Monday, February 28, 2022

Everyone else has an inflation problem, why can't we have one too?

I suspect we’re engaged in a strange exercise of trying to convince ourselves that we, like the Americans, Brits and Europeans, have a big problem with inflation. I fear that, if we try hard enough, we’ll succeed.

As the December quarter consumer price index shows, it’s true some prices have risen noticeably. The price of petrol has jumped and so have home building costs.

But, as our top econocrats have been reminding us, that’s not a big deal. The world price of oil has always gone up and down, for many reasons – none of which we have any ability to influence. Most other rises we’ve seen are temporary problems caused by the pandemic and governments’ response to it, as the supply of certain goods (but not services) falls short of demand. Computer chips, for instance.

And, as Reserve Bank governor Dr Philip Lowe demonstrated in his recent testimony to a parliamentary committee, our price rises are nothing like as big a deal as those in America, Britain and Europe, where there’s a lot more going on than just the passing effects of the pandemic.

Lowe noted that, over the past year, electricity and gas prices have risen by 25 per cent in the US and Europe, and even more in Britain, but by 2 per cent in Australia. Used car prices are up 40 per cent in the US, but nothing like that here.

People complain about rising rents but, as with mortgage interest rates, there’s a gap between advertised rates and what people actually pay. Actual rents have fallen in Sydney and Melbourne. And though everyone’s highly conscious of the jump in petrol prices, petrol accounts for only about 3 per cent of the cost of all the goods and services households buy.

The funny thing is, there are various groups in Australia that want to believe our problem’s as big as the other rich countries’. The key group is the financial markets. As Lowe said, “some in financial markets look at what’s going on in the United States and Europe and say, ‘They’ve got higher inflation, it’s coming to Australia’. They may be right” - he said before going on to explain why that was unlikely.

But so convinced are our financial markets that we’re just a carbon copy of the US economy that they’re laying bets the Reserve will be forced to start whacking up interest rates within a few months and will go hell for leather for the rest of the year.

The media have been happy to report this speculation as though it’s pretty much set in stone. “Inflation on the rise” is a good story and “rates to rise” even better.

As for the public, it’s kinda pleased to be told inflation’s a big problem, not because it likes rising prices, but because it confirms what people have always believed: that keeping up with “the cost of living” is always a struggle.

If you run a bit short before pay day, this is incontrovertible proof that prices are rising rapidly. The notion that the problem may be inadequate pay rises never seems to occur.

The CPI people carry in their heads always gets much bigger increases that the one calculated by the Bureau of Statistics because ordinary mortals’ memory of price rises is always stronger than their memory of price falls. And it never occurs to them to include in their sums all the many prices that didn’t change.

Which means, I fear, there’s a big risk that all the talk of inflation and rising prices – and all the media stories of a rise in this or that price; stories that multiply when “inflation” becomes the flavour of the month - could become a self-fulfilling prophecy.

To see this, you need to remember where we’ve come from: eight years of surprisingly weak growth in wages and six years of the (officially-calculated) inflation rate being below 2 per cent.

For much of that time, Lowe – whose scrutiny of statistics is supplemented by having his “liaison” people speak to more than 100 key businesses a month – has explained the weakness in wage and price inflation as arising from a strong “cost-control mentality” among Australian businesses.

Lowe explains that many businesses – retailing in particular – have been through a period of intense competition. There’s the threat from “category killers” such as Bunnings and Officeworks, the decline of department stores, Aldi taking on Coles and Woolies, and the move to online shopping, which has opened access to overseas competitors and made price more “salient” in decisions to buy things.

This increased competition came at a time when retail demand hasn’t been particularly strong (thanks mainly to weak wage growth). Special sales and other forms of discounting have been widespread.

In these circumstances, firms have been most reluctant to raise prices. Rises in purchase costs that may not last have been absorbed rather than passed on. Instead, firms have become obsessed with controlling their costs – including, and in particular, their labour costs.

In their book Radical Uncertainty, British economists John Kay and Mervyn King argue there’s no such thing as a profit-maximising firm. It’s not that firms wouldn’t like to earn maximum profits, it’s that they don’t know where that point is.

In real life, there’s no diagram or equation you can look up to tell you. You know there is a “price point” beyond which you’ll lose more in sales than you gain from the price increase, but you don’t know where it is. In real life, you have to feel your way, reading the signs and making sure you don’t push it too hard.

See where I’m going? We’re coming from a period where price rises have been heavily constrained for a long time. Not big, not many. “I haven’t been game to raise my prices because none of my competitors have been been either.”

Suddenly, however, everyone’s talking about inflation and every day the media are reporting that this price is rising and that price is going up. It’s obvious prices everywhere are taking off.

“One of my competitors has moved, so I can too. There’s always some cost increase I can point to. In this environment, I won’t get much push-back from customers. The media’s been softening them up.”

Can we talk ourselves into having a real inflation problem like the other rich countries? We’ll find out whether prices can be raised by imagination alone.

I fear, however, that getting those higher prices passed through to bigger wage rises will be a taller order. And, if that doesn’t happen, we’ll get no ongoing increase in the inflation rate, just a worsening in the cost of living.

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Competition boss warns faith in market economy under threat

In his parting remarks last week, veteran econocrat Rod Sims, boss of the Australian Competition and Consumer Commission, offered some frank advice to his political masters and big business.

Let me put it even more frankly than he did: if governments don’t require businesses to improve their behaviour, voters and consumers could lose faith that they’re getting a fair shake from a lightly regulated economy and fall for populist solutions that make things worse for everyone.

Though business leaders make speeches in praise of competition, the truth is businesses hate competition. Why wouldn’t they? It makes their jobs much harder. To the extent the law allows, they buy out or bankrupt small competitors, and take over big ones.

In its public statements, the Business Council poses as wanting economic “reform” in the interests of us all. Behind the scenes, it lobbies governments hard to preserve big businesses’ ability to take over competitors and to impose unreasonable terms in transactions with small businesses.

Politicians make speeches about the importance of small business because all those owners add up to many votes. But pollies yield to the lobbying of big businesses because they make generous donations to party coffers, which can be used to buy votes through advertising and the rest.

It follows that the competition commission and whoever’s running it get a hard time from business interests. The more effective that person is in seeking to achieve “effective competition”, the more criticism they attract.

