Wednesday, February 19, 2020

They should make benefiting you the goal of economics

I was reading yet more about the troubles besetting the rich economies when it struck me: we’d do a lot better if our politicians and their advisers just managed the economy in ways that gave first priority to benefiting the ordinary people who constitute it.

The bleeding obvious, you say? Well, of late, not so you’d notice. Just what we’ve always been doing, the pollies and economists say? Again, not so you’d notice. Too simple? Not if you do it right.

Economics is the study of “the daily business of life” – going to work to earn money, then spending that money. If so, the economy is nothing more than all those who work (paid or unpaid) and consume, which is all of us.

The fact that we are the economy means it’s actually our economy. So all the other players – politicians, economists, even business people – are there to serve our interests. Rather than becoming alienated from the process, we should be holding them to account.

During the past 30 or 40 years of what it’s now fashionable to call neo-liberalism, we were acting on the theory that the best way to benefit all Australians was to reduce the role of government in the daily business of life and give freer rein to businesses.

This indirect approach didn’t work well. We gave our bankers and business people greater freedom from government regulation, but they abused our trust. The lenience of regulators has seen business become remarkably lawless. Too much of the extra income the economy has generated has gone to the very highest income-earners, leaving too little going to middle and lower income-earners.

This era of “economic rationalism” and “microeconomic reform” has ended, leaving Scott Morrison with much damage to clean up. Meanwhile, many voters are disillusioned and distrustful of both main parties, and are turning elsewhere to populists such as Pauline Hanson, who not only have no answers to the problems that bother us, but also seek our support by blaming our troubles on unpopular scapegoats – Muslims, city-slickers etc.

The economic rationalists’ solution to misbehaving businesses, caveat emptor – let the buyer beware – is good advice but, in the modern complex world, it’s impractical. There aren’t enough leisure hours in the day for us to spend most of them checking that all the businesses we deal with aren’t overcharging us or taking advantage of us in some way, and our employer isn’t underpaying us.

So why don’t governments cut to the chase and simply make treating us in such ways illegal? And when doing so is already illegal – as it usually is – why don’t they resume adequately policing those laws?

Something almost everyone craves in their lives, but politicians and economists long ago lost sight of, is a high degree of security. We want the security of owning our own homes and we want security in our employment.

And yet we’ve allowed home ownership to become unaffordable to an increasing proportion of young people. Why? Because we’ve put the interests of existing home owners ahead of would-be home owners. We could fix the unaffordability problem if we were prepared to put the interests of the young ahead of the old.

Some degree of flexibility in the job market is a good thing provided it works both ways. Under economic rationalism, the goal was more flexibility for employers without any concern about what this did to the lives of casual workers mucked about by selfish and capricious employers.

It’s good that part-time jobs are now available for those who want one – students, parents of young children, the semi-retired – but we could do more to make part-time jobs permanent rather than casual.

Many young people worry that we’re moving to a “gig economy” in which most jobs are non-jobs: short-lived, for only a few hours a week and badly paid, with few if any benefits.

I don’t believe we are moving to such a dystopia, mainly because I doubt it would suit most employers’ interests to treat most of their employees so shabbily. But, in any case, the way to avoid such a world is obvious: governments should make it illegal to employ people on such an unacceptable basis.

And governments will do that as soon as it’s the case that not to do so would cost them too many votes. That is, we have to make democracy work for the masses, not just the rich and powerful.

Of course, the security many of us would like is to live in a world where nothing changes. Sorry, not possible. Economies, and the mix of industries within them, have always changed and always will – often for reasons that, though they disrupt the lives of some people, end up making most of us better off.

New technologies are a major source of disruptive, but usually beneficial, change. Another source of disruptive change is the realisation that certain activities are bad for our health (smoking, for instance) or for the natural environment (excessive irrigation and land clearing, burning fossil fuels) and must be curtailed.

Adversely affected interest groups will always tempt governments to try to resist such change – at the ultimate expense of the rest of us. The right answer usually is for change to go ahead, but for governments to help the adversely affected adjust. Just what we haven’t been doing.
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Monday, February 17, 2020

Home ownership has become a devouring monster


Like all the advanced economies, ours has stopped working the way we’re used to. Our obsession with home ownership is a fair part of the problem.

Let’s be clear: I’m a believer in the Great Australian Dream of owning your own home.

But right now, it’s adding to the economic troubles of many countries. I doubt if the preference for home ownership is causing those countries bigger problems than it’s causing us. We have one of the highest rates of household debt to household disposable income (although ours is made to look worse than the others because of our unusual tax breaks for negatively geared property investments).

Like a lot of people who care about the state of the world we’re leaving to our children and grandchildren (my four-year-old grandson is “helping” me as I write this), I was pleased to see the period of spiralling house prices come to an end a few years back and prices start falling.

