Working less could be the answer to one of our biggest problems

By MILLIE MUROI, Economics Writer

Inflation has been the talk of the town for the past few years, but now that it’s paled enough for interest rates to start coming down, it’s the dreaded ‘P’ word – and our seeming lack of progress on it – that’s resurfacing as a threat to our living standards.

Still, there’s only a handful of people who are noticing it and like talking about it: among them, the Productivity Commission, which couldn’t ignore the issue even if it wanted to.

But if it’s such a huge deal, why don’t most people care? Probably because it’s not easily seen or measured.

Plenty of headlines have lamented our failed attempts at boosting productivity (a supposed need to work harder?). Apparently we’ve been suffering from a decade of it – and it matters because more than 80 per cent of our real income growth (income adjusted for inflation) over the past three decades has been thanks to how much more productive we’ve become.

But measuring how much better we’ve become at making things and providing services with the same amount of workers and time is hard – especially if you can’t put a dollar figure on the outcome.

It’s fairly straightforward, for example, to measure how many more bananas or cows we’re pumping out. But what about the quality of those bananas and cows? How do we put a figure on how much better quality those products are? Even worse: how do we measure how much better we’ve become at providing services like healthcare? Is a surgeon rushing through more surgeries always a better outcome?

Because of this, it’s hard to pinpoint exactly where – and how much – we’re going wrong.

And at an individual level, there’s not a lot we can do.

The biggest leaps in productivity – pumping out more or better-quality things with the same amount of resources (like workers and time) – have come from technological developments like the invention and spread of the internet, electricity or the steam engine.

Sure, a handful of individual geniuses helped bring these things to life, but a majority of workers are limited in their ability to do things more efficiently, often by the tools, rules and conditions they’re forced to work with.

One suggestion made by the productivity boffins in their latest push (triggered by Treasurer Jim Chalmers’ request for reform recommendations) in the economy-wide brainstorm on how to overcome the productivity road block, is shaking up the way companies are taxed.

Specifically, the commission is looking at ways to prod businesses to invest more (something that has been lacking in Australia for quite a few years). Specifically, it will consider tax incentives for businesses to spend on things like better equipment, tools and technology – things which help workers to save time and produce more or better things without having to work harder.

A barista, for example, who doesn’t have to share a machine with their colleague, may be able to serve more coffees, and an accountant with access to better software provided by their company may be able to slash the time it takes to crunch numbers for their clients.

Cutting the 30 per cent corporate tax rate (an option currently on the table according to Productivity Commission boss Danielle Wood), though, is probably not a good move unless there’s a way to guarantee those big businesses won’t just pocket the extra profit or pay it out to shareholders.

It’s probably also bad news if it gives big companies – which already dominate many sectors of the economy – more power, making it difficult for small and medium-sized businesses to challenge them and drive innovation.

However, tax breaks for new investment which, in theory, should encourage firms to invest, seem less effective in Australia compared with many other countries, according to the Reserve Bank.

While big businesses might be keen for such changes, they probably don’t provide bang for our buck, and they come at a cost to the government’s budget.

This makes it more difficult to achieve some of the commission’s other reform priorities such as improving school student outcomes and upskilling the workforce. The better-educated we are, and the more we’re able to build on our skills, the better we become at doing things.

Under-resourcing of schools has been a well-documented issue – and probably a key factor behind Australia’s lagging performance academically. It’s also something the government will struggle to improve if its budget is tight.

Cutting red tape is another area of reform being examined by the commission. This is a good thing – especially when it comes to the net-zero transformation. It’s clear that climate change and the increased prevalence of natural disasters will hamper our ability to work. And without making it easier for Australian businesses to transition to cleaner energy, we’ll be left behind in the global shift, and fail to act on a hugely promising area of growth.

Speeding up approvals for new energy infrastructure is a good example from the commission of how we can improve productivity. Instead of being bogged down by lengthy approval times, businesses can get on with investing in transformative projects aimed at harnessing some of our natural gifts: sunlight, wind, and other cleaner forms of energy.

And while they are just lofty aims for now, other focus areas including supporting government investment in preventing health problems (rather than waiting to treat them after they arise) and improving our uptake of digital technologies, should make us more productive by ensuring a healthy workforce and helping us harness the power of developments such as artificial intelligence.

But these are all things we’ve known for some time.

It’s also about bosses and government departments listening to the lesser – but consequential – suggestions made by their employees.

If you ask any worker what the most time-consuming and unnecessary parts of their job are, they’ll almost always have an answer. Most teachers, for example, point to the growing and excessive administrative work they’re required to do which reduces their ability to do what matters for students – and what will actually affect students’ outcomes.

Yet, at company and department level, there’s usually little to no engagement with employees about what they think could be done better – and even when there is, a dismal amount is actually done about it.

A key determinant of the Productivity Commission’s success in improving productivity will be to compel top decision makers and bosses to act on all of these reform ideas. Paradoxically, legislating a shorter working week seems radical, but – as with the laws which brought in the eight-hour working day – could boost productivity.

There have been multiple studies showing shorter work hours improve workers’ wellbeing, focus and efficiency. Having less time to get things done often pushes us to lock in and get more done in a shorter amount of time.

And if this isn’t the case, shorter work hours will push bosses to implement the productivity-boosting changes required to support their workers to work more efficiently and improve productivity in the longer term.

Productivity growth isn’t always about our need for incessant growth in material things. It’s just as much about making our lives easier by giving ourselves the tools and conditions to help us work less for the same outcomes.

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After 50 years, we're back to the glory days of full employment

I promise I’ll stop talking about the surprising election result if you let me make one last point. There was a hidden factor that helps explain why Labor did so well despite all our grumbling about the cost-of-living crisis.

It’s a factor for which the Morrison government, the Albanese government and even the Reserve Bank deserve more thanks than they’ve received. A factor without which it’s highly likely Labor would have been tossed out.

Long before most of us were born – even I am only just old enough to remember it – Australia enjoyed something called “full employment”. In the years between the end of World War II in 1945 and the early 1970s, the rate of unemployment rarely got above 2 per cent of the labour force.

When it did rise above 2 per cent for some months, it was called a recession. For the long period in which it was rarely above 2 per cent, it was called “full employment”.