Whenever they take court proceedings that fail, there’s much crowing by business commentators. Elsewhere, competition regulators are attacked for being sleepy and toothless watchdogs.

Of course, public servants are too discrete to say all that. So let’s switch to what Sims actually said in his valedictory speech to the National Press Club. It was frank - by the standards of econocrats.

“When I arrived at the commission [11 years ago] I mentioned my main objective in chairing the commission was ‘that Australians see that a market economy and strong competition work for them and that they see the commission working tirelessly for the long-run interests of consumers’, he said.

“We must recognise that a market-based economy is fragile, as its organising principle relies on companies and businesspeople pursuing their own self-interest. This is not an obvious way to organise things.

“For this to work to the benefit of all Australians requires, at a minimum, strong competition between firms and strong enforcement of the Competition and Consumer Act.

“In our society, large established businesses have a strong voice, which is not surprising as the largest firms employ many people and supply Australians with many of their needs.

“Often, however, the understandable interest of large established businesses in short-term advantage sees them, I believe, work to the disadvantage of their own long-term interests,” he said.

Large established businesses had opposed all the main changes to the competition Act when they were introduced, he said. For example, laws against misleading and deceptive conduct.

“I would ask, however, how many specific interventions and extra red tape would we now have that would damage our market economy, if we did not have this general provision?”

The competition Act largely had economy-wide laws, whose effectiveness underpinned the necessary wide acceptance of the market economy. “Perceptions of unfairness and inequity will see faith in a market economy eroded,” he warned.

Last year Sims proposed a tightening of our merger law. Big business was loud in its disapproval. Distinguished corporate lawyers insisted the present laws were working fine. Business commentators were dismissive.

Last week Sims said “large established businesses and their advisers will oppose these changes, but my guess is that well over 90 per cent of Australians would support them. Further, I think such changes would strengthen our market economy, and would benefit the vast majority of Australian businesses.” (He means the smaller ones.)

When Sims took over the commission in 2011, it had a near-perfect success rate in its court actions. He took this as a sign it was being too cautious in its efforts to enforce the law.

Eleven years later, “we have a good win/loss record, including recent guilty pleas in cartel cases, including by individuals in two criminal cases. I recognise, however, that we have had some losses, including in a recent high-profile case.”

The commission’s record on enforcing the protection of consumers “includes creative wins against companies such as Trivago (where we unpicked its algorithm) and Google, and we have seen penalties imposed by the courts for breaches of the Act increase from $1 million being seen as high, to recent penalties of $50 million against Telstra, $125 million against VW, and $153 million against AIPE, a vocational education provider.”

Let’s hope Sims’ successor is just as diligent in protecting the market economy against its own excesses.

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Friday, February 25, 2022

Here's a novel idea: Australia needs more competition, not less

Business has many tired ideas for reforming the economy and improving productivity, most of which boil down to: cut my tax and give me more power to keep my wage bill low. But a veteran econocrat has proposed a new and frightening reform: make our businesses compete harder for our custom, thus making it harder for them to raise their prices.

Treasurer Josh Frydenberg has asked the Productivity Commission to undertake a five-yearly review of our (dismal) productivity performance. And this week Rod Sims, who’s departing after 11 years heading the Australian Competition and Consumer Commission, offered a few helpful hints in a speech to the National Press Club.

Sims says “the Australian economy suffers from high levels of market concentration [markets dominated by a few big firms] to the detriment of consumers, small business and productivity”.

He argues that the pandemic-related supply shortages and logistics problems we’re facing are worsened by market concentration in so many areas and by our infrastructure bottlenecks.

“We need to address this through competition law, to prevent anti-competitive abuses of market power, and through general infrastructure reform,” he says. He’s referring mainly to road, rail, air and sea transport facilities, and also to utilities – electricity, gas and water.

Australia’s infrastructure is generally high cost, he says, compared with other countries. “Why do we keep privatising assets and claiming success when huge amounts are paid for the asset?”

My answer: when state Treasuries are run by bankers rather than econocrats, that’s what they think they’re supposed to be doing.

Sims says that often, “these huge prices are the result of closing off competition, or because a monopoly was deliberately sold without any regulation of the prices that can be set for users who have no alternative but to use the monopoly asset”.

“Such behaviour can dramatically affect existing users and could be considered a continuing tax on the community,” he says.

Governments need to sign up to a checklist before infrastructure assets are sold to avoid provisions which restrict competition and to ensure there is appropriate regulation where monopoly or significant market power will exist after the sale to private interests, he says.

“Let’s acknowledge this issue and fix it so that Australia can avoid even higher priced infrastructure in future.”

Another infrastructure challenge is ensuring the regulatory arrangements for the National Broadband Network are appropriate.

“After [the federal government] spending $50 billion on the NBN, the objective must not be a commercial return on the [$50 billion] sunk investment. It must be making the best use of this great asset.

“The prices that allow the NBN to get a commercial return on all its outlays, and the prices that make best use of this expensive asset, are very likely quite different,” he says.

We all saw the benefit of having the NBN completed in time for the pandemic lockdowns. That’s just a taste of the benefits if we get the NBN’s pricing right. Prices must allow the NBN to keep investing as needed, but must also see optimum use made of the network.

That is, the goal should be maximising the network’s benefit to the whole economy, not creating a new business that can exploit the pricing power that usually goes with a monopoly network, then selling it off to the highest bidder (or continuing to own it while overcharging customers).

Another area where we’re not getting enough competition, are paying prices that are too high (often in ways that aren’t visible) and are crimping productivity improvement is “digital platforms”.

Sims says we have an internet dominated by a few gatekeeper companies: Google has 95 per cent of searching activity, Facebook dominates social media, and Google and Apple dominate the app market, particularly on mobile devices.

“I am proud that the ACCC is at the forefront of world efforts to identify the harms from digital platforms and potential solutions to them,” he says.

While it’s true that these giants innovated their way to success - bringing many benefits to ordinary internet users – it’s equally true they also acquired a huge array of companies that could have been competitors, which has extended their reach and cemented their power.

They also engage in many activities, from “product bundling” (where to get the ones you want, you have to pay for stuff you don’t want) to “self-preferencing” (where they put their own products at the top of a list, and rival firms’ products at the bottom). Over time, this has lessened competition in various important digital markets.

