Enjoy the wonderful land of full employment - while you can

I hope that while you’re complaining about the cost of living, you’re also wallowing in the joys of living in an economy that’s reached the sacred land of “full employment” – being able to provide a job for almost everyone who wants one. This is the first time we’ve seen it in 50 years.

You have to say we’ve achieved it not by design, but as an unexpected consequence of our bumbling attempts to cope with the vicissitudes of the pandemic.

We used interest rates and, more particularly, the budget, to stimulate demand (encourage business and consumer spending) and ended up doing a lot more than we needed to. To the economy managers’ surprise, the rate of unemployment fell rapidly to 3.5 per cent – a level most of them had never seen before and never expected to see.

The sad truth is that, during the half century that the high priests of economics were wandering in the wilderness of joblessness, they lost their faith, and started worshiping the false god Nairu, who whispered in their ears alluring lies about the location they were seeking.

But now the wanderers have stumbled upon the promised land of Full Employment, a land flowing with milk and honey.

So now’s the time for us all to sing hymns of praise to one true god of mammon, Full Employment, in all its beneficence and beauty. And here to be our worship leader is Michele Bullock, deputy governor of the Reserve Bank, who published some new soul music this week.

Bullock says it’s “hard to overstate the importance of achieving full employment. When someone cannot find work, or the hours of work they want, they suffer financially. However, the costs of unemployment and underemployment extend well beyond financial impacts.

“Work provides people with a sense of dignity and purpose. Unemployment – particularly long-term unemployment – can be detrimental to a person’s mental and physical health,” she says.

“The costs of not achieving full employment tend to be borne disproportionately by some groups in the community – the young, those who are less educated, and people on lower incomes and with less wealth.

“In fact, for these groups, improved employment outcomes and opportunities to work more hours are much more important for their living standards than wage increases.”

Early in the pandemic and the imposition of lockdowns, we thought we were in for a regular recession. And “the sobering experience from previous recessions had taught us that these episodes leave long-lasting marks on individuals [called “scarring” by economists], communities and the economy.

“For example, if people stay unemployed for too long, their skills may deteriorate or become obsolete and their prospects for re-engaging in meaningful work may decline. This can result in more people in long-term unemployment or, alternatively, people withdrawing from the workforce,” Bullock says.

But, thanks to all the up-front stimulus, there was no recession and, hence, no scarring. Instead, outcomes in the labour market over the past three years “have consistently exceeded the expectations of the Reserve Bank and other forecasters”.

In fact, the share of the Australian population in employment has never been higher – higher even than in the decades between the end of World War II and the mid-1970s, when full employment became the norm.

Today, the number of Australians in a job has increased by more than 1.1 million since late 2021, and the level of employment is now almost 8 per cent above its pre-pandemic level. Get that.

Almost all the gains in employment since the start of the pandemic have been full-time jobs. Strong demand for labour has enabled many previously part-time employees to move into full-time work. This has pushed the underemployment rate – the proportion of people with jobs, but seeking more hours – down to its lowest since 2008.

Bullock says the people who’ve benefited most from all this are those on lower incomes and with less education. Unemployment has tended to decline more in local areas that had weaker employment to begin with.

Young people – those aged 15 to 24 years – who usually suffer most when recessions occur, have seen their rate of unemployment decline by more than twice the decline in the overall unemployment rate.

Long-term unemployment is defined as being without work for more than a year. Last year, a record number of the long-term unemployed found a job, and fewer gave up looking for one.

What’s more, the risk of not being able to find a job within a year declined significantly. So the rate of long-term unemployment is close to its lowest in decades.

Wow. Now, Bullock’s not exaggerating when she says it’s hard to overstate the many benefits – economic and social – of achieving full employment.

But she’s harder to believe when she assures us that, just because the Reserve has hardly spoken about anything other than the need to reduce inflation for the past year and more: “it does not mean that the other part of our mandate – maintaining full employment – has become any less important.

“Full employment is, and has always been, one of our two objectives.”

Well, I’d love to believe that was true, but both the Reserve’s present rhetoric and behaviour, and its record, make it hard to believe.

The Reserve has had independent control over the day-to-day management of the economy for more than 35 years. For almost all of that time we’ve had low inflation, but only now have we achieved full employment – and only by happy accident.

For most of that time it, like most macroeconomists the world over, has been listening to the siren call of the false god Nairu – aka the “non-accelerating-inflation rate of unemployment” – telling it that “full employment” really means an unemployment rate of 5 per cent or 6 per cent.

If you dispute that, answer me this: how many times in the past 35 years has a Reserve Bank boss been able to make a similar speech to the one Bullock gave this week?

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My version of how 'net zero' will change our lives: not much

I think by now almost all of us are agreed that, to reduce climate change, we’ll have to achieve “net zero emissions” of greenhouse gases by 2050. But that’s a very tall order, involving much change to existing industries – many of which will continue seeking to delay the inevitable – and change in the way you and I use energy. So, how on earth is it going to come about?

We see the Albanese government and the state governments setting targets and beavering away on various parts of the puzzle, but if the feds have a grand plan for how it all comes together they’re doing a good job of keeping it to themselves.

So let me have a stab at detecting the method in our leaders’ madness. I’ll be leaning heavily on the work of the one person who is thinking out loud about how we can get to the 2050 objective, Tony Wood of the Grattan Institute.

First, let me acknowledge the truth the climate change deniers and foot-draggers make so much of: nothing we Australians do will stop the globe warming unless the other major emitting countries – America, China and those in the European Union – also achieve net zero emissions by 2050.

This is why, though we’ve known about the problem for decades, we’ve achieved so little to date. It’s just so easy to use others’ inaction as an excuse for our own. The truth is, all we can do is set a good example and urge the others to do likewise. Under the previous federal government, we were setting a bad example.

But remember this: our part in reducing global emissions is bigger than just reducing our own because we’re also one of the world’s largest exporters of fossil fuels. We need to reduce our complicity in other countries’ emissions by at least ceasing to expand our existing coal mines and gas fields.

Getting to net zero largely involves eliminating our use of coal, oil and gas, and replacing them with renewable sources of energy.

This history-making break from the past won’t happen by magic. Nor by sitting back and waiting for market forces to bring it about. No, it won’t happen until the government has the courage to make it happen, by saying just what has to happen, and by when.

As with the pandemic, and most of the problems we face, the responsibility is shared between the federal government and the states. This means the feds must take the lead, but in close consultation and co-operation with the states. Since the feds have most control over the purse strings, the wheels of co-operation are greased by offers of money.

