Seeking the positive-sum economy where everyone wins a prize

What is this “abundance” thing that progressive economists are suddenly banging on about after reading the latest American pop economics book? At last, one of them has explained it.

He is Dr Andrew Leigh, Australia’s assistant minister for productivity, competition, charities, treasury and the kitchen sink. In short, he’s the assistant assistant treasurer. Leigh is a former economics professor and one of the brightest minds in the government.

So why does he have such a rag-bag of a job? Because he’s not a member of either of Labor’s right and left factions, which means that, no matter how capable he is, he gets what’s left after the faction members have bagsed all the top jobs.

This is good, actually, because it leaves Leigh with time to do the government’s creative thinking. He gave a thoughtful speech last week about “the politics of abundance and the perils of zero-sum thinking”. In it, he does a much better job of explaining the relevance of abundance than the authors of the book.

Economics is sometimes defined as the study of scarcity. Our wants are infinite, but the resources available to fulfil those wants are finite, so economists help us maximise the satisfaction we extract from the available resources. But the authors say economists should be on about abundance, not scarcity.

Leigh explains that abundance doesn’t mean everyone gets to be as rich as Gina Rinehart, but that everyone should be provided with the capability to live the life they want. He adds that when the economy is seen as a zero-sum game, ambition shrinks, but when we see the possibility of positive-sum outcomes, we open the way for abundance. Abundance is “the ability of societies to deliver more homes, more affordable energy, more inclusive growth”.

Trouble is, too many of us are inclined to see the economy as a zero-sum game. Zero-sum thinking sees everything as a contest in which if I win, you must lose and vice versa. Positive-sum thinking says if we work together we can all be better off.

Economists often use the metaphor of a pie. If the pie is of fixed size, all you can do is compete for a bigger slice at other people’s expense. But economists say that, if we do it right, we can make the pie grow bigger, so everyone gets a bigger slice.

Unfortunately, zero-sum thinking is the simplest and easiest way to analyse something: you divide it into two possibilities, the good and the bad. Thus, it’s easy to see immigration as a case of migrants versus jobs. Gender debates are seen as women versus men. Climate change is jobs versus the environment.

Leigh says that, when you view politics this way, ambition shrinks and co-operation falters. But, though he doesn’t say so, two-party politics is the epitome of a zero-sum game. An adversarial system of government and opposition, in which only one side can win.

Another point I’d have made is that whether some action is zero-sum or positive-sum often depends on whether you’re thinking short term or longer term. Can action on climate change cost jobs? Yes, of course. Will banning the logging of old-growth forests cost the loggers their jobs? Yes.

But that’s just what economists call “the first-round effect”. And, as someone once said, the most important question economists keep asking is “but then what happens?” . In such cases as these, the displaced workers find jobs elsewhere (with help from the government, you hope), but the damage to the environment stops.

It’s because economists know to distinguish between initial effects and ultimate effects that they find it easier to see the likelihood of positive-sum ultimate outcomes.

Leigh says zero-sum thinking is common but not inevitable. It’s shaped by culture, history and politics. And it carries real consequences. People who think this way are less trusting, more anxious and more convinced that society is unfair.

“Negotiators who assume every gain for the other side is a loss for them miss opportunities for co-operation. Politicians who frame issues in zero-sum terms find it harder to build coalitions. And when populism exploits zero-sum narratives, democracy itself risks becoming a theatre of permanent division,” he says.

What people think is important. “If you believe government is captured by elites, then every policy must be suspect. If you believe institutions can work for the public, then reform is possible,” he says.

People’s experiences of growth and mobility matter enormously. When families see that children are doing better than their parents, life feels like an expanding pie. Progress seems natural. But when grow stalls and mobility falters, scarcity starts to feel like common sense.

“That is why younger generations in many rich countries are more prone to zero-sum beliefs than their parents and grandparents. They have grown up in decades when wages barely moved and housing became less affordable. Their parents could expect each generation to do better. They cannot,” Leigh says.

Abundance is about competence. It’s about building systems that deliver more homes, more energy, more research – systems that replace delay with delivery, and scarcity with capability.

But abundance is also about mindsets. It requires belief – belief that progress is possible, belief that growth can be shared, belief that win-win outcomes exist.

So the politics of abundance has a double task: deliver concrete results through institutions that work and foster the cultural confidence that those results are possible and can be shared.