But, for Sydney and Melbourne, this sorely needed correction came to an end last year, after three interest-rate cuts and a change in prudential lending rules saw prices resumed their upward climb.

If we can’t cut interest rates a little without an upsurge in borrowing causing us to resume bidding up house prices, we’ve got a problem. Our household debt is at near-record levels, but let’s add to it.

Meanwhile, when you add falling house prices to the economy’s deeper problem of protracted weak wage growth, many home buyers worry and slash their consumer spending to try to reduce their debt.

That huge household debt will be a drag on our economy for years, keeping growth low. Another issue that isn’t helping is our “new normal” of exceptionally low price and wage inflation.

Until recent years, first-home buyers (or any other borrowers for owner-occupied housing) used to be able to load themselves up to the gunnels in debt and monthly payment obligation, secure in the knowledge that, after a few years of high growth in nominal wages, those repayments (little changed in nominal terms) would be reduced to a much more manageable share of their income.

When such “norms” get stuck in people’s heads, it can take years for people to realise they can no longer be relied on. And for those couples for whom the memo arrived too late, they’ll be struggling to keep up their huge mortgage payments for many more years than they bargained for.

So, on one hand we’ve got the economy being held back by households’ huge level of debt and mortgage payments while, on the other, home ownership is becoming unattainable for an increasing proportion of the population. Those who do eventually manage to attain it have to scrimp on other aspects of their living standards, and often get there so much later in their working lives that their ability to save for retirement is diminished.

The devouring monster we’ve allowed home ownership to become is now eroding what’s long been the fourth leg of retirement income policy. More people are retiring without owning a home, whereas the level of the age pension is kept low under the assumption that almost everyone owns their home outright.

Get it? We’re suffering the wider economic disadvantages of huge household debt without the commensurate advantage of a higher rate of home ownership. The rate of home ownership is actually falling slowly as the oldies with high rates of home ownership are dying and being replaced by newly formed, young households, very few of which can afford a mortgage.

But Reserve Bank governor Dr Philip Lowe has injected a note of hope. When measured against the ruler of household income, America’s house prices are much lower than ours. Why? Because of differing policies towards housing. The Yanks have kept land prices lower by allowing more suburban sprawl.

For our part, we’ve had various tax and pension policies seemingly intended to help would-be first-home buyers that, in reality, work to benefit existing home owners. We’ve made housing – whether owner-occupied or rental properties – a tax-preferred investment, not just a means to security of tenure. In the process, we’ve made it too hard for young first-home buyers to afford.

When parents respond to this by recycling to their offspring some of the capital gain they’ve enjoyed on their own property investment (as I have), they’re solving their own children’s affordability problem in a way that keeps house prices high, at the expense of those many young people whose parents aren’t able to help out.

No, if we want to make home ownership more affordable for more young people seeking security of tenure for their home, the answer is to make home ownership less attractive as a form of investment.
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Saturday, February 15, 2020

Lucky Country has lost its dynamism and can't find where it is

Do you know what economists mean when they talk about the nation’s “economic fundamentals”? I thought I did until I heard what Reserve Bank governor Dr Philip Lowe said they were.

When Lowe had a meeting with Treasurer Josh Frydenberg after last year’s election, I was puzzled by him saying that the economy’s fundamentals were “sound”. How could he say that when the economy had grown by an exceptionally weak 1.8 per cent over the year to March?

But at his appearance before the House of Reps economics committee last week, he had to respond to a challenging description of the state of the economy by Labor’s Dr Andrew Leigh, a former economics professor.

“We have seen declines in labour productivity for the first time on record, the slowest wage growth on record, declining household spending per capita, record household debt, record government debt, below average consumer confidence, retail suffering its worst downturn since 1990 and construction shrinking at its fastest rate since 1999,” Leigh said.

“The economy is in a pretty bad way at the moment, isn’t it?” he asked.

“That wouldn’t be my characterisation,” Lowe responded. “One thing you left out of that list is that a higher share of Australians has jobs than ever before in our history ... ultimately what matters is that people have jobs and employment and security.”

What’s more, “our fundamentals are fantastic”, Lowe went on – but this time he spelt out what he meant.

“We enjoy a standard of living in this country that very few countries in the world enjoy. More of us have jobs than ever before. We live in a fantastic, prosperous wealthy country, and I think we should remember that.”

Well, if that’s what he thinks our fundamentals mean, who could argue? Even if Leigh thought the weaknesses he was outlining were a description of our fundamentals. Maybe Lowe’s fundamentals are more fundamental fundamentals than other people’s are.