As I see it, the basic strategy is simple: switch the production of electricity from coal and gas to renewables and batteries, and use clean electricity to replace the use of oil and gas. The beauty of this great reliance on electricity is that, though it will mean much disruption of particular industries, it doesn’t involve much disruption to the way we run our households.

Much of the heavy lifting with the major industrial emitters will be done by Climate Change Minister Chris Bowen’s recent reforms to the “safeguard mechanism”, aimed at achieving the promised 43 per cent reduction in emissions by 2030.

Much of the progress in eliminating our use of oil will come from shifting to electric vehicles. Make sure your next car is electric, and you’ve got that box ticked with minimal disruption to your life. It’s the various governments’ job to get the price of EVs down to something more reasonable and ensure sufficient charging points.

Which brings us to the elimination of natural gas, the subject of Wood’s Grattan report earlier this week. It would suit the blatant self-interest of the gas industry for gas to be seen as the “transition fuel”: we move electricity production from coal to gas and later to renewables.

But 2050 – and even worse climate change - isn’t that far away, and we don’t have time for a leisurely transition. We must move straight to renewables and storage (batteries), using gas to provide only residual capacity, balancing the last 10 per cent or so.

Household use of gas – for cooking, water heating and space heating – is big only in Victoria, NSW and the ACT. About 30 per cent of Australian homes are already all-electric, and Wood calculates that about 40 per of those that have gas are in a position to upgrade to all-electric.

Although electric appliances are dearer than gas appliances, electricity itself is cheaper – meaning savings longer-term. It’s also cleaner and free of fumes that damage your health. So, being obliged to become all-electric is no great imposition. Even so, governments should move all their own social housing to all-electric, offer tax incentives to landlords and low-interest loans to homeowners.

Governments should ban new gas connections and phase out the sale of gas appliances, so the last remaining gas appliances are replaced with electric. Set firm rules and deadlines, and we can rely on market forces to do the rest.

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Maybe Lowe should stay on as governor to clean up any spilt milk

I’ve never liked making free with the R-word until it’s an undeniable reality. Too many journalists refuse to recognise that if enough people in positions of influence predict bad things enough times, their predictions have a tendency to become reality.

But I confess I’m starting to worry that Reserve Bank governor Dr Philip Lowe – a man who, until now, I’ve always regarded as having steady judgment – is pressing harder on the interest-rate brakes than he needs to. And I don’t think I’m the only economy-watcher who shares that fear.

He seems to be seizing on any argument that says he should give the thumbscrews another turn, while ignoring all the arguments that say he’s already done enough. The Fair Work Commission has awarded the people whose wages constitute the bottom 10th of the national wage bill a 5.75 per cent pay rise. Oh, no! Give it another turn.

Employment grew by 76,000 in May and the unemployment rate went down a fraction. Oh, no! Give it another turn.

One of the rules of using interest rates to suppress demand is that they work with “long and variable lags” so that, if you keep tightening until it’s clear you’ve done enough, you’ve already done too much and will crash the economy. But Lowe seems to have forgotten this.

Another thing he seems to have forgotten is that, in times past, we’ve needed a big increase in interest rates to slow a booming economy because the boom has resulted in real wages growing so strongly.

Not this time. This time an unusual feature of the boom has been that real wages have been falling for several years. Do you realise that real labour costs per unit of production are now 6 per cent lower than they were at the end of 2019?

What’s been (conveniently) forgotten is that, in the early days of the pandemic, when we imagined we were in for a severe recession, employers were quick to demand a wage freeze, to which workers readily acquiesced.

Turned out that a couple of lockdowns don’t equal a recession, and employers did fine. But there was no suggestion of a catch-up for the wage freeze that wasn’t needed. Remember this next time you see Lowe banging on about the worrying rise in nominal labour costs per unit.

If Lowe knew more about how wages are fixed in the real world, rather than in economics textbooks, he’d have noticed that the union movement’s failure to talk about the need for a wage catch-up was a sign of its diminished bargaining power.

(He’d also be more conscious that the conventional economic model’s implicit assumption – that the parties to every transaction are of roughly equal bargaining power – doesn’t hold between an employer and an employee. Nor between a big business and a small business, for that matter.)

Then there’s Lowe’s invention of a new doctrine (one previously exclusive to bull-dusting employer groups) that workers need to produce more if they want their wages merely to keep up with inflation.

Lowe professes to be terribly worried about a fall in the productivity of labour in recent quarters but, as The Conversation website’s Peter Martin has reminded us, falling productivity (output per hour worked) is exactly what you’d expect to see at a time when falling unemployment is returning us to full employment.

Employers have preferred to hire more workers rather than buy more labour-saving machines. And, as the econocrats have pointed out, they’re having to hire more of the kinds of workers they usually prefer not to hire – the young, the old and the long-term unemployed.

That is, they’ve had to start hiring the less-productive. This is a bad thing, is it?

One reason I’m shocked by Lowe’s newly invented line that, absent productivity improvement, all wage growth above 2.5 per cent is inflationary, is that I was around in the 1970s when wage growth really was excessive and inflationary. It was to be condemned then; but anyone saying it now has moved the goal posts.

It was then that Treasury made so much fuss about labour costs per unit that the Bureau of Statistics began publishing the figures every quarter – the ones Lowe has been leaning on so heavily.

But when the Australia Institute think tank copied the method used by the European Central Bank (and now by the Organisation for Economic Co-operation and Development) to calculate profits per unit, the econocrats wrote learned treatises saying its method was “flawed”. Apparently, sauce for the wages goose is not sauce for the profits gander.

Speaking of flaws, the flaw in Lowe’s new-found argument that wage rises exceeding 2.5 per cent, but less than the rise in prices, are inflationary ought to be obvious to anyone not blinded by pro-business bias. It doesn’t add to the inflation rate, but it does add to the time it takes for the inflation rate to fall back.

So, what Lowe’s on about is the speed at which inflation is returning to (the now unrealistically low) target range of 2 to 3 per cent. And he’s in such a tearing hurry he’s prepared to risk causing a recession.

Why? Well, what I wonder is whether Lowe’s expectation that his term as governor won’t be renewed in September – so a new governor can make the changes the Reserve Bank review has recommended – is affecting his judgment.

There’s a concept in economics called “revealed preference” which says: judge people not by what they say, but what they do. Lowe says he’s aiming for the “narrow path” to low inflation without a recession.

But what he seems to be aiming for is low inflation come hell or high water. I wonder if he’s decided he prefers not to be remembered as the governor who let inflation get out of control, but left without fixing it.