The digital giants also have access to, and control, a massive amount of data, which has seen harms ranging from that seen with Cambridge Analytica, to profiling people so as to maximise sales by exploiting consumers’ vulnerabilities.

Then there’s the many examples of inadequate competition in banking. Sims quotes just three. First, the price of the most important financial product, a home mortgage, is unknowable without huge effort and cost, which benefits banks and harms borrowers.

The still-being-rolled-out “consumer data right” (that is, it’s your data so you should be able to have it forwarded to a rival business) should help this a lot. And Sims wants consumers to be continually informed by a “prompt” of what typical borrowers are paying, so they know when to start shopping around.

Second, to reduce “debanking” – where banks find excuses to refuse to move money that has been arranged through the new “fintechs” and money remitters – the government should set up a scheme these digital non-banks can use to prove their controls are adequate to detect money laundering.

Third, now the digital giants are getting into the now largely cashless world, outfits such as Apple Pay must be stopped from preventing other providers of digital wallets making use of its “near field technology”.

Funny how it’s never occurred to the Business Council and other business lobby groups wringing their hands over weak productivity that an obvious solution to the problem is to make firms compete harder for their profits.

Read more >>

Wednesday, February 23, 2022

Interest rates won't rise until wages are higher

Let’s talk about pay. Been getting pretty good rises of late? Well, some people have. But if your pay increases have been small and far between, you’re in good company. And I have some good news. Well, not so much good news as not-as-bad-as-it-could-be news.

In recent times people in our financial markets – including the banks – have been predicting that the Reserve Bank will start raising its official interest rate within a few months and, once it starts, there’ll be more increases in quick succession.

The media have been reporting these predictions with great enthusiasm, almost implying they’re a certainty. The financial types are so confident because interest rates really are about to rise in America, and they save on research time by assuming anything the Americans do, we’ll do a few months later.

The Americans have had a lot of price rises lately and, thanks partly to their Great Resignation, also seen strong growth in wage rates. When prices rise a lot and this flows through to higher wages, that’s when you do have a problem with ongoing inflation – a “wage-price spiral”.

But here’s the thing. We’ve had a smaller rise in prices but, so far, little rise in wages. (We’ll see on Wednesday, with the publication of the Bureau of Statistics’ wage price index, how much that changed in the three months to December.)

And Reserve Bank governor Dr Philip Lowe has said repeatedly that he won’t be raising interest rates until he sees that the rise in prices is also reflected in wage rises. As he put it in his recent parliamentary testimony, “the higher interest rates will be occurring in an environment where people have stronger wages growth and jobs”.

So the banks’ predictions about rising interest rates imply that most workers will be getting a pay rise of 3 per cent or so this year. Find that hard to believe?

According to the wage price index, wage rises have averaged 2 per cent a year over the past six years. And, as you remember, businesses and governments were quick to impose wage freezes when the pandemic began in 2020.

A move to 3 per cent rises is always possible of course but, given recent history, I’ll believe it when I see it. And Lowe’s also waiting for the evidence. As he puts it, “is the stronger labour market going to translate to higher wages?”

The fad of assuming that whatever happens in America also happens here has led some to talk about our own Great Resignation. It’s not true.

In the US, many workers have simply given up working or looking for work. Some are staying home to care for family, some to avoid the plague, some because the upheaval has caused them to re-evaluate their lives.

“Especially if you were working in a low-wage job, you probably thought that the risk [of infection] was not worth the return,” Lowe says. Older Americans were “leaving the workforce in droves”.

But whereas the proportion of working-age people who are in the US labour force has fallen heavily – thus requiring employers to offer higher wages to attract the workers they need – this hasn’t happened here. Our rate of people “participating” in the labour force has returned to its record level pre-pandemic.

Which is just one sign of how much “tighter” our jobs market has become. We have 270,000 more people in jobs than we did before the pandemic, and both unemployment and underemployment are at 13-year lows, while the number of job vacancies is at a record high. (Our closed borders to skilled workers, backpackers and overseas students have helped in this, of course.)

This tight market is the main reason the econocrats are hoping it won’t be long before employers are obliged to start offering higher pay rates to get – poach – the workers they need.

When that happens, it will be a new experience for a lot of employers, many of whom have got into the habit of thinking their profitability comes from keeping wage costs as low as possible.

In the old days, the unions and the regulated wage-fixing system could be relied on to ensure that wages kept up with rising prices – plus a bit more to ensure living standards kept rising. Not any more.

These days, few workers belong to unions, and it’s not hard for employers to stop engaging in enterprise bargaining. And, as we’re seeing with the NSW government’s resistance to its transport workers’ wage claim, workers don’t get much sympathy from conservative governments.

These days, if you want a pay rise you have to get it yourself. Although we haven’t had a Great Resignation, the econocrats say we have had a significant increase in workers willing to change jobs for higher pay. We’ve also had employers agreeing to move workers to a higher pay grade.

The top econocrats hope that by keeping the job market tight they’ll finally crack the wages dam, getting the latest generation of employers used to the frightening idea than their workers are entitled to decent pay rises. Good luck, guys.

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Friday, February 18, 2022

Unlike the media, econocrats in no great hurry to raise interest rates

The financial markets and financial press may have convinced themselves we have a serious inflation problem and must hit the interest-rate brakes early and often, but the clear message from our top econocrats is that they aren’t in such a hurry. Their eyes haven’t moved from the prize: seizing this chance to achieve genuine full employment.

Nothing in Treasury secretary Dr Steven Kennedy’s remarks to a Senate committee this week suggested he was anxious about our recent rise in prices, nor hinted that a rise in the official interest rate was imminent.

Indeed, “interest rates are still close to zero and expected to remain historically low for some time,” he said.

What little he said about inflation was that “the effects of COVID on inflation, often characterised as a combination of increased demand for goods [at the expense of demand for services] and supply-side shocks, are still passing through the economy.

“Fortunately, these impacts have been much less pronounced in Australia than in other countries. Nevertheless, the impacts have been felt and headline inflation is currently at an 11-year high.” (Not hard when inflation has been so low for so long.)

It’s true Kennedy also said that “it will not be until we see interest rates rise back to more usual levels that the risks associated with very low interest rates abate”.