Full employment has never meant an unemployment rate of zero. Why not? Because at any time there will always be many thousands of workers moving from one job to the next, and education leavers taking a month or so to find their first proper job. So, that’s nothing to worry about.

But the unemployment rate started edging up from the beginning of the 1970s, and by the time the Whitlam government was dismissed in November 1975, it had reached 5.4 per cent. For reasons far more complicated than the various mistakes of Gough Whitlam, the era of full employment was over.

And although economists kept a return to full employment as their ultimate objective – as did the Reserve Bank – it was never seen again. Well, not until August 2022, when unemployment got down to a low of 3.5 per cent for several months. That was its lowest in “almost 50 years”.

That’s higher than 2 per cent, but the labour market has changed a lot in half a century, and these days there’s probably a lot more “structural” unemployment – where the unemployed live in different cities to the job vacancies.

There’s general agreement among economists that 3.5 per cent is now a good level to regard as full employment. Remember that, over the past 50 years, unemployment has averaged about 6.5 per cent.

So how, after all this time, did the rate of unemployment suddenly drop to the level of full employment? It was perhaps the only benefit from all the trouble we had using lockdowns to restrict the spread of COVID-19.

Federal and state governments spent hugely to hold the economy together during the lockdowns and so, when they ended and people were let loose in the shops, restaurants and live entertainment venues with all the money they’d been unable to spend, the economy boomed.

Employment grew enormously and unemployment fell, with most of the new jobs being full-time. It helped that, at the time, our borders were still closed, so none of the new jobs went to people who’d come to Australia just to take the job.

All this happened under the Morrison government, with unemployment bottoming out at 3.5 per cent just three months after the May 2022 election. So then-treasurer Josh Frydenberg gets the credit for our return to full employment.

By then, however, the booming economy had caused consumer prices to take off. So the Reserve Bank did what it always does to slow the rate at which prices are inflating: it starts jacking up interest rates to force people with mortgages to cut their spend on other things. As people spend less, businesses don’t raise their prices as much.

But here’s the trick. Normally, the Reserve loses little time in pushing interest rates way up. Spending takes a big hit, businesses lay off workers, unemployment shoots up and the rate of price inflation quickly falls back to normal, after which the Reserve soon cuts interest rates back to normal.

Normally, but not this time. Treasurer Jim Chalmers and the Reserve agreed that this time care would be taken to limit the rise in unemployment and thus not stray far from full employment. To this end, the Reserve would raise interest rates slowly and no higher than absolutely necessary.

We can now see this softly, softly approach has worked. As interest rates have risen, employment has continued growing, with the rate of unemployment rising only to about 4 per cent, where it’s stayed for 14 months.

By now, however, the rate of inflation has fallen back to the Reserve’s target range of 2 to 3 per cent, so it’s slowly cutting interest rates back to a more normal level.

So how did this effort to hang on to full employment affect the election? Had the cost-of-living crisis been accompanied by many people losing their jobs, the pain would have been much greater, and the likelihood of Labor itself being shown the door would have been high.

Instead, almost everyone kept their job, while some were able to move to a full-time job or a second job to help make ends meet.

Our avoidance of recession – unlike other countries, starting with New Zealand – has come at a price, however. Although our smaller and slower increase in interest rates didn’t hurt so acutely, the period of high rates – about three years – kept homebuyers in pain for longer.

But I think it was well worth it. If you think coping with of the cost of living is tough, try doing it on the dole. A well-functioning economy is one that provides jobs for (almost) everyone who wants one. And that’s what our fully employed economy has provided us with for the past three years.

The proportion of all working-age people with a job is 64 per cent, its highest ever. That’s the solid proof we’re fully employed. Women have done best in gaining jobs in recent years. Fifty years ago, only 36 per cent of women were participating in the paid labour force. Today it’s 63 per cent.

It’s strange we could have passed judgment on the performance of the Albanese government this month without most people realising how well the jobs market has done on its watch.

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Want greater productivity? Set wages to rise by 3.5 pc every year

Stand by for yet more talk about productivity. With the election over and Labor more comfortably ensconced on the Treasury benches, Treasurer Jim Chalmers has pronounced that top priority can turn from fixing the cost of living to fixing our poor productivity performance.

We’ll get the first of the Productivity Commission’s reports today on things we can do to improve our ... productivity. Well, let’s hope something comes of it. I’ll believe it when I see it.

Forgive my scepticism, but the great and good have been sermonising on the need for productivity improvement for well over a decade and, so far, the rate of improvement has gone down, not up.

A few years back, the Australia Institute reminded us that just about every economic change the Abbott-Turnbull-Morrison government made came with an assurance it would lead to greater productivity. It didn’t.

(But usefully, the think tank defined productivity as the amount of output of goods and services that can be extracted from each unit of input of labour or physical capital.)

So, at the opening of open season on claims about productivity, let’s start by spelling out a few clarifying facts. First, over the past decade or so, productivity improvement has slowed throughout the developed world. Thus, if we manage to turn ours around, we’ll have achieved something none of the other rich countries have managed.

Second, almost everything we hear implies that if productivity isn’t improving, it must be the government’s fault. So productivity must be something supplied by the government and, if the supply is inadequate, the government must produce more.

Nonsense. Productivity is determined by how efficiently every workplace is organised. Since the great majority of workplaces are privately owned, if the economy’s productivity isn’t improving from year to year, it’s primarily because the nation’s bosses aren’t bothering to improve it.

Remember this next time you see the (Big) Business Council issuing yet another report urging the government to do something to improve productivity. What businesspeople say about productivity is usually thinly disguised rent-seeking.

“You want higher productivity? Simple – give me a tax cut. You want to increase business investment in capital equipment? Simple – introduce a new investment incentive. And remember, if only you’d give us greater freedom in the way we may treat our workers, the economy would be much better.”

Why do even economists go along with the idea that poor productivity must be the government’s fault? Because of a bias built into the way economists are taught to think about the economy. Their “neoclassical model” assumes that all consumers and all businesspeople react rationally to the incentives (prices) they face.

So if the private sector isn’t working well, the only possible explanation is that the government has given them the wrong incentives and should fix them.

Third, businesspeople, politicians and even economists often imply that any improvement in the productivity of labour (output per hour worked) is automatically passed on to workers as higher real wages by the economy’s “invisible hand”.