Under further questioning from Leigh, however, Lowe said he didn’t want to deny that “we have very significant issues, and the one that worries me most is weak productivity growth ... We’ve had four or five years now where productivity growth has been very weak ... in my own view it’s linked to very low levels of investment relative to gross domestic product.”

This is an important point. As former top econocrat Dr Mike Keating has been saying for some years, you can take a neo-classical, supply-side view that weak productivity improvement explains why the economy’s growth has been so weak (a view that assumes productivity improvement is “exogenous” – it drops on the economy from outside), or you can take a more Keynesian, demand-side view that weak economic growth explains why productivity improvement has been so weak (that is, productivity is “endogenous” – it’s produced inside the economy).

Keating keeps saying that it’s when businesses upgrade their equipment and processes by replacing the old models with the latest, whiz-bang models that improving innovations are diffused throughout the economy, making our industries more productive.

Why is it that our businesses (particularly those other than mining) haven’t been investing much in expanding and improving their businesses? The simple, demand-side answer is that they haven’t been seeing much growth in the demand for their products.

But Lowe sees something deeper. “I fear that our economy is becoming less dynamic [continuously changing and developing],” he told the economics committee. “We’re seeing lower rates of investment, lower rates of business formation, lower rates of people switching jobs, and in some areas lower rates of research-and-development expenditure.

“So right across those metrics it feels like we’re becoming a bit less dynamic. I worry about that for the longer term.

“Public investment is not particularly low at the moment. What is low is private investment. Firms don’t seem to be investing at the same rate that they used to, and I think this is adding to the sense I have that the economy is just less dynamic ...

“There’s something deeper going on, and it’s not just in Australia: it’s everywhere. At the meetings I go to with other central bank governors, this is the kind of thing we talk about. Something’s going on in our economies that means the same dynamism that used to be there isn’t there.”

Asked later by another MP what was causing this loss of dynamism, Low replied, “I wish I knew the answer to that ... My sense is, as an Australian and looking at what’s going on in our economy, that we’re becoming very risk-averse.” (A sentiment I know other top econocrats share.)

“It’s a global thing that happens – I think it probably happens partly when you’re a wealthy country. The standard of living here is fantastic. It’s hardly matched anywhere in the world, so we’ve got something important to protect,” he said.

“But I think in that environment you become more risk-averse. Probably with the ageing of the population, we become more risk-averse. When people have a lot of debt, they’re probably more risk-averse.

Risk-aversion seems to help explain the slow wage growth we’ve had “for six or seven years” now. “It’s the sense of uncertainty and competition that people have, and this is kind of global. Most businesses are worried about competition from globalisation and from technology, and many workers feel that same pressure.

“There are many white-collar jobs in Sydney and Melbourne and Canberra that can be done somewhere else in the world at a lower rate of pay, and many people understand that ...,"Lowe said.

“So the bargaining dynamics ... for workers is less than it used to be. And firms are less inclined to bid up wages to attract workers because they’re worried about their cost base and competition,” he said.

Doesn’t sound too wonderful to me. But not to worry. Just remember, our fundamentals are fabulous.
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Wednesday, February 12, 2020

The Great Australian Dream is keeping the economy weak

Do you worry about the enormous size of your mortgage? If you do, it seems you’re not the only one. And the way Reserve Bank governor Dr Philip Lowe sees it, people like you are the main reason consumer spending is so weak and the Reserve and the Morrison government are having so much trouble getting the economy moving.

Until the global financial crisis in 2008, we were used to an economy that, after allowing for inflation, grew by about 3 per cent a year. The latest figures show it growing by barely more than half that. (This, of course, is before we feel the temporary effects of bushfires and the coronavirus.)

This explains why the Reserve cut its official interest rate three times last year, dropping it from a record low of 1.5 per cent to an even more amazing 0.75 per cent. Cutting interest rates is intended to encourage people to borrow and spend. So far, however, it’s shown little sign of working.

Similarly, the first stage of the massive tax cuts that were Scott Morrison’s key promise at last year’s election, a new tax break worth more than $1000 a year to middle-income-earners, was expected to give the economy a kick along once people started spending the much bigger tax refunds they got after the end of last financial year.

Despite Treasurer Josh Frydenberg’s confident predictions, it didn’t happen. Why have the authorities had so little success at pushing the economy along? Why did real consumer spending per person actually fall in the year to September?

That’s what Lowe sought to explain to the House of Reps economics committee last Friday. His theory – which he backed up with statistical evidence – is that, the combination of weak growth in wages with falling house prices has really worried a lot of people with big mortgages.

So, rather than increase their spending on goods and services, they cut it and used whatever spare money they could to pay down their mortgage.