But it’s clear he meant it would take years before the Reserve had rates back up to “more usual levels” - such as an official rate of 3, 4 or 5 per cent – not to give a big hint that Commonwealth Bank economists were right in predicting this week that the Reserve would start whacking up the official rate at its first board meeting after the May election.

And he was also making a quite different point. Settle back. Usually, he said, monetary policy (the manipulation of interest rates) is the primary tool with which to manage economic cycles, with fiscal policy (the manipulation of government spending and taxes in the budget) focusing on economic growth and budget stability.

Of course, in this conventional approach fiscal was complementary to monetary policy primarily through the workings of the budget’s “automatic stabilisers” (which cut tax collections and increase the number of dole payments when private sector demand is weak, but do the reverse when private demand is strong).

However, when major shocks to the economy come along, fiscal policy plays a more active role. And shocks to the economy don’t come bigger than the pandemic.

In any case, lockdowns cut the supply of goods and services, whereas monetary policy works to encourage demand – provided there’s plenty of scope to cut interest rates, which there wasn’t because rates were already close to zero.

So fiscal became the dominant policy instrument, with huge increases in government spending – including on the JobKeeper wage subsidy scheme – leading to huge increases in the budget deficit and public debt.

Got that? Now for Kennedy’s big announcement: “This unusual episode of macro-economic policy is now coming to an end.”

From here on, the dominant role will revert to monetary policy, with fiscal policy taking a step back.

Why? Well, partly because monetary policy will be busy for years getting interest rates back to “more usual levels”.

In which case, Kennedy says, “it is important that the withdrawal of fiscal policy support is tapered, as it currently is, to ensure that monetary policy has an opportunity to normalise”. (In the lingo of econocrats, “tapered” means something reduces slowly and steadily, not sharply and suddenly.)

As Kennedy says, the tapered withdrawal of fiscal policy support has already been arranged. That’s because all the government’s stimulus measures were designed to be temporary. So, as those programs wind up, the level of government spending – and the size of the budget deficit – will fall noticeably over the next few financial years.

Which means that what he’s really saying is there should be no additional, discretionary moves to hasten the return to a lower budget deficit. Why not? So monetary policy has an opportunity to “normalise”.

Get it? Over coming years, the Reserve will have to move interest rates up a long way to get them back where they should be – that is, to a level where borrowers have to compensate savers both for the loss of their money’s purchasing-power (that is, for inflation) and for being given the (temporary) use of the savers’ money.

But the Reserve’s scope to do this will be constrained if, while it’s trying to tighten monetary policy, the government’s rapidly tightening fiscal policy.

And Kennedy says there’s “an even more compelling reason” for fiscal policy support for demand not to be withdrawn too abruptly. Which is? “The opportunity to achieve full employment”. The “important opportunity to achieve and sustain full employment.”

No one knows how far unemployment can fall before shortages of labour cause wages to grow at rates that worsen inflation. Which, Kennedy says, suggests we need to exercise “a degree of caution” in tightening both fiscal policy and monetary policy.

All this fits with the remarks Reserve Bank governor Dr Philip Lowe made to a House of Reps committee the week before.

Lowe made it clear most of our inflation problem was temporary, not lasting. Although underlying inflation was 2.6 per cent, for the first time in years, “it is too early to conclude that inflation is sustainably in the target range”.

The Reserve has “scope to wait and see how the data develop and how some of the uncertainties are resolved” – one of which is whether “the stronger labour market [is] going to translate to higher wages”.

“I think it’s worth taking the time to have the uncertainties resolved and trying to secure this low rate of unemployment, which we have not had for 50 years.”

The financial types may be in panic mode over inflation, but it doesn’t sound to me like our top econocrats are in any mood to join them.

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Monday, February 14, 2022

Boring auditors-general our last defence against dodgy governments

You may be appalled by the ever-declining standards of propriety as the two main parties chase each other to the bottom of the barrel, putting career advancement ahead of their duty to voters. But recent events show our courageous auditors-general haven’t lost their commitment to upholding honest behaviour.

Which, particularly in the absence of a federal independent commission against corruption, is one thing to be thankful for.

Just last week in NSW, state Auditor-General Margaret Crawford issued a highly critical report on the Stronger Communities grants program established by the Berejiklian government before the 2019 state election.

The report said there was “little or no [defensible] basis” for the selection of grant recipients, with 95 per cent of all grant money flowing to 22 local councils belonging to Coalition electorates. These decisions were made by the former premier and her deputy, Gladys Berejiklian and John Barilaro.

This is reminiscent of federal Auditor-General Grant Hehir’s equally critical 2020 report on the “sports rorts” grants made by the Morrison government before the 2019 federal election. He found that the Australian Sports Commission’s carefully evaluated recommendations for grants were overridden by the minister’s office.

More than 61 per cent of the grants awarded failed to reach the commission’s merit cut-off. Rather, the grants went predominantly to sporting organisations in marginal electorates held by the Coalition.

When announcing tax cuts, Liberal politicians in particular love making speeches about how they’re only returning taxpayers’ own money. But in their attitude to pork-barrelling – it’s not illegal and everybody does it, in the immortal words of Saint Gladys – pollies on both sides act as though it’s really their money, to be spent as best suits their interests.

We’d know much less about their misuse of our money were it not for our auditors-general. The pollies want to keep it dark, but they can’t stop the auditors doing their duty. Scott Morrison was so grateful to the Australian National Audit Office he cut its funding. (More proof he regards taxpayers’ money as his own.)

As an accountant who was glad to escape auditing and become a journo, I’m pleased to acknowledge our debt to the auditors-general’s diligence. But I’m particularly impressed by the fearless Crawford’s blow against that great blight on budget honesty, “creative accounting” – using loopholes in the rules of public accounting to make the budget balance look better – or less worse – than it really is.

Some years ago, some bureaucrat in the NSW government (I doubt if any pollie could have come up with it) got the bright idea of making the budget look better by transferring the state’s railway assets to a new off-budget body, the Transport Asset Holding Entity.

This way, the cost of additional annual spending on rail infrastructure could be removed from the budget and treated “below the line” as an equity investment in a government-owned business. But this turned into an almighty and long-running battle between the state Treasury and the state Transport department.