Don’t believe it. The Productivity Commission seems to support this by finding that, over the long term, improvement in labour productivity and the rise in real wages are pretty much equal.

Trouble is, as they keep telling you at uni, “correlation doesn’t imply causation”. As Nobel Prize-winning economist Daron Acemoglu argues in his book Power and Progress, workers get their share of the benefits of technological advance only if governments make sure they do.

Fourth, economics 101 teaches that the main way firms increase the productivity of their workers is by giving them more and better machines to work with. This is called “capital deepening”, in contrast to the “capital widening” that must be done just to ensure the amount of machinery per worker doesn’t fall as high immigration increases the workforce.

It’s remarkable how few sermonising economists think to make the obvious point that the weak rate of business investment in plant and equipment over the past decade or more makes the absence of improvement in the productivity of labour utterly unsurprising.

Fifth, remember Sims’ Law. As Rod Sims, former boss of the competition commission, often reminded us, improving productivity is just one of the ways businesses may seek to increase their profits.

It seems clear that improving productivity has not been a popular way for the Business Council’s members to improve profits in recent times. My guess is that they’ve been more inclined to do it by using loopholes in our industrial relations law to keep the cost of labour low: casualisation, use of labour hire companies and non-compete clauses in employment contracts, for instance.

Sixth, few economists make the obvious neoclassical point that the less the rise in the real cost of labour, the less the incentive for businesses to invest in labour-saving equipment.

So here’s my proposal for encouraging greater labour productivity. Rather than continuing to tell workers their real wages can’t rise until we get some more productivity, we should try reversing the process.

We should make the cost of labour grow in real terms – which would do wonders for consumer spending and economic growth – and see if this encourages firms to step up their investment in labour-saving technology, thereby improving productivity of workers.

Federal and state governments should seek to establish a wage “norm” whereby everyone’s wages rose by 3.5 per cent a year – come rain or shine. That would be 2.5 percentage points for inflation, plus 1 percentage point for productivity improvement yet to be induced. Think of how much less time that workers and bosses would spend arguing about pay rises.

Governments have no legal power to dictate the size of wage rises. But they could start to inculcate such a norm by increasing their own employees’ wages by that percentage.

The feds could urge the Fair Work Commission to raise all award wage minimums by that proportion at its annual review. If wages of the bottom quarter of workers kept rising by that percentage, it would become very hard for employers to increase higher wage rates by less.

A frightening idea to some, maybe, but one that might really get our productivity improving.

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The RBA is spooked by pay rises. It should relax

By MILLIE MUROI, Economics Writer

When the Reserve Bank meets next week, it will probably cut interest rates. But it will be some time before it is comfortable enough to lower them to a level that isn’t grinding down economic growth.

Already, some economists have slammed the bank for being slow to cut rates, saying it’s causing more cost-of-living pain than necessary for people with home loans.

Now that the bank’s preferred measure of inflation is within its 2 per cent to 3 per cent target range and the economy has slowed to a crawl (with the risk of a further slowdown as US President Donald Trump’s tariffs hit home), those criticisms are growing louder.

So, why is the Reserve Bank still determined to keep the economy growing below its potential? A lot of it comes down to the bank’s phobia of pay rises – which, like many modern-day fears, served us well in the past but aren’t so useful today.

One of the first rules we learn in economics is that the prices we pay are determined by the balance between supply and demand: when supply of a good or service outstrips demand for it, prices fall, and when demand exceeds supply, prices rise.

Then, we learn all the reasons why this rule isn’t that simple. For example, if a business has a lot of power (maybe it has few competitors), it can charge more for its goods and services.

On the other hand, when customers hold more power, they can drive prices down. How do you think the Australian government manages to negotiate cheaper prices for medicines it buys from other countries? By acting as a single buyer, representing millions of Australians, which gives it a lot more bargaining power than if you or me, individually, tried to negotiate with the pharmaceutical giants. This is what’s called a “monopsony”.

Put simply: prices are determined by the balance of supply and demand – but also the power balance between buyers and sellers.

Our wages are determined in a similar way, which is what the Reserve Bank has been worried about. At almost every interest rate decision in the past couple of years, the bank has mentioned the strong labour market as a reason for its reluctance to cut rates.

Think of your wage as the price of the work you supply. Workers sell their labour to companies which buy – or employ labour. This is called the labour market.

When there’s more demand for workers than there is supply, we have a labour shortage and unemployment tends to be low. This is the position we’ve been in for the past few years, when unemployment dropped to a record low of 3.4 per cent and has remained historically low at roughly 4 per cent.

While this might seem like a good thing, the Reserve Bank is worried.

Its biggest concern is inflation, which it’s worried could follow the same path it did in the 1970s. That is, prices could spike back up if unemployment stays low and businesses give us big wage rises which, in turn, could feed into higher prices.

How do we know the bank is biting its nails? Because of how carefully it’s treading. While inflation hit nearly 8 per cent in 2022, that figure has fallen a lot over the past two years. Yet in that time, the central bank has cut interest rates only once (and raised them six times).

To be fair, employment is growing robustly (a huge 89,000 additional Australians were employed in April compared with March) and job vacancy data shows there’s still a big worker shortage.

But a “wage explosion” is unlikely given the labour market has changed radically since the 1970s.

Wages have finally started growing faster than inflation, but it’s been at a relatively modest pace of 3.4 per cent over the year – and following a year-and-a-half in which wage growth fell short of price rises.

So, what explains the Reserve Bank’s worries of excessive wage growth?

For one thing, the bank relies on a relatively neoclassical view of how the economy works, one in which demand and supply (in this case, of labour) determine price levels, including wages, with individual firms having little control over how much to pay their workers. It’s why the bank is constantly surprised by the strength of the labour market – and waiting (with little avail) for wages to spring up out of it like a jack in a box.

Meanwhile, this lack of a wage explosion comes as no surprise to a lot of labour economists, including Professor Emeritus David Peetz from the Carmichael Centre.

That’s because the neoclassical view of economics tends to assume everyone has roughly equal bargaining power, while many labour economists acknowledge that isn’t the case – especially in recent years.

Peetz argues that real wages – that is, wages adjusted for inflation – have been held back in Australia in recent decades because workers’ power to negotiate has been persistently eaten away.

