This may be the first time you’ve watched the managers of the economy using high interest rates and a tighter budget to throttle demand to get inflation down. But if it isn’t your first, have you noticed how much harder they’re finding it to catch the raging bull?
It explains why both the previous and the new Reserve Bank governor have been so twitchy. How, after they seem to have made as many interest rate rises as they thought they needed, they keep coming back for another one.
The economy isn’t working the way it used to. Have you noticed that, although consumer spending stopped dead in the September quarter, and overall growth in the economy slowed to a microscopic 0.2 per cent, there’s been so little weakness in the jobs market?
Although there’s no doubt about how hard most households have been squeezed over the course of this year, how come the rate of unemployment has risen only marginally from 3.5 per cent to a still-far-below-average 3.9 per cent in November?
And if the economy’s been slowing for the whole of this year, how come the budget balance is getting better rather than worse, with Treasurer Jim Chalmers achieving a surplus last financial year and hoping for another in the year to next June?
There are lots of particular things that help explain these surprising results – world commodity prices have stayed high; some parts of the economy change earlier than others – but there’s one, more fundamental factor that towers over all the others: this is the first time in 50 years that we’ve been trying to slow a runaway economy that’s reached anything like full employment.
It turns out that throttling an economy that’s fully employed is much harder to do. Households are more resilient and, after a period when it’s been hard to get hold of all the workers they need, businesses have been far less inclined to add to the slowdown by shedding staff.
Remember that we reached full employment by happy accident. Between the unco-ordinated stimulus of state as well as federal governments, plus the Reserve cutting rates to near-zero, we (like many other rich economies) hit the accelerator far too hard during the pandemic.
This was apparent after the pandemic had eased and before the Morrison government’s final budget in March last year. But there was no way Scott Morrison was going to hit the budget brakes just before an election.
So the econocrats in the Reserve and Treasury resigned themselves to second prize: an unemployment rate much lower than what they were used to and felt comfortable with.
Because the pandemic had also caused us to close our borders and thus block employers’ access to skilled and unskilled immigrant labour, the econocrats got far more than they expected: unemployment so low we hit full employment.
The jobs market is getting less tight, with the number of job vacancies having fallen a long way, but last week’s figures for November showed how strong the labour market remains.
Sure, unemployment rose a fraction to 3.9 per cent, but this is no higher than it was in May last year. And the month saw total employment actually grow, by more than a remarkable 61,000 jobs during the month.
After all this slowing and all this pain, the rate at which people of working age are participating in the labour force by either having a job or actively seeking one has reached a record high.
And almost 65 per cent of the working-age population has a job – a proportion that’s never been higher in Australia’s history.
Employment is still growing strongly, partly because of the rebound in immigration, with foreign students in particular filling part-time job vacancies.
But also, it seems, because more hard-pressed families are trying to make ends meet by taking second jobs. In past downturns, those jobs wouldn’t have been there to be taken.
To force households to spend less, they’re being hit with three sticks. Obviously, by raising mortgage interest rates. Also by employers, taken as a group, raising the wages they pay by less than they’ve raised their prices (have you noticed how Chalmers avoids referring to the cut in real wages by just blaming “inflation”?).
And, third, by the government allowing bracket creep to take a bigger bite out of what pay rises the workers do manage to get.
But there’s another factor that’s been working in the opposite direction, adding to households’ ability to keep spending: over the year to November, the number of people with jobs rose by more than 440,000. That’s a full-employment economy.
All the extra people with jobs pay income tax. All the part-time workers able to get more hours pay more tax. All the people getting second jobs pay more tax. Add the bigger bite out of pay rises, and you see why Chalmers’ budget’s so flush.
But note this: the many benefits of full employment come at a cost – “opportunity cost”. As a coming paper by Matt Saunders and Dr Richard Denniss of the Australia Institute will remind us, “opportunity cost makes it clear that when resources are used for one purpose, they become unavailable for other purposes”.
So when we’re at or close to full employment, any developer, business executive or politician seeking our support for any project because “it will create jobs” should be laughed at. Where will the workers come from to fill the jobs? You’ll have to pinch them from some other employer.
This is especially true when the jobs you want to create are for workers with specialist skills.
According to a federal government report, in October last year there were 83 major resource and energy projects at the committed stage, worth $83 billion. But about two thirds of these were for the development of fossil fuels, including the expansion of nearby ports.
Really? And this at a time when the electricity grid needs urgent reconfiguration as part of our move to a low-carbon economy, but projects are being deferred because you can’t get the workers?
As Saunders and Denniss conclude, “With rapid population growth and the stated need to transform our energy system, the real cost of spending tens of billions of dollars building new gas and coal projects is the lost opportunity to invest in the infrastructure and energy transformation the Australian economy needs.”
I think Jim Chalmers needs to explain the iron law of opportunity cost to his boss. And make sure Climate Change and Energy Minister Chris Bowen’s in the meeting.