“People are more likely to believe in positive-sum outcomes when they have seen them in their own lives,” Leigh says. “When children do better than their parents, they believe in social mobility. When immigrants are welcomed and succeed, communities see that newcomers expand the pie. When governments act fairly and visibly in the public interest, citizens are less inclined to believe politics is controlled by elites.”

Abundance politics requires honesty about the disruptions that change brings, coupled with willingness to design transitions fairly.

It is about building the capacity of institutions and about building the confidence of citizens. Institutions that cannot deliver breed cynicism. Citizens who cannot imagine positive-sum outcomes will not support reform.

Get it? Leigh is saying you get reforms happening by reducing the resistance caused by zero-sum thinking and increasing the co-operation that comes from positive-sum thinking.

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Here's what we can learn from Japan's ageing society

By Millie Muroi, Economics Writer

When my grandpa was little, he didn’t think he would live past 80. His own grandfather was the oldest in his village at that age when he died.

But this month, my grandpa, Tatsuyuki Muroi, quietly turned 99. I say “quietly” because although it’s a milestone, when I visited him in his aged care home in southern Japan this week to ask him about it, he chuckled and admitted he had lost count.

Japan is the epitome of an ageing population. More than one in 10 people living in the country have celebrated an 80th birthday. And this month, it recorded just shy of 100,000 people aged 100 or older.

It’s an intriguing place and far from perfect. But it gives us an insight into what we might expect, and what we should think about, as Australia becomes an older population too.

One thing I noticed almost immediately in many places across Japan was the number of older people not only going about their day, but manning food stalls, cleaning streets, and running their own businesses.

Part of this is out of necessity. Because the pension that Japanese people receive is largely based on the amount they contributed during their working life, those who have worked in unstable or low-wage jobs may not receive enough to live comfortably. Meanwhile, older Australians without enough superannuation or wealth are generally eligible for a pension that ensures they can live relatively comfortably.

But working can also help people to stay connected, feel a sense of purpose, and pass on wisdom and skills to younger generations.

About one in four people aged 65 or older were employed in Japan in 2021 compared with about one in seven in Australia.

Some of the difference might come down to cultural expectations, but also the perverse incentives created by Australia’s pension system. For instance, a pensioner in Australia can end up effectively earning less despite working more because of the clunky way our aged pension payments shrink as people take on a little extra work.

Of course, we shouldn’t force people to work until they drop.

The year after World War II ended, my grandpa said he worked 365 days straight. “We worked from as soon as the sun came up, to when it went down,” he told me. That, of course, is excessive.

But there are big missed opportunities – for our longevity, physical and mental health, and the economy more broadly – in discouraging those who might want to continue working from doing so.

It’s backed by solid research but also makes sense intuitively.

Having built up his own construction business, my grandpa continued working, at least odd jobs here and there, well into his 80s. “I didn’t have a day where I specifically retired,” he told me.

By his 90s – and until he entered an aged care home about a year ago – he was handling just a handful of small requests from family, but it kept his mind and body active.

“Now, I’m bored out of my mind and getting more frail,” he told me. “If I could do even a bit of work, I could be useful. But all I am now is a burden to everyone.”

Of course, that isn’t true, and I made sure to let him know. “I guess there’s not a space available yet in the afterlife,” he laughed.

For many, work can give a sense of purpose, especially for those who haven’t got strong ties to family, friends or the community.

And that work doesn’t have to look like a conventional nine-to-five – or even part-time or casual work.

It could be things like getting more older people involved in mentoring, both through government-funded programs and private businesses or individuals taking initiative.

After all, older people have decades of experience, not just in business, but life more broadly.

With loneliness becoming a widespread and growing trend, especially among young people, there’s a lot to gain from this. Facilitating more opportunities for interaction between generations could be a win-win, particularly for those who may not have relationships with their own grandparents or grandchildren.

Reducing loneliness can lift productivity – our ability to produce things better, faster or using less resources – and take pressure off the healthcare system by preventing the many health problems linked to loneliness.

That brings big economic benefits, but also fulfils one of our greatest human needs: the desire for connection with other people.

Taking the time to talk to my grandpa over three days came with a noticeable boost in his mood, cognition and energy level – that I think could be traced to more than just my Japanese language skills improving over hours of conversation.