In principle when interest rates fall, people with home loans now have more money to spend on other things. In practice, however, most people leave their monthly payments unchanged. The amount they’re paying above the bank’s newly reduced minimum payment comes straight off the principal they owe, thus further reducing (by a little) the interest they’re charged.

That’s pretty much standard behaviour for Australian home-buyers. But this time they’ve also avoided spending their tax refunds, leaving the money in their “offset account”. They may or may not decide to spend it later. But for as long as it’s sitting in the offset account it’s reducing their net mortgage debt and the interest they’re paying.

But get this: not content with those two moves, households have also decided to cut their consumer spending and so save a higher proportion of their income. It’s a safe bet that people with home loans have got that extra saving parked in their offset accounts.

Lowe makes the point that, when worried home-buyers take money sent their way to get them spending and use it to reduce their debt, this does bring forward the day when they feel confident enough to start spending again. That’s true, but very much second prize.

If people with mortgages are feeling anxious, that’s hardly surprising. By June last year, household debt reached a record 188 per cent of annual household disposable income, before falling a bit in the September quarter (see above). About half that debt was for owner-occupied housing and about a quarter for personal loans and credit cards, leaving about a quarter for housing investment debt.

This is higher than in most rich countries, but that’s mainly because of our generous tax breaks for negatively geared property investors, a loophole most other, more sensible countries have closed.

But hang on. Those of us living in Melbourne or Sydney (but not elsewhere in Australia) know that, in response to the recent cuts in interest rates, people have resumed borrowing for housing, causing house prices to stop falling and start rising again.

Is this a good thing? Lowe can see advantages and disadvantages. On the plus side, rising house prices are likely to make people with big mortgages feel less uncomfortable and so get closer to the point where they allow their spending to grow. It also brings forward the day when the building of new homes stops falling and starts rising again.

On the negative side, is it really a great thing for house prices to take off every time interest rates come down? How’s that going to help our kids become home owners?

Lowe asks whether we benefit as a society from having very high housing prices relative to the level of our incomes. “There are things that we could do on the structural side . . . to have a lower level of housing prices relative to income.” They’re much lower across the United States, for instance, even though, by and large, the Americans’ interest rates have been lower than ours.

What are these “things on the structural side” we could be doing to make our housing more affordable? He didn’t say. But I think he was referring to more liberal council zoning regulations and to getting rid of the many tax concessions that favour home owners at the expense of would-be home owners, including negative gearing.
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Monday, February 10, 2020

Unions conspire with bankers to make you pay more super

When is big business most successful at "rent-seeking" – winning special favours – from government? Often, when it’s got its unions on board. That way, both the Coalition and Labor are inclined to give it the privileges it seeks.

Despite the decline in the union movement’s power and influence in recent decades – and all the nasty things the bosses continue saying about unions – it’s very much a product of the capitalist system.

Over the decades, its greatest success has come in industries with some form of pricing power that’s allowing businesses to make outsized profits. The union simply applies pressure for the workers to be given their share of the lolly.

What kept Australia’s manufacturing industry heavily protected against competition from imports for most of the 20th century, before the Hawke-Keating government pulled the plug in the 1980s, was the manufacturing unions’ strong support for the manufacturers’ success in getting the Coalition committed to protection.

In the end, however, the manufacturing unions got screwed. While being protected in the name of preserving jobs, the manufacturers began automating and shedding many jobs. Turns out protection is better at protecting profits than jobs.

In last year’s election campaign, some part of Labor’s ambivalence on the question of new coal mines in North Queensland is explained by the support the Construction, Forestry, Maritime, Mining and Energy Union, one of the few remaining powerful unions, has thrown behind the foreign mine owners.

At present, however, there’s no more significant instance of the unions being in bed with the bosses than their joint campaign to have the government increase compulsory employee superannuation contributions.

When it comes to government-granted favours to business, there aren’t many bigger than the one that compels almost all the nation’s workers to hand over 9.5 per cent of their wage, every year of their working lives, to financial institutions which will charge them a small fortune each year to "manage" their money, until the government thinks they’re old enough to be allowed to get their money back.

I’ve supported compulsory super since it began because, when it comes to saving for retirement, most of us suffer from myopia. But it does leave the government with huge obligations to ensure the money’s safely invested, ensure super tax incentives aren’t biased in favour of the highly paid (such as yours truly) and ensure the money managers don’t abuse the monopoly they’ve been granted by overcharging the punters.

And, since most of us also save for retirement in ways other than super (such as by buying a house and paying it off), governments have an obligation to ensure that workers aren’t compelled to save more than needed to live in reasonable comfort in retirement.