If, to avoid that fate, he has to be remembered as the guy who plunged the economy into a recession no one thought was needed, then them’s the breaks.

The sad truth about independent central banks is that, if they really stuff up, it’s the elected government that gets blamed. Since there’s no voting for who’s to be governor, there’s no other way voters can register their disaffection.

So, if Lowe continues finding excuses to tighten the monetary screws, don’t be surprised if the Albanese government gets ever less muted in its criticism.

But if I were Treasurer Jim Chalmers, I’d consider postponing the reform of the Reserve’s procedures and extending Lowe’s term, so his mind could be fully focused on achieving the soft landing – or be around to share the blame if he crashes the plane. And help mop up the debris if he fails. This may also stop him acting so uncharacteristically.

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We're investing more overseas than foreigners are investing here

 For pretty much all of Australia’s modern history, our strategy for getting more prosperous was to be a “net importer of [investment] capital” from the rest of the world. But four years ago, that was turned on its head, and we became a net exporter of investment capital.

If you think that doesn’t sound like a good thing, I agree with you – though probably not for the same reason as you. I think it does much to explain why the economy – and the productivity of our labour – have grown so weakly over the past decade. And are likely to continue growing slowly once the Reserve Bank has beaten inflation out of our system.

How come you haven’t heard about this historic turnaround? Because, though economists hate to admit it, economics is subject to fashions, and for many years they haven’t been much interested in talking about what’s happening in the economy’s “external sector”, which accounts for about a quarter of the whole economy.

All of Australia’s households’, businesses’ and governments’ economic dealings with the rest of the world during a period are summarised in a document called the “balance of payments” – payments to foreigners and payments from foreigners.

The balance of payments is divided into two accounts, the “current” account and the “capital and financial” account.

The current account shows the value of our exports of goods and services ($171 billion in the latest, March quarter) less the value of our imports of goods and services ($129 billion), to give us a trade surplus for the quarter of $42 billion.

But then it takes account of our interest and dividend payments to foreigners of $57 billion, less their payments of interest and dividends to us of $24 billion, to give us a “net income deficit” of $33 billion.

Subtracting this deficit from the trade surplus of $42 billion leaves us with a surplus on the current account for the quarter of $9 billion.

So, we ended up making a profit during the quarter, as we have in every quarter for the past four years, whereas for almost every year before that we ran deficits. We’ve made some progress.

Is that what you think? Sorry, as the father of economics, Adam Smith – born 300 years ago this year – spent his life explaining, this “mercantilist” notion that a country gets rich by trying to export more than it imports is wrong.

We benefit from importing the things that other countries do better than we do, and they benefit from us exporting to them the things we do better than they do. Economists call this the “mutual gains from trade”.

In any case, like the accounts of every business, the balance of payments is based on “double-entry bookkeeping”, where every transaction is seen as having two, equal sides, a debit and a credit. So, it’s wrong to think that debits are bad and credits are good.

Similarly, it’s wrong to think that the resulting deficits (debits exceed the credits) are bad, and surpluses (credits exceed the debits) are good.

And remember that the “current” account is only one half of the balance of payments so, since the debits and credits are always equal, if we’re running a surplus on the current account, we must be running a deficit of equal size on the other, capital and financial account.

Until four years ago, we always ran a surplus on the capital account, but now we’re running a deficit. But what does this switch actually mean?

It means that, until recently, our households, businesses and governments always spent more on investment – in new housing, new business equipment and structures, and new public infrastructure – than they could finance from their own savings.

(Households save when they don’t spend all their income on consumption. Businesses save when they don’t pay out all their after-tax profits in dividends. Governments save when they raise more in taxes than they spend on their day-to-day activities.)

How can we, as a nation, spend more on new physical investment than we’re able to finance with our own saving? By getting the extra savings we need from abroad. We can borrow it, or we can allow foreigners to own Australian businesses or real estate.

And that’s exactly what we did until four years ago. We borrowed overseas and let foreigners own “equity” in our economy. This is what it means to say Australia was a “net importer of capital”.

Why did we do that? Because we had more opportunities for economic development than we could finance from our own saving, and figured that allowing foreigners to join us in investing in our economy would leave us better off.

The consequence was that, for more than 200 years, our economy grew faster and our standard of living improved faster than if we’d kept everything to ourselves.

So, what’s changed? Why have we switched to being a net exporter of investment capital? Why have we begun investing more of our savings in other countries than they’ve been investing in Oz?

Partly because the build-up of our compulsory superannuation system means we, as a nation, are saving a lot more of our income than we used to.

Now here’s the killer: but also because, particularly since the end of the mining investment boom a decade ago, we’ve been investing a lot less in improving and expanding our businesses.

You wonder why, until the government and the Reserve Bank mistakenly caused the present brief inflationary surge, the economy’s growth was so weak? Now you know.

You wonder why the productivity of our labour’s been improving so slowly? Because we haven’t had enough business investment in new and better machines. Or in research and development, for that matter.

And the main thing we’ve got to show for this deterioration is a current account surplus. You beaut.

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Grim Reaper is catching up with the Baby Boomers, waving bills

Having witnessed the last days of my parents and in-laws, I don’t delude myself – as they did – that I’ll be able to avoid being carted off to an old people’s home. Sorry, an aged care residential facility.

Actually, I dream of dying in the saddle. My last, half-finished column would be the announcement that I’d finally made way for the bright young women coming up behind me. That’s assuming they hadn’t already found a chance to push me under a bus.

Speaking of bright young women, Anthony Albanese’s Minister for Aged Care and Sport, Anika Wells, seems to be attacking her job with much more enthusiasm than her Coalition predecessors.

In a speech to the National Press Club last week, she noted that Labor inherited a system that a royal commission had characterised with a single word – “neglect”. She’d spent the past 12 months engaged in “triage” and “urgent reform” and was now able to think about the future.

And what’s she been thinking? “I don’t want Australians to be scared about the care they will be provided in later life,” she said. “I don’t want daughters and sons worried about the treatment their parents will receive.”

The Howard government’s Aged Care Act of 1997 was aimed at saving money by turning aged care over to community and for-profit providers. It was focused on how the providers were to run their services, setting out their obligations and responsibilities.

But, as recommended by the royal commission, the government planned to introduce a new act next year, this time focused on the rights of older people, with “a clear statement that the care provided to residents is safe and of high quality”.

Labor had already done much to fix the system, she said, but there were more challenges ahead, and “we must act now”. Why? Because “the Baby Boomers are coming”. (I’d have thought they’d come some time ago, and the real problem was their looming departure.)