Treasury prevailed and the Transport boss was dismissed without explanation. Enter the Auditor-General. Crawford declined to issue an audit report for the government’s 2020-21 accounts until she was satisfied all was in order.

In particular, she required evidence that the new holding entity was genuinely independent of the government and a genuinely profitable business. This would require higher annual payments from the budget for the use of the rail assets, thus reversing the engineered improvement.

Treasury delivered that evidence on December 23, allowing Crawford to issue an unqualified audit report about three months’ late. Soon after, Treasury secretary Mike Pratt, a former banker, announced his return to the private sector.

In another report last week, Crawford accused Treasury of obstructing her investigation into the holding entity by dragging its feet, withholding critical documents and overestimating the expected budget benefit from the transaction.

NSW Treasury’s reputation for probity has been damaged by evidence about the imbroglio given to a long-running parliamentary inquiry. Treasury regularly struggles to extract full and timely information from other departments. Now it has given them a master class in misbehaviour.

The parliamentary inquiry’s hearings have also damaged the reputation of KPMG – one of the big-four auditing firms moving into the more lucrative field of consultancy – which was revealed to have given opposing advice to Treasury on one side and Transport on the other.

The new NSW Treasury secretary is the highly experienced state and federal econocrat Dr Paul Grimes. Grimes has the distinction of having been sacked as head of the federal Agriculture department by Barnaby Joyce.

Joyce claims to have sacked him to show who was boss. It’s easier to believe that “a relationship of strong mutual confidence” between them wasn’t possible. In any case, the era of NSW Treasury being run by itinerant bankers seems to be over.

The holding-entity budget fiddle has its parallel federally. Both sides of politics have exploited a loophole in the definition of the budget balance introduced by Peter Costello’s Charter of Budget Honesty in the late 1990s.

The former Labor government used the loophole to stop its massive spending on the National Broadband Network from worsening the budget deficit by treating it “below the line” as an equity investment in a new for-profit business.

The present government is using the same trick to hide spending on its Nationals-inspired inland freight railway from Melbourne to Brisbane. A profitable business to be sold off at some future date? I think not.

There was a time when Yes, Minister was a reasonably accurate depiction of the relationship between a minister and his department head. But that was in Bob Menzies’ day. These days, the term “permanent head” is hardly apposite. Department heads have renewable fixed-term contracts, but it’s relatively common for prime ministers and premiers to lop off the heads of those who displease them.

When Tony Abbott sacked several department heads on coming to office in 2013, he was following the precedent set by John Howard in 1996. If the objective was to discourage unwelcome advice from bureaucrats – “Sorry, minister, that would be contrary to the Act” – it seems to have worked a treat.

So, how come our auditors-general are still so diligent in telling us when ministers have been playing ducks and drakes? Auditors-general are statutory officers appointed by the governor or governor general, and report to the parliament, not cabinet. They’re appointed for non-renewable eight or 10-year terms, and can’t move on to another government job. It’s a terminal appointment.

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Friday, February 11, 2022

Can we believe the great news on unemployment? Yes and no

Scott Morrison has a great re-election pitch: forget the problems with the pandemic, just look at how well the economy’s going. The rate of unemployment is already down to 4.2 per cent, and his goal is to get it below 4 per cent, the lowest it’s been in 50 years. Wow. What fabulous economic managers the Libs must be. But can you believe unemployment’s that low? Didn’t they fiddle with the figures some time back?

It’s good to be sceptical about the claims politicians make on the economy. Government politicians tend to tell us about the good bits and fail to mention the not-so-good parts of the story. Opposition politicians tend to do the opposite.

But not everything we think we know about the tricks politicians play is true. For instance, many people think they remember that, some years ago, a government changed the definition of unemployment to make the figures look better. They made it so that someone who worked just one hour a week was classed as employed.

This week I’ve had people asking me about this. In my experience, when a Labor government’s boasting about good unemployment figures, Liberal supporters remember Labor fiddled the figures. When, as now, it’s a Liberal government doing the boasting, it’s Labor supporters who remember a Liberal government doing the fiddling.

Which hints at the truth: actually, no government has changed the definition of unemployment. It’s an urban myth which, I suspect, has arisen because people get confused between who’s getting unemployment benefits and who’s unemployed.

The two are related, obviously, but they’re not the same. For instance, you can be unemployed and not get the dole because your spouse is working. On the other hand, single people working a few hours a week wouldn’t be earning enough to make them ineligible for the dole.

Governments can, and do, change the rules about who does or doesn’t get unemployment benefits. But who’s unemployed is measured by a huge monthly sample survey conducted by the independent Australian Bureau of Statistics.

It doesn’t let politicians decide who’s counted as unemployed and who ain’t. Rather, its definitions come from international conventions set by the UN’s International Labour Organisation in Geneva.

So it was the ILO that decided, decades ago, to define anyone doing as little as an hour’s work a week as employed. (I remember talking to an official of the Australian Council of Trade Unions who was an Australian delegate on the sub-committee that, a few years ago, decided to leave that definition unchanged. He vigorously defended the decision.)

Remember, you have to draw the line between being employed or unemployed somewhere – where would you draw it? Five hours work a week? Fifteen? Thirty-five? – and it was set so low ages ago when part-time work was much less common than it is today.

What’s true is not that the unemployment figures have been fudged, but that classing everyone working an hour or more as employed defines unemployment too narrowly. So narrowly as to understate the extent of the problem.

In fact, few people work as little an hour a week. But, though it’s wrong to imagine the only satisfactory jobs are full-time – it suits many students, parents of young children and retirees to work only a few days a week – it’s also true that many people working part-time would prefer more hours.

So for several decades, the bureau has supplemented the official unemployment figures by also publishing the number of people underemployed – those part-timers who’d prefer working work more hours. The latest figures show an unemployment rate of 4.2 per cent, plus an underemployment rate of 6.6 per cent.

Thus it is true the official unemployment rate of 4.2 per cent isn’t as good as it looks. It does understate the proportion of people who aren’t able to find as much work as they want.

And, since we know the proportion of underemployed workers is much higher today that it was 50 years ago, it’s also true that getting back to the lowest unemployment rate in 50 years isn’t likely to be as good as it was 50 years ago.

