What goes on in the Reserve Bank's mind

By MILLIE MUROI, Economics Writer

So far, the Reserve Bank is winning. Every time we’ve had a new inflation read or jobs data, the country has held its breath … and exhaled a sigh of relief. Things are a little tougher for a lot of people, and a lot harder for some. But inflation, our public enemy number one, is gradually slinking away, and a historically high bunch of us have jobs.

The Reserve Bank might not be high-fiving itself yet, but it’ll be cautiously relieved that things are going (mostly) the way it planned. As the bank gets closer to the finish line, though, the balancing act will get harder. The reserve has been laser-focused on shrinking inflation, which it has. But the labour market is weakening, and there’s a risk we won’t feel or see the full impact on jobs of keeping interest rates on hold until after we’ve gone too far.

What is “too far”? Well, it’s tricky to say, because there’s no exact number to guide us on how many job losses we’d be OK with. And because – until we’ve locked inflation well within the 2 to 3 per cent target range – a strong jobs market is also a sign the economy might be pushing too hard to keep up with demand, and therefore that inflation might be here for a bit longer.

As one of the country’s leading labour economists, Jeff Borland, has pointed out, while recent data points to the Reserve Bank’s success so far, there probably needs to be a turning point in the bank’s thinking soon if we’re to avoid a big round of lay-offs.

Underlying inflation, the measure the bank cares about – and which doesn’t count items with especially large price changes – fell to 3.4 per cent over the year to August. Gross domestic product (a measure of how many goods and services the economy is producing), while crawling along, is still growing. And at 4.1 per cent in August, the unemployment rate shows we’ve managed to hold on to a lot of the gains in our labour market.

Compared with the US, UK and Canada, Australia seems to be the Goldilocks country. Partly because of Australia’s responsiveness to interest rate changes (we have one of the highest shares of mortgage-holders on variable rate loans, which means interest rate changes are felt pretty much immediately), the central bank has been less aggressive in ramping up interest rates to curb inflation.

While the US Federal Reserve jacked up rates by 5.3 percentage points from 2022 to its peak, Australian interest rates rose only 4.3 per cent (that’s also lower than in Canada and the UK). Despite this, the increase in Australia’s inflation rate since the first interest rate rise hasn’t strayed far from its peers. In fact, the 2.7 percentage point increase in inflation since the first rate rise is a lot lower than in the UK, where inflation surged 4.8 percentage points from its first rise.

The downward journey in inflation has also been fairly even across the countries. From its peak, Australia’s inflation rate has fallen about 0.7 percentage points every quarter, the same as in Canada and only a touch slower than the 0.8 percentage points in the US. The UK, with a high inflation peak, has had the fastest decline at 1 percentage point every quarter.

Australia’s approach has also limited damage to the jobs market. While unemployment increased 1.6 percentage points in Canada since the first rate rise and 0.8 percentage points in the US, the UK and Australia have managed to keep the lift in unemployment to just 0.6 percentage points.

At the same time, Australia’s participation rate has climbed 0.7 percentage points – the highest of its peers – since unemployment started rising. The participation rate is the proportion of working-age people (those aged over 16) who either have a job – full-time or part-time – or are actively seeking one (we call all these people “the labour force”) in the wider working-age population.

All this, together with high inflation, signals to the Reserve Bank that the Australian economy is still “running hot” as the Reserve’s chief economist Sarah Hunter has put it.

We tend to focus on the rate at which the economy is growing rather than the level it is sitting at. That’s why, when we see weak figures such as 0.2 per cent GDP growth for the most recent quarter (and for the quarter before that, and the one before that), we hear warning bells ringing about recession: commonly defined as two back-to-back quarters of falling growth.

So, why isn’t the bank in a rush to ease up on interest rates?

For as long as employment is growing and unemployment has risen only a bit, the bank won’t be living in fear, as many of its critics are, that the economy could drop into recession at any moment.

While the movement in GDP and household consumption has been very weak, the levels they’re at are still high – especially when compared with how much production capacity we have in the economy.

A strong labour market (one where most people who want a job can find one), means there’s still a lot of demand from businesses for workers. Why? Because there’s strong demand for their goods or services, and they need people to help produce or provide them. In August, for example, the Australian economy added more than 47,000 jobs.

But there are some signs the labour market is weaker than the headlines might tell us.

Some of the additional jobs and additional hours worked are a result of a big boost in immigration and therefore our population. In August, our population grew by 50,000 – but this growth won’t last forever, especially with the government’s cap on international students.

A lot of the growth in hours has also been in industries such as education, healthcare and social assistance. As Borland points out, about 40 per cent of the extra hours worked in recent months were in these largely government-funded industries – which, once again, cannot last forever.

We also know businesses are likely to be hoarding workers (firms tend to cling onto their workers when the economy starts to slow, until the very last minute, because it can be a pain to rehire them), and that interest rates take up to 12 to 18 months to impact the economy, meaning we may be yet to see the full impact of our rate rises.

Until underlying inflation sits comfortably within the target zone, GDP turns negative, or the jobs market deteriorates more noticeably, the Reserve Bank won’t be in a rush to dust off its bias towards reining in inflation.

But we know job loss has life-altering and long-lasting consequences for those affected. For the bank to keep Australia on the “narrow path” and continue to kill it (its job, that is, not the economy), it might need to start shifting its focus towards keeping us all in our jobs.

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Why the big parties' professed housing fixes won't work

I’m sorry to tell you, but it’s becoming increasingly likely that next year’s federal election campaign will feature a fight over which side has the better policies to end the housing crisis. Why is that bad news? Because neither of the major parties’ proffered solutions would do much good.

The Albanese government wants to introduce two schemes – Help to Buy and Build to Rent – but these are being blocked in the Senate by the opposition and the Greens. If they’re not passed, Labor will go to the election claiming it has the policies that could fix the high cost of housing, but is being stopped by its evil, anti-housing opponents.

The Liberals claim Labor’s schemes are no good, but that their own proposal, Super for Housing, would do the trick. As for the Greens, they’re blocking Labor’s schemes because, they say, they’re too small to make any difference, and Labor needs to agree to their proposals to make that difference. What proposals? To end negative gearing, spend a lot more on building social housing, and limit how much rents can be increased in any year.

The Greens are selling themselves as the party for renters. This is no bad thing. The two big parties have never worried much about renters, even though they make up about a third of households.

The real problem is that the big parties’ schemes don’t stand up to close examination. They’re designed to look bigger and more helpful than they really are.

The term housing “crisis” is misleading. Both sides of politics have sat back for decades, happily watching house prices rise faster than household incomes.

When you go back to basics, the cause of rising house prices is that the demand for properties is growing faster than the supply of them. The only policies that slow the rise in prices are those that either add to the supply of homes or reduce the demand for them.

So when governments pretend to help first-home buyers with grants or reduced stamp duty, they’re neither adding to supply nor reducing demand. They’re just making it easier for some people to pay the high price. Get it? They’re actually helping keep the price high. And if they help enough buyers, they’re probably pushing prices a bit higher.

This is what’s wrong with both Labor’s Help to Buy scheme and the Libs’ Super for Housing scheme. Labor’s scheme would involve the government giving eligible homebuyers up to 40 per cent of the home’s purchase price, but retaining ownership of the same proportion of the home’s value.

Whenever you sold the house, you’d have to buy out the government’s share, which by then would be a much higher amount than you were originally given. This is a condition that hasn’t appealed to many people when some of the states have offered similar schemes. There haven’t been many takers.

Labor’s scheme would be offered to a maximum of 10,000 buyers a year. This may sound a lot, but in an economy of 27 million people, it ain’t.

The deeper problem, however, is that, as with previous straight-out grants to first-home buyers, it doesn’t reduce the price of homes but, rather, makes them a bit easier for a few lucky people to afford. By doing so, it actually adds to the demand for homes, so putting upward pressure on prices.

The Libs’ objection, however, is that Labor’s scheme smacks of socialism. Their rival plan, Super for Homes, would allow eligible buyers to add to their home deposit (and thus to the amount they could borrow), by withdrawing up to $50,000 from their superannuation savings, provided it was no more than 40 per cent of their super balance.

One objection to this is that it wouldn’t do much to help younger homebuyers, since they wouldn’t have accrued much super. But, again, the more serious criticism is that the scheme would actually add to the demand for homes and so help push prices higher.

By contrast, Labor’s other scheme, Build to Rent, would offer special tax concessions to those big concerns that built new blocks of apartments and rented them out. So it would – in principle, at least – help by adding a bit to the supply of homes.

And, to be fair to the government, its already-implemented deal with the state governments, where it’s giving them big bucks to facilitate the building of 1.2 million new homes over five years, would – in principle – add to the supply of homes, particularly higher-density housing in the parts of capital cities where people most want to live.

Why will we be increasing the supply of homes only “in principle”? Because, right now, the nation’s home building industry can’t expand without more tradespeople. It’s short of workers because a lot of them have gone off to work on the states’ big infrastructure projects, but also because for years the industry has been saving money by not training enough apprentices.

When you’ve allowed homes to become ever-harder to afford over many decades, a few showy schemes won’t suddenly fix the problem.

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How to avoid being conned by business lobby groups

The obvious question arising from big business’s onslaught against Anthony Albanese and his government is: do Australia’s voters know which sides their bread is buttered on? Sorry, boss, I think they usually do.

Last week the (Big) Business Council let fly against Albanese & Co. with both barrels. According to its chief executive, rather than feeling confident in our growing national prosperity, many of the big-business chief executives who make up the council’s membership “feel we are losing our way”.