But I imagine the Boomers (present company excepted) will be living a lot longer than previous generations – thanks to advances in medical science and being the first generation to realise that exercise was something to be sought and enjoyed, not avoided.

But though their arrival in aged care may be at a later age, their later lives won’t be trouble-free and certainly not doctor-free.

One change we’ll be seeing is more in-home care. Almost everyone would prefer to keep living at home rather than go off to a “facility” (sounds like a toilet block). The previous government did introduce the home-care package, but it was expensive and so was limited in how many people were given it.

Wells is introducing a new Support at Home program in July 2025 which, by delaying or eliminating people’s move to facility care, should save money.

But her big announcement last week was the setting up of an aged care taskforce – chaired by her good self – to answer the royal commission’s “great unanswered question”: How to make aged care equitable and sustainable into the future?

Which is a politician’s way of saying, “How we gonna pay for all this?”

One of the commissioners wanted a new aged care tax levy of 1 per cent of everyone’s taxable income (which, in practice, would be added to the present 2 per cent Medicare levy), whereas the other wanted some unspecified combination of a levy and a means-tested contribution from users.

Wells notes that, within a decade, we’ll have, for the first time ever, more people aged over 65 than under 18. And the proportion of people aged 15 to 64 – the people working and paying income tax – will shrink.

Now, this is the point where we need to remember that we’ve gone for decades stacking the financial rules against the younger generation and in favour of the oldies. We’ve kept handing tax breaks to the ageing. Old people can have good incomes that are largely untaxed, whereas young people on the same money have to pay up - and pay for their tertiary education.

It’s not true that every Boomer’s rolling in it – there are poor people in every generation – but most have done pretty well. Most were able to climb aboard the home-ownership gravy train when homes were still affordable. Many have been able to buy an investment property or two on the top.

And though the compulsory superannuation scheme hasn’t applied to the whole of their working lives, they’ll be retiring with a lot more, hugely taxpayer-subsidised super than any previous generation.

So, the idea of spreading the entire cost of the Boomers’ aged care – whether in-home or in-facility – across all those people young enough to still be working and paying income tax ought to be unthinkable.

If Labor doesn’t summon the courage to ask those Baby Boomers who’ve done OK to help pay directly for the cost of their highly privileged lives’ last stage, it will just prove what a rotten world Albo and the rest of us have left our offspring.

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Economy close to stalling, as Reserve hits the brakes yet again

It’s been a puzzling week, as we learnt the economy had slowed almost to stalling speed, just a day after the Reserve Bank raised interest rates for the 12th time, and warned there may be more.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by just 0.2 per cent over the three months to the end of March.

That took growth over the year to March down to 2.3 per cent, which sounds better than it is because the economy has slowed so rapidly. If it continued growing by 0.2 per cent a quarter, that would be annual growth of 0.8 per cent.

And the resumption of immigration means the population is now growing faster than the economy. Allow for population growth and GDP per person actually fell by 0.2 per cent. Over the year to March, it grew by only 0.3 per cent.

While a growing population is good for businesses – they have more potential customers – to everyone else, economic growth has been sold to us as raising our material standard of living. Not much chance of that if GDP per person is falling.

The Reserve Bank has been trying to slow the economy down because demand for goods and services has been growing faster than the economy’s ability to supply them, thus allowing businesses to increase their prices.

With additional help from the rising prices of imported goods and services, the rate of inflation has shot up. It’s started falling back from its peak of 7.8 per cent at the end of last year, but is still way above the Reserve’s 2 per cent to 3 per cent target range.

The Reserve’s been raising the interest rates paid by the third of households with mortgages, to reduce their ability to spend on other things. But, at this stage, probably the biggest dampener on consumer spending is coming from the failure of wages to keep up with rising prices.

“Demand” means spending, so if households find it harder to spend on goods and services, that makes it harder for businesses to raise their prices, thus bringing the inflation rate back down.

And remember that the full effect of all the interest rate rises we’ve seen is still to be felt. The pain will increase over the rest of this year.

But if I were Reserve Bank governor Dr Philip Lowe, I wouldn’t be too worried that the plan wasn’t working. The biggest single factor driving GDP is consumer spending, which accounts for more than half of all spending. In the June quarter last year, it grew by 2.2 per cent.

The following quarter its growth fell to 0.8 per cent, then 0.3 per cent, and now 0.2 per cent. Wow. I think the squeeze is working.

Although more people have been working more hours, real household disposable income fell by 0.3 per cent in the quarter, and by 4 per cent over the year to March.

It was hit by the failure of wages to rise in line with prices, by the doubling in households’ interest payments, and by the bigger bite that income tax took out of pay rises, caused by bracket creep.

How did households manage to keep their consumption spending growing despite their falling real income? By cutting the proportion of their income that they were saving from more than 11 per cent in March quarter last year to less than 4 per cent this March quarter – the lowest it’s been in about 15 years.

Household investment spending on newly built homes and alterations fell by 1.2 per cent, its sixth fall in seven quarters.

One bright spot was growth in business spending during the quarter of 2.9 per cent, led by spending on machinery and equipment, and non-dwelling construction – particularly on renewables and electricity infrastructure.

Unfortunately, much of the machinery investment was on imported equipment that had been delayed by the pandemic, so it’s not a sign of continuing strength. The volume of spending on imports was a super-strong 3.2 per cent, but imports subtract from GDP, of course.

Treasurer Jim Chalmers always blames the economy’s slowdown on higher interest rates (blame the Reserve, not me), high inflation (not me either) and “a slowing global economy” (blame the rest of the world).

A slowing global economy? Yes, of course. Everyone’s heard about that. Trouble is, the main way the rest of the world affects us is by buying – or not buying – our exports. And the volume of our exports grew by 1.8 per cent in the March quarter, and 10.8 per cent over the year to March. That’s because our miners have done so well (and our fossil-fuel-using households and businesses so badly) out of the higher world coal and gas prices caused by the Ukraine war.

Even so, this quarter’s growth in export volumes of 1.8 per cent has been swamped by the 3.2 per cent growth in import volumes, meaning that “net exports” – exports minus imports – subtracted 0.2 percentage points from the overall growth in real GDP during the quarter.

After Lowe’s decision on Tuesday to raise rates yet again, Chalmers wasn’t mincing his words. “I do expect that there will be a lot of Australians who find this decision difficult to understand and difficult to cop – ordinary working Australians are already bearing the brunt of these interest rate rises, they shouldn’t bear the blame too,” he said.

“The Reserve Bank’s job is to quash inflation without crashing the economy, and they will have a lot of time and opportunities to explain and defend the decision that they’ve taken today.”