Even so, it’s quite realistic to expect that, since unemployment is already down to 4.2 per cent, and regardless of who wins the federal election, it won’t be too hard to get the rate down below 4 per cent sometime this year or next.

And whether you hate Morrison – or hate Anthony Albanese – don’t let any smarty pants tell you that will be anything other than a great achievement. If it’s not the best we’ve had the jobs market in 50 years, add in underemployment and it would be the best in maybe 40 years. Unemployment isn’t something you should wish on anyone.

No, the main reason for having reservations is the uncertainty about how long we’ll be able to keep unemployment that low.

We’ve had great success in creating extra jobs in the past year – most of which have been full-time – mainly because the government has responded to the pandemic with massively increased government spending. But the economy may slow if, as all that “fiscal stimulus” runs out, the private sector doesn’t take up the running.

The jobs market has also had a lot of help from an unprecedented (and temporary) source: for two years our borders have been closed to incoming workers. Skilled workers on temporary visas, and overseas students and backpackers doing unskilled and casual jobs.

You’ve heard employers complaining they can’t get workers and that job vacancies are at a far higher level than usual. The consequence is that many older workers who might have been pensioned off, haven’t been. And some of the jobs that haven’t been filled by overseas students and backpackers have gone to local young people.

But now our borders are re-opening to immigrant labour, we’ll see how tight the jobs market stays. I reckon it’ll be a fair while before we get back to the high levels of immigration pre-pandemic.

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Wednesday, February 9, 2022

Aged care crisis a clue we’ll be paying higher, not lower taxes

Do you like paying tax? No, I thought not. With so many other calls on our pockets, it’s easy to tell ourselves we’re already paying enough tax – probably more than enough.

Trouble is, our reluctance to put more into government coffers doesn’t stop us demanding the government spends more on additional and better services.

This presents a problem for politicians on both sides. They solve it by ensuring that, particularly in election campaigns, they tell us what we want to hear, not the unvarnished truth.

They’re often promising a tax cut sometime after the election, but also telling us their plans to spend more on this and more on that. What they don’t mention is what might have to happen after the election to ensure the tax cuts and spending increases don’t add too much to government debt.

But we’ve become so distrusting of our politicians that, in more recent years, they spend less time telling us how wonderful their own policies are and more time telling us how terrible the other side’s policies would be. Fear works better than persuasion.

Scott Morrison won the last federal election partly by claiming the Liberals are the party of lower taxes, whereas Labor is the party of “tax and spend”. It worked so well he’s bound to say it in this year’s election campaign.

So, it’s worth examining the truth of the claim. It strikes a chord because it fits voters’ stereotypical view that the party of the bosses must surely be better at running the economy and managing the government’s budget than the party of the workers.

But just because it fits our preconceived notions doesn’t make it true. It’s true that Labor’s record shows it to be a party that spends more on public services, and so has to tax more. What’s not true is that the Liberals are very different.

The record simply doesn’t support their claim to be the lower taxing party. If you look at total federal tax collections as a proportion of national income (gross domestic product) – thus allowing for both inflation and population growth – over the past 30 years, taxes have been highest under the Howard government and the present government.

Most of this has happened without explicit increases in taxes and despite governments usually having tax cuts to wave in our faces as proof of their commitment to lower taxes.

So, what’s the trick? An old one that all of us know about but few of us notice: bracket creep. It works away behind the scenes slowly but steadily increasing the proportion of our incomes paid in income tax. This usually ends up increasing tax collections by more than governments ever give back in highly publicised tax cuts.

Now, however, the aged care sector’s inability to cope with the additional pressures from the pandemic – where they’re so desperate for workers they even want help from the Army’s clodhoppers – offers a big clue about the tax we’ll be paying in the coming three years: more not less.

Ever since the public rejected Tony Abbott’s plans for sweeping spending cuts in 2014, the government has been trying to keep a lid on government spending in areas where there wouldn’t be much pushback.

By this means the Libs have had remarkable success in limiting the growth in government spending overall but, as the Parliamentary Budget Office has warned, they’re holding back a dam of spending. They can’t keep it up forever.

Eventually, problems and pressures from the public get so great, the government has to relent and start catching up. You can see that in this week’s election-related decision to reverse some of the cuts in grants to the ABC.

But a more significant area where the government’s been trying to limit the money flow is aged care.

It’s clear the sector’s problems getting everyone vaccinated and coping with COVID-caused staff shortages have just piled on top of all its existing problems.

The longstanding attempt to limit costs by moving the sector to for-profit providers has failed, with businesses making room for their profit margin by cutting quality. The aged care workforce is understaffed, underqualified, underpaid and overworked.

Most jobs are part-time and casual; staff turnover is high. When a work-value case before the Fair Work Commission is decided, hourly wage rates may be a lot higher.

After the royal commission’s shocking revelations, the government had no choice but to ease the purse strings, spending an additional $17 billion in last year’s budget. But it’s already clear a lot more will need to be spent to get the care of our parents and grandparents up to acceptable standards.

Turn to the national disability insurance scheme and its problems, and it’s clear we’ll end up having to spend a lot more here, too.

And that’s before you get to the failure of the job network – “employment services” – and the chaotic understaffing of Centrelink.

We have a lot of repressed government spending to catch up with. Don’t let any pollie tell you they’ll be putting taxes down.

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Monday, February 7, 2022

Interest rate rises will be a good thing - provided they're not too soon

Sometimes I think you can divide the nation’s economy-watchers into those desperate to see the Reserve Bank start raising interest rates and those desperately hoping it won’t. As usual, the sensible position is somewhere between them.

To some, interest rate rises are always a bad thing. They’re either speaking from self-interest or they’re victims of a media that unfailingly assumes all its customers are borrowers and none are savers. Tell that to your grandma.

What gets missed in all the angst is that the need to raise rates is always a good sign. A sign the economy’s growing strongly – perhaps too strongly. Trust the media to see the glass as always half empty.

In the present debate, however, the financial-market urgers fear we have a burgeoning problem with inflation, which must be stamped out quickly if it’s not to become a raging bushfire.

On the other side, the econocrats and others not wanting to start raising rates any earlier than necessary see how close we are to achieving a “historic milestone” in getting the rate of unemployment below 4 per cent for the first time in 50 years.