“Workers have lost a lot of power since the last wages explosion in the 1970s,” he says, noting that from 2014 to 2022, government policies such as WorkChoices have taken away workers’ bargaining power.

The Reserve Bank isn’t totally blind to this. Their economists have written about bargaining power and its relationship with wages. But their justification of interest rate decisions suggests they don’t give much weight to it.

While the bank might worry the current skills shortage could lead to a wage spike and further inflation as in the 1970s, Peetz points out employers now rarely feel compelled to hand out pay rises in response to skills shortages.

In 2023, Jobs and Skills Australia, a federal government agency, asked employers what they do in response to a skills shortage. Only 1 per cent said they would adjust how much they paid their workers.

Why? Because there’s not as much pressure to do so when only one in seven Australian workers are part of a union (it was one in two during the 1970s). The threat of industrial action such as strikes is much smaller. Only 100,000 working days were lost in 2021 compared with 6.3 million working days lost to industrial action in 1974.

While workers in 1974-75 managed to win wage rises of 10 per cent accounting for inflation, workers went backwards by 3 per cent in 2021-22.

This is because of several changes including legal changes in recent decades which have made collective bargaining (in which workers across an entire industry band together to negotiate) less common than enterprise bargaining, in which workers negotiate directly with their employer.

Wage increases won through enterprise bargaining apply only to workers at a specific business or site, limiting those workers’ negotiating power as well as how far the wage rise, if won, can spread. While a wage rise at one company might put some pressure on another company to do the same, in practice, this kind of flow-on impact is limited.

While changes under the Albanese Labor government such as its same job, same pay policy have started to hand more power back to workers, rampant wage rises – and a resurgence in inflation – are far from a big threat to the economy. The Reserve Bank can, and probably should, relax a bit, too.

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Whatever happened to the cost living we were so worried about?

Talk about the dog that didn’t bark. Cast your mind back to the distant days of the election campaign, and you’ll dimly remember how often we were told how polling revealed that the only subject hard-pressed voters were interested in discussing was the cost of living.

Treasurer Jim Chalmers stuck to this rule relentlessly, repeatedly assuring us the economy had “turned the corner” (a focus-group-tested line if ever there was one), but Peter Dutton had trouble keeping to the script.

He was supposed to keep asking whether we felt better off than we did three years ago and, knowing our answer would be “no”, put all the blame for this regression onto Labor. But he couldn’t resist reminding us of the supposed rising tide of crime and risk of invasion.

Am I the only person to have noticed that, in all the many thousands of words commentators have spilled in explaining Labor’s landslide win, there’s been nary a mention of the cost of living? Had it been the only issue in voters’ minds, surely there’d have been a swing away from Labor, not towards it?

And what about all those outer-suburban seats full of families with massive mortgages? Why didn’t any of them think it was time to give the other side a try?

I think the explanation for the big swing to Labor was far simpler than the pundits think. People’s worries about the cost of living were forgotten after the arrival of a new and far more pertinent issue: voters got their first good look at Dutton and the kind of politician he was and, overwhelmingly, said “No thanks”. Come back Albo, all is forgiven.

So, what happened to the cost of living? Were the pollsters deluded in believing voters wanted to think about little else? Why were voters’ minds so easily diverted to another issue? Where are we at with the cost of living? Is it done and dusted, have we really turned the corner, and what are the prospects?

When people complain about the cost of living, they’re really saying they find it a struggle to balance the family budget from fortnight to fortnight. The trick is that, while in recent years they’ve been finding it particularly difficult, even in normal times it’s a fairly common occurrence.

So, complaining about the cost of living is like complaining about the weather – an ingrained habit. In summer, it’s always too hot; in winter it’s always too cold. Complaining about the cost of living is our default setting.

If nothing too bad is happening, pollsters asking about the big problems the politicians should be dealing with will always be told the cost of living’s a worry. It’s always up near the top of the list. When household budgets are particularly tight, it’s always at the top.

But introduce some more novel cause for concern, and the cost of living is quickly supplanted.

The thing about of the cost of living, however, is that it’s like an ailment. It’s the symptoms you complain about, not necessarily the root cause of those aches and pains.

When you ask people why they’re complaining about the cost of living, they usually reply that the rise in prices is shocking. How do they know? They see it at the supermarket every week.

It’s true. Overall, supermarket (and other) prices are always rising. But what matters is the rate at which prices are rising – that is, the rate of inflation. For about the past 30 years, governments, their econocrats (including the Reserve Bank) and economists generally have accepted that if the rate of inflation is averaging between 2 and 3 per cent a year, that’s nothing to worry about.

When Labor came to power in May 2022, the annual inflation rate, as measured by the consumer price index, was 5.1 per cent. By the end of that year, it reached a peak of 7.8 per cent.

The rate has slowed continually since then. By the end of September last year, it had slowed to 2.8 per cent – that is, back within the desired range. By March this year, it had slowed to 2.4 per cent. The more demanding “underlying” or core measure of inflation has slowed to 2.9 per cent.

So yes, in that sense, we have turned the corner, as Chalmers keeps telling us. But it’s not that simple. You have to ask why the rate of increase in consumer prices has slowed so much. A fair bit of it is the slowing – and, in some cases, actual falls – in overseas prices that are beyond our control.

But where home-grown prices are concerned, the main reason they’ve been rising more slowly is that the Reserve Bank has been raising interest rates to put the squeeze on households with mortgages, reducing their ability to keep spending so much on other goods and services, and so reducing the upward pressure on prices.

The Reserve made its first increase in the official interest rate just a few days before the May 2022 election – a clear signal to voters that the inflation problem got going under the previous, Coalition government.

After the election, the Reserve raised interest rates a further 12 times, increasing the official rate by a total of 4.25 percentage points to a peak of 4.35 per cent in November 2023.

See what happened? It’s not the pain of rapidly rising prices that’s caused people to keep complaining about living costs, it’s the pain from the high mortgage interest rates the Reserve has been using to get prices rising more slowly.

But in February this year, the Reserve cut interest rates by one click, of 0.25 percentage points. This was a sign it regarded the job of getting the inflation rate down as almost done. It was also a pre-election signal that rates would be falling further in the next term of government.