It’s a phenomenon that’s been noted in research showing young people can, through social interaction alone, help improve the vascular health, cognitive abilities and life span of the elderly.

But there’s also a lot to gain for young people, who can receive advice and gain an insight into history.

Speaking with my grandpa, for example, gave me an opportunity to hear from one of the diminishing number of people who lived through, and remember, the Second World War.

When I asked him about his time in the Imperial Japanese Army Academy – the army officer training school – he reignited my interest in modern history, telling me stories I wouldn’t get from history books.

“I disliked exercise and absolutely hated running,” he said. “But we were made to do a lot … judo, kendo, running … one time, towards the end of all our training, we had to walk for 24 hours straight and weren’t allowed to sit down. It was beyond exhausting, but this training made me very fit by the end.”

Incredibly, my grandpa was spared from being sent to war because Japan surrendered the month he was supposed to graduate from the army officer training school.

“One day in August, we gathered at 12pm to listen to the emperor’s announcement,” he said. “At first, it was such a bad-quality sound that we didn’t know what had been said, but when we returned to our rooms, someone delivered the message that we had lost the war.”

I asked whether it came as a surprise. “Of course,” he said. “We didn’t think we were winning, but we’d been taught to fight until the last man, so we never thought we would surrender.”

While learning more about World War II is sobering, it feels especially pertinent as wars continue in the Middle East and Ukraine and Russia today. Both my grandparents who are still alive stress the importance of peace. “We should never go to war,” my 92-year-old grandma often tells me.

There’s perhaps no better time to learn from our parents, grandparents and the elderly. And no better time to improve the way we look after them, break down the barriers discouraging them from working, and spend time listening to them.

My grandpa told me I could probably live to 120 years old. I hope in that time, we’ve worked on ways to show older people we value them and want them to stay active in the ways they’d like. But for now, I’m more inspired than ever to keep asking all the questions in the world to my grandpa in the years I have left with him.

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More Boomers are choosing not to retire. They want to work

As the great bulge of babies born after World War II have moved through the life course, the world has changed to suit them and their needs. But just as the latest generations of Zoomers and Millennials have begun to outnumber the Baby Boomers, and are taking over as the politically dominant age group, the Boomers have caused one last change: retirement has become more a matter of personal preference, with many choosing to keep working.

In the years before the first of the Boomers began reaching normal retirement age in the early 2010s, the big trend was to early retirement. Many people fancied the idea of stopping work just as soon as it was financially feasible.

Men wouldn’t become eligible for the age pension until they turned 65, but maybe they had enough superannuation or other savings to live on until then. Or perhaps they could downsize, selling the family home and moving to something smaller and cheaper up the coast, leaving them with money to invest and live on the interest.

Employers were often keen to get rid of older workers, giving them redundancy payouts sufficient to let them retire before reaching age-pension age. Early retirement was great if you could wangle it somehow.

This was when worthies started worrying about “population ageing”. The average age of the population was rising because couples were having fewer children, but oldies were living longer.

Early retirement was adding to the problem, reducing the proportion of people still in the workforce, thus worsening the ratio of people needing to be supported relative to workers doing the supporting.

This was the motivation for the Howard government’s introduction of a five-yearly “intergenerational report” in 2002. Treasury’s job was to assess what population ageing was likely to do to the federal budget over the coming 40 years, assuming policies remained unchanged.

The idea was to produce a report every five years that said: “Oh, no. The budget deficit’s just going to get bigger and bigger because we’ve got an ever-growing army of oldies to support with health and aged care, but an ever-smaller proportion of the population working. Something must be done.”

Well, something has been done, partly by the Boomers and partly by the authorities. In five-yearly report after report, Treasury assumed that, with the Boomers retiring – and many retiring early – the proportion of the population that was participating in the workforce would just keep falling.

Wrong. Badly wrong. With about 67 per cent of the working-age population either in paid work or seeking it, our rate of participation is near record levels.

And the reason? Too many of the people who could have retired – and, in earlier times, would have – haven’t. They’ve just kept steaming on. (And I don’t just mean yours truly.)

According to research by economist Terry Rawnsley of chartered accountants KPMG, the share of 70-year-old men still in paid employment has increased from one in 10 in 2004 to one in four today. And about 10 per cent of men in their late 70s are still working.