Compulsory super is such an easy money-maker for the for-profit financial institutions (mainly bank-owned) that it’s not surprising they’ve gone for years trying to con governments into increasing the percentage of their wages that workers are compelled to hand over. They’ve done this by exploiting people’s instinctive fear that they aren’t saving enough, using greatly exaggerated estimates of how much they’ll need to be comfortable.

What’s harder to understand is why the non-profit "industry" super funds – with union officials making up half their trustees and the employer reps not taking much interest – go along with the for-profit industry lobby groups’ self-interested empire-building.

The main reason compulsory super isn’t a particularly good deal for most union members is that when forced to pay super contributions, employers reduce their workers’ pay rises to fit. This has been understood from the outset, but last week’s report from the Grattan Institute convincingly demonstrates its truth.

The second reason is that, by design and above certain limits, super savings reduce workers’ eligibility for the age pension. Treasury and independent analysts have repeatedly discredited the industry’s claims that the present contribution rate is insufficient to provide workers with a reasonably comfortable retirement.

The present legislated plan to raise the contribution rate to 12 per cent represents the industry funds’ gift to the army of ticket-clippers making their living off the super industry. It’s origins lie in the Rudd government yielding to industry fund pressure because it believed the huge cost to the budget would be more than covered by its wonderful new mining tax.

But, as an earlier Grattan report has shown, raising the contribution rate as planned would force many workers to accept a lower-than-otherwise standard of living during their working lives so their living standard in retirement could be higher than they ever were used to when working.

This is the union movement protecting its members’ interests? Sounds to me more like union officials expanding the union institution at the expense of their members – and delivering for the banks’ "retail" super funds while they’re at it.
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Saturday, February 8, 2020

Sorry, the government can't make the boss pay for your super

When the government compels employers to contribute to their employees’ superannuation, it seems obvious that it’s forcing the bosses to give their workers an extra benefit on top of their wage. Obvious, that is, to everyone but the nation’s economists.

They’re convinced it’s actually the workers themselves who end up paying because employers respond to the government’s compulsion by giving their workers pay rises that are lower than they otherwise would have been.

But can the economists prove their intuition is right? Not until this week.

The argument about who ends up paying for compulsory employee super is hotting up. The Hawke-Keating government’s original scheme required employers to make contributions equal to 9 per cent of a worker’s pay. But when former prime minister Tony Abbott took over from Labor in 2013, he inherited a law requiring the contribution to be gradually increased to 12 per cent.

The Coalition has never approved of compulsory super, which began as part of the union movement’s Accord with the Labor government. By the time Abbott got around to it, the contribution rate had crept up to its present 9.5 per cent, but he managed to persuade the Senate to delay the next (0.5 percentage point) increase until July next year, with the 12 per cent to be reached in July 2025.

Everything about this scheme’s history says Prime Minister Scott Morrison wouldn’t want the contribution rate to go any higher. It’s likely he’s hoping the looming inquiry into super will recommend this, and so help him persuade the Senate to change the law accordingly.

The superannuation industry has been campaigning for years to convince you and me that 9 per cent or so isn’t sufficient to pay for a comfortable retirement, and to get the contribution rate greatly increased. In this, the non-profit “industry” super funds (with much union involvement) are at one with the largely bank-owned, for-profit part of the super industry.

Apart from some important reports by the Productivity Commission, the most authoritative independent analysis of super comes from Brendan Coates of the Grattan Institute. Grattan has argued that raising the compulsory contribution rate would be contrary to employees’ interests, forcing them to live on less during their working lives so their incomes in retirement could be higher than they were used to and more than they needed.

To strengthen the case for continuing to raise the contribution rate, the industry funds have commissioned a couple of studies purporting to show that the conventional wisdom is wrong and contributions do indeed come at the employers’ expense.

So this week Grattan issued a paper providing empirical evidence supporting the economists’ conventional wisdom that, in the end, workers have to pay for their own super.

If the notion that employees pay for employers’ contributions strikes you as strange and hard to believe, it shouldn’t. Consider the goods and services tax. Have you ever sent the taxman a cheque for the GST you pay? No, never. The cheques are written by the businesses you buy from. So, does that mean they pay GST but you don’t? Of course not. Why not? Because the businesses pass the tax on to you in the retail prices they charge.

Economists have long understood that the “legal incidence” of a tax (who’s required to write the cheque) and the “economic incidence” or ultimate burden (who ends up paying the tax) are usually different.

It’s convenient for the government to collect taxes from a smaller number of businesses rather than from a huge number of consumers or employees. Economists know that businesses may pass the burden of the taxes they pay “forward” to their customers or “backward” to their employees. Only if neither of those is possible is the ultimate burden of the tax passed from the business to its owners.

Naturally, the business would like to pass the burden anywhere but to its owners. But whether it’s passed forward or backward (or some combination of the three) will be determined by the market circumstances the business finds itself in.

