the era following the second world war it meant that in most countries workers shared in productivity growth and wages tracked pretty closely with it.

Since the mid 1970s and especially since the 1980s all this has changed.

Australia has not seen anything like full employment since the early 1970s. While unemployment has been cyclical, it has usually been 5% or more since that time. More importantly, underemployment has been on the rise.

This has not been cyclical. It has racketed up after each recession.

And that is just in terms of hours worked. If we took into account workers with skills not being used, levels of labour underutilisation are much higher. Estimates of underutilisation of this nature vary as being between 15 and 25%.

High levels of indebtedness also weaken workers bargaining power. Today few can hold out for long bargaining periods – either individually or collectively. This gives employers a huge advantage in setting wages.

The legacy of labour market ‘reform’

In the 1970s and 1980s Australia’s wage setting institutions worked well to protect wage rates against the full force of these downward pressures. Since the early 1990s, however, those institutions have been transformed.

The key issue here has not just been the weakening of unions and their bargaining power. Just as significant has been the uncoupling of wage rates set by wage leaders, from the wages of the weak. Workers in benchmark setting sectors like construction used to establish wage norms. These were recognised by industrial tribunals as a community standard which they then passed on to workers in weaker sectors like retail through generalised award wage base rises. In this way the wages of the strong supported movement in the wages of the weak.

This was a key “reform” of the Keating government, introduced with the active support of the ACTU. It was explicitly designed to let wages of the strong grow faster than the wages of the weak to maintain macroeconomic balance as the wages system decentralised.

The Howard governments’ labour law changes – first the Workplace Relations Act (1996) and then Workchoices (2006) – merely extended the logic of this reform trajectory. The current Fair Work Act merely codifies this trajectory as the law of the land today.

Today Austraila’s minimum wages remain among the highest in the world. The difference is they operate in relative isolation from the rest of the workforce.

Until the 1990s they were part of an interconnected system that ensured wages gains of the strong were widely shared. Today they provide the ultimate safety for those with the weakest levels of bargaining power – currently about 15% of the workforce directly and a further 15% indirectly.

We should also not forget the new found role of Treasury departments. Immediately after its election, the O’Farrell government in NSW legislated to cap wage rises in the NSW public sector to no more than 2.5% per annum.

Pubic sector teachers and nurses, especially in NSW, were emerging at the new wage leaders. This meant that their wages were now capped and this Treasury edict – and not collective bargaining and arbitration – set community wage norms.

Today our wages system has a different logic. The recent cut in penalty rates is a case of the wages of the weak putting pressure on the wages of the strong. While the Fair Work Commission quarantined the rest of the workforce from this cut by limiting its recent decision to low paid service workers – the precedent is there. Future movement in wage standards for anti-social hours will be down and not up.

Over the course of the twentieth century Australia devised a remarkable set of institutions to manage the complex problem of wages and labour standards. It’s time we built on what little remains of that legacy to remedy low wage growth.

Building on these institutions doesn’t mean restoring what was. New policies need to engage with new realities. Even former enthusiastic supporters for reducing labour standards and wages such as the IMF now recognise growth needs to be inclusive if it is to sustainable.

It’s much easier to destroy institutions that deliver fair pay than build them. Australia found ways of achieving fair pay over the course of the twentieth century – it can to so again.

Author: John Buchanan, Head of the Discipline of Business Analytics, University of Sydney Business School, University of Sydney

Wall Street landlords are chasing the American dream

From The Conversation.

Owning a family home in the suburbs has been a cornerstone of the American dream for many generations. But in 2008, when the United States’ housing bubble burst and a spate of mortgage foreclosures triggered the global financial crisis, that dream was vanquished, and such houses would instead become the sites of shattered lives.

In the aftermath of the crisis, hundreds of thousands of suburban homes were repossessed and sold at auction. With the market in shambles, prices were low. Tightened credit made it hard for individuals to buy – even for those whose credit was not destroyed by the crisis. Investors saw an opportunity, and began buying up houses.

Though house prices have recovered in many regions of the US, many of the people living in these homes are now renting – and their landlords are some of the biggest investment firms on Wall Street. Of course, small scale, mostly local investors have long owned and rented out individual houses. But it simply wasn’t feasible to manage large numbers of individual homes at a distance. As technology changed, it became much more practical for large corporations to manage individual homes spread across different regions.

