Wednesday, September 22, 2021

Timing the economy to fit a pandemic election is a tricky business

So, with Scott Morrison pulling the new AUKUS pact out of his hat, will we be off to a khaki election? It would hardly be the first election conservative governments have won by promising to save us from the threat to our north.

But that’s why I doubt it. For an issue to dominate an election campaign, it has to be in contention. National security is an issue that always favours the conservatives, so Labor won’t be offering any objection to AUKUS or nuclear subs.

Similarly, an issue that should figure large in the campaign is whether the Coalition is too conflicted over climate change to be worthy of re-election. But that issue naturally favours Labor, so Morrison won’t want to take up that fight.

Which leaves? The economy, stupid. Until the end of June, the economy was looking in great shape, better than it had been even before the pandemic. But the arrival of the Delta variant means that, right now, more than half the national economy is back in lockdown, and looking mighty sick.

Does it surprise you that Morrison’s so keen to see the south-eastern mainland states out of lockdown and the others opening their borders, and is pressing the premiers accordingly? He desperately needs the economy back looking trim and terrific by March – May at the latest.

Add to this the business community’s pressure to get back to business – “don’t bother me with all the COVID details” – and the public’s impatience to get life back to normal. Sydneysiders have had enough of lockdowns; Melburnians have had more than enough – something even “Dictator” Dan Andrews can see.

So Gladys Berejiklian and Andrews have added their separate modelling by the Burnet Institute to Morrison’s National Plan modelling by the Doherty Institute – not to mention the independent modelling by the Kirby Institute – and announced their “road maps” for opening up their economies progressively once vaccination rates have reached 70 per cent and 80 per cent of the eligible population, expected in mid-to-late October and early November.

NSW is projected to be only about a week ahead of Victoria, and the gap between 70 and 80 per cent only about two weeks.

Everyone’s so pleased to be getting on with it that we risk losing sight of the high risks the two premiers are running. If all goes to plan, we’ll be back to a new (still-masked) normal by early next year, and the economy will be humming in time for a March election.

But models, based on a host of unmentioned explicit and implicit assumptions, inevitably give politicians and punters a false sense of certainty. No model can accurately predict something as mercurial as human behaviour. And, as we’ve learnt, a new coronavirus knows nothing of models and is a law unto itself.

The risk Andrews and Berejiklian face is that so many unvaccinated people contract the virus that our hospital system is overwhelmed, with people dying because they were turned away, leading to a number of deaths the public finds unacceptable. Whether they press on or turn back, the premiers would be in deep trouble.

The first risk comes from an ambulance and hospital system that, 18 months after the crisis began, is already at full stretch. The premiers tell us our wonderful health workers are coping; the message from ambos, doctors and nurses on the ground says they’re close to collapse.

The next risk comes from the inconvenient truth that our vaccination targets of 70 and 80 per cent of people 16 and older turn out to be just 56 and 64 per cent of the full population. That’s a huge proportion of unvaccinated friends and relations.

Remember, too, that these are statewide averages. They conceal less-vaccinated pockets of particularly vulnerable groups – the disabled, the Indigenous, for instance – and a city-country gap that leaves many rural towns hugely exposed, together with their limited hospital capacity.

Even the decision to move as soon as the 70 and 80 per cent targets are reached, rather than wait another fortnight for vaccines to become fully effective, carries a risk of higher infection.

Both the Burnet and revised Doherty modelling say starting to open up at 70 per cent rather than 80 per cent is likely to involve significantly higher infections, hospitalisations and deaths. Why take that risk just to avoid waiting another fortnight or so?

Morrison’s national plan called for all states to open up together once all had reached the 70 and 80 per cent targets, but now NSW and Victoria are going first. This increases the risk that, despite the other states’ closed borders, the virus will spread to them – where the lesser threat of catching the virus has caused vaccination rates to be much lower.

The risk for Berejiklian and Andrews is that they could be moving the Delta outbreak from the city to the country. The risk for Morrison is that, by pressing those two to open up early, he could be moving the outbreak from one half of the economy to the other.