That is, the question can’t be answered from economic theory, but must be answered with empirical evidence (experience in the real world). Theory (using the simple demand and supply diagram familiar to all economics students – see page 12 of the Grattan report) can, however, clarify the exact question.

Theory suggests that the ultimate destination of the burden depends on how workers and employers respond when super is increased. There are two “effects”. First, when workers value an extra dollar of super, even if they value it less than an extra dollar of wages, then some (but not all) of the cost of super will come out of their wages.

Second, if workers’ willingness to work doesn’t vary much when wages change – that is, if labour supply is relatively “inelastic” – then they’d be expected to bear a larger share of the cost. Similarly, if employers’ willingness to hire people doesn’t vary much when wages change – labour demand is inelastic – then more of the cost will fall on the bosses.

Most overseas studies have confirmed the economists' conventional wisdom. But what about us?

Coates and his team examined the details of 80,000 federal workplace agreements made between 1991 and 2018. They found that, on average, about 80 per cent of the cost of increases in compulsory super was passed back to workers through lower wage rises within the life of an enterprise agreement, usually two to three years. (This leaves open the question of how much of the remaining 20 per cent was passed forward to customers in higher prices.)

Only about a third of workers are covered by enterprise agreements. For the many wages linked to the Fair Work Commission’s annual adjustments to award wages, it has said explicitly that when super goes up, award wages grow more slowly. As for workers covered by individual agreements, it’s a safe bet which way the employers will jump.

Whatever it suits the superannuation industry to claim, increased super contributions are no free lunch.
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Wednesday, February 5, 2020

Morrison's dream: climate fixed with no changes to jobs or tax

When I was new to journalism, there was a saying that the two words which, when used in a newsagents’ poster or a headline, would attract the most readers, were "free" and "tax". These days, the two words politicians use to suck in unwary voters are "jobs" and "tax".

These words have magical powers because we attach our own meaning to them and assume the polly is using them to imply what we think they imply. They evoke in us an emotional reaction – welcoming in the case of "jobs", disapproving in the case of "tax" – and so we ask no further questions.

Those two words have the magical ability to cut through our distrust and disarm our powers of critical thought. Scott Morrison has been using both in his belated response to this appalling summer of bushfires, heatwaves, smoke haze and dust.

Many of us have realised how terrible climate change actually is, that it’s already happening and will keep getting worse – much worse – unless all the world’s big countries get serious about largely eliminating their carbon emissions, and doing so pretty quickly.

Although Australia is a big emitter relative to our small population, in absolute volume we’re not in the same league as America, China or Europe. But the rest of the world’s horrified reaction to our fire season has helped us see we’re in the vanguard, that the Wide Brown Land is going to cop it a lot harder than the green and pleasant lands.

So our self interest lies not just in doing our fair share, but in doing more than our share, so we’re well placed to press the big boys to try harder.

Initially, Morrison seemed to want us to believe he agreed with those saying we must do more to reduce greenhouse gas emissions. "We want to reduce emissions and do the best job we possibly can and get better and better at it. In the years ahead, we are going to continue to evolve our policy in this area to reduce emissions even further," he said.

But then he wanted to reassure his party’s climate-change deniers, and those of us who want to fight climate change without paying any personal price, that nothing had changed. "But what I won’t do is this: I am not going to sell out Australians – I am not going to sell out Australians based on the calls from some to put higher taxes on them or push up their electricity prices or to abandon their jobs and their industries."

On the question of jobs, don’t assume it’s your job he’s promising to save. What we know is that jobs in the coal industry are sacred, but what happens to other jobs isn’t the focus of his concern. Don’t forget, this is the same government which, as one of its first acts, decided we no longer needed a motor vehicle industry. Favoured existing jobs take priority over future jobs – which can look after themselves.

But even this doesn’t fully expose the trickiness of the things politicians say about jobs. What governments usually end up protecting in an industry isn’t its jobs, but its profits. For instance, when not in the hearing of North Queensland voters, Adani boasts about how highly automated its mine will be. Apart from the few years it takes to construct a mine, mining involves a lot of expensive imported machines and precious few jobs.

Looking back, it’s arguable that most of the jobs lost from manufacturing were lost to automation, not the removal of tariff protection.

As for taxes, the latest turn in Morrison’s spin cycle is that his "climate action agenda" is "driven by technology not taxation". This, apparently, is a reference to technologies such as hydrogen, carbon capture and storage, lithium production, biofuels and waste-to-energy.

Like many of politicians’ efforts to mislead us, this contains a large dollop of truth. It’s likely that our move to zero net emissions will involve the adoption of most if not all of those new technologies, in the process creating many job opportunities in new industries and – inevitably – doing so at the expense of jobs in existing fossil-fuel industries.