“Instead of taking big steps on the things that matter, we are taking incremental – but noticeable – steps backwards. We have let the balance shift too far away from encouraging Australians to grow, hire, innovate and be more competitive on the world stage,” he said.

What were the big steps Albanese was failing to take? Reducing red tape, making workplace laws more flexible, making planning systems simpler and the tax system more efficient.

But “abolishing multi-employer bargaining must be seen as a priority,” he said.

This fits with the equally vehement criticism from the Mining Council the previous week, which claimed Albanese’s “reckless” industrial relations laws were already bringing conflict “to every workplace in every industry”.

Ah. So that’s what’s biting big business. But the criticism doesn’t stop there. As the business press revealed, even former trade union leader Bill Kelty – who was virtually a member of the Hawke-Keating government’s cabinet – was highly critical.

The Albanese government “seems to have lost its way” and was “mired in mediocrity”, Kelty is reported to have said to a private business gathering. “We need a Labor Party agenda in which the big issues are confronted.”

What the business press didn’t seem to know is that Kelty’s “big issues” are hardly likely to have much in common with big business’s big issues. And I very much doubt that Albanese’s industrial relations changes would have been among them.

There are plenty of good reasons for being disappointed with this government’s performance. Also last week, former Labor heavy Gareth Evans has accused the Albanese government of political timidity, condemning its instinct to “move into cautious, defensive, wedge-avoiding mode”.

Evans said in a speech: “One can’t avoid the impression that more and more people are asking: what exactly is this Labor government for?”

Just so. Now that’s a criticism many of us could share, without bearing the government any ill-will and, unlike the business lobby groups, without our disappointment concealing some purely self-interested barrow we’re pushing.

I think it’s past time voters were told more about the major role the many lobby groups play in federal politics. It’s as though lobbying has become Canberra’s second-biggest industry.

The business, employer and industry lobby groups engage in three main activities. First, they lobby the government, top bureaucrats and key senators in private, without any of us noticing. They press for policy changes that would make it easier for their businesses to increase their profits, and press against policy changes that would make it harder for their businesses to increase profits.

After just about every proposal to change a government policy, Treasury or some other department opens a “consultation”, inviting interested parties to say (in private) what they think about the merits and practicality of the proposed changes.

This is when the Canberra-based lobby groups, and private firms of lobbyists (many of them former politicians or ministerial staffers from the party that happens to be in power) swing into action. Responding to these offers of private consultation with the bureaucracy is the main way they earn their living.

Their objective is always to persuade the bureaucrats to persuade the government to tone down the change, making it less restrictive and costly to the businesses they’re representing. Often their argument will be that it’s a nice idea but, unfortunately, hugely impractical. Would cost them millions to comply.

A second role of the lobby groups is to respond publicly to changes their clients don’t like with exaggerated claims about the death and destruction the changes will cause. Just about any increase in the minimum wage will lead to thousands of Australians losing their jobs, we’re told. The latest changes to industrial relations rules will “bring conflict to every workplace in every industry”.

They exaggerate to ensure their press releases are picked up by the media. Their purpose is partly to put pressure on the government (or the Fair Work Commission), but mainly to use the media to send a signal back to their fee-paying member businesses around the country: “Don’t worry, you’re getting good value for having us here in Canberra fighting tirelessly to protect your interests against the wicked government.”

The lobby groups’ third role is the one we saw last week. Once all your private lobbying has failed to deter the government from doing something your clients really hate, take the fight public.

You try to pressure the government via the voters, by cooking up an argument that the people who’ll suffer most from the changes you don’t like aren’t the shareholders and bosses of the businesses you represent, but the country’s ordinary workers and consumers.

“We’ll be forced to pass all the new tax on to our customers. So we’ll be right, but we’re really worried about what the government’s doing to our poor customers.” (In which case, why are you fighting the tax so hard?)

As for all the industrial relations changes designed to reduce the insecurity of so many workers and to give workers in smaller businesses the ability to gain some bargaining power by uniting with workers in other businesses, this won’t improve workers’ job security, pay or conditions, but will stifle investment and productivity, make Australian businesses less competitive against the sweat shops of Asia, and cause many people to be unemployed, we’re told.

Some of these arguments contain a grain of truth, but they’re attempts to use concocted, pseudo-economic arguments to con ordinary voters into believing their interests coincide with the interests of big business, and so get them to pressure the government to stop doing things that business objects to.

A big part of this con involves the use of code words that sound more innocuous than they are. “Flexible” means flexibility for the boss, but inflexibility for the worker. “Reform” means a change that benefits business at someone else’s expense. “Populism” means a change that benefits many ordinary people at business’s expense.

“Red tape” should mean excessive form-filling that serves no useful purpose. In the mouths of big-business people, however, it means laws and regulations that limit their freedom to build new mines and other projects in places that would do great damage to the natural environment.

The Albanese government’s timidity in all but industrial relations is disappointing, but I doubt it’s so hopeless it fails to ensure voters know that what big business wants for itself is contrary to their interests.

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Why the planet needs the economy to go round in circles

By MILLIE MUROI, Economics Writer

For as long as humans have walked the earth, we’ve grappled with this dilemma: how to satisfy our unlimited wants and needs with limited resources. Eventually, people started putting pen to paper, and called the study of this problem “economics.”

Over time, we’ve become better at making – and doing – more: by piecing together machines that can dig more out of the ground, stripping the soil, and producing all sorts of foods, gadgets and shelter. Our ancestors would be shocked walking through the supermarket, and trawling online, at the seemingly infinite choices at our fingertips today.

But all this has come at a cost – which we haven’t been particularly good at factoring in.

For the past few centuries, we’ve measured our success, economically speaking, mostly by how much we’re able to produce. The bigger the amount (often measured by gross domestic product (GDP). the better.

In simply prioritising greater output, though, we’ve been pumping out emissions, producing massive amounts of waste and damaging land and waterways. We’ve been scoring own goals, even as we press forward in this seemingly never-ending game of producing more.

Now, the solution isn’t necessarily to rewind the work we’ve done. But it does pay to look back in time. For many indigenous communities, it has been the case for millennia that people take only what they need, leaving enough for remaining resources to regenerate, and reusing and repairing things rather than tossing them away.

These principles are also at the heart of the concept of a “circular economy”.

Our economy now is mostly “linear”, meaning we tend to take raw materials from the earth, make things out of them, then pretty quickly dispose of them when those things start falling apart. A lot of the valuable materials we take from the land end up buried in landfill or drifting around in the atmosphere or our oceans – which, apart from harming the environment, is a problem when we’re on a planet with limited resources.

Now, most of us have a decent understanding of recycling. You probably divvy-up your hard plastics from your soft plastics, and you might even have a compost bin or worm farm.

Australia’s overall material recycling rate in the 2021–22 period was about 63 per cent – or 1568 kilograms of recycled material for each person, up from 57 per cent in 2011-12. It’s an industry which added roughly $5 billion in value to the Australian economy, more than 30,000 jobs, and paid over $2.5 billion in wages and salaries in 2021-22. And there’s room to grow.

But the circular economy starts long before we decide to toss things out. It’s about designing things in ways that create less waste: from the process of making them (how can we limit by-products like carbon dioxide when building a house, or make a car using less material?) to designing goods that last the distance, or run more efficiently (how can we make T-shirts that hold their shape for years, or planes that run on less fuel and cough out fewer emissions?)

It’s also about a mindset shift – which could actually make us happier. In our consumption-led economy (household spending drives more than half of our economic growth), it’s easy to fall into the trap of buying things. Ads spruiking that thing you really need are everywhere. Whether it’s the newest iPhone, that cute outfit you’ve been eyeing up, or that power tool which will definitely complete your collection, the dopamine hit when you walk away with a new item is a fuzzy feeling many of us are familiar with.

But that excitement tends to wane over time, buyer’s remorse can creep in, and we often end up with a lot of clutter which we compare to other people’s clutter and fall into an endless cycle of sorting through.

Being more conscious about our purchases, buying things that are made sustainably, and thinking about how to extend the life of our possessions, are good places to start. “Buy Nothing” groups where people give away things they no longer need, and repairing things rather than throwing them away, are ways we can save money and feed into this circular economy.

The way we consume things is undeniably a game-changer. But the government and the country’s businesses also have a role. In October 2022, Australia’s environment ministers committed to speeding up the transition to a circular economy by 2030.

This week, the Productivity Commission opened up its desk to submissions for its inquiry into Australia’s opportunities in the circular economy. Requested by Treasurer Jim Chalmers, the inquiry will look into ways Australia can “improve materials productivity and efficiency in ways that benefit the economy and the environment.”

While we’ve tended to fixate on how we can improve the productivity of workers, international studies suggest a more circular economy can lead to higher economic growth and productivity, largely by boosting how productive we are with our inputs: essentially making more with a given amount of raw materials.

Australia has the fourth-lowest rate of materials productivity among OECD countries, generating $US1.20 of economic output for each kilogram of materials we consume. That’s less than half of the OECD benchmark of $US2.50.

Of course, it’s important to remember Australia is a bit of an outlier. We’re a highly resources-driven economy, with vast amounts of land separating us from our cows, sheep, mines and one another. While we can make transport less wasteful, achieving 100 per cent circularity is practically off the table.

Moving towards a more circular economy, though, is a worthwhile exercise – and one we’ve been making progress towards. Our material productivity has increased from $1.45 generated from a kilo of materials in 2010, to nearly $1.60 a kilogram in 2023, and we’re generating a bit less waste per person than we were a couple of decades ago.