Lowe has said repeatedly that he’s seeking the “narrow path” where “inflation returns to target within a reasonable timeframe, while the economy continues to grow, and we hold on to as many of the gains in the labour market [our return to full employment] as we can”.

After seeing the next day’s GDP figures, Paul Bloxham of HSBC bank observed that the narrow path “is looking extremely narrow indeed”. True.

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Consumerism and social status keep our noses to the grindstone

What better time to think about whether we’re working too hard than while we’re enjoying a Monday off, thanks to a public holiday? Wouldn’t it be nice if every weekend could be a long weekend?

Actually, almost 100 years ago, the greatest economist of the 20th century, John Maynard Keynes, pretty much predicted that’s the way we’d be living by now.

In his essay Economic Possibilities for our Grandchildren, written in 1930, he envisaged that by now, we’d be able to live comfortably while having to work only 15 hours a week. We could work just three hours each weekday, or clock up our 15 hours in just a few days – say, three five-hour days.

Really? What a duffer. How could anyone so smart be so disastrously wrong?

Well, not quite. What Keynes was saying was that, technological advance – the invention of ever-better labour-saving machines – would increase the productivity of our labour to such an extent that, by now, we wouldn’t need to work very hard to be able to live comfortably.

His point was that, as we’re able to produce more goods and services per hour of work, we become better off. We can take that benefit either as enjoying an unchanged material standard of living while working fewer hours a week, or as higher monetary income – thus allowing us to buy more stuff – while working the same number of hours.

As Jan Behringer and other economists from Germany’s University of Duisburg-Essen have written, in the years since Keynes made that prediction the productivity of labour in the developed economies has improved by more than he expected.

So, we could have been working a 15-hour week had we chosen to but, in fact, we chose to take the money and the extra stuff rather than the extra leisure. Working hours have fallen since the 1930s, but not by all that much.

Behringer and colleagues say the “obstacles to more leisure time are primarily sociopolitical in nature” – by which they mean it’s not purely economic reasons, the shortage of resources, that require us to work more.

I’ve no doubt it has suited the rich and powerful to have us working and spending rather than devoting four days a week to developing our hobbies. That way, the rich and powerful get more so.

But, by the same token, I think the rest of us have been easily seduced by the lure of the materialist, consumer culture. We love buying things that are new, shinier and do better tricks.

In Australia – and in Europe, but less so in America – pretty much all the reductions in working hours, the increases in annual leave and sick leave, and the introduction of that strange animal, long service leave, have happened because union-backed governments have imposed them on unwilling employers.

And every time they have, the employers and their political parties have predicted the death and destruction of the economy.

But, even so, how long since you’ve seen a union telling its bosses they should go easy on the pay rise, but cut working hours? No, I have no doubt that the workers have preferred more bangles and baubles.

Behringer and colleagues, however, have a different take. Their study of developments in the US and Europe over the decades leads them to two conclusions.

First, since the 1980s, average working hours have fallen more slowly as inequality – the gap between high and low incomes – has increased.

Second, in countries with high inequality, employees earning higher hourly wage rates tend to work longer hours than those on lower hourly wage rates.

Both these findings are striking because they contradict economists’ earlier finding that people with higher incomes chose to increase their leisure time.

So, what’s going on? The authors’ explanation is that rising inequality of incomes leads to more “upward status comparisons”. Like most social animals, we are conscious of our social status – where we fit in the pecking order.

And, particularly where there’s a big difference between the top and the bottom, we seek to improve our position.

“The upper middle class emulates the consumption norms of the rich, and sacrifices leisure time to do so. Because the rich also increase their spending on status goods such as housing, education, etc as their incomes rise, the middle class feels pressure to keep up,” they say.

“After all, what constitutes ‘a good place to live’ or ‘a good education’ is essentially defined in comparison to the standards that the upper income groups largely determine.”

Another of their findings is that working hours are more likely to be shorter when wage bargaining is centralised and government social benefits in kind (but not in cash) are more adequate.

One possible explanation, they say, is that centralised wage bargaining reduces status conflict because workers can decide collectively to avoid a “positional arms race” to allow shorter working hours and more leisure.

They find that social benefits in kind rather than cash are associated with lower hours of work. This may be because the direct provision of goods and services by governments reduces the need for status-oriented private spending on goods and services.

Education has many dimensions. It broadens the mind, it helps you get a better-paying job, and it’s a “positional good” – it helps people judge your social status.

"The extent to which the education sector is organised through private markets is found to be associated with longer working hours among workers who themselves have high levels of education,” the authors say.

Get it? If governments provided better healthcare and public schools, more people would be content to use the publicly provided services along with everyone else, and fewer people would feel the need to work longer to afford private hospitals and schools.

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THE ECONOMY AND THE POLICY MIX

June 2012

If you’re not quite sure what’s happening in the economy at present, don’t feel bad. Some people are saying the economy’s in bad shape; others are saying it’s doing pretty well. The reason for the confusion is that the economy’s being hit by three different factors, at present: one expansionary, one contractionary and one that sounds worse than it actually is - so far, at least. These conflicting factors are affecting different industries differently and different states differently. This is because they’re bringing about a change in the structure of our economy, and structural change is often painful. The three factors are: first, the resources boom; second, the high exchange rate the resources boom has brought about and, third, the problems in the developed economies of the North Atlantic, particularly the Europeans’ debt crisis and worries about the survival of the euro. Let’s start with the troubles in the North Atlantic, then move to the boom then on to the high exchange rate.

Problems in America and Europe

The mighty US economy is recovering only very slowly from the Great Recession of 2008-09. But the problems are much more severe in continental Europe, as well as Britain. Europe’s basic problem of excessive levels of public debt is greatly complicated by the now-exposed structural weaknesses in the euro currency union. Most governments have resorted to the policy of ‘austerity’ - attempting to reduce budget deficits by slashing government spending and raising taxes at a time when their economic recoveries were still very weak. Unsurprisingly, this policy has proved counter-productive and has pushed various economies back into recession.

The media have given great publicity to Europe’s troubles and its tribulations have caused weakness in global sharemarkets, including ours. But the real question is the extent to which Europe’s problems affect our economy. They could do so via three main channels. First, the financial channel: they could cause certain global lending markets to seize up for a time, or increase the risk premiums paid by Australian banks or businesses borrowing in those markets. Second, the confidence channel: media reports of problems in Europe could damage the confidence of Australian consumers and business people. Third, the trade channel: weak growth or contraction in Europe could reduce our exports.