Indeed, it’s likely to cut rates by another 0.25 per cent click next week, with a further two or three clicks to come after that, greatly reducing the cost-of-living pain for households with mortgages.

Time for us to move on to other economic worries.

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Ross Garnaut: Prophet with a sunny view of our better future

Economist Paul Krugman’s endlessly repeated maxim that “productivity isn’t everything but, in the long run, it’s almost everything” has deluded far too many of the economics profession’s conventional thinkers.

It’s a throwaway line that should be thrown away.

It implies that any economic objective other than improved productivity is hardly worth worrying about. Such as? Distributional fairness aka “intergenerational inequity”. Tell that to the 40 per cent of voters under 40, and see how far you get.

It implies that the structure of our economy never changes, nor does the planet we live on. So the single-minded pursuit of improved productivity will somehow either stop climate change or magically deliver us a zero-carbon economy without any need for government intervention.

Or maybe the proviso “in the long run” is saying that our great, great-grandchildren will be able to look back on the clean-energy transition as little more than a blip. What a pity we live in a succession of short runs, not the long run.

A more realistic view is that, should the world fail to stop climate change, life will become almost unlivable, much of the economy will be stranded assets, and every spare cent we have will be spent shifting from one part of the country to another, and on buying hugely expensive water and permanent air conditioning.

A less cataclysmic future would see climate change get a lot worse before the major economies finally got their act together and ended the use of fossil fuels. This, of course, would lead to much unemployment in our coal and gas industries and much loss of export income.

Our future, no matter which way you envisage it, doesn’t sound very inviting. Much of our “natural endowment” of coal and gas deposits will be worthless and our “comparative advantage” in flogging them off to other countries will have disappeared. Do you still believe our government should be only worried about improving productivity?

What we need is some sort of economist prophet who can help us overcome this existential threat, not an army of blinkered economists telling us all that matters is raising our material standard of living.

Fortunately, among the profession’s abundance of unproductive thinkers is a lone prophetic, and so productive, thinker, Professor Ross Garnaut, who sees not only how we can minimise the economic cost of the transition to clean energy, but also what we can do for an encore. What we can do to fill the vacuum left by the looming collapse of our fossil fuel export business (which, by chance, happens to be our highest-productivity industry).

Because economists are such incurious people, Garnaut seems to have been the first among them to notice that, purely by chance, Australia’s natural endowment also includes a relative abundance of sun and wind.

Until now, we thought these were non-resources and of little or no commercial value. It took Garnaut to point out that, in a post-carbon world, they had the potential be our new-found comparative advantage. To provide us with a whole new way of making a bundle from exports, while generating many new jobs for the miners to move to.

When you add the possibility of structural change to the rules of conventional economics, you get what’s a scary thought for many economists: maybe our natural endowment isn’t ordained by the economic gods to be unchangeable through all eternity.

Maybe there are interventions fallible governments should be making to move our economic activity from one dimension of our natural endowment to another. Maybe such a switch is too high-risk and involves too many “positive externalities” (monetary benefits than can’t be captured by the business doing the investing) for us to wait for market forces to take us to this brave new world.

Maybe changing circumstances can change the nature of our comparative advantage in international trade, meaning the government has to nudge the private sector in a new direction.

It was Garnaut who first had the vision of transforming Australia into a “Superpower” in a world of ubiquitous renewable energy. And it was he who uncovered the facts that made this goal plausible.

Exporting our fossil fuels is cheap, whereas exporting renewable energy would be much more expensive. So whereas it was more economic to send our coal and iron ore overseas to be turned into steel, in the post-carbon world it soon will be more economic to produce green iron and other green metals in Australia and then export them.

In a speech last week, Garnaut acknowledged that, in its first term, the Albanese government began to lay the policy foundations for the Superpower project. The economic principles are set out clearly and well by Treasury’s “national interest framework” for A Future made in Australia, released after last year’s budget, he says.

The re-elected Albanese government has already restated its commitment to the project. Garnaut says there’s much more for the government to do in creating the right incentives for our manufacturers to re-organise and expand.

Research sponsored by his Superpower Institute finds that Australian exports of goods embodying renewable energy could reduce global emissions by up to 10 per cent. So we can contribute disproportionately to global decarbonisation by supplying goods embodying renewable energy that the high-income economies of Northeast Asia and Europe cannot supply at reasonable cost from their own resources.

This would “generate export income for Australians vastly in excess of that provided by the gas and coal industries that will decline as the world moves to net zero emissions over the next few decades”.

Garnaut concludes: “The new industries are large enough to drive restoration of growth in Australian productivity and living standards after the dozen years of stagnation that began in 2013.”

The present fashion of obsessing with productivity improvement for its own sake is counterproductive and probably won’t achieve much. We should get our priorities right and focus on fixing our most fundamental problems – unfairness between the generations, action on climate change and fully exploiting the opportunities presented by our newfound strength in renewable energy – and let productivity look after itself.

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Game theory explains why the Liberals lost - and how they can win

By MILLIE MUROI, Economics Writer

Elections are one of the biggest – and real-life – displays of strategic thinking. There are winners and losers, set choices and strategies galore.

They’re a dynamic affair with a million moving parts, but Labor’s thumping victory in the latest federal election can be explained by a relatively new branch in economics called “game theory”, which focuses on the strategic actions of two or more players in a given situation.

More importantly for the Liberals, game theory is the key to winning back votes in three years’ time (and one shadow treasurer Angus Taylor is very familiar with).

Game theory is often applied to business, but ANU lecturer in politics, philosophy and economics Dr William Bosworth says it works remarkably well when thinking about the Australian political landscape.

In your day-to-day life, you may have noticed close competitors such as Coles and Woolworths tending to set up shop right next to each other, and McDonald’s and Hungry Jack’s cosying up to each other on the same street.

It’s because these businesses know the best place to capture the largest number of customers is as close to the centre of all their potential burger-loving, or grocery-buying, customers as possible.

In game theory, this is known as the “Nash Equilibrium”, where neither company can improve its customer reach by changing location – especially given where their competitor is. The further away one moves from the centre, the more customers they give up to their competitor.