Since the industrial revolution, we’ve rapidly fattened up our economy by pumping out products and consuming more. While going around in circles is generally a bad thing, the best way forward might be just that.

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The best thing our pollies have done in decades is also the worst

With the coming departure from politics of Bill Shorten, it’s time to talk about his former bouncing baby, and now obese adult, the National Disability Insurance Scheme. To his credit, his final act has been to put it on a strict diet.

The NDIS is one huge contradiction. Its introduction, in 2013, is Julia Gillard’s short-lived government’s greatest achievement, and Labor’s biggest extension of our welfare state since the introduction of Medicare in 1984.

Before the scheme began, the physically and mentally disabled received some help from state governments, but not a lot. To a great extent, the day-to-day care of the disabled was left to their families.

Under the NDIS, however, the lives of hundreds of thousands of Australians living with a disability have been transformed. They’ve been given greater choice and control over the services and supports they receive. More of their needs are being met, with more of their care being provided by paid workers and less left to family members.

People with a disability are given a personalised “package” – a budget to cover the cost of specified goods and services they need. It sounds like a great improvement, and for many thousands of people it has been.

So, what’s the problem? It’s costing taxpayers far more than ever expected. It’s supporting more people than were expected to need help – more than 600,000 – and covering more forms of disability than intended.

The scheme’s cost is rising far faster than expected. It’s become the second-biggest item of spending in the federal budget, after the age pension. It’s expected to cost $49 billion this financial year, rising to $61 billion in three years’ time.

In 2014, the Medicare levy was increased from 1.5 per cent to 2 per cent of individuals’ taxable income to cover the cost of the scheme. This has proved wildly inadequate. The scheme’s cost has been rising by an astonishing 11 per cent a year.

This was clearly unsustainable. Since Labor returned to power in 2022, Shorten – the man who championed and initiated the scheme – has been struggling to control its ever-mounting cost, and thereby secure its future.

Last month, after reaching agreement with the states and gaining the support of the opposition, Shorten put through the Senate changes in the scheme’s rules intended to reduce the growth in its cost to a mere 8 per cent a year. The scheme will support fewer forms of disability and do more to limit overcharging by service providers. The states will be required to accept more responsibility.

As proof that costs are coming under control, Shorten has said the scheme ended last financial year about $600 million under budget.

But how has such a well-intentioned scheme been such a disaster financially? It’s been a victim of the misguided crusade for smaller government – also known as neoliberalism – and its ideology that the public sector is always inefficient, whereas the private sector is always efficient.

The great misstep of our age has been the privatisation of many government-owned businesses and the “outsourcing” of taxpayer-funded services to private providers.

The proposal for a disability scheme was given a big tick by the Productivity Commission because a market could be established where private businesses competed to provide the goods and services to individuals using government money. This was ideology-based delusion. Governments can’t wave around the cash and create out of thin air a “market” that has any of the self-controlling properties described in economics textbooks.

Many people with disabilities can act like an ordinary consumer, making sure they get the good or service they need at a fair price, but many can’t, or don’t. Even where they have the understanding, they don’t have the same motivation to spend taxpayers’ money with the care they spend their own.

Where people’s disability means they’re unable to pick and choose, the government can pay someone to help them make their choices. But that adds to the cost. And who can be sure that person’s own interests don’t get in the way of them doing the best by their customer?

Even when most of these helpers do the right thing, are they highly motivated to ensure no more taxpayers’ money is spent than necessary? And that’s before you get to the actual providers of goods and services to the disabled. Since their prices are being paid from the bottomless pit of the government’s coffers, what’s to stop them providing more services than are strictly required, or padding out their prices, or even charging the government for services they didn’t provide?

When the feds took over responsibility for the disabled, the states happily stopped providing those limited services they were providing. So where they had, for example, employed providers in regional centres, they ceased to. Did a market of self-employed providers spring up to fill the vacuum? No, it didn’t.

The other hard lesson we’ve learnt is that the bureaucrats administering the scheme aren’t much good at detecting and preventing overservicing, overcharging and outright fraud.

Let’s hope that changes.

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All the reasons house prices will keep rising until we wake up

Contrary to popular opinion, the cost-of-living crisis will pass. But the housing crisis will go on worsening unless politicians – federal, state and local – try a mighty lot harder than they have been.

The cost of home ownership took off – that is, began rising faster than household incomes – about the time I became a journo 50 years ago, and is still going. Even the (unlikely) achievement of Anthony Albanese’s target of building 1.2 million new homes by 2029 probably wouldn’t do more than slow the rate of worsening affordability for a while.

You’d think there must be some kind of limit to how much harder it becomes to afford a home of your own, but considering how long it’s been running, it’s difficult to see just how it will come to an end.

It’s the advent of the Bank of Mum and Dad that’s making the rise in prices seem self-sustaining. Housing prices keep rising, but this makes the existing home owners wealthier, giving them greater wherewithal to help their kids afford the higher prices, which keeps those prices rising, rather than falling back to a level young people could afford without a special leg-up.

Small problem: we end up with a country divided between those born into the wealthy, home-owning class and those born into the class where generation after generation has never been able to afford to own the home they live in. Is that the Australia we want to live in?

How on earth did we allow housing prices to rise faster than household incomes for the past five decades, with little reason to hope this gap won’t get ever wider?

By allowing the slow but steady decline in the rate of home ownership – which began in the mid-1970s – to be a problem we’d worry about later. Or worse, to be a problem the politicians only pretended to care about.

I call this the Howard Effect. John Howard takes the credit because he’s the polly who most clearly hinted at the political class’s true lack of concern about declining home ownership.

He was always repeating the line that he had yet to meet a home owner who thought rising house prices were a bad thing. Get it? The number of happy home-owning voters far exceeded the number of unhappy young couples unable to join the club.

But the rise of the Bank of Mum and Dad has changed this calculus. It’s proof of home owners’ dawning realisation that rising house prices are a two-edged sword. They’re not a problem only if you don’t give a crap about your kids.

It’s probably housing’s big part in the cost-of-living crisis that’s finally broken the dam of politicians’ disinterest in housing affordability. What is of lasting significance about the Albanese government’s efforts to speed up the rate of home-building is its shift to seeing blockage on the supply side of the housing market as the key to progress.

Until now, those seeking to do something about the decline in home ownership have focused on the way special tax breaks and pension exemptions add unhelpfully to the demand for housing.

But the misguided notion that its plan to reform negative gearing and the capital gains tax discount played a significant part in Labor’s loss of the 2019 federal election put paid to demand-side solutions.

The great strength of Albanese’s plan is its focus on reforming local government planning and zoning restrictions on the supply of medium and high-density housing in our capital cities.

Tax and pension problems are the responsibility of the feds. Planning and zoning restrictions are the responsibility of the states. As ever, the only way for nationwide state-level problems to be fixed is for the feds to take the lead. And, as ever, the only way for the feds to get the states to make changes is to flash the federal chequebook.

The state governments – NSW in particular – are making genuine efforts to overcome the long-standing NIMBY resistance to higher-density housing.

Great. But if you think fixing the density problem will stop housing prices rising faster than household incomes, you’re deluding yourself. Just as fixing negative gearing wasn’t a magic answer, nor is fixing density.

No problem as big and long-lasting as declining home ownership could be anything other than multi-faceted. Yes, we need to fix the supply side. But yes, we need to fix the demand side as well. And there’s more to the supply side than density, just as there’s more to the demand side than negative gearing.

Last week’s report of its Review of Housing Supply Challenges, by the NSW Productivity Commission, should be read by people in all states.

The report says local councils should lift their game in reducing the inordinate delays in accepting development approvals and in reducing unreasonable demands on builders.

I think government agencies are monopolies and, like all monopolies, they rarely resist the temptation to put their own convenience ahead of their customers’ needs.

As federal Treasury’s sermon on the housing challenge in this year’s budget papers also made clear, the NSW report notes that part of the problem is the inadequacy and inflexibility of our housing industry.

It’s simply not capable of expanding to meet the surge in demand for homes – something that, I suspect, doesn’t worry it greatly. It’s content to respond by “rationing by [higher] price”, a mechanism I explained in last week’s column.

But the NSW report says the housing industry simply doesn’t have enough tradespeople to increase its production. Workers have been lost to the major construction projects, thanks to the surge in state government spending on infrastructure.

This is no doubt right, as far as it goes. It’s certainly true that state governments would do better (and cheaper) if they timed their investment spending to fit with the ups and downs of private sector major construction spending.

But I think the ability to meet shortages of skilled workers simply by bringing workers from overseas when you need them has led the industry to neglect training sufficient apprentices to meet future needs.

Neither this report nor Treasury’s budget sermon acknowledges another possible supply-side problem, the one highlighted by the economists’ great alternative thinker on housing, Dr Cameron Murray. He argues that the developers keep house prices rising by limiting the release of land to fit.

When you look at the broader causes of ever-rising house prices, even the Reserve Bank doesn’t escape responsibility. The central bankers have always argued that housing prices are a consequence of the interaction of the demand for housing and its supply, so nothing to do with them.

Again, that’s true as far as it goes. But it sidesteps the more behavioural possibility that whacking interest rates up and down engenders an “irrational” FOMO – fear of missing out – that helps keep house prices rising when rates are falling and even when rates are rising and could rise further.

If so, that’s yet another reason why the economists need to come up with a better way of limiting demand than just screwing young people with big mortgages.

There’s more to ever-rising house prices than has ever crossed the minds of most economists.