With access to credit and funds unavailable to the average home buyer, large investors have been able to enter the landlord market in ways that have never been seen before. Blackstone – the world’s largest alternative investment firm – pioneered new rent-backed financial instruments in 2013, whereby rent checks are bundled up and sold as securities, similar to the way that mortgage payments are turned into financial products bought by investors.

Now, Blackstone’s rental company Invitation Homes looks set to merge with Starwood Waypoint Homes; a move that would create the nation’s largest landlord, with roughly 82,000 homes across the country. Another Wall Street backed firm, American Homes 4 Rent, owns a further 49,000 homes across 22 states.

Renting the American dream

Since 2010, the United States has seen a massive rise in the number of families renting the kind of single-family houses that have long been the desire of would-be homeowners chasing the American dream. While estimates vary, the inventory of single family homes being rented has grown by anywhere from three to seven million (35% to 67%) compared with pre-crisis levels. Single-family houses are now the most common form of rental property in the United States.

Overwhelmingly, the people living in these houses are families. Our ongoing research with Jake Wegmann of the University of Texas and Deirdre Pfeiffer of Arizona State University shows that almost half of Single Family Rented (SFR) households (49%) have at least one child under 18; a far greater percentage than rental properties with multiple units (roughly 25%) and owner-occupied homes (31%).

According to our own analysis of the American Community Survey, in 2015 an estimated 14.5m children in the United States lived in a rented single-family home. Demographically, single-family renters are more likely than owners to be people of colour, and to face moderate or severe housing cost burdens. The upshot of all this is that the 40m or so people living in SFR homes now form the basis of a new asset class of rental-backed securities.

Destination unknown

Scaling up portfolios consisting of thousands or tens of thousands of rental homes has made it possible for Wall Street firms to roll out financial instruments suited to “a rentership society”. Securitisation allows big investors to borrow against the value of the properties, to buy more properties and pay off old debt, and acts as a loan that tenants pay back with their rent checks.

Wall Street is no stranger to the housing business in America. But their involvement as landlords of single-family homes is new, and so are the financial instruments they have developed. The impact of Wall Street’s new role is unclear. While rehabilitating houses and helping to stabilise home values in the hardest-hit markets, they may also be crowding out first-time buyers, creating a lopsided market that shuts out would-be owner-occupiers.

Some Wall Street landlords have been singled out for poor repairs, problems with billing and collections and lacklustre customer service. There is also growing concern about the fact that renters of single-family homes have little protection, even in cities with some form of rent control. A report from the Federal Reserve Bank of Atlanta found that large corporate owners of houses are more likely than smaller landlords to evict tenants; some filed eviction notices on up to a third of their renters in just one year.

Here to stay

Wall Street landlords are also making new political allies, hinting they intend to stick around. The largest single-family rental companies have banded together to form a trade group, the National Rental Home Council, which promotes large-scale, single-family rental housing and advocates for public policies friendly to their interests. And it seems to be working.

In an unprecedented move, just after President Trump’s inauguration, the government-backed mortgage agency, Fannie Mae, agreed to underwrite Blackstone’s initial public offering of Invitation Homes stock, to the tune of a billion dollars. Blackstone’s CEO is Steve Schwarzman, one of the president’s most loyal backers. And Thomas Barrack – the recently departed leader of Colony Starwood Homes, which is preparing to merge with Invitation Homes – is a longtime friend of the mogul-turned-president.

Meanwhile, another government-backed agency, Freddie Mac, has announced that it too was supporting investment in single-family rentals, but with a focus on financing for mid-size investors and with an explicit goal of maintaining rental affordability. Non-partisan organisations like the Urban Institute have also suggested that government-backed financing opportunities could help single-family rental serve as a new affordable housing strategy.

All of these developments suggest that the downward trend in home ownership after the financial crisis could be here to stay. And while there is nothing wrong with renting – just as there is nothing inherently good about owning – the changes we are seeing in the single-family rental market bear ongoing scrutiny, to ensure that Wall Street’s demand for profit does not once again wreak havoc on Main Street.

Authors: Desiree Fields, Lecturer in Urban Geography, University of Sheffield; Alex Schafran, Lecturer in Urban Geography, University of Leeds; Zac Taylor, PhD Candidate in Geography, University of Leeds

What would it take to raise Australian productivity growth?

From The Conversation.

While productivity is once again growing in Australia, we face a big challenge in getting it to a level that would restore the rate of improvement in our living standards of the last few decades.

Yet the measures required to meet this challenge may not be the ones usually promoted by economists and editorial writers. We need innovation not just in the technologies we use but in our business models and management practices as well.

