What all this means is revenue is being generated but it's not taking the same scale of physical capital investment we are used to.
As well as adding capacity cheaply, the new entrants force incumbents to narrow margins to try and retain customers. And so their influence is directly deflationary.
Technology businesses by their nature often break one of the foundational laws of economics: they show increasing returns to scale rather than diminishing returns. They generate network effects.
Industries where technology becomes more dominant tend to be industries where you get a natural rise in industry concentration. This means the returns to capital tend to go up - and the returns to labour tend to go down.
For Australia you might argue there are special factors in operation, that it’s not technology. In fact Treasury just recently argued three other factors were significant:
• Spare capacity in the labour market;
• Low inflationary expectations; and
• The end of the mining boom which brought wages growth “back to earth”.
In Treasury’s view, therefore, the factors behind low wage growth in Australia are almost entirely local, and are almost entirely cyclical. If they are, then low wage growth will resolve itself in time.
This has also been the initial response from every policy institution globally I can think of. However, a number are starting to think more broadly given wage growth is still undershooting their traditional metrics after so long.
In my view there are actually three good reasons why we should be cautious about the local and cyclical interpretation:
• Wage growth has been surprisingly low for a long time. None of the factors listed by Treasury are of themselves, surprising.
• The occurrence of surprisingly low wage growth across a number of countries at the same time suggests to me our presumption should be there are some common factors at play – and we should work to find them - rather than presuming it is local factors.
• And, if technology is the global driver, then the implications are very significant. From an expected value perspective it is prudent to canvass this issue more seriously.
In fact, if it is technology, there are profound implications:
• Cycles in wages and inflation and capital heavy investment will be more muted.
• The focus on monetary policy will be more on macro prudential policy and managing the leverage cycle, than on interest rates and the inflation cycle.
• Competition (anti-trust) policy will become an increasing government focus, as industry concentration rises.
• The cycle won't bail us out of the structural issues many countries face, including major housing affordability issues (eg Australia or Hong Kong), unsustainable fiscal positions (the US; where there has been no improvement in public debt to GDP at all despite leading the global recovery) or a legacy of bad debts in the banking system (such as India and Indonesia).
• We are going to have to generate growth the hard way, through genuine reform. (If you want the reform list, The Productivity Commission in 2012 gave us one. It is still relevant.)
There is no doubt reform is complicated and vexing, particularly in the current political environment.
This is why it is more important than ever the policies put forward take account of the circumstances we are in.
There seems to be some confusion about this issue. GDP growth is, after all, reasonable at between 2 and 3 per cent. On many forecasts (although not ours at ANZ) it will head above 3 per cent in the next year or two.
But growth in GDP and gains in welfare are not the same, even though they are related. At low rates of sustained economic growth, the difference between GDP and welfare gains become starker.
Moreover, the difference between growth in GDP and growth in GDP per person also becomes more important. In Australia, once you take account of the narrowly based gains from LNG exports, we expect growth in GDP per capita will struggle to get much above 1 per cent.
Around any average will be a range of outcomes — some do better than average and some worse.
But as the average comes down, unless you can do something about the dispersion, more of those doing worse than average will be going backwards in absolute terms. For more people it means their personal GDP growth is negative. They will be worse off.
Additionally, as gains in income — or personal GDP — are closer to zero, we should expect differences in the level of wealth, already pronounced, to increasingly become a source of concern.