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Monday, September 6, 2021

Smaller Government turns out to be penny wise, pound foolish

Our problems responding to the pandemic are just the latest, most acute demonstration of the failure of the decades-long pursuit of Smaller Government. It was intended to leave us better off by rooting out waste and inefficiency, so we’d get government services of unchanged – maybe better – quality at less cost to taxpayers.

You’d have to say the project has limited the rise in government spending – after allowing for inflation and population growth – despite politicians on both sides being willing to increase the services provided. The Libs on defence and security; Labor on the Gonski school education funding reforms and the National Disability Insurance Scheme.

There’s little reason to believe we’ve seen much improvement in the efficiency with which government services have been delivered. Rather, there are numerous examples of reductions in the quality of services and a decline in the policy capability of public service – evident in the need to bring in military generals and the small fortune being spent on management consultants from the big four accounting firms.

This failure isn’t surprising when you remember the Smaller Government project is based on prejudice rather than evidence – the public sector is always inefficient; the private sector is always efficient – and on using the crudest measures to achieve greater efficiency.

For economists, the private good/public bad mentality is implicit in the neo-classical model of how the economy works. For business people and politicians, it comes from tribalism: the private good guys versus the public bad guys.

The Smaller Government push has been hijacked by conservative politicians wanting to transfer taxpayers’ money, workers and (they hope) votes from the public Labor column to the private Liberal column.

To the nation’s business people, privatisation spells access to the state’s monopoly pricing powers. Outsourcing gives them easier access to the vast profit-making opportunities of that Aladdin’s cave that is the government’s coffers.

Leaving aside this hijacking of the Smaller Government push for PPP – party-political purposes – it’s done more harm than good for two reasons: because of the failure to think through the objects of the exercise and because of the crude methods used to limit government spending.

One reason government spending has continued to grow is that governments have continued to promise voters new and better services. This is no bad thing, and is inevitable as we get richer and our wants shift from more goods (which are usually best produced by the private sector) to more services, many of which – such as education and healthcare, childcare, disability care and aged care – are better funded (and often, provided) by the public sector.

Once you accept that, in terms of government spending, literally Smaller Government is never going to happen, you realise the object of the exercise should be not smaller government, but better government: government that achieves its objectives efficiently and effectively. Government that gives value for money.

A big part of the problem is that, within the bureaucracy, the Smaller Government push has been led by the accountants in the Finance Department, with little thought applied by the economists in Treasury.

Lacking an appreciation of the broader economic issues involved in government budgeting, Finance has taken a Good Housekeeping approach: a tidy budget is a balanced budget. It’s been a short-sighted, budget-to-budget affair: “next month’s budget’s deficit is looking on the high side, so what quick cuts can we make to stop it looking so bad?”

This mentality is what breeds the crudeness of the measures used to limit spending – notably, the annual “efficiency dividend”, which each year imposes an arbitrary, top-down percentage cut in the total administrative costs of a department or agency. “We have no idea where the waste is, but there must be plenty of it, so you find it.”

After a couple of decades of saying “there must be plenty of waste” every year, the waste is long gone. Departments are left to find their own cuts, and what they cut is anything that won’t bring howls of protest from the lobbyists representing the powerful industries the department is supposed to be regulating in the public interest.

You end up cutting things where the true cost won’t be apparent until sometime in the future – such as the people doing the department’s policy development, the preparations you’re making for a pandemic that may never happen, and anything that involves cost now in return for cost-savings later.

This, however, is just the opposite to what you should be doing to make government better – more cost-effective. You should be seeking out, initiating and protecting spending that’s an investment in future cost-saving.

What we’ve ended up with isn’t Smaller Government, it’s just penny-pinching. It’s being penny wise and pound foolish.

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Friday, September 3, 2021

When judging recessions, depth matters more than length

With the publication this week of the latest “national accounts”, our situation is now clear: we’re not in recession, yet we are – but, in a sense, not really.

Confused? It’s simple when you know. One thing we do know is that the economy – as measured by real gross domestic product – will have contracted significantly in the present quarter, covering the three months to the end of September.