So what damage have we suffered so far? Europe’s tribulations have added a little to our banks’ costs of borrowing overseas. They do seem to have added to the uncertainty of our business people, helping to explain the weakness of non-mining business investment spending. But it’s hard to be sure Europe has had much effect on consumers because the household saving rate has been steady for more than a year and consumer spending has been growing at its trend rate. Europe accounts for less than 10 pc of our exports, so its weakness has had little direct effect on our export income.

However, Europe is a significant customer of our biggest export customer, China. So any adverse effect from Europe’s weakness could come to us via China - unless China were to offset the fall in its export income from Europe by stimulating its domestic demand, as it seems willing and able to do.

Bottom line: Europe’s problems have had some negative effect on us, but so far, not much. This could change, however, if the euro arrangement collapsed. Were something really bad to happen in Europe, the RBA would react quickly with big cuts in the official interest rate.

Resources boom

The big expansionary shock to the economy is coming from the resources boom, the biggest we have experienced since the gold rush. The rapid industrialisation of China and India has pushed prices for our exports of coal and iron ore to extraordinary heights, with our terms of trade only now starting to fall from their best level in 200 years. The improvement in the terms of trade represents a significant increase in the nation’s real income which, when spent, adds to demand. The boom has also added to demand by sparking a huge surge of investment spending on the construction of new mines and liquid-gas facilities. The emerging economies’ demand for the main components of steel is likely to stay strong for a decade or two. So, though the price of our exports of coal and iron ore is likely to fall back to less extreme levels, the volume of our exports is likely to continue growing for many years.

High exchange rate

The big contractionary shock to the economy is coming from the still very high exchange rate caused by the resources boom. An improvement in our terms of trade almost always leads to a rise in our exchange rate. Our dollar is likely to stay unusually high for some years, even as commodity prices fall back, because of the significant net inflow of foreign capital needed to finance the expansion of our mining sector. The high exchange rate helps to prevent the resources boom from leading to inflation by, first, directly reducing the price of imports and, second, reducing the international price competitiveness of our export and import-competing industries, thus reducing their production and so working in the direction of diminishing demand.

Structural change

The public is used to thinking about the economy in cyclical terms: it’s either booming or turning down. At present, however, because these two big shocks to the economy - the resources boom and the high dollar - are working on opposite directions, the economy is neither booming nor busting. It’s easier to understand what’s going on in the economy if you think of it in structural terms: the interplay of the two conflicting forces bearing on the economy is causing some industries to expand while others contract. The mining industry and mining-related parts of the construction industry and the manufacturing industry - accounting in total for up to 20 per cent of GDP - is expanding rapidly, whereas most of the other trade-exposed industries (manufacturing and service export industries such as tourism and education) are likely to get relatively smaller. The other industry that’s suffering from structural change is retailing. The pressures it’s facing have little to do with the high dollar, however. It’s being affected by the digital revolution and the rise of e-commerce.

Outlook for the economy

Over the year to March, the economy grew by an exceptional 4.3 pc, lead by strong consumer spending and the boom in mining investment. But now the economic managers are expecting growth to return to its trend rate of 3.25 pc for the coming financial year, 2012-13, as a whole. But this is expected to involve quite disparate growth in the components of GDP: another very big increase in mining investment spending and trend growth in consumer spending, but no growth in new home building and a small contraction in public sector spending as federal and state governments seek to return to operating surplus.

And note that the other economic indicators are looking pretty good at present. The latest figures say underlying inflation is running at 2.2 pc - almost down to the bottom of the RBA’s 2 to 3 pc inflation target. The latest figures say unemployment is running at about 5 pc - which economists say is down very close to our NAIRU - the non-accelerating-inflation rate of unemployment, which is the lowest point to which unemployment can fall before labour shortages start causing wage and price inflation. That is, unemployment is very close to its lowest sustainable rate.

Monetary policy

Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the RBA independent of the elected government. It is the primary instrument by which the managers of the economy pursue internal balance - low inflation and low unemployment. MP is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 pc, on average, over the cycle. The primary instrument of MP is the overnight cash rate, which the RBA controls via market operations.

Aware the unemployment rate was only a little above the NAIRU and concerned the resources boom could lead to excessive wage growth, the RBA stood ready to tighten monetary policy throughout most of 2011. But, partly because of the lingering effect of the Queensland floods in early 2011, the economy did not accelerate as the RBA had forecast. Instead, the outlook for growth in the North Atlantic economies worsened, business and consumer confidence weakened and inflation continued to improve. So the RBA cut the cash rate by a click in both November and December of 2011, lowering it to 4.25 pc. In May it cut by 0.5 points in June by a further 0.25 points, taking the cash rate down to 3.5 pc, more than offsetting the banks’ efforts to preserve their profit margins, and producing a net fall in the interest rates actually paid by households and businesses. With market interest rates a little below their long-run average, the stance of monetary policy is now mildly expansionary.

Fiscal policy

Fiscal policy - the manipulation of government spending and taxation in the budget - is conducted according to the Gillard government’s medium-term fiscal strategy: ‘to achieve budget surpluses, on average, over the medium term’. This means the primary role of discretionary fiscal policy is to achieve ‘fiscal sustainability’ - that is, to ensure we don’t build up an unsustainable level of public debt. However, the strategy leaves room for the budget’s automatic stabilisers to be unrestrained in assisting monetary policy in pursuing internal balance. It also leaves room for discretionary fiscal policy to be used to stimulate the economy and thus help monetary policy manage demand, in exceptional circumstances - such as the GFC - provided the stimulus measures are temporary.

After the onset of the GFC, tax collections fell heavily, and they have yet to fully recover. The Rudd government applied considerable fiscal stimulus to the economy by a large but temporary increase in government spending.

The government’s ‘deficit exit strategy’ requires it to avoid further tax cuts and limit the real growth in government spending to 2 pc a year until the budget has returned to a surplus equivalent to 1 pc of GDP. The delay in returning to surplus is caused not by continuing high spending but by continuing weak revenue.

In this year’s budget the government shifted its spending plans around to allow it to keep its election promise to budget for (then actually achieve) a tiny budget surplus in 2012-13. After allowing for unimportant changes in the timing of spending and the effect on demand of particular budget measures, the stance of fiscal policy is much less contractionary than it appears to be, with the Treasury secretary estimating the effect to be less than 1 pc of GDP, which is still significant.

Conclusion

Should the contractionary stance of fiscal policy combine with other factors to weaken aggregate demand, the RBA has scope to counter this by further loosening monetary policy from its present stance of ‘mildly expansionary’.