It’s also why the two biggest players in Australian politics – Labor and Liberal – sit relatively close to the centre of the political spectrum and to each other: it’s where they’re able to appeal to the largest number of voters. Labor is generally seen as a centre-left party economically and socially, while the Liberals are seen as centre-right.

That’s not to say they mimic each other entirely. Just as Hungry Jack’s promises their burgers are better, political parties must also ensure they highlight their perceived strengths. That’s why we saw Anthony Albanese whip out his Medicare card and Peter Dutton pump fuel so many times throughout the election: they both had different packaging for their agendas.

But University of NSW professor of politics and economics Dr Gabriele Gratton pointed out ahead of the election that Labor and the Coalition shared some fairly similar policies.

Both, for example, promised to take the heat out of cost of living, one by slashing the government’s tax on petrol (called the fuel excise), the other by promising to (once again) pay a slice of our electricity bills. They also both wanted to cap international student numbers to dampen immigration, and matched each other on various spending promises, including investment into Medicare and major road upgrades across the country.

Why is this? It’s because, like the supermarkets and burger chains maximising their customer reach, both Albanese and Dutton wanted broad appeal to voters. The closer they were to the centre, the more voters they could pull from their opponent while still being closer to those on the left (for Albanese) and those on the right (for Dutton).

So, why did Albanese come out so clearly on top?

A large part of the reason is that the game has changed. More specifically, the “customers” they were trying to attract (voters) have skewed more progressive – especially as younger people: Gen Z and Millennials – together became the biggest group of voters for the first time.

That meant the “middle” or “average” voter was probably more left-leaning than at previous elections, prioritising issues such as climate action and gender equity.

“You can quite confidently say that the median voter has shifted a generation [younger],” Bosworth says.

Neither party was especially ambitious, but it was clear the Coalition’s focus was misplaced.

Not only did the Liberals fail to read the room on issues such as working from home (which the majority of the population clearly supported), but they also went hard on conservative policies such as their anti-woke agenda.

While some people claim the Liberal Party needs to firm up support among its traditional voters by moving further to the right, the outcome of the election shows that’s the wrong direction.

Parties further right of the Liberals, such as One Nation, won just 8 per cent of the national vote, while the Greens (despite losing seats) claimed a record 11 per cent – and Labor secured an overwhelming majority.

Trump’s victory in the US might seem like evidence that right-wing policies appeal to voters, but compulsory voting in Australia means there’s little to be gained by appeasing the extreme ends of the political spectrum in a bid to get the most passionate supporters out to vote.

Since everyone votes here, the key – or the optimal strategy in game-theory lingo – is to appeal to the average voter. If the Liberals want to win more than half the national vote, staying put (or moving further right) is a dead-end move.

“It’s clear that if the Coalition wants to win the next election, they have to move closer to the centre,” Bosworth said. In doing so, the Liberals have a better chance of taking back some of the voters they lost to Labor this election.

One big problem for the party is that they’ve lost many of their moderate Liberals over the past few years, instead ending up with a party leaning further to the right. They have also failed to fix their well-aired “women problem”, still noticeably represented mostly by men.

The two front-runners for the party’s leadership after Dutton’s defeat are Angus Taylor (who is in the party’s “right” faction and, coincidentally, wrote a thesis applying game theory to analyse English pubs) and the slightly more moderate Sussan Ley.

While neither Taylor nor Ley are particularly inspiring, there is an argument that a party led by the slightly more moderate Ley could be better placed as the Liberals try to return with a more centrist focus (while also at least signalling that the party is ready to embrace female leadership). The party must also be prepared to preselect more moderate candidates to rebuild its pool of talent without collapsing further right.

Of course, the Liberals’ resounding defeat this election wasn’t just about their suboptimal positioning. It was also about execution of a campaign during which they backflipped on policies such as ending working from home for public servants, all but abandoned their nuclear policy, and sent mixed messages through conflicting spokespeople.

It’s easier said than done, but they must stem the splintering within their party and deliver a more coherent and cohesive message.

A swing back towards more conservative views among Australian voters is not out of the question. But the long-term trend seems to be younger generations being broadly more progressive than their predecessors.

Without acknowledging this and moving their business closer to the centre, no amount of soul-searching will help the Liberals win the political game.

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The Liberals won't win without more women and fewer oldies

If the Liberals have any sense, they won’t waste too much time blaming their shocking election result on Peter Dutton, Donald Trump, Cyclone Alfred, the party secretariat, an unready shadow ministry or any other “proximate cause”, as economists say. Why not? Because none of these go to the heart of their party’s problem.

The Liberals’ problem is that Australia has changed but their party hasn’t. They’re like someone still driving a Holden Commodore: a great car in its day but looking pretty outdated today.

In other words, the Libs’ problem is structural, not merely cyclical. It can’t be fixed just by finding a more attractive leader – not unless that leader has the authority to make what many Liberal MPs and party members would regard as radical changes.

Liberal leaders have been aware of their party’s two key problems for some years without facing up to them. The first is their “women problem”. While Labor has put much effort into increasing the proportion of women among its parliamentary members and ministers, the Libs have been quite half-hearted about it, refusing to use quotas to speed up the process.

I’m sure Labor people have been sincere in believing a roughly 50-50 split should become the norm, but I’m equally sure they’re aware of the political advantage that comes with making sure they attract the votes of at least half the female voters, and preferably more.

Go back far enough and you find Australia’s women slightly more attracted to the Coalition than Labor. Not these days. The Australian National University’s Australian Election Study, which uses polling of people after they’ve voted – at the democracy sausage stage – found that, in the previous, 2022 federal election, while 38 per cent of male respondents voted for the Coalition, only 32 per cent of females did.

I’d be surprised if that disparity was much reduced on Saturday, and not surprised if it had increased. Surely a party incapable of attracting its share of the female half of the voting population is a party without a bright future.

Did you notice Monday’s photo of Labor’s just-elected federal members in Brisbane? Seven broadly smiling, youngish women. A lot of them who’d just taken seats from the Libs.

And, as I’m sure you have noticed, all the teals are women. Could there be a message in there somewhere? If so, Labor’s got it, but the Libs haven’t yet.

Another relevant finding from the study of the 2022 election: whereas only 9 per cent of men voted for the Greens, for women it was 16 per cent. My guess is that a lot of those women voting Greens were young.