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Economists have a glaring problem: themselves

By MILLIE MUROI, Economics Writer

Economists don’t often get the chance to look at themselves. They spend their lives keeping a close eye on the actions, behaviours and motivations of others: people like you and me. But the self-reflection they have done recently points to a glaring issue.

When I was first getting my bearings in economics nearly 10 years ago, there were four giant posters at the front of my classroom. The heads of four economists, including Adam Smith, Milton Friedman and John Maynard Keynes, stared smugly down at me as I took notes on all the important things: demand, supply and how to pass my economics exams.

The profession looks a little different now, although maybe not as different as we would like to think. It remains disproportionately pursued by one gender – and those who are relatively well-off.

It’s a sentiment shared by Treasurer Jim Chalmers who said in a speech to high school students last week that we still need to strike a better gender balance, starting with school and university enrolments.

“The economics profession will need to reflect the diversity of our country – I’m thinking especially of attracting more women into these roles,” he said.

Why does this matter? Because the people who study economics are the ones who go on to make some of our most important economic decisions: the governor of the Reserve Bank, the chair of the Productivity Commission, and the head of the Department of Finance to name a few.

All three of these positions are now occupied by women for the first time: Michele Bullock, Danielle Wood and Jenny Wilkinson.

Gender is just one of the diversity metrics we need to monitor. But it has a big impact.

A survey of professional economists in the US showed that while there wasn’t much difference in the perspective of women and men when it came to economic methodology, there were notable ones on policy. Women, for example, were 32 percentage points more likely to agree that income should be distributed more equally.

As Wood wrote in 2018, teams of people who are too similar – in terms of gender, race, age and class – perform poorly because of their narrow range of perspectives and because they are more likely to lapse into “group think” where bad ideas go unchallenged.

“Study after study has demonstrated that more diverse teams make better decisions,” she wrote.

So, what is the state of the economics profession? It’s a question that Jacqui Dwyer, head of the Reserve Bank’s information department, has probed – and it starts at high school.

First, there has been a dramatic fall in the size of the economics student population. Over the past decade, year 12 economics enrolments have been sitting about 70 per cent lower than in the early 1990s.

“Most of the fall occurred during the mid-1990s, with enrolments then drifting down before persisting at relatively low levels for the past decade,” Dwyer said. Part of this is because of the introduction of business studies in the early 1990s, which has become a substitute for economics that students see as easier to learn with clearer career prospects – and which teachers see as easier to teach.

This has, in turn, led to fewer schools offering economics as a discipline. Government schools in particular have dropped off. While almost every school in NSW across the government and non-government sectors offered economics in the 1990s, only about 30 per cent of government schools now offer the subject.

This has led to less uptake of economics by students from less advantaged backgrounds, while the share of advantaged students picking up the subject has grown.

There’s also been a stark fall in female participation. Male and female students accounted for roughly equal shares of year 12 economics enrolments in the early 1990s. Since then, female participation has fallen off: males now outnumber females, two to one.

These numbers are crucial because they feed into the economics student populations at universities. While enrolments have grown in fields such as management and commerce, STEM and banking and finance since the 1990s, the number of economics students has flat lined.

Another factor weighing on economics enrolments at university is the perception that economics is a “riskier” subject to study with a less well-defined career path than other disciplines.

That’s despite economics graduates having among the highest average earnings (only beaten by engineering graduates) and one of the widest array of employment options, in terms of industry and occupation.

Economics students do, however, face some challenges in landing their first job out of uni. The unemployment rate of economics graduates is higher than disciplines such as health, education and business, especially just after graduation (although, as Dwyer notes, it’s a similar rate to those in science and information technology).

The fall in the number of economics students also impacts economic literacy in the broader population. This is important because those who are economically literate make more informed economic choices, better understand the world around them and can influence public discussions and government action.

They can also make public policy more effective by aligning their expectations or behaviour with its intended purpose.

Unfortunately, diversity issues continue into university. Unlike at high school, the gap between female and male participation has always existed, recently sitting at a similar ratio to what we see in high schools.

Even worse, there’s been a sharp worsening of diversity in socioeconomic status. “Economics has become a socially exclusive subject, with a higher share of students from advantaged backgrounds than is the case for most other disciplines,” Dwyer said.

More than half of university economics students are from high socioeconomic backgrounds, whereas only about 7 out of 100 were from the bottom 25 per cent.

The economics discipline is often criticised for its shortcomings: flawed predictions, incorrect assumptions and policy blunders.

While it will always be an imprecise science, If we want to improve public policy and the questions and discussions shaping them, the state of the economics discipline must change, reflecting the diversity of the people it studies.

As Chalmers has pointed out: “numbers are very important. But the main reason we study economics is not numbers, it’s people.”

If we want economics to serve people, we need the faces at the front of that classroom, and in the classroom, to reflect a wider set of perspectives that better mirror how our economy – and its people – work. That’s step one of improving the state of the discipline.

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Our gambling obsession is doing great harm to addicts and their families

I grew up in a strict, Salvation Army household where there was no drinking, smoking or gambling. My parents wore their uniforms everywhere they went. Women wore no makeup or jewellery. Young boys like me weren’t allowed to go to the pictures.

My parents were strict, but loving. I had no problem with any of this except the ban on movies. We kids played cards, but not with ordinary playing cards. Why not? Because people might think we were gambling. So we played Snap, and Happy Families, with cards depicting Mr Bun the baker and his family.

After I left home I gave up these old-fashioned strictures. But they left me convinced of the damage that addiction to alcohol and gambling can do to people and, especially, their families, often deprived of enough money to live on.

So when the last act of the late Peta Murphy, a Victorian federal MP, was a parliamentary inquiry calling for greater control over the modern scourge of online betting, I was happy to join the cause. It’s way past time we stopped allowing businesses and even the members of licensed clubs to benefit from the harm done to addicts and their families.

As the Grattan Institute and its chief executive Aruna Sathanapally reminded us in last week’s report, Australia has a gambling problem unmatched by other, more sensible rich countries. Our annual gambling losses exceed $1600 per adult. That’s twice what people lose in America or Britain, and almost three times what our Kiwi cousins shell out.

Why are our gambling losses so much greater? Not because of the romantic delusion that Aussies would gamble on “two flies crawling up a wall”, but because our governments have done less than others to protect us from people who just want to make a buck at our expense.

Grattan tells us that, in total, Australians lose about $24 billion a year on gambling. Half of this comes from poker machines and another quarter from betting on sport and racing. Lotteries, scratchies and casinos make up the rest.

By far the most addictive are pokies and fast-growing online betting, so these are the ones to worry about. When it comes to politicians failing to protect us from having our susceptibilities exploited, successive NSW governments take the cake.

They were the first to let licensed clubs become addicted to revenue from pokies, then let hotels have them too. But eventually, the malady spread to other states. NSW has 14 pokies per 1000 adults, ahead of Queensland on 11.

More sensible Victoria has just six machines per 1000 adults, but Western Australians manage to live normal, happy lives with just 0.7 per 1000.

Poker machines were once called “one-armed bandits”. Now they’re just bandits. Although Australia has only about 0.3 per cent of the world’s population, it has 18 per cent of the world’s pokies. NSW accounts for about half of that.

As for online betting, its ubiquitous ads make it the most noticeable. It’s a safe bet it will grow to be a bigger problem than today. But so far, it’s of little interest to women, with young adult men by far the most susceptible.

Now, the vast majority of people who gamble do so in moderation, and do themselves no harm. But a small minority of pokie players and online betters become addicted. Grattan quotes data from debit card use showing that 5 per cent of gamblers account for 77 per cent of the spending.

That’s what makes pokies and betting so exploitative. Addiction can harm people’s financial security, health and broader wellbeing. Addicts can lose their jobs, smash their marriages, commit family violence, engage in fraud, be declared bankrupt and take their own lives.

I’m unforgiving of business people and club members who want to benefit from gambling – and politicians who lack the courage to hold them back – while turning a blind eye to all the human suffering gambling causes.

Grattan wants the feds to ban all gambling advertising and inducements, while state governments reduce the number of pokies over time.

It wants the feds to establish a national, mandatory “pre-commitment system” for all online gambling. Each state should introduce a similar pre-commitment scheme for pokies.

Pre-commitment schemes were invented by behavioural economists to allow us, in our more sensible moments, to impose limits on our own behaviour when we’re acting in the heat of the moment.

Grattan wants such commitments to be compulsory for all people that start using clubs, pubs or online betting sites after the scheme starts. You choose the limits you want to set on your spending per day, per month and per year. You can lower those limits any time you wish, but can raise them only after a delay of at least a day. The scheme would also impose maximum limits of say, $100 a day, $500 a month and $5000 a year.

Most gamblers would be unaffected by this scheme, but for others it would stop them ruining their lives. The clubs and pubs and big online betting companies will tell us it would destroy the economy. Don’t believe them.

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If there's no 'price gouging' how come interest rates are so high?

The nation’s economists have a dirty little secret. They all believe that what the punters denigrate as “price gouging” is actually a good thing, part of the mechanism by which a market economy returns to “equilibrium” (balance) after it’s been hit by an inflationary shock.

But they have a visceral hatred of terms such as “price gouging” and “profiteering”, and are always producing graphs and calculations purporting to prove that the recent surge in inflation – the worst in about 40 years – has produced no increase in company profits.

What they don’t seem to have noticed, however – or maybe are hoping none of us have noticed – is that you can’t argue that demand has been growing stronger than supply and so causing price increases, thus justifying using higher interest rates to slow down demand, and at the same time claim there’s no evidence that profits have risen.