At this stage, the smart money is predicting a contraction – a fall in the production and purchase of goods and services – of “two-point-something” per cent, although there are business economists who think the fall could be as much as 4 per cent.

Recessions are periods when people cut their spending sharply, causing businesses to cut their production of goods and services and lay off workers. It’s mainly because so many people lose their jobs that recessions are something to be feared. But also, a lot of businesses go broke.

This means no one should need economists to tell them if we are or aren’t in recession. If you can’t tell it from all the newly closed shops as you walk down the main street, you should know from what’s happening to the employment of yourself, your family and friends. Failing that, you should know it from all the gloomy stories you see and hear on the media.

Have you heard, by chance, that NSW, Victoria and now Canberra are back in lockdown, leaving some workers with no work to do, and the rest of us unable to spend nearly as much as usual because we’re confined to our homes? You have? Then you know we’re in recession.

When the first, national lockdown began in late March last year, real GDP contracted by 7 per cent in the June quarter. That was the deepest recession we’ve had since the Great Depression of the 1930s.

But it was also the shortest recession we’ve had because, once the lockdown was lifted, the economy – both consumer spending and employment - immediately began bouncing back. As the Australian Bureau of Statistics revealed this week, the bounce-back continued in the June quarter of this year, which saw real GDP growing by a strong 0.7 per cent, leaving the level of GDP up 1.6 per cent on its pre-pandemic level.

All clear so far? The confusion arises only in the minds of those people silly enough to let the media convince them that, despite all the walking and looking and quacking they see before their eyes, a recession’s not a recession unless you have two consecutive quarters of contraction in GDP.

The size of the contraction is of no consequence, apparently, nor would be two or more quarters of contraction that weren’t consecutive. This is nonsense.

As my colleague Jessica Irvine has explained, this “rule” is repeated ad nauseam by the media, but has no status in economics. It’s a crude rule of thumb that’s frequently misleading. It’s in no way the “official” definition of recession.

But the consecutive-quarter rule is so deeply ingrained that it causes needless debate and uncertainty. Some business economists convinced themselves that this week’s figure for growth in the June quarter could be a small negative.

Oh, gosh! Since we know the present quarter will be a negative, that means we could be in another recession. Quick, get out the R-word posters.

But no. June quarter growth proved stronger than expected. Treasurer Josh Frydenberg couldn’t resist the temptation to declare there’d been no “double-dip recession”. Thank God!

But wait. The lockdowns could easily continue beyond the end of this month and into the December quarter. So we could have a second negative quarter on the way. Quick, bring back the posters and start writing the double-dip speech.

Sorry, this is not only silly, it’s got the arithmetic wrong. When the economy goes from growth to lockdown, you get a negative. But when, in the follow quarter, the economy merely stays in lockdown you get zero growth, not another fall.

The present lockdowns apply to a bit over half the economy. So, if the other half continues to grow, we will get a positive change in GDP during the quarter.

What’s more, if the lockdowns end sometime before the end of December, we’ll get a bounce-back in growth in that half of the economy, as everyone rushes out to start buying the things they were prevented from buying during the lockdown.

That’s what happened last time the lockdown ended; it’s safe to happen this time too. So it’s hard to see how we could get a second quarter of “negative growth” in the three months to New Year’s Eve.

We’ll learn what the figure was in early March, in good time for the federal election. Stand by for Frydenberg’s triumphant declaration that we’ve avoided a double-dip recession for a second time. He’ll turn the media’s consecutive-quarters bulldust back on them, and spin a story of great success.

But this will literally be non-sense. He’ll take a contraction in the September quarter of, say, 2 to 4 per cent – as big as the contractions that caused the recessions of the mid-1970s, the early 1980s and the early 1990s – and pretend it doesn’t count, simply because that massive contraction was concentrated in one quarter rather than spread over two.

He’ll con us into accepting that the depth of a slump doesn’t matter, just its length. More nonsense.

But there remains a respect in which, like the first dip, the second isn’t really a recession. What we had last year and are in the middle of right now aren’t recessions in the normal sense.