You surely can’t have missed the news that Saturday’s was the first election in which the great bulge of Baby Boomers has finally been outnumbered by the Millennials and Gen Z, which now account for 40 per cent of the electorate.

With some Zoomers yet to reach voting age, the younger share of the electorate can’t fail to grow as the Boomers start falling off the twig. (Last week I had to go to Melbourne for the funeral of a mate. I stayed with another mate whose wife died last year. Could mortality be catching up with the invincible Boomers?)

So let’s shift from gender to age. The 2022 electoral study observes that “across the democratic world, younger voters tend to prefer parties and candidates of the left and centre-left more so than older voters”. But each Australian election study since 1987 has found that as age increases, so, too, does Coalition support.

In 2022, however, the Coalition’s share of the vote fell in almost every age group, but especially among the youngest age groups. Question is: will today’s younger voters drift to the Coalition as they age, as previous younger generations have?

Probably not. As the Millennials aged between 2016 and 2022, the Coalition’s share of their votes actually fell from 38 per cent to 25 per cent. In both 2019 and 2022, only 26 per cent of Zoomers voted for the Coalition, with 67 per cent voting for the Greens or Labor.

“No other generation records such skewed preferences at similar early stages of the life course,” the 2022 study concludes.

What could possibly cause the latest batch of younger voters to be so down on the Coalition that they may never grow more conservative as they grow older?

Well, one candidate is “intergenerational inequity”. Home affordability has been an issue for yonks, but never has it been as big as it was this time. “How come our parents had little trouble buying a home of their own while we’re finding it almost impossible?”

Until now, politicians have shed only crocodile tears for first home buyers – with the most openly unsympathetic of them being the Liberals’ second Menzies, John Howard.

But home affordability is just one of the ways the system of taxes and benefits has been biased in favour of the well-off elderly – the self-proclaimed “self-funded retirees” – at the expense of younger, working taxpayers.

Who was it who did most to advantage better-off single-income families who could afford private schools and private health insurance? The same John Howard. He rejigged the system to benefit the Liberal heartland, but now that heartland has resigned from the party.

Why? Many reasons, no doubt, but one that stands out: the Liberals’ lip-service-only support for action to reduce climate change. Turns out women worry more about climate change than men, and young people worry more than oldies – for obvious reasons. Thinks: I’ll be dead before it gets intolerable.

Ever since Labor’s Julia Gillard introduced a carbon tax in 2012, the Libs, while denying they were climate-change deniers, have taken the low road: don’t worry about climate, just stop electricity prices rising.

If the Liberals want a future, a future with more votes from women and younger people, the place to start is getting fair dinkum about climate change.

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Dutton's election campaign rout lets RBA off the hook

Reserve Bank governor Michele Bullock must be breathing a quiet sigh of relief now the Albanese government has been triumphantly returned to office. If you can’t think why she should be relieved, you’re helping make my point.

There was something strange in all the accusations hurled at the Labor government for doing little or nothing to ease the great cost-of-living pain so many voters had suffered over the three years of its first term in office.

And that was? Never once did Peter Dutton mention the Reserve Bank. The tough state of the economy was 100 per cent Labor’s fault. And never once did Anthony Albanese or Treasurer Jim Chalmers say what they could have: “Don’t blame us, it was the central bank wot dun it.”

“And there was nothing we could do to stop it doing what it did,” Labor didn’t say. “Had we tried to counter what the Reserve did in increasing mortgage interest rates by a massive 4.25 percentage points, it would just have raised rates even further.” (As every macroeconomist knows, such behaviour is dignified by the title “the monetary policy reaction function”.)

So Albo & Co. did what the system required of them: they stood there and took all the abuse on their own chin. Since the Reserve was granted independence of the elected government in the mid-1990s, the deal between the elected government and the Reserve is that the Reserve says nothing about the government’s conduct of fiscal (budgetary) policy, and the government says nothing about interest rates.

Albanese’s quite unexpected landslide win will tempt many people to start rewriting history in favour of the victors. “Ah yes, Labor was never really in any bother and there was never much risk that all the cost-of-living pain could see it tossed out.”

Bollocks. Before the formal start of the campaign in late March, the polls showed there was a big chance Labor would be tossed out. The Coalition was ahead in the polls, and Dutton’s personal approval rating was high.

It was only as the five-week campaign progressed, and voters got their first close look at Dutton and started listening to what he was saying, that the Coalition’s lead in the polls started sliding down and voters’ comparison of him with Albanese started shifting in Albo’s favour.

Both sides knew from their research that the cost of living was the only issue voters wanted to know about. So both sides vowed to talk about little else. Labor stuck to that resolve, but Dutton couldn’t make himself.

The truth is, throughout his long career in politics, Dutton has shown little expertise or interest in the management of the macroeconomy. He’d been a copper, who saw his life’s vocation as to “protect and serve”. He was on about the threat to our security from abroad and the threat on our own streets. And, as the campaign progressed, that’s what he kept returning to.

He was the wrong person to be leading the Coalition at a time when economics was all that mattered. He had a powerful (though misleading) line asking people if they felt better off than they were three years ago, but failed to keep pushing it. This left Labor room to push its antidote: “don’t worry, the worst is over, interest rates have started coming down, and soon everything will be back to normal”.

But what’s that got to do with the Reserve Bank? Just this: had the Coalition succeeded in getting Labor sacked, Labor would rightly have blamed the Reserve’s tardiness in cutting interest rates for that sacking, and its side of politics would have gone for at least a decade seeing the central bank as the enemy.

But don’t think the Coalition would have loved the Reserve forever. It would have thought: “If those blasted bureaucrats can trip up Labor, next time they might trip us up”. Get it? Both sides would have been looking for ways to clip the Reserve’s wings.

Two points. First, central bank independence and democracy make awkward bedfellows. They mean the Reserve has all care and no responsibility. Much as they may want to, the voters can’t sack Michele Bullock. The only people voters can take the Reserve’s performance out on is the elected government.

Second, the post-pandemic price surge is the first big spike in inflation in the 30 years since the rich economies adopted the policy of handing over primacy in the day-to-day management of the economy to an independent central bank with an inflation target.

So, only now has this regime been stress-tested. This test has revealed how hard it is for a democratically elected government to carry the can for a central bank taking a seeming eternity to use higher interest rates to get the inflation rate back into the target zone.