Sorry, guys. You can’t have it both ways. If you claim there’s been no noticeable rise in profits, you’re contradicting the Reserve Bank’s main justification for its 13 increases in the official interest rate since May 2022. (Which is funny, considering the Reserve has been prominent among those seeking to deny that profits have risen.)

That main justification has been that much of the worsening in the rate of price increases has been caused by “excessive demand”, thus necessitating higher interest rates to discourage us from spending so much.

But how exactly does excessive demand lead to higher prices? It’s simple. When there are more people wanting to buy my product than I and my suppliers can keep up with, I could leave the price I’m charging unchanged, in which case it won’t be long before my shelves are empty, and I have nothing to sell.

That’s not the way it works in practice, however, nor the way it works in economic theory. I take advantage of strong demand to raise the price at which I’m selling the item. Why do I do this? Because, like all business people, I’m trying to maximise my profit.

The higher price means I won’t be selling my stock as fast as I was – so it will take longer for my shelves to empty – but I’ll still be better off.

Economists say that when demand exceeds supply, the stuff still available has to be rationed, one way or another. One way to ration supply is simply to keep selling at an unchanged price until everything is sold. After that, everyone who comes later misses out.

But when the seller raises their price, economists call this “rationing by [higher] price”. They believe this is always the better solution to the rationing problem because it does so in a way that uses the “market mechanism” to fix the problem.

The higher price encourages would-be buyers to reduce their demand – by wasting less of the product, or finding a cheaper substitute – while encouraging suppliers to produce more of the now-more-profitable product.

So because the higher price reduces demand while increasing the supply, the price mechanism causes the price of the item to fall back towards what it first was. Brilliant. Another win for market forces.

But this means a (possibly temporary) rise in prices is an essential part of the price mechanism. So a consequent rise in profits is also an inevitable part of the mechanism.

It’s gone out of fashion but, long ago, economists would say there were two causes of inflation: “cost-push” and “demand-pull”.

Sometimes firms raise their prices because they’re passing on the higher costs they’re paying for their inputs. At other times they’re raising their prices simply because the high demand for their product allows them to.

We now know from the work of behavioural economists that ordinary consumers accept it’s OK for businesses to raise their prices because of their higher costs. But they regard raising your prices just because shortages in supply let you get away with it as exploitative. (The classic example is charging more for umbrellas on rainy days.)

This dual, supply caused and demand-caused, explanation for inflation fits well with the Reserve’s analysis of the origins of the great surge in prices – in all the developed economies – in late 2021 and 2022.

Part of it was from disruptions to supply caused mainly by the COVID-19 pandemic, but also the Ukraine war, which pushed up the cost of building materials, various manufactured goods, shipping and oil and gas. But part of it was caused by the excessive stimulus applied to the economy by governments and central banks during the pandemic and its lockdowns, which had caused the demand for goods and services to run ahead of the economy’s ability to produce them.

Increasing interest rates can do nothing to increase supply, and the end of the lockdowns would see supply gradually return to normal, the Reserve reasoned. But higher rates could dampen the excess demand caused by all the extra government spending and rock-bottom interest rates that was applied to ensure the lockdowns didn’t lead to a lasting recession.

See how this analysis is undermined by claims there’s no sign of firms earning higher profits in the post-pandemic period? It implies that there’s no sign of excess demand, suggesting the surge in prices must have come only from supply disruptions and other cost increases.

In which case, the justification for maintaining high interest rates is greatly weakened. It implies that demand hasn’t been growing excessively and, rather than waiting for the supply problems to resolve themselves, we’re going to batter down demand to fit.

If so, that would be a very painful solution to a temporary problem. And, unlike the inflation problem we suffered in the 1970s, there’s no way this inflation surge can be blamed on excessive growth in wage costs.

Real wage growth had been weak long before the pandemic arrived. And in 2020, many workers were persuaded to skip an annual wage rise in the belief that we’d entered a lasting recession. As we subsequently discovered, government handouts to business meant many businesses sailed through the pandemic with few scratches.

Why so many economists want us to believe that, despite decades of increased market concentration – more industries dominated by just a few huge firms – and despite excessive monetary and budgetary stimulus, profits never increase, I’m blowed if I know.

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Our economy has turned into a tortoise. The RBA will be pleased

By Millie Muroi, Economics Writer

Most of us know the age-old saying: slow and steady wins the race. Numbers released into the wild on Wednesday show the Australian economy is definitely a tortoise – but it should make the Reserve Bank pretty happy.

The national accounts – data gathered and shared every three months by the Australian Bureau of Statistics – gives us one of the most detailed pictures of how our economy has been tracking. The numbers always run slightly behind where we are because all the information has to be collected, crunched and spat out into a digestible clump. This week’s data drop was for the three months to June.

So, how did we go? There’s not much that should come as a surprise. Economists have long known the economy has been slowing. And most of the household data points to trends you’ve probably seen and lived yourself less spending, less disposable income and less of our income being put away for a rainy day.

Economic growth – or gross domestic product (GDP) – was weak, expanding 0.2 per cent in the June quarter for the third quarter in a row. But economic growth per person, which matters more when assessing our living standards, has tumbled … again. It fell 0.4 per cent – the sixth back-to-back quarter of shrinkage.

Will this worry our decision makers? Probably not. The focus is almost always on the total, not what’s happening on an individual level. It’s also much simpler to talk about GDP than GDP per capita – and much easier to fit in a headline!

The Reserve Bank, for one, won’t be worried by Wednesday’s figures. In fact, it’s probably quite happy. Why? Because its decisions are made at an aggregate level: it looks at the big picture, not the finer details.

There’s always a risk the bank will push the economy too far down the drain.

The bank’s forecasts for certain sections of the national accounts might have fallen on the wrong side of the fence: disposable income (how much people have to spend or save after taxes) for example, came in 0.3 per cent lower over the year, compared with the bank’s expectations for a 1.1 per cent increase.

But the Reserve Bank has one thing at the front of its mind: pushing inflation back into the 2 per cent to 3 per cent target range. In June, annual inflation was still sailing in at 3.8 per cent.

Sure, the bank also wants to keep Australians employed. But with the number of jobs still growing, and the unemployment rate (at least the headline measure) staying low by historical standards, it’s inflation that the bank is worried about.

As you know, inflation is determined by the balance – or imbalance – between demand and supply. There’s not much the Reserve Bank can do about supply (except shout from the sidelines about the importance of boosting productivity), so its focus is on demand.

From the bank’s perspective, it doesn’t matter where that demand comes from, or who exactly is doing the demanding. Its mission is to dampen demand when inflation is high, and give it a boost when inflation is low and the economy is slow.

There’s always a risk the bank will push the economy too far down the drain. We know GDP is only just managing to keep pace and the Reserve Bank has one tool – interest rates – which it’s not afraid of holding high until there’s a clearer sign it has inflation under its thumb.

After all, it doesn’t want inflation running high and finishing first, unless finishing means an end to high inflation.

For this to happen, the bank needs demand to slow down. That means less spending – at least until we figure out a way to pump out more goods and services with the limited people, machinery and materials we have.

It’s clear households are feeling more pressure. The proportion of households’ income that they were able to save dropped to 0.6 per cent in the June quarter, compared with 1.7 per cent at the same time last year. That’s despite households also cutting their spending.

Household consumption, at more than half of GDP, is the single biggest driver of economic growth. But with household spending down, it was government spending (which contributed 0.3 percentage points to growth) that helped keep the economy expanding. Investment spending on new homes, business equipment and building had no impact this time around, while net trade (the difference between exports and imports) contributed 0.2 percentage points, largely thanks to international students and all the spending they did in our economy.

Overall, there’s little in the national accounts to spook the Reserve Bank. Treasurer Jim Chalmers copped some heat this week for a tweak in his language when he said interest rates were “smashing” the economy. But Chalmers and the bank know that without a miracle or a slowing economy, it’s hard to see inflation being reined in anytime soon.

If anything, the national accounts show the economy is moving the way the bank wants. That means both an interest rate cut and rise are unlikely for the time being. The Reserve Bank doesn’t want the economy to stall, but it needs any increase in demand to run behind growth in supply, for inflation to come down.

Right now, our country is still running too hard down the shopping aisle for suppliers to keep up, meaning we’re putting upwards pressure on prices. That’s where the government needs to strike a fine balance. Spend too little and, as our figures showed, we could slip into recession. But spend too much and inflation could stick around for longer.

Anyone who runs knows it’s impossible to sprint all the time. Going slow is not always fun, but until we build up the stamina, muscle and skill, we have to make sure not to push ourselves too hard for too long in case we sustain an injury.

It’s a similar story for the economy. The demands we put on it have to grow alongside our ability to cater for them. The Reserve Bank is like a coach making tough calls because it thinks we’re pushing too hard.

Our economy is slowing, and it’s a fine balance to strike when jobs are on the line. But as long as we’re not running backwards, and with the jobs market so strong, the bank will be happy to stay the course with our tortoise economy.

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Albo’s quiet quest: stop wasting so much taxpayers’ money

If you’ve gained the impression that Anthony Albanese’s government is one that knows what it should be doing to fix our various problems, but lacks the courage to do anything that might be controversial – even just including questions in the census about people’s sexual orientation – I can’t tell you you’ve got the wrong idea.

What people outside Canberra often don’t realise is how obsessed governments, of either colour, become with how their opponents will react to anything they do or say. Albo seems to have a bad case of this.

It’s something economists understand from their study of the behaviour of duopolies. Albanese has forgotten the golden rule of competition laid down by the social psychologist Hugh Mackay: to compete successfully, focus on your customers, not your competitors.

