Why the Idea of Loss Scares the Hell Out of Us | If The Question Is “Are We Happy?” How Do We Tell? And, Are We? / by Adam Howard

Welcome back to the cauldron for another blistering edition of the Update!!  Our topic of late has been reminding ourselves that things in Australia are actually pretty good, despite most media outlets talking doom and gloom.

First thing I would like to do this week is emphasize a point made last week, which is that human beings are loss averse; any risk of a drop in income or net wealth is seen as intolerable; not it actually happening, but just the risk of it happening.

So, you can see why Australians are uneasy.  The GFC had a disproportionately small impact on our economy so it feels a bit like its our turn to get hit, we are far better off right now than we have ever been so we have more wealth to lose, and China, one of the engines behind our growth, appears to be slowing, or at least paying less for our exports than previously.

Then there’s all the talk about slowing GDP growth, slower retail spending, rising unemployment, rising bankruptcies, growing government deficits….it’s enough to cause a few sleepless nights.

International Unemployment Rates

International Unemployment Rates

On the topic of unemployment, here is a list of nations by unemployment rate.  Yes, it’s a bit dated and the data is mixed but it is indicative. If you order the table by data date, and look at the nations who provided data in 2014 then Australia is in a relatively good position.  Here on the right is a quick, abridged table of the data for Australia and some comparable nations and/or trading partners.

Now back to the stories in the media.  The point of the stories are to grab your attention by using your natural aversion to loss and make you buy in and keep reading as the story goes on and on.

What makes this easier for writers and journos is a feature of today’s world that doesn’t get enough attention: the absolute bucket load of data that’s now gathered….on everything. 

And any writer or researcher who wants to do a little digging can grab some of that data and tell whatever story they want; after all, that’s what I do!

Now, there’s no question that the economy is slowing down.  All I am suggesting is we pay some attention to our relative global position and ask, rationally of course, “Should I be scared?”

And the data I choose to use shows things are actually OK…and, in some cases, quite different to what we read.

Here’s an example. 

Interest rates.  We are obssessed with them.  OBSSESSED!!  But only because they determine what our debt costs us.

Now, rates set by the central bank (in Australia’s case, the RBA and the cash rate) were historically meant to be used as a tool to combat inflation.  If inflation shot up, maybe due to a sharp drop in the value of a nation’s currency, the central bank would jack up rates in a bid to attract foreign investors to buy the local currency.  This should stabilise the currency, and hopefully slow down inflation.

But crazy rates of inflation (above 10%) haven’t been a problem in Australia for well over 20 years.

So now, in our minds, the cash rate is tied more to stimulating an economy than cooling it down.  Drop the cash rate to get people to spend more.

A couple of weeks ago I included a graph that showed the steady deterioration of Australian households’ balance sheets, and one of the reasons is excessive borrowing.  One of the key concerns in Australia, and globally, is excessive private and public debt, and yet the view at the moment is the cash rate should drop this year…to create more spending and more debt.

Seems a bit crazy….to me at least.

Here’s another example.  Productivity.  It’s a buzzword these days.  My personal interpretation of the word, particularly when I was an employee of a big organisation, was doing more with less.  And that’s kind of the definition:

Productivity:  the effectiveness of productive effort, especially in industry, as measured in terms of the rate of output per unit of input.

And most of the media reporting has been about the lack of LABOUR productivity, particularly towards the end of the mining investment boom.

But, the following graphs, based on data from the OECD and our own ABS, seems to show two things:

International Labour Productivity

International Labour Productivity

  1. (Graph 1, right) Growth in labour productivity has dropped since 2000, but is still positive;
  2. (Graph 1, right) Australia’s labour productivity isn’t too bad. Mid table and broadly comparable to Japan, Germany, New Zealand and the Netherlands; and
  3. (Graph 2, below) Growth in labour productivity in Australia is far stronger than growth in capital productivity, which has actually been negative for almost 2 decades.
Market Sector Productivity 1994-5 = 100

Market Sector Productivity 1994-5 = 100

Whoa…didn’t know that.  Wasn’t told that.  Hadn’t read that anywhere. 

Maybe poor capital productivity might be one of the reasons for Australia’s mediocre performance in innovation?  If you go back and look at the table included at the end of last week’s Update, which I have included below, you can see only 1 of the 5 innovation inputs is a labour factor, while the other 4 are all capital inputs:

My hope is the last few weeks Updates have provided some good context regarding Australia’s economic position.  Things are good in Australia, both in absolute terms and in a relative sense.  The data supports this.  And it’s this position coupled with our natural tendency to be terrified of potential loss that creates this current heightened fear of economic calamity.

The challenge is to use our human brain; our rational brain; to think about this and see things as they really are, not as we are told they are.

I am not saying it’s a conspiracy, just that we need to be careful of falling into the trap of not seeing the wood for the trees.

Finally, all this guff about economics is really an attempt to answer one question; how happy are we?

I have included two tables below, with links to the full rankings, that I thought provide as good an idea as any of our general feelings of happiness.

The Happy Planet Index (HPI) is produced by the New Economics Foundation (quite a left leaning organisation, so my apologies if you disagree with their politics) and measures 151 nations on their ability to provide long, fulfilling and sustainable lives for their citizens, producing an index that measures factors.

While our overall ranking of 86th is pretty ordinary, if you break the index into it’s three components it gets interesting:

  • Experienced well-being:  8th
  • Life expectancy:  4th
  • Ecological footprint:  142nd.

Sadly, according to the HPI, there seems to be a correlation between well-being, longevity and treating the planet poorly.

Happy Planet Index

Finally, and not on too morbid a note I hope, I thought suicide rates would also shed some light on overall happiness, but make sure you are aware that as the article states, these rates are heavily influenced by each nations culture, religions and attitude towards suicide.

List of countries by suicide rate

Here is a table including the same nations as our unemployment data, with the HPI and suicide rates included, as well as some of the other data from our last three Updates:

See what I mean about data? Norway: happier than us; paid more than us; more developed than us, but more likely than us to kill themselves. 

Spain: paid the least and the least developed but the least likely to kill themselves.

Confusing….but the conclusion seems to be that on the basis of empirical data, Australians are a fairly happy lot.

Food for thought…