The truth is, all the seeds of the inflation surge were sown before Labor was elected in May 2022. But Labor didn’t waste its breath trying to mount that argument. The retort would have been obvious: surely three years is long enough for any macroeconomic problem to be fixed?

Good point. When Labor took over, the annual inflation rate stood at 5.1 per cent. By the end of 2022, it had peaked at 7.8 per cent. But by this time last year – 15 months later – it was down to 3.6 per cent. And now it’s back in the 2 to 3 per cent target range.

So, with consumer spending almost flat, the past year has seen inflation do what it could always have been expected to do: keep falling back to target. So why did the Reserve start cutting the official interest rate only in February?

The first rule of using interest rates to manage demand (spending in the economy) is that, because rate changes affect demand with a “long and variable” delay, you don’t wait until inflation reaches the target before you start cutting rates.

But the Reserve has ignored this rule because of its fear of a wage explosion that was never likely to happen. Its “blunt instrument” has hurt voters with mortgages more than was needed. Fortunately for the Reserve, however, its mismanagement hasn’t got an innocent government kicked out.

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Young people will decide who's the next PM

By MILLIE MUROI, Economics Writer

By now, it’s no secret that young people are the biggest voting group. While no demographic fits neatly into either the Labor or Coalition camp – or completely agrees on any given issue – it will be a relief for many young Australians to know they are more than an afterthought this election.

Neither party has been exceedingly visionary, but as Prime Minister Anthony Albanese and Opposition Leader Peter Dutton jet around the country in a final scramble to cement their messages in the dying days of the election campaign, one leader will be tossing and turning far less when they hit the hay every evening.

For the past few decades, voters have tended to be “rusted on” to the major parties. That is, there wasn’t much anyone could do to change their minds in the weeks leading up to election day – and “safe” seats, where one party was practically guaranteed to win, were actually safe.

But young people have thrown a spanner in the works. Not only do Gen Z (born after 1996) and Millennials (born between 1981 and 1996) make up more than 40 per cent of the national vote – outnumbering Baby Boomers for the first time – but they are increasingly pulling their support from the major parties.

The Greens have taken a bigger bite of the youth vote in recent elections, and the Australian Electoral Study – which has surveyed voters after every election since the mid-1980s – has found support for the major parties more widely has dropped to the lowest level it's seen.

That may also be thanks to the rise of independent or teal candidates who have offered platforms more in tune with issues such as climate change – especially hurting the Coalition in wealthier, inner-suburban electorates.

While there is diversity within the youth cohort, there are certain trends, shared experiences and grievances that have clearly shaped the major parties’ campaigns – and which will ultimately determine the result of the election.

Issues such as housing affordability, climate change and cost of living consistently dominate polling among young people.

With house prices continuing to slip out of reach of younger Australians (which their parents and grandparents are also seeing secondhand), both Labor and the Coalition have put housing policies front and centre in their campaigns.

Their demand-side policies are not especially helpful for dampening house prices because they increase the number of people bidding for a new home (and therefore push up house prices). Labor has guaranteed to allow all first home buyers to buy a place with a 5 per cent deposit, and the Coalition has promised to allow first home buyers to withdraw some of their superannuation and reduce their income tax by deducting their mortgage payments.

But these policies are short-term carrots that both parties know will appeal to first home buyers – many of whom are younger.

After facing a red-hot rental market, wage growth failing to keep up with the growth in everyday prices, and a pandemic which could have a long-term drag on their career progression, a seemingly lower hurdle to enter the housing market may be welcome for many young people.

It’s also more immediate than policies aimed at increasing supply, such as the Housing Australia Future Fund aimed at building thousands of homes, and the Coalition’s less direct promise to invest in housing infrastructure such as water, power and sewerage systems, which are more effective, longer-term responses. Both Labor and the Coalition know voters do not have the patience to wait (more) years to be able to crack into the housing market.

While cost of living has persistently been the number one issue for voters, one party has taken the extra step when it comes to easing pressures for young people. Labor’s promise, for example, to wipe 20 per cent off student loans, is a compelling proposition – especially for recent graduates who have racked up record levels of debt amid higher course fees. It’s a policy that has strong support – even among young Coalition voters.

The risks for Labor, of course, include the tendency of voters to “punish” or kick out whoever is in power during hard times, even if those hard times had little to do with the government, and the possibility of young people – who tend to be more progressive – choosing to back minor parties such as the Greens who have pushed for more radical policies such as capping rents.

While there’s recent evidence some young men are leaning more to the right and holding more conservative views than older generations, young people are, for the most-part, “issues-based” voters, meaning action on top offenders: housing affordability, climate change and cost of living are crucial to gaining their support.

Albanese, while arguably lacking extraordinary charisma, speaking ability or policy ambition, has done the basics well. He has relentlessly hammered home announcements on urgent care clinics, affordable medicines, childcare and fee-free TAFE, many of which matter to many, but especially young people.

By contrast, the campaign period has revealed some of the cracks and weaknesses in the Coalition. While their fuel excise cut is undeniably one of the policies with the strongest cut-through this election, they have been slow in releasing their costings, backflipped on their policy to end work-from-home for public servants, and only spoken about their nuclear policy when prodded.

Meanwhile, Albanese has consistently demonstrated he has a solid grasp of how systems, from health to roads and renewables, work – focusing on small improvements but never backing down or straying from his core policies.

Albanese has also connected more effectively in the social media space where young people tend to reside, at least much more than older generations. Dutton’s refusal to engage with influencers has narrowed his reach, while missteps such as his declaration that he would prefer to live in Sydney’s Kirribilli House over Canberra’s Lodge, did the rounds.

While Albanese has made his fair share of mistakes and neither leader has a natural flair for social media, the prime minister’s quips, vulnerability when speaking about his mother, and ability for banter may have put him in a stronger position on platforms such as TikTok where a sense of authenticity and personality are key to connecting with users, most of whom are younger.

Young people may have an appetite for bolder reform and back in more independents and minor party candidates this election, but Albanese will almost certainly secure a second term as prime minister. While there’s no one-size-fits-all approach to attracting young voters, doing the “ordinary” well is probably enough to get Labor across the line.

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