But while Albo’s lack of courage keeps hitting the headlines, it’s not the whole story of this government. Behind the scenes, it’s gearing up to do a better job of ensuring that the many billions of taxpayers’ money it spends each year are more effective in improving our lives.

Governments don’t deliberately waste our money. Almost all of it is spent with the intention of making us safer, improving our health, adding to our education, ensuring we don’t starve because we can’t find a job or are too old to work, or just to help us travel from A to B more easily.

But while almost all government spending is done with good intentions, a surprising amount of it does little to achieve its stated objectives. Why? Because we’re spending on things we’ve always spent on, doing things the way we’ve always done them. Because we’re spending on new things just in the fond hope this will make things better. And because our spending choices are guided by ideology, anecdotes or – and this one’s a favourite – because it’s spending you know will give voters the impression things are improving.

After decades of pursuing the quest of making government smaller – by privatising government-owned businesses and paying private businesses to deliver government-funded services – Albanese and Treasurer Jim Chalmers are on a quest to make government better.

They’ve set up within the Treasury the Australian Centre for Evaluation, which will co-operate with other departments in assessing government spending programs to see how well they are achieving their objectives. The goal is to build a body of evidence of what spending works and what doesn’t. Spending programs should be based on such evidence, not on hunches and hopes.

Last week, Treasury secretary Dr Steven Kennedy gave a long speech outlining his department’s commitment to “evidence-informed policymaking”.

For many years, the medical profession has been committed to using “randomised controlled trials” to evaluate the effectiveness of medicines and medical procedures. These involve experiments where subjects are divided into two groups selected at random. One group is given the pill or the procedure, then compared with the “control” group to see what difference it made.

Now the econocrats want to use this technique to evaluate government spending. And on Tuesday Dr Andrew Leigh, the assistant minister for competition, charities and treasury, gave a speech on evidence-based policing.

Controlled experiments have been used to study the effectiveness of police behaviour in America for many years. For instance, it’s widely believed that the use of body cameras will improve the way police treat members of the public.

But a study involving more than 2000 police officers in Washington DC found that wearing cameras had an insignificant effect on police use of force and on civilian complaints. Their benefit was in providing better evidence in court.

In Australia, the Queensland community engagement trial tested the effect of training in “procedural justice” on citizens’ views of the police. Traffic police were taught to use a script when speaking to drivers stopped for random breath testing.

The study found it improved drivers’ views of the police, though they were no more likely to obey officers’ directions. (But I doubt if many people disobey the coppers, no matter how impolite they are.)

Many randomised trials involving the police are being conducted in Victoria. One seeks to reduce the number of people who fail to appear in court after being summonsed.

It tests the effect of providing simpler information, replacing a 2200-word, seven-page document with a 60-word statement and links to support services from Victoria Legal Aid and the Victorian Aboriginal Legal Service.

The initial results show that the shorter document leads to better court attendance, and thus fewer arrests and incarcerations of people who don’t turn up. The results of many more experiments are on the way.

Meanwhile, the Brits have set up a What Works Centre for Crime Reduction, and Leigh hints that we may do something similar in Australia.

Policing is just one example, of course. It all seems pretty laborious, but if it leads to less ineffective spending and better government it’s a worthwhile endeavour. And not before time.

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GDP is going backwards. That doesn't mean your life is, too

By Millie Muroi, Economics Writer 

If gross domestic product – better known by its nickname GDP – were a perfect reflection of our quality of life, we would be in trouble.

It’s a rough measure of how much we produce, earn and spend, and it grew a measly 0.1 per cent in the first three months of this year. If our population hadn’t boomed at the same time, Australia would be in recession. In fact, in per-person terms, we’ve actually been going backwards for an entire year.

GDP is a go-to gauge for politicians, pundits and journalists when it comes to our standard of living. Generally, if it’s growing, that’s a good thing. It means we’re producing more, making more money and getting to consume more: all signs of a happy, healthy economy, right? Not necessarily.

GDP reflects the monetary gains from economic activity. But it’s basically blind to any destruction we might cause to the natural environment as we pursue profits and make purchases. And it tells us nothing about how those monetary gains – or income – are shared among the rich and poor.

It also fails to account for all the other things that make life worth living: safety, a sense of belonging and how healthy (not just wealthy) we are, to name a few.

While it’s important to keep an eye on traditional economic indicators, they don’t give us a well-rounded picture of many of the things that matter. Metrics such as GDP, unemployment and inflation can help the Reserve Bank and government make informed choices when steering the economy.

But relying on these indicators alone is like driving down a highway with broken mirrors and shattered headlights. You might be able to see some things, but you’ll miss (and hit) a lot – with some pretty big consequences.

It’s part of the reason the Labor government has been copping heat this week after it decided not to add questions on topics such as sexuality in the 2026 census. Deputy Prime Minister Richard Marles said it was to avoid “divisive” community debate, but many members of the LGBTQ community understandably felt they were being overlooked.

Without solid data, it’s difficult to make policy decisions, particularly for groups that are vulnerable and facing particular challenges. This was a chance to fill one of those gaps.

But the Coalition has no clean record either when it comes to data collection. Shadow Treasurer Angus Taylor has said the government needs to zone in on lower inflation and lower interest rates. Fine. Except that he wants to scrap the government’s “Measuring What Matters” framework to do so.

But the Measuring What Matters framework … matters. It tracks our progress towards a more healthy, secure, sustainable, cohesive and prosperous Australia. That may sound fluffy and abstract. But those five adjectives frame 50 key indicators that make up the wellbeing dashboard, covering everything from air quality to how secure we feel and how healthy we are. It’s a toolkit we can use to fix at least some of the broken mirrors and headlights on our car and develop a more holistic view of our economy.

While it’s important to keep an eye on traditional economic indicators, they don’t give us a well-rounded picture of many of the things that matter.

It’s all about getting the economy to work for people and the planet rather than the other way around.

Dr Cressida Gaukroger, wellbeing government initiative lead at the Centre for Policy Development, says the data doesn’t often swing massively (perhaps one reason why the wellbeing report was largely glossed over by the media last week).

But it’s important because it gets us thinking about the long term, specifically “the changes we should be making now and the investments that we should be making now,” Gaukroger says. This way, we can save ourselves from longer-term problems that might otherwise be ignored in the frenzy around the latest GDP number, for example.

“Without that kind of long-term vision of what we should be aiming for, it makes it very difficult when we’re stuck with short-term election cycles and politicisation of government spending,” Gaukroger says.

So, what did the latest update on this data tell us? Let’s look at the bad news first.

Female health-adjusted life expectancy has dropped. Normally, Gaukroger says, we don’t see much movement in the average number of years a person can expect to live in “full health”. But chronic health conditions are crippling more people. About half of Australians lived with a chronic health condition in 2022 – up from 47 per cent in 2018 and 42 per cent in 2002, with women more likely to be grappling with one.

When it came to the environment, biological diversity worsened. From 1985 to 2020, the abundance of threatened and near-threatened species plummeted by roughly 60 per cent. Biodiversity is important because it ensures balanced and functioning ecosystems.

Some measures of cohesiveness have also deteriorated. In 2023, our sense of belonging fell to a value of 78 – the lowest it has been since 2007, when the measure was benchmarked at a score of 100.

But it’s not all doom and gloom. Other measures have improved, highlighting the areas we are thriving in.

We’re feeling safer walking through our neighbourhoods at night, and more than three-quarters of people in 2023 agreed with the statement that “accepting immigrants from many different countries makes Australia stronger” – up from 63 per cent in 2018.

Gaukroger says another positive development is the decline in “material footprint” per person, meaning fewer raw materials such as fossil fuels and minerals are being extracted to satisfy our demand. While the amount of raw materials being used to fulfil our wants and needs was 37.6 tonnes a person in 2010, the amount fell to 31 tonnes in 2023.

That means we’re working towards a circular economy, which reduces waste by, for example, sharing, reusing, repairing, and recycling things and designing materials that are less resource-intensive to make in the first place. This is a win for the environment.

The Measuring What Matters dashboard is not perfect. As Treasurer Jim Chalmers admitted last week, some of the data is too old, and there are still holes that need to be patched up. But it’s still well worth the investment.

Focusing too heavily on one thing comes at a cost. If we want a well-rounded gauge of our wellbeing and effective policy to drive us to our desired destination, we need to look beyond GDP.

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How GPT (not that one) could help fix our inflation problem

By Millie Muroi, Economics Writer

ChatGPT is not the answer to Australia’s productivity problem. At least, not yet.

But I asked ChatGPT what its chances were of productivity improving in Australia – if it was a betting man. The answer? 70 to 80 per cent.

Productivity growth excites economics nerds, like those at the Reserve Bank ... and just about no one else. But it matters for everything from your mortgage to the prices you pay at shops and the quality of your life.

Why? Because productivity growth means being able to make more with what we have, which is the best solution to the biggest economic issue of our time: inflation.

After all, there are two sides to this inflation problem: too much demand and too little supply. Instead of the Reserve Bank beating down our appetite for goods and services through ramping up interest rates, wouldn’t it be nice if businesses could simply produce more with the workers and equipment they already had, therefore keeping prices in check?

We could work longer hours and maybe even put our machines under more strain, but we can only do that for so long: it would be like trying to run a marathon at sprinting speed.

That doesn’t mean we should abandon all hope.

Instead, to curb price rises, and to lift our living standards over time, we need to improve productivity. Like a marathon runner improving their running technique, we need a way to get faster or better at what we do. A crucial way of doing this is through discovering and using new technology that helps us pump out more, or better quality, goods and services, in a way that can be maintained.