They’re determined to see that goal achieved and put new meaning into the words “full employment” because they see it as key to avoiding a return to the low-growth trap in which we were caught before the pandemic.

And they want to ensure the return to low unemployment is more than fleeting by making sure we play our monetary policy (interest rates) and fiscal policy (the budget) cards right. As Reserve Bank governor Dr Philip Lowe said last week, “low unemployment brings with it very real economic and social benefits”.

In a way, we’re back to the great monetarists-versus-Keynesians debate of the mid-1970s: which is more important, low inflation or low unemployment? But, to use a phrase of Scott Morrison’s, it’s not binary choice. We need both; the trick is to pursue them in the right order.

Right now, the risk is that, by conning central banks into anti-inflation overkill, the markets will weaken the recovery from the pandemic, sending the rich economies back to the slow-growth trap.

But the debate about whether or when our Reserve should start raising interest rates has overshadowed an important development last week: its decision to end QE – quantitative easing; the Reserve buying second-hand government bonds with money it has created with a few computer key-strokes – by ceasing to buy $4 billion worth of bonds each week.

Lowe announced that, in total, the various elements of the Reserve’s QE program involved buying more than $350 billion in bonds. (He didn’t say that this means the Reserve has, in effect, financed more that all the government’s pandemic stimulus spending with created money. It’s all a book entry between the government and the central bank it owns.)

Among the various benefits of the QE program claimed by Lowe was that it led to Australia having “a lower exchange rate than would otherwise have been the case”. He noted, too, that the US Federal Reserve and other central banks were ending their QE programs.

And there you have the real reason why, with us having avoided QE after the global financial crisis, Lowe felt he had little choice but to join in the second, pandemic-related round.

The least doubted “benefit” of QE is that it puts downward pressure on the country’s exchange rate, at the expense of its trading partners’ price competitiveness.

So, when the mighty Fed indulges in QE, most other central banks feel they have to defend their own exchange rates by joining in. Any country that doesn’t join the game becomes the bunny whose exports suffer.

Lowe reminded us that ending the bond-buying program doesn’t constitute a tightening of monetary policy, but rather a cessation of further easing. True. The tightening – quantitative tightening, or QT – will come if, when the bonds it has bought reach maturity, the Reserve decides not to replace them with new bonds. It hasn’t yet decided what it will do.

The financial markets, the media and ordinary citizens are far more interested in what happens to interest rates than in the arcania of unconventional monetary policy. But this ending of QE is a reminder that it would hardly make sense to keep boring on with QE with one hand while putting up interest rates with the other.

It’s important to ensure we don’t risk cutting off our return to a sustained recovery by lifting interest rates too soon – that is, before our business people have been forced to abandon their perverse notion that it’s best to keep wage rates low forever – or raise interest rates too high.

We do want to emerge from the pandemic with more than just a once-only bounce-back from the lockdowns. We need ongoing growth, which requires a return to real growth in wages.

But remember this: the present “stance” monetary policy is highly stimulatory. That can’t go on for ever. With no sign whatever of wage growth becoming excessive, it’s obvious we don’t need to flip to the opposite extreme of interest rates so high they’re contractionary. We’re not trying to put the clamps on demand.

No, the next move, when it comes, will be from a stimulatory stance simply towards a neutral stance – one that’s neither stimulatory nor contractionary. That time will come when we’re confident the economy’s growth will be sustained. That’s when getting interest rates back to more normal levels will be a good sign, a sign of success.

And remember this: thanks to the world’s dubious experiment with unconventional monetary policy for more than a decade – with almost all the rich world’s central banks printing money like it’s going out of style – the monetary side of the world economy (including ours) is way out of whack.

For too long, borrowers have been paying interest rates that, after allowing for inflation, are negative, with savers receiving little or nothing to compensate them for their money’s lost purchasing power, let alone reward them for letting others use their money.

This is perverse. It’s the opposite of the way the economy’s supposed to work. It’s neither fair nor sensible. It’s the way to encourage investment that’s not genuinely productive. We won’t be back to anything like normal until, ultimately, interest rates are much higher.

Don’t forget that. Your grandma hasn’t.

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Friday, February 4, 2022

The news on the economy is better than we're being told

From the way the financial markets – and an easily-led media – are telling the story, our troubles have multiplied. Along with all our other worries, Australia now has a big new problem: inflation is back with a bang. But that’s not the way Reserve Bank governor Dr Philip Lowe told the story this week. He thinks we’re going great guns.

According to the markets, recent figures show we’ve caught America’s disease and inflation has taken off. Something must be done urgently to stop the rot and, just as the US Federal Reserve is about to start raising interest rates to get prices back under control, we’ll have no choice but to follow within a month or two.

The bets the financial markets are making about imminent rate rises imply that most of us will be getting big pay rises this year – which I’ll believe when I see it. But if that did happen it would be the first decent pay rise most workers had received in almost a decade. This, apparently, would be very bad news. Really?

In marked contrast, Lowe thinks everything in the economy’s got better, not worse. Right now, he said in a speech this week, “we are closer to full employment and achieving the inflation target than we had anticipated”. Gosh. That bad, eh?

This time last year, the Reserve was expecting the economy - real gross domestic product - to grow by 3.5 per cent last year. Now it’s expected to have grown by 5 per cent. The rate of unemployment was expected to be 6 per cent. Turned out to be 4.2 per cent. Wages were expected to grow by only 1.5 per cent. Now it’s likely to have been 2.25 per cent.

The story in the jobs market does much to explain Lowe’s high spirits. “Australia is within sight of a historic milestone – having the national unemployment rate below 4 per cent” for the first time since the early 1970s.

“This is important because low unemployment brings with it very real economic and social benefits for many Australians and their communities. Full employment is one of the Reserve Bank’s legislated objectives and [its] board is committed to playing its role in achieving that objective, consistent with also achieving the inflation target,” Lowe said.

Already, our unemployment rate is at its lowest in 13 years, along with our rate of underemployment.

Unemployment has also fallen in America and Britain, but whereas in their cases this is partly because a lot of workers have stopped looking for jobs and left the labour force, in our case labour force “participation” is almost as high as it’s ever been.

So why all the market and media gloom and doom? Because the rate of inflation was expected to be a below-target 1.5 per cent by the end of last year, but has jumped to 3.5 per cent.