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It's not the wolf at the door that's driving women to work harder

Why do mothers go out to work? Why are more women doing paid work than ever before? And why are more of those women working full-time? At a time when so many are struggling with the cost of living, it’s easy to conclude that more women are having to work more hours just to keep up. But I think that sells women short.

Worse, it’s a fundamental misreading of perhaps the greatest social change of our age: the economic emancipation of women.

I don’t doubt that women are just as concerned about the cost of living as men, maybe more so if they’re in charge of the family budget. Nor do I doubt that, if you ask a woman why she’s been doing more paid work lately, the cost of living’s likely to be mentioned.

But things are not always as they seem. For instance, when people complain about the cost of living, their focus is on rising prices. But prices rise almost continuously. What matters more is whether wages are rising as fast as prices are – or, preferably, a little faster.

It’s true that the prices for goods and services have risen at a much faster rate than normal over the past two years or so. But the real problem is that wages – which usually do keep up – have been falling behind since the start of the pandemic. Yet people are far more conscious of the rising prices than of the weak wage growth.

Another distinction that’s clearer to economists than to normal people is between the cost of living and the standard of living. When people have trouble maintaining the same standard of living as their friends – a comparable car, comparable house, comparable private school – they would often rather blame the cost of living than their need to keep up with the Joneses.

No, what’s driving the change in women’s lives – causing them to behave very differently from their grandmothers – isn’t the cost of living, it’s education. And with education has come aspiration. Aspiration to put their learning to work, to have a career as well as a family, and to be treated equally with men.

I think it all started sometime in the 1960s when, for some unknown reason, the parents of the rich world accepted that their daughters were just as entitled to a good education as their sons. Everything flows from that fateful change in social attitudes and behaviour. What father today would dream of telling his daughter that, being a girl, she didn’t need an education?

The trouble for boys is that girls do education better. It’s now several decades since the number of girls going to university first exceeded the number of boys.

That being so, the figures for two-income families should come as little surprise. The latest report from the federal government’s Australian Institute of Family Studies, Employment patterns and trends for families with children, finds that in 2022, both parents were employed in 71 per cent of couple families with children under 15. This is up from 56 per cent in 2000, and 40 per cent in 1979.

Within those couple families, the proportion with both parents working full-time was 31 per cent in 2021, up from 22 per cent 12 years earlier. The proportion with one parent working full-time and the other part-time is unchanged at 36 per cent.

Only 4 per cent of these families involved fathers who weren’t working and mothers who were. (Which leaves the young men in my immediate family looking good.)

But there’s something else you need to understand. In the days when there weren’t many two-income families, this gave them a distinct advantage in the housing market. They could afford a better house than their peers.

Once most young home-buying couples have two incomes, however, their greater purchasing power gets built into the prices of the kind of houses they buy, so that what began as an advantage turns into a requirement.

Now it’s the couples who choose not to have both partners working who’ll have trouble affording a home comparable to those of other couples. They’ll have to accept a lower standard of living.

Similarly, it’s a misconception to say, as some do, that you need to have both parents working to afford a family. No, you just have to accept a lower standard of living.

I’ve long suspected that the rise of the two-income family helps explain the growing practice of sending kids to private schools. Two incomes make this easier to afford – though this, too, gets built into the size of the fees the schools can get away with charging.

There’s no reason a mother – or a father – who chooses to have a career should feel guilty about it. But I suspect some double-income couples find it easier to justify if they can say that the extra money is buying their kids a better education.

Sorry, a mountain of evidence says that, once you allow for the parents’ socio-economic status, private schools don’t add to students’ academic performance. Buyer beware.

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Business cries poor on wages, even as profits mount

Don’t believe anyone – not even a governor of the Reserve Bank – trying to tell you the Fair Work Commission’s decision to increase minimum award wages by 5.75 per cent is anything other than good news for the lowest-paid quarter of wage earners.

Because they are so low paid, and mainly part-time, these people account for only about 11 per cent of the nation’s total wage bill. So, as the commission says, the pay rise “will make only a modest contribution to total wages growth in 2023-24 and will consequently not cause or contribute to any wage-spiral”.

But that’s not the impression you’d get from all the wailing and gnashing of teeth by the main employer group, the Australian Chamber of Commerce and Industry. It claims “an arbitrary increase of this magnitude consigns Australia to high inflation, mounting interest rates and fewer jobs”.

These are the sort of dramatics we get from the Canberra-based employers’ lobby before and after every annual wage review. They lay it on so thick I doubt anyone much believes them.

But it’s worse than that. In the age-old struggle between labour and capital – wages and profits – most economists have decided long ago whose side they’re on, and long ago lost sight of how one-eyed they’ve become.

For a start, many of the talking heads you see on telly work for big businesses. They’re never going to be caught saying nice things about pay rises.

Econocrats working for conservative governments have to watch what they say. And parts of the media have business plans that say: pick a lucrative market segment, then tell ’em what they want to hear.

In my experience, there’s never any shortage of experts willing to fly to the defence of the rich and powerful, in the hope that some of the money comes their way.

But I confess to being shocked in recent times by the way the present Reserve Bank governor, Dr Philip Lowe, has been so willing to take sides. The way he preaches restraint to ordinary workers struggling to cope with the cost of living, but never urges businesses to show restraint in the enthusiasm with which they’ve been whacking up their prices.

It’s true that Lowe has a board that’s been stacked with business people, but that’s been true for all his predecessors, and they were never so openly partisan.

When businesses take advantage of the excessively strong demand that Lowe himself helped to create, that’s just business doing what comes naturally, and must never be questioned, even in an economy characterised by so much oligopoly – big companies with the power to influence the prices they charge.

But when employees unite to demand pay rises at least sufficient to cover the rising cost of living, this is quite illegitimate and to be condemned. The more so when a government agency such as the Fair Work Commission acts to protect the incomes of the poorest workers.

On Friday, the commission set out what has long been the rule for fair and efficient division of the spoils of the market system between labour and capital: “In the medium to long term, it is desirable that modern award minimum wages maintain their real value and increase in line with the trend rate of national productivity growth”.

In other words, wage rises don’t add to inflation unless their growth exceeding inflation exceeds the nationwide (not the particular business’) trend (that is, over a run of years, not just the last couple) rate of growth in the productivity of labour (production per hour worked).

But last week, in his appearance before a Senate committee, Lowe was twisting the rule to suit his case, setting nominal (before taking account of inflation) unit labour costs (labour costs adjusted for productivity improvement) not real unit labour costs as the appropriate measure.