So this seems to have a lot of similarity with Professor Ross Garnaut’s vision of us becoming a renewable-energy superpower. But get this: Garnaut’s grand plan has been designed to require no return to any form of carbon tax.

Economists advocate "putting a price on carbon" because they believe it’s the best way to minimise the ultimate cost to the economy (and the punters who make it up) of moving to a low-carbon economy.

But if Australian voters are stupid enough to allow some on-the-make politicians to persuade them to reject the economists’ advice, then so be it. You prefer to do it the expensive way? Okay, have it your way. There’s no shortage of more costly alternatives.

So Morrison is busy demolishing a straw man. Why? Because he wants to distract your attention from the likelihood that his preferred way of skinning the cat will require a big increase in government spending to facilitate all those new technologies and industries.

You don’t think this increased spending will eventually have to be covered by higher taxes? Dream on.
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Monday, February 3, 2020

Lack of trust may have made economic reform impossible


Life’s getting a lot tougher for optimists. I’m starting to wonder whether our politics has passed the point of peak economic reform and controversial policy changes are no longer possible.

We keep berating our politicians, urging them to show leadership and have the courage to make much-needed reforms, but they never do. Right now, it’s easy to look at the way Scott Morrison has fumbled the bushfire response, the need to get real about climate change, and even his reluctance to take a stand against blatant rorting of taxpayers’ money, and decide we have a Morrison problem.

But though we’re discovering the miracle election-winner’s various shortcomings, it’s a mistake to think one man is the cause of our reform problem. It’s possible to argue things have got steadily worse in the revolving-door period since the departure of John Howard, but the greater truth is that the problem’s systemic.

It’s hard to think of any major improvements made by five prime ministers over the past 12 years, with the possible exception of the National Disability Insurance Scheme (which we’re still busy stuffing up).

The carbon tax was a significant reform before Tony Abbott abolished it, but Labor had sabotaged its mining tax long before Abbott got to it. Malcolm Turnbull took one look at the great goal of increasing the goods and services tax and realised it was politically impossible without full compensation of low to middle income-earners, but net of compensation it would have raised peanuts.

All this is just the Australian version of similar stories that could be told in most of the other rich democracies. But, sticking with our story, why has it become next to impossible for our governments to make controversial policy changes?

The pollies would tell you it’s because the 24-hour news cycle – the media are constantly demanding to be fed, and will turn to you opponents if you don’t oblige – and the power of social media to set hares running that have to be chased. This now gets so much attention from ministers and their staff they have little time left to get on with policy development.

Maybe. A less convenient explanation is the way politics has turned into a lifelong career – from staffer to minister to a late-career job advising big business – leading pollies to worry more about their careers and less about the ideals they espoused in their first speech on entering Parliament.

But however you explain it, there’s little doubt that the life of ministers has become pretty much all day-to-day tactics and no long-term strategy. This both explains and reinforces the long-established trend – which Morrison now freely acknowledges – for ministers to prefer the advice of the ambitious young punks in their office to the advice of their department.

The staffers know about what matters – political tactics – whereas the bureaucrats want to keep banging on about policy and warning you about looming problems. Worse, they’re obsessed by the notion that whatever governments do must be strictly in accordance with the law.

Partly because fixing problems usually costs money, the era of Smaller Government and the politically motivated obsession with returning the budget to surplus has heightened the politicians’ normal temptation to pigeonhole government reports warning about problems that need to be fixed now before they get much worse.

A bunch of former fire chiefs want a meeting to warn about how much worse this year’s bushfire season will be and the need for much more equipment and action to limit climate change? Sorry, too busy with more pressing matters.

Even the idea that politicians should “never waste a crisis” – that you won’t get broad support for unpopular measures until everyone’s up in arms about the actual arrival of the problem – and its corollary – don’t act on the multitude of mere warnings of problems ahead, wait and see which of them actually transpire – seem themselves to have been pigeonholed.

Why are politicians no longer game even to seize the moment to do something real when everyone’s demanding that something be done? Because years of declining standards of political behaviour mean that trust in political leaders is now lower than ever. There’s strong survey evidence of this.

Neither side of politics is trusted to take tough measures that are genuinely in everyone’s interests. It’s got to be a trick. Mainstream politicians are trusted only when they run scare campaigns against the other side’s reform plans. But hope springs eternal that some populist rabblerouser may have the answers.

The more impotent mainstream politicians are seen to be, the more disillusioned voters will turn to populist saviours – and the more the main parties will themselves turn to populist diversions and trickery. Freeing ourselves from this vicious circle won’t be easy.
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Saturday, February 1, 2020

It's official: too much banking is bad for you

When the newish boss of the International Monetary Fund, Bulgarian economist Kristalina Georgieva, contemplates the challenges of the new decade, she thinks of many things: increasing uncertainty, climate change and increasing inequality – particularly the role the financial sector in making it worse.