The most influential of these tools (those that have transformed the way we live) are called General-Purpose Technologies – or GPTs for short. The steam engine, cars, electricity and the internet all count as GPTs, because they were widely adopted and became crucial pieces of technology which dramatically yanked up our productivity.

We may not consciously think about it. But imagine what our lives would look like today without electricity, internet and cars. We would be slower, have much less information at our fingertips and would find it harder to work once the sun sets.

As Andrew Leigh points out in his book The Shortest History of Economics, the journey to create the electric bulb itself shows how our productivity has improved. In prehistoric times, producing as much light as a regular household lightbulb using wood fire would have taken our ancestors about 58 hours of foraging for wood. Today, it takes less than a second of work to earn enough to flick a household light bulb on for an hour.

ChatGPT is an example of a tool that could become a general-purpose technology. But the “GPT” in its name actually stands for “generative pre-trained transformer”: a fancy way of saying a piece of software trained using huge amounts of data to offer up human-like answers to questions like mine.

During the pandemic, there was a short-lived surge in the take-up of cloud computing (IT services that businesses can use without owning or running the physical servers, hard drives and networks required themselves). But generally, Australian businesses are behind the curve when it comes to adopting new technologies – and we don’t develop much of it ourselves.

That doesn’t mean we should abandon all hope. Instead, we need to think about the drivers of, and barriers to, adopting technologies such as cloud computing and artificial intelligence: two GPTs in the making.

Kim Nguyen and Jonathan Hambur at the Reserve Bank say these technologies could alter the way we do business. But knowing how to use and make the most of them also requires highly skilled and educated workers.

A website called ChatGPT is raising questions about the role of artificial intelligence in our education, work and relationships.

Nguyen and Hambur’s research involved trawling through the annual reports, job ads and earnings calls of Australian businesses to figure out how much workers’ and managers’ skills matter when it comes to successful adoption of GPTs.

Here’s what they found. Firms which had snagged a board member with experience in the IT industry were 30 percentage points more likely to adopt a GPT. While there were certainly businesses which took up GPT without a technologically skilled board member on their team, these firms generally failed to see much improvement in their profitability after putting a GPT in place.

Basically, having board members with relevant technological experience has been linked to more profitable use of GPT. Of course, the authors point out this could be because firms that appoint technology-savvy board members tend to be more focused on IT in the first place, and therefore more likely to be able to adopt GPT in a way that increases profitability.

But firms with technologically skilled board members were also more likely to look for workers with GPT skills, indicating those workers might also play an important role in profitable GPT adoption. Whatever the exact link, uptake of GPT is linked to higher demand for skilled workers, meaning education and training will be key to nailing the use of these technologies.

While the Reserve Bank’s toolkit is limited to setting interest rates (and, informally, jawboning) the less painful solution to getting inflation under control is to improve our productivity, and therefore the amount of goods and services to go around.

Productivity growth is difficult to measure, and quarter-to-quarter movements can be rocked by things that have little to do with anything. But it has flattened out in recent months, and without productivity growth to match, wages, which have begun to pick up in recent times, will worry the Reserve Bank and may build the case for the Reserve Bank to keep interest rates higher for longer.

ChatGPT has hit the headlines over the past year: from students using it in a bid to boost their marks and to some media companies relying on it to churn out AI-generated content. While it’s yet to join the ranks of coveted general-purpose technologies, ChatGPT is an example of innovation which could turn out to be a game-changer.

Right now, it’s an imperfect tool being put to use by an inexperienced user (me). But I asked ChatGPT if it could write a better opinion piece, and faster than I could. The answer? “I’d love to give it a try!” 

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Think you've snagged a bargain online? It's you who's been snagged

By Millie Muroi, Economics Writer 

In a cost-of-living crisis, I’m sure I’m not the only bargain hunter who has put giant e-commerce sites Temu, Shein and Wish to the test.

I’ve heard all the arguments against shopping online, and like most of my generation, I’ve shrugged off most of them, too. It’s how we do things when money is tight. Get with the program, or get old.

One friend splashed cash on a giant stuffed pig from Temu for my birthday, and another told me their “mate” (sure, sure) had tried buying some “weird stuff” from Wish, including weapons and sex toys. By weapons, they meant pepper spray. I didn’t press on the sex toys.

“Verdict?” I asked. “Worth someone switching suppliers?”

“Feel free to trust the online reviews,” they replied. “I can’t speak for it myself.”

You might think you’ve bagged a bargain, or something you wouldn’t buy in person, when using these sites. And in some cases, you probably have. But whether you’re stocking up on knock-off essentials, or chasing a quick hit of retail therapy, there are some risks to keep in mind.

First, there’s the good chance you’re spending more than you bargained for. Sneaky sales tactics have been used by bricks-and-mortar shops for decades. Switching up the floor plan every few weeks or months, for example, forces customers to spend more time in the store and discover products they may not have noticed before on their well-worn path.

But online shopping is a different ball game, and has ushered in a raft of new sneaky techniques. One of these strategies is gamification: where e-commerce sites turn shopping into a game-like experience. Hop onto Temu, for example, and you might mistake it for an online casino.

Timers count down how long you have before you’ll miss out on a deal. And when a roulette wheel of discounts and store credit pops up with tantalising rewards (and seemingly no possibility of losing), it would seem silly not to give it a shot, right?

The dopamine hit from activities like spinning a wheel and landing a discount help reel us in, keep us engaged, and get us invested in making use of our reward, which, of course, means spending. The countdowns, meanwhile, fuel a sense of scarcity and urgency which compel us to act now (often impulsively), rather than abandon our cart.

Gamification, of course, is not just an online phenomenon. McDonald’s, for instance, runs its Monopoly promotion every year, encouraging customers to collect tokens, some of which can be exchanged instantly in-store for discounts.

But there are few e-commerce sites which have used these tactics so heavily, and converted so many people into customers. Despite only launching in 2022, Temu has become the fifth most popular online retail brand in Australia, with an estimated 1.2 million Australians checking out on the platform, and $1.3 billion spent by them annually.

Of course, part of this comes from the hundreds of millions of dollars the company has splashed each year on advertising. This includes money spent to flood social media platforms with ads and, in the US, even a spot at the most sought-after marketing opportunity: the Super Bowl.

Since Temu’s debut, its Chinese parent company Pinduoduo has seemingly gone from strength to strength. In the first three months of this year, it raked in nearly $5.4 billion in profit, triple its earnings from the same period last year.

Apart from its mammoth marketing budget, Temu has probably also benefited from launching at a time when inflation pressures, especially across developed economies, have driven customers to intensify their hunt for bargains.

Amazon, the US behemoth which launched back in 1994 as an online bookstore, still holds the top spot in e-commerce when it comes to profits and sales globally. But companies such as Temu have come under particular scrutiny because of a Chinese intelligence law which allows Beijing to access sensitive information held by Chinese firms.

While information on the $2 phone case you bought from Temu might not be too consequential, there are suspicions the Chinese government could be accessing personal information which could expose customers to fraud or cyberattacks.

And while misbehaviour by multinationals isn’t an issue unique to Chinese companies, regulation and compliance in China can be looser. Temu, for instance, has been accused of selling products built with slave labour. And authorities in Seoul this month found women’s accessories sold by companies including Shein, Temu and AliExpress contained toxic substances, some at hundreds of times above the legal limit.

There are also wider economic implications of shopping with these platforms. A tactic often used by new companies is to temporarily sell at loss-making prices; that is, they sell their goods for less than it costs to make and ship them.

It can’t be done forever, but businesses with money to burn can use these aggressive strategies to drive smaller competitors into the ground or steal customers away from bigger rivals. Consumers benefit, for a little while, from cheaper prices, but competing businesses may suffer and so, eventually, will consumers.

Then, there’s the issue of sharing data. The internet has made it easier for companies to collect personal and minute behavioural information at an unprecedented scale.

While this can be beneficial when companies can match you with products you actually need, at prices that can’t be beaten, it can also help them take advantage of our weaknesses and play to our psychology in ways that make us spend more than we should.

There’s little doubt heavy use of gamification on sites such as Temu is already hooking us in. But by engaging with these tactics in the first place, we’re also feeding into the algorithms they use, and helping these companies figure out what makes us tick.

Temu’s tagline is “shop like a billionaire”, but unless we stay alert to the risks and tactics used by these e-commerce giants, it will be their pockets we end up lining.

While new and competitive businesses are a good thing for consumers looking for a bargain, we should keep a careful eye on these firms. After all, they’re keeping a close watch on ours.

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RBA worries too much about expectations of further high inflation

Other central banks have started cutting interest rates, yet our Reserve Bank is declining to join them because, as governor Michele Bullock explained on Friday, it doesn’t expect our rate of inflation to fall back to the mid-point of its target range “in a reasonable timeframe”.

Its latest forecasts don’t see the “underlying” (that is, smoothed) annual inflation rate returning to 3 per cent until the end of next year, and reaching the mid-point of 2.5 per cent until late in 2026.

Clearly, the Reserve doesn’t see such a timeframe as reasonable, so it’s keeping interest rates high for longer, until it can see inflation returning to target much earlier. And, Bullock warns, should the inflation outlook get worse, she won’t hesitate to raise rates further.

Obviously, the longer interest rates stay high, the greater the risk of forcing the economy into recession, with much higher unemployment and business failures, something Bullock swears she wants to avoid.