The market thinks that higher inflation leads immediately to higher interest rates, and the media think higher rates are bad news because all their customers are borrowers and none are savers.

But the news on inflation – and the prospects for more of it – ain’t as bad as they sound, for several reasons.

First, if we really do have an inflation problem, it’s not nearly as great as America’s. The Yanks’ rate is 7 per cent, the Brits’ is 5.4 per cent and the Kiwis’ 5.9 per cent. Even in a globalised world, each economy’s story is different.

Second, it’s not as though most prices in Australia have grown by 3.5 per cent. Much of the jump to 3.5 per cent is explained by big rises in the prices of petrol and home-building. The world price of oil goes up and down over the years. Nothing we did in Australia caused the latest increase, and nothing we could do would have any influence on whether it keeps going up or goes back down a bit.

Other price increases are explained by the effect of the on-again, off-again waves of the virus in causing mismatches between the supply and demand for various goods – mismatches which are unlikely to last very long.

This explains why the Reserve uses a less volatile measure of “underlying” inflation to judge how inflation is going relative to the target of keeping annual inflation between 2 and 3 per cent, on average over time.

Its preferred measure of underlying inflation is running at 2.6 per cent, not the “headline” rate of 3.5 per cent, and 2.6 per cent is close to the middle of the target. So, no cause for concern - unless you have strong reasons to believe it’s rapidly heading up out of the target range.

Third, with this being the first time in six years that underlying inflation’s been high enough to reach the target zone, Lowe’s made it clear he won’t start raising the official interest rate until he’s convinced the return to target is “sustained”.

He made the obvious (but often forgotten) arithmetic point that, for inflation to be sustained at current rates, the prices of many goods would have to keep increasing at their recent rates, not just settle at higher levels.

When we’re talking about petrol prices and virus-caused mismatches between supply and demand, this seems unlikely. That is, there’s a good chance we’ll see a fall rather than a rise in the quarterly inflation rate.

Another basic point. One-off price increases only become part of the ongoing rate of inflation if they flow on to wages – that is, if they add to the “wage-price spiral”.

In the days when we really did have a serious inflation problem, that flow-through could be taken for granted. But over the past seven years, the link between rising prices and rising wages has become much less certain.

That’s why I’ll believe we’re all in for 3 per cent pay rises when I see it. And the man with his hand on the interest-rate lever is saying the same thing.

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Wednesday, February 2, 2022

We should make the economy less unequal - and we can

Since the working year doesn’t really get started until after Australia Day, it’s not too late to tell you my New Year’s resolutions. Actually, they’re more in the nature of re-affirming my guiding principles as an economic commentator. Why are we playing the economic game? Who are the people it’s supposed to benefit? And would all the policies I write in support of lead us towards or away from these ultimate objectives?

My first principle is that “the economy” – all the daily effort we put into producing and consuming goods and services – should be managed to benefit the many, not the few.

But it’s hard to believe this has been our overriding objective, particularly in recent decades. Although most of the activity in the economy is undertaken by the private sector – households and businesses – this activity is regulated by the public sector, governments.

Since our governments are democratically elected, this ought to mean that governments govern in the interests of all voters, not just some. But, as we all know, sometimes it doesn’t work out that way.

Sometimes governments pander to the majority when it gangs up against an unpopular minority – asylum seekers, for instance. Other times, governments act in the interests of powerful individuals, businesses and interest groups.

Since the two main political parties have become locked in a hugely expensive contest to influence voters at election time, they seem to have become more receptive to the interests of businesses able to donate generously to party coffers.

The notion that the economy will work best when governments manage it in ways that best suit the interests of business was hugely reinforced by the 30-year reign of a fad called “neoliberalism” – a movement started by na├»ve econocrats and economists (and supported by yours truly) that was soon hijacked by businesses and politicians who saw an opportunity to advance their own interests.

The neoliberal era is over – the proof of which you see every time Scott Morrison announces another government subsidy to a new gas-fired power station, oil refinery or Snowy Mountains scheme.

But our new project, to redress the balance of benefit in favour of ordinary workers and consumers, has a long way to go. It will make more progress when more voters understand the need to give ordinary players in the economic game a bigger share of the prizes.

Business invariably justifies its demand for favourable treatment by the jobs it creates. But increasingly, those jobs are of a lower quality than we have come to expect.

Many are casual, part-time and insecure. They come with fewer safeguards: sick and holiday pay, workers compensation coverage, super contributions. Pay rises are fewer and meaner. Wage theft has become common.

Voters need to realise the rise of crappy jobs in the “gig economy” is not some inescapable consequence of technological progress. It’s a policy choice that governments have made using the power we give them.

Were voters to tell politicians more forcefully that such a deterioration in the quality of the working life of the rising generation is unacceptable, they would act to stop less-scrupulous businesses finding ways to avoid or evade the labour laws that protect the rest of us.

All this is happening while the share of national income going to profits has risen strongly, at the expense of the share going to wages. And the share of income collected by the top 1 per cent of Australia’s income earners has risen to about 9 per cent of total income.

A capitalist economy wouldn’t work as well as it does were entrepreneurs not always trying new ways to increase their profits. The trouble is that not all the ways they try are of benefit to the rest of us, not just themselves and their shareholders.

In such cases, governments should not shirk their responsibility to act in the interests of the many not the few. Nor should we fear that, unless we give businesses free rein in their pursuit of higher profits, our business people will lose all interest in running businesses.

So, a longstanding view of mine is that we’d all be better off if business executives focused less on maximising profits (and their related bonuses) and more on giving their customers value for money and ensuring all their employees had rewarding jobs.

Not just jobs that were better paid and more secure, but more emotionally satisfying because they gave workers more autonomy – more freedom to choose the best ways of doing their job – and jobs better fitted to a worker’s particular strengths and preferences.

Easier said than done? True. Particularly because, though governments can prohibit certain undesirable practices in the treatment of workers, they can’t legislate to force bad bosses to be good ones.

Not easy, but not impossible to reshape the economy to improve it for ordinary people, not just bosses. And we won’t get any improvement until we accept that it is possible, and that we should measure the politicians we vote for according to their willingness and ability to spread the benefits of economic life less unequally.

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