They’re artificial recessions deliberately brought about by governments to minimise the loss of life from the pandemic. They thus involve a degree of monetary assistance to workers and businesses unknown to normal recessions. This means they don’t take years to go away, but disappear in six months or so because of the speed with which the economy bounces back when the lockdown ends.

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Wednesday, September 1, 2021

If you want to shop in competitive markets, you’ll have to fight for it

The lockdown is dragging on so long and its end point is so uncertain that it’s easy to become anxious and despondent. That’s especially true of the young, who’ve had less experience of bad episodes eventually passing. The rest of us know they will, however long it takes. But it may help if we switch the focus to what we’ll do to make the world a better place once things return to normal.

One conclusion the young are justified in reaching is that the world is run by well-off older men (present company excepted) intent on making the world better for themselves, even if that comes at the expense of others.

A question for the coming federal election is which side is more likely to restrain the rich and powerful rather than help them in their quest.

It’s true that people near the very top have continued doing better, while the rest of us have had very modest pay rises. In healthy market economies, vigorous competition and continuous investment in better machines increases the productivity of workers, which is reflected in higher real wages.

There’s been very little of that over the past decade and one reason for this seems to be a decline in competition between the few big businesses that dominate so many of our markets.

When companies get bigger by taking over their competitors, this gives them more power to increase their prices and profits (and executive salaries) without them becoming more efficient or paying their workers more.

The list of Australian markets dominated by a few large firms is long, including banking, supermarkets, insurance, electricity and gas retailing, domestic air travel, pathology testing, mobile phones and internet service providers, not to mention internet search and social media platforms.

It may surprise you that, contrary to what happens in other advanced economies, companies seeking to merge don’t need permission from the ACCC, the Australian Competition and Consumer Commission.

Many choose to consult the commission, but if they press on with a merger the ACCC thinks will increase their “market power”, its only recourse is to take them to the Federal Court and convince it that the merger would “substantially lessen competition” in the future.

This isn’t easy. The executives generally assure the judges that something so dastardly has never crossed their mind, and their assurances are believed. The last seven times the commission has sought to get mergers blocked, it has failed.

It’s not the court’s job to come back a few years later and see if those assurances were honoured by the rich and powerful men whose evidence the judges found it so easy to believe.

So, in a speech last week, commission chair Rod Sims sought to start a public debate on “market concentration” and proposed that the proponents of mergers be legally required to notify the commission of their intentions, then wait for the deal to be assessed and cleared before proceeding. The proponents could appeal in court against any decision they didn’t like.

Sims says competitive markets work much better for consumers, and increase innovation and productivity.

“While the available evidence is not definitive, it appears that market power [to raise prices] is increasing in Australia. This trend has also been observed in many advanced economies, including by the International Monetary Fund,” he says.

“Without action, market power in Australia will become further entrenched; and will certainly not reduce.”

Market power is hurting Australians in many ways, he says. Consumers are paying more than they should for a wide range of goods and services.

It’s also “squeezing the incomes of farmers. For example, chicken growers and dairy farmers have little option but to sell their produce to large buyers with substantial bargaining power.” Farmers purchase many of their supplies from only a few big sellers.

“Many small businesses and farmers are largely reliant on Coles and Woolworths to access grocery shoppers ... This power imbalance places small businesses and farmers in precarious positions with consequent damage to our economy.

“In digital markets, we are exchanging access to our personal data and attention for so-called ‘free’ services, but have little choice, knowledge or control over how our data is being used.”

Now, if you’re sitting down, I’ll tell you something that will amaze. Jennifer Westacott, chief executive of the Business Council of Australia, can’t see what the fuss is about. She fears the proposed changes would be “another blow to investment”. (By which I assume she means businesses “investing” in the takeover of other businesses.)

As for Treasurer Josh Frydenberg, he has no enthusiasm for Sims’ reforms. He says the lockdown means we need to encourage business and growth, not throw up regulatory barriers. (I suspect we’ll be hearing a lot more of that convenient argument between now and the election.)

Do you see why Sims wants to start a public debate? If this issue is left for the Treasurer and the big-business lobby to sort out behind closed doors, nothing will change.

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