But what’s the hurry? Why is taking another two years to get inflation down an unreasonable timeframe? (Another question is, what’s so magical about 2.5 per cent? Why would 3 per cent or 3.5 per cent also be unreasonable? But I’ll leave that for another day.)

The hurry comes from central bankers’ longstanding fear that, should the inflation rate stay high for too long, the people who set prices and wages will come to expect that inflation will stay high rather than return to where it used to be.

Why do their expectations matter? Because, many economists believe, when enough people expect inflation to stay high, they act on their expectations and so make them a reality. Workers and their unions demand higher wages, and businesses pass their higher costs on to customers in higher prices.

This is the much-remarked “wage-price spiral”. It’s important to remember, however, that inflation expectations and wage-price spirals aren’t a longstanding tenet of either neoclassical or Keynesian economics.

They’re just a bit of pop psychology some economists came up with to explain why, in the mid-1970s, the developed economies found themselves beset by “stagflation” – both high inflation and high unemployment.

So how much we should worry about inflation expectations is an empirical question: is the idea borne out by the facts and figures?

In 2022, Dr John Bluedorn and colleagues at the International Monetary Fund conducted a study of the historical evidence for wage-price spirals in the developed economies, concluding that a jump in wage growth shouldn’t necessarily be seen as a sign that a wage-price spiral is taking hold.

Bluedorn elaborated on these finding at the Reserve Bank’s annual research conference last September. The discussant for his paper was Iain Ross, former president of the Fair Work Commission and now a member of the Reserve’s board.

Ross (and leading labour market economists, such as Melbourne University’s Professor Jeff Borland) readily agree that Australia experienced a wage-price spiral in the 1970s. But both men conclude that our circumstances 50 years later are “very different”, which means it should be possible to sustain steady wage growth without initiating a wage-price spiral.

In mid-2022, Borland listed three respects in which our present circumstances are different. First, upward pressure on wages is being limited on the supply side by employers’ ability to give extra hours of work to part-time workers who’d prefer more hours, and by drawing more participants into the jobs market.

Second, changes in the “institutional environment” since the 1970s have reduced the scope for people to get wage rises based on the principle of “comparative wage justice” – “Those workers have had a pay rise, so it’s only fair that we get the same.”

And third, a decline in the proportion of workers who are members of a union, and a range of other factors, have reduced workers’ bargaining power, thus limiting the size of wage increases likely to be obtained.

There could hardly be anyone in the country better qualified than Ross to explain how the institutional arrangements governing the way wages are set have changed over the decades. He told the conference that “these changes have been profound and substantially reduce the likelihood of a wage-price spiral”.

The central difference was that, in the 1970s and 1980s, the institutional arrangements facilitated the transmission of wage increases bargained at the enterprise level – usually by unions in the metal trades – to the relevant industry sector and then ultimately to the broader workforce.

There were four important respects in which the present rules are very different. First, the new “modern awards” operate as a minimum safety net and the circumstances in which minimum wages may be adjusted are limited. In effect, there is no scope to adjust minimum award rates to reflect the outcome of collective bargaining at the enterprise level.

Second, the Fair Work Act limits the general adjustment of all modern-award minimum wage rates to one annual wage review conducted by the Fair Work Commission.

Third, enterprise agreements need to be approved by the commission before they acquire legal force. The length of agreements averages three years, during which time employees covered by that agreement can’t lawfully engage in industrial action in pursuit of further wage rises.

Fourth, the sanctions against engaging in such industrial action are, Ross said, “readily accessible and effective”.

Ross noted that the proportion of all workers who are members of a union has fallen dramatically since the 1970s. From a little above 50 per cent, it has fallen to 12.5 per cent. And in the private sector it’s down to 8.2 per cent.

The manufacturing sector and its unions were central to the wage-price spiral of the 1970s. But manufacturing’s share of total employment has fallen from 22 per cent to 6 per cent, while the proportion of union members in manufacturing has fallen from 57 per cent to 10 per cent.

Whereas the annual number of working days lost to industrial disputes was about 800 per 1000 employees during the 1970s, these days it’s next to nothing.

Ross said the present enterprise bargaining arrangements operate as a shock absorber by constraining the bargaining capacity of employees subject to an agreement. “To date there is no evidence of the emergence of a wage-price spiral in the present circumstances and recent data suggests such an outcome is unlikely,” he concluded.

My point is, there’s no reason for the Reserve to live in fear of an imminent worsening in inflation expectations if workers and their unions’ ability to turn their expectations into higher wages is greatly constrained. That being so, we shouldn’t allow impatience to get the inflation rate back to target to worsen the risk we’ll end up in a recession, the depth and length of which could greatly impair our return to full employment.

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Why the Reserve Bank thinks it's too soon to cut interest rates

By Millie Muroi, Economics Writer 

When the Reserve Bank’s second-in-command – recently appointed deputy governor Andrew Hauser – took shots at his closest observers this week, he ruffled plenty of feathers.

“It’s a world of winners and losers, gurus and charlatans, geniuses and buffoons,” he proclaimed. Then he wagged a finger at those confidently commentating from the sidelines on the direction of the economy. “It’s a dangerous game,” he warned.

We know economists – including those at the Reserve Bank – are notoriously bad at knowing exactly what we (and therefore the economy) will do. So, why was Hauser so mad at those confidently making their own calls?

Brash statements made by the media, government and economists have real-world consequences. People often rely on that information to make decisions, from taking out mortgages to negotiating wages.

“What about Phil Lowe?” you may ask. Didn’t the former RBA governor promise in 2021 that interest rates would not go up until 2024? Well, sort of. It was actually couched in caveats which many people glossed over.

The Reserve Bank generally treads carefully because the words of its bosses can shift behaviour: a hidden weapon beyond its interest rate-setting superpower.

RBA governor Michele Bullock often declares she is “not providing forward guidance” when fielding questions from journalists trying to get a steer on interest rates. But last week, she gave the closest thing to guidance in a while: people’s expectation for rate cuts in the next six months doesn’t align with the RBA board’s feeling, she said. At least, “not at the moment.”

In doing so, Bullock flexed the bank’s hidden bicep. She signalled for all of us to rein in our expectations of a rate cut and, she would have hoped, our inflation expectations.

This is important because what people believe can become reality. If we expect inflation to stay high, this belief can feed into the wages we ask for, and the prices businesses charge.

That’s not to say the Reserve Bank doesn’t believe its own thinking. The only medicine it can explicitly prescribe is the level of interest rates, but the central bank busies itself with a lot of data gathering, discussions and number crunching to diagnose the state of the economy.

Core to the Reserve’s thinking is its observation that, collectively, we are consuming more than we can produce for an extended period of time. Sure, young people and mortgage holders have been tightening their belts as housing costs surge. But that’s been more than offset by older, affluent Australians splurging on things such as travel, by population growth and by government spending.

Now, the government has bones to pick with any suggestion that its spending is contributing to inflation. And Government Services Minister Bill Shorten this week trashed RBA chief economist Sarah Hunter’s assessment that the economy is “running a little bit too hot”.

However, it is important to note Hunter’s view isn’t necessarily that Australians are doing too well, or that the economy is bubbling along. It’s more a reflection of the limited spare capacity we have to cater for the spending – however little or much of it we may be doing.

We’re spending “too much” mostly by comparison to the limited resources we have to keep up with it: the people making our coffee in the morning and machines they use to brew it for us, for example.

Unless we become more productive, making more with the things we already have, the more we strain people and machines to meet our demands, and the pricier things will be to produce.

Productivity is especially difficult to improve for sectors such as hospitality, which rely heavily on people rather than machines (there’s only so many ways your barista can brew a coffee faster and better). And it’s why services inflation is proving so much more stubborn than goods inflation.

How does the Reserve Bank know how much spare capacity we have (and therefore how much pressure we might expect on prices)? It looks at something called the output gap: the difference between how much we’re producing and how much we could produce without putting too much pressure on prices.

Heaven for the Reserve Bank would be an output gap of zero. Any lower means we’re not using our resources as intensively as we could – including people who want to work, but can’t find jobs, or machines sitting idle.

Any higher, and we’re using our resources too intensively. This can be OK for a short period, but as workers demand higher wages, machines are run into the ground and businesses compete for a shrinking pool of resources, prices rise. For the past few years, this is the state the Reserve Bank thinks our economy has been in.

Measuring the output gap is tricky. We can’t really see it, and our capacity can change over time as our population changes, or we find better ways to do things. So, how does the RBA measure it?

How much the economy is producing is measured through statistics such as Gross Domestic Product. The trickier task is pinning down how much the economy could produce without adding to inflation. To do this, the Reserve Bank uses economic models which spit out results based on things such as what’s happened in the past and the data plugged into them: relatively straightforward numbers such as population, as well as educated assumptions about other factors influencing the economy.

The bank also asks businesses about their capacity usage through surveys and by chatting with them through its liaison program. Then, there’s also the inflation figure itself.

While the output gap is just one gauge, it is given considerable weight in the Reserve Bank’s decisions. So far, the gap is narrowing, the bank says, but it’s likely we’re still pushing our resources past the ideal level to pull inflation back into line.

There’s not much the central bank can do to increase potential output, or capacity, in the economy, which is why it is instead focusing on weakening our demand, or spending.

While a rate cut now would be like an iron infusion for an anaemic economy, help preserve jobs, and bring mortgage holders relief, the bank is clearly on the warpath against its public enemy number one: inflation.

Keep in mind, though, no one is perfect. The Reserve Bank is careful to stress that the output gap, like most of its other measures, is “subject to considerable uncertainty.”

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