Georgieva foresees increasing uncertainty over geopolitical tensions, uncertainty that the trade truce between the US and China will last, and uncertainty that governments can fix the frustrations and growing populist unrest in many countries. "We know this uncertainty harms business confidence, investment and growth," she said in a recent speech.

On climate change, after observing that the "brush fires" blazing across Australia are a reminder of the toll on life that climate change exacts, she avoids saying that we are possibly the most vulnerable among the rich countries (something that might have surprised the she’ll-be-right Scott Morrison).

But she did note that it’s often the poorest and most vulnerable countries that bear the brunt of "this unfolding existential challenge". "The World Bank estimates that unless we alter the current climate path an additional 100 million people may be living in extreme poverty by 2030," she says.

The previous decade saw the rich world’s economists become much more conscious of the economic importance of inequality, with the IMF’s economists at the forefront of this realisation. "We know that excessive inequality hinders growth and hollows out a country’s foundations. It erodes trust within society and institutions. It can fuel populism and political upheaval," she says.

Many people think of using the budget to reduce inequality, which they should, "but too often we overlook the role of the financial sector, which can also have a profound and long-lasting positive or negative effect on inequality," she says.

"Our new staff research shows how a well-functioning financial sector can create new opportunities for all in the decade ahead. But it also shows how a poorly managed financial sector can amplify inequality."

"Financial deepening" refers to the size of a country’s financial services sector relative to its entire economy. Georgieva notes that, on one hand, developing countries benefit from the growth of their undeveloped financial sectors as small businesses and ordinary households gain access to credit and saving and insurance products.

The sustained growth in the financial sectors of China and India during the 1990s, for instance, paved the way for enormous economic gains in the 2000s. This, in turn, helped in lifting a billion people out of poverty.

On the other hand, the IMF’s latest research shows there’s a point at which financial deepening is associated with exacerbated inequality and less-inclusive growth. Many factors contribute to inequality, but the connection between excessive financial deepening holds across countries, she says.

Why is too much "financialisation" of an economy a bad thing? "Our thinking is that while poorer individuals benefit in the early stages of deepening, over time the growing size and complexity of the financial sector end up primarily helping the wealthy.

"The negative impact is especially visible where financial sectors are already very deep. Here, complicated financial instruments, influential lobbyists, and excessive compensation in the banking industry lead to a system that serves itself as much as it serves others."

The US has one of the most diversified economies in the world (it has a lot of everything). And yet, in 2006, financial services firms comprised nearly a quarter of the S&P500 share index and generated almost 40 per cent of all profits. (Read that again if it doesn’t amaze you.) Obviously, this made the financial sector the single biggest and most profitable part of the whole sharemarket.

Does that strike you as out of whack? What happened next – the global financial crisis and the Great Recession – tells us that excessive financial sectors increase the risk of financial instability and collapse.

The painfully slow recovery from that episode of financial crisis was the defining issue of the past decade. Research shows that, on average, a country’s financial crisis leads to a permanent loss of output (gross domestic product) of 10 per cent. This can cause a lasting change in the country’s direction and leave many people behind (as the Americans, with their opioid and middle-aged male suicide crises, know only too well).

The IMF’s latest research shows that inequality tends to increase before a financial crisis, suggesting a strong link between inequality and financial instability. But also, of course, the subsequent recession usually leads to a long-term worsening in inequality.

Much effort has been made since the global financial crisis to make the banks more stable and better regulated. But no one imagines this guarantees there couldn’t be another major crisis.

Georgieva says financial stability will remain a challenge in the decade ahead – for all the usual reasons, but also for "climate-related shocks". "Think of how stranded assets [such as now-unviable coal-fired power stations or coal mines] can trigger unexpected loss," she says. "Some estimates suggest the potential costs of devaluing these assets range from $US4 trillion to $US20 trillion."

The private sector and the banking industry, not just governments, have a critical role to play in making the financial system more stable, she says. That’s certainly the case when it comes to the climate’s effect on financial stability.

"The financial sector can play a critical role in moving the world to net zero carbon emissions and reaching the targets of the Paris agreement. To get there, firms will need to better price climate change impacts in their loans.

"Last year, climate change claimed its first bankruptcy of an S&P500 company. It is clear investors are looking for ways to adapt. If the price of a loan for an at-risk project increases, companies may simply decide the money for the project could be better spent elsewhere."

What has stopping climate change got to do with inequality? If we don’t, the consequences will fall hardest on the world’s poor (and Australians).
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