The problem, according to new Treasury research, is that national income growth can no longer be propped up by the favourable terms of trade associated with our once-in-a-generation mining boom.

Does this mean we are back to the hard grind of productivity-enhancing reform? There are (at least) two opposing schools of thought on this. Some believe reform is needed, but mainly corporate tax cuts and labour market deregulation. Others deny any such reform is even necessary.

What has happened to productivity?

Productivity is a complex issue, but may be simply defined as output produced per worker, measured by the number of hours worked. On this basis we have seen a modest spike in productivity growth over the last five years to 1.8% per year.

This is primarily due to “capital deepening”, an increase in the ratio of capital to labour. Contemporary examples include driverless trucks in iron ore mines, advanced robotics in manufacturing and ATMs in banking.

Before this five-year period, productivity growth was much lower, even negative. This was especially the case during the mining boom itself when capital investment was taking place but had not yet translated into increased output.

The Treasury paper argues that to achieve our long-run trend rate of growth in living standards of 2% a year, measured as per capita income, we now need to increase average annual productivity growth to around 2.5%.

This will require not just capital deepening, but also improvements in the efficiency with which labour and capital inputs are used, otherwise known as “multifactor productivity”.

The hype cycle

Australia is not alone in facing this productivity challenge. Globally, amidst what would appear to be an unprecedented wave of technological change and innovation, developed economies are experiencing a productivity slowdown.

Again, explanations for this vary. Some economists question whether the current wave of innovation is really as transformative as earlier ones involving urban sanitation, telecommunications and commercial flight.

Others have wondered whether it is still feasible to measure productivity at all when innovation comprises such intangible factors as cloud computing, artificial intelligence and machine learning, let alone widespread application of the “internet of things”.

However, there is an emerging consensus that we are merely in the “installation” phase of these innovations, and the “deployment” phase will be played out over coming decades.

This has also been called the “hype cycle”. New technologies move from a “peak of inflated expectations” to a “trough of disillusionment” and then only after much prototyping and experimentation to the “plateau of productivity”. Think blockchain in financial transactions and augmented reality for consumer products.

The world is bifurcating between “frontier firms”, whose ready adoption of digital technologies and skills is reflected in superior productivity, and the “laggards”, which are seemingly unable to benefit from technology diffusion.

These latter firms drag down average productivity growth and, lacking competitiveness, they inevitably find it more difficult to access global markets and value chains.

The increasing gap between high- and low-productivity firms is less a matter of technology as such than the capacity for non-technology innovation. In particular, this encompasses the development of new business models, systems integration and high-performance work and management practices.

Many of the world’s most successful companies, such as Apple, gained market leadership not by inventing new technologies but by embedding them in new products, whose value is driven by service design and customer experience.

Engaging our creativity

Recent international studies have shown that a major explanatory variable for productivity differences between firms, and between countries, is management capability.

It is noteworthy that Australian managers lag most behind world-best practice in a survey category titled “instilling a talent mindset”. In other words, how well they engage talent and creativity in the workplace.

Most organisations today would claim that “people are our greatest asset”, but much fewer provide genuine opportunities for participation in the decisions that affect them and the future of the business. Those that do are generally better positioned to outperform competitors and demonstrate greater capacity for change.

More survey work on this issue is under way.

A more inclusive approach

Wages are also related to productivity but not always in the way that is commonly assumed. It is said that productivity performance determines the wages a company can afford to pay, with gains shared among stakeholders, including the workforce.

But evidence is emerging that causation might equally run in the reverse direction, with wage increases driving capital investment and efficiency.

This casts the current debate on productivity-enhancing reform in a very different light. It may now be a stretch to argue that corporate tax cuts will be much of a game-changer in the absence of any incentive to invest in new technologies and skills. The same may be said about the ideological insistence on labour market deregulation, if all that results is a low-wage, low-productivity economy.

The populist revolt against technological change and globalisation has its roots not just in the failure to distribute fairly the gains from productivity growth, but in a longstanding effort in some countries to fragment the structures of wage bargaining and to exclude workers from any strategic role in business transformation. This has assigned the costs of change to those least able to resist, let alone benefit from it.

The next wave of productivity improvement, if it is to succeed, must be based on a more “inclusive” approach to innovation policy and management.

As jobs change or disappear altogether, Australia’s workforce can make a positive contribution. But workers will only be able to do so if they have the skills and confidence to take advantage of new jobs and new opportunities in a high-wage, high-productivity economy.

Author: Roy Green, Dean of UTS Business School, University of Technology Sydney