He told the senators that growth in labour costs per unit of 3 or 4 per cent a year was adding to inflation because the past few years had seen no growth in the productivity of labour (which, of course, is the fault of the government, not the businesses doing the production).

This is dishonest. What he was implying was that wage growth should not bear any relationship to what’s happening to prices at the time. Wage growth should be capped at 2.5 per cent a year every year, come hell or high water.

Without any productivity improvement, any wage growth exceeding 2.5 per cent was inflationary. Should the nation’s businesses choose to raise their prices by more than 2.5 per cent, what was best for the economy was for the workers’ wages to fall in real terms.

Now, Lowe is a very smart man, and I’m sure he doesn’t actually believe anything so silly. Like the employer groups, he’s cooked up a convenient argument to help him achieve his KPIs. He sees the inflation rate as his key performance indicator.

He’s got to get it down to the 2 to 3 per cent target range, and get it down quick. He ain’t too worried what shortcuts he takes or who gets hurt in the process.

When he claims that, absent productivity improvement, wage rises far lower than the rate of inflation are themselves inflationary, what he really means is that they make it harder for him to achieve his KPIs.

Clearly, the wage rise that would help him get the inflation rate down fastest is a wage rise of zero. It would plunge the economy into recession, and businesses would have a lot more trouble finding customers, but who cares about that?

It’s not true that sub-inflation-rate pay rises add to inflation. What is true is that the bigger the sub-inflation rise, the longer it takes to get inflation down. But he doesn’t like to say that.

Why’s he in such a hurry he’s happy for ordinary workers to suffer? Because he lies awake at night worrying that, if it takes too long to get inflation down, inflation expectations will rise and a price-wage spiral will become entrenched.

Does Treasury secretary Dr Steven Kennedy also lie awake? Doesn’t seem to. He told the senators last week that “there are no signs of a wage-price spiral developing and medium-term inflation expectations remain well anchored”.

If ever there was a general fighting the last war, it’s Lowe.

Meanwhile, please don’t say business profits seem to be going fine. It may be true, but please don’t say it. Business doesn’t like you saying such offensive things, and business’ media cheer squad goes ape.

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For better housing affordability, try the premier, not the PM

People have been complaining about the unaffordability of houses for as long as I’ve been a journalist. In all that time, governments have professed great concern, while doing nothing of consequence. But I suspect their insouciance can’t last much longer.

Over the years, the prices of houses and apartments have risen much faster that household incomes have risen, gradually lowering the proportion of Australians able to afford a home of their own.

So the problem keeps getting worse and, with interest rates having risen so far so fast, as well as renters now feeling so much pain, it wouldn’t surprise me if, in coming federal and state elections, many younger voters – and some of their parents – were really steamed up about the issue.

If so, both Labor and the Liberals will be vulnerable to minor parties offering solutions – sensible or otherwise. But what could the major parties do to reduce the problem?

Well, nothing that some people wouldn’t vigorously object to. That’s why the political duopoly has done so little for so long.

The unending rise in house prices has been caused by various factors – some under the control of the federal government, some controlled by the states.

If prices keep rising, this suggests that demand is outstripping supply. In general, the feds have more direct influence over the demand for housing, whereas the states have more direct influence over the supply of them.

It’s wrong to assume that all the problems are coming from either the demand side or the supply side. But, of late, economists have been focusing on the supply side, which points the finger at state governments.

At first blush, if house prices are high and rising, this suggests not enough houses are being built. That’s probably true at present, with immigrants coming faster than we’re building new dwellings for them to live in.

But, over the decades, supply has eventually caught up with demand, so that doesn’t explain why prices have been rising for ages.

And, if it was just a matter of building enough houses to accommodate the growing population, cities would just keep spreading out for ever. That would be expensive – with all the extra transport and infrastructure you’d have to build – and not everyone wants to live that far out from the CBD.

So, the real supply issue is not that we should be building enough houses, it’s building enough housing where people want to live. And the truth is that many people want to live closer in.

As the NSW Productivity Commission explains in a new report, state planning systems make it “difficult to build enough new homes where people want to live – close to jobs, transport, schools and other amenities”.

“Instead, the system encourages urban sprawl, forcing people into longer and longer commutes. These policies increase inequality, especially for low and middle-income workers.”

Guess what happens if governments don’t allow enough homes to be built where people want to live? The prices of homes in, or nearer to, the most desirable areas get bid up relative to prices out in the boondocks, forcing up the median price.

As Australia’s population has grown so rapidly over the decades, the populations of Sydney, Melbourne and the other state capitals have increased greatly, but done so mainly by spreading out.

This has made housing more expensive, as people have had to pay more to live in the closer-in, more desirable parts of the city. Inevitably, it’s the better-off who get the best spots and the less well-paid who have to live further out, where the amenity is less.

Everyone’s paying more for their housing, but the well-off pay a smaller proportion of their income than those in the middle and at the bottom. This pushes families to compromise on where they live – further from family, friends and jobs.

The NSW Productivity Commission report says poor housing affordability brings four disadvantages to individual families and the community. It leaves families with less to spend on other things. It reduces the productivity of the nation’s labour because so many people who want to work can’t afford to live near their best employment prospects.

It adds to environmental damage because more workers live further from city centres and endure long, polluting commutes to their jobs.

And it reduces people’s quality of life because so much of our cities’ populations end up too far from the beach, sports arenas, big entertainment venues and other amenities.

So, what can state governments do to reduce these costs and make our lives better?

We should build more new homes in areas closer to the city’s centre. “These areas offer both the richest collection of job opportunities, and a supply of already-built infrastructure and other amenities whose capacity can be leveraged and expanded,” the report says.

What we need to do is build up, not out, and achieve more “infill” of unused or underutilised land close in.

Specifically, the report says, we need three changes. First, raise average apartment heights in suburbs close to the CBD (and to job opportunities).

Second, allow more development around transport hubs, such as train stations, and take advantage of our existing infrastructure capacity.

And third, encourage more townhouses and other medium-density development, and allow more dual-occupancy uses such as granny flats, where higher density is not an option.

The report argues that, even if the new supply of homes targets the high end of town, building more housing closer to the CBD, “downward filtering” means affordability improves everywhere.

The new, more expensive homes near the centre will be occupied by high-income families. But they will leave behind high-quality homes that middle-income families can move to, leaving their homes to be occupied by lower-income families.

NSW Productivity Commissioner Peter Achterstraat says that “if you believe, as I do, that today’s kids deserve the same shot at the Australian dream that my generation had, we need to change our planning system and build near existing infrastructure to make room for them”.

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