Note that anyone still working in their 70s is doing so of their own volition. It’s possible they’re still working because they can’t make ends meet on the age pension, but more likely they’re working just because they want to.

There is no official age at which people must retire. What many of us take to be the retirement age is the age at which people become eligible for the age pension. And it’s true that governments have been encouraging later retirement by increasing the age for eligibility.

For decades, the pension age for men was 65, while for women it was 60. But between 1995 and 2004 the age for women was raised to 65. Then, between 2017 and July 2023, the pension age was raised for both sexes from 65 to 67.

So, for women between 60 and 67, and men between 65 and 67, their decisions about when to retire may have been influenced by government policy. According to figures from the Melbourne Institute’s HILDA survey published this week, the proportion of women aged 60 to 64 who were completely retired fell from 69 per cent to 41 per cent over the 20 years to 2023. That may be mainly the government’s doing.

Similarly, the later pension age may explain most of the fall of 20 percentage points in the proportion of women aged 65 to 69 who were completely retired over the 20 years. And the 12 percentage point fall for men.

But if you look at people aged 55 to 59, who were always too young for the age pension, you see the proportion of those completely retired fell over the 20 years by 25 percentage points for women and 11 percentage points for men.

That tells you early retirement has gone out of fashion without any help from changing government policy.

So what other factors could be encouraging us to work longer? Well, Australians have long been near the top when it comes to longevity. And advances in medical science have allowed us to live longer, active lives.

Jobs have become less physically demanding. Ill-health is the main reason people choose to retire early.

Population ageing means we’re likely to encounter shortages of labour, which may explain why bosses have become much less keen to show older workers the door. It’s become more common for oldies to go part-time rather than stop working completely.

Another factor is the introduction of compulsory super in 1992, which is making it easier for workers to make decisions about when to retire independent of what’s happening to the pension. You can get your hands on your super once you’re 60, provided you’ve permanently ceased work. And once you’re 65 you can get your super and keep working.

I think that, if we’re living longer, healthier lives doing work that’s less physically demanding, it makes sense to spend that extra time working rather than cooling your heels in retirement. I doubt it will be long before the age pension age is phased up to 70.

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Albanese takes his usual each-way bet on climate change

After last week, Anthony Albanese and his Climate Change Minister Chris Bowen are entitled to a great sigh of relief. They made it through without anyone noticing what a weak job they’re doing of protecting our children and grandchildren’s future.

They began the week belatedly releasing an official report telling in shocking detail just how bad our lives will become if we and the other rich countries fail to do enough to stop global warming. They ended the week setting a target aiming to do insufficient over the decade to 2035.

They offered a masterclass in convincing people you’re doing something to fix a problem when, in reality, you’re doing more to make it worse than make it better. If there was an Oscar for fooling the punters, these guys would win it.

And how did they do it? By waving around % signs. As required by the Paris climate change agreement of 2015, we have committed to reduce our emissions of carbon dioxide and other greenhouse gasses by 43 per cent of their 2005 level by 2030.

In readiness for the next United Nations climate change conference in Brazil in November, we’ve had to set a target for further emission reductions by 2035. And last week the target was revealed: further reductions to between 62 per cent and 70 per cent of the 2005 level.

Brilliant. Those people who don’t care about climate change could grumble that 62 per cent is too much, while those who do care about it could complain that 70 per cent is too little.

Fortunately for Albanese, Opposition Leader Sussan Ley said she was “dead against” the new target, while the greenies attacked it as inadequate.

Well done, Albo. This is surely the oldest trick in politics. If you can get yourself between someone saying you’re doing too much and someone else saying you’re doing too little, you make yourself look moderate and reasonable. You’re the epitome of the Sensible Centre.

This is Albanese, the man who’s been in politics for so long he’s forgotten why he wanted to be a politician, doing what by now comes naturally: taking an each-way bet. You’ve got a problem? I’m happy to do a bit to help.

Of course, I won’t help you so much I annoy other people. I might lose their votes. I don’t want to actually fix problems, just be seen trying to fix them.

This is Albanese, the man who’s been in politics for so long he’s forgotten why he wanted to be a politician, doing what by now comes naturally: taking an each-way bet.

But the other part of last week’s illusion was that setting a target for what you’ll have achieved in 10 years – or 25 years in the case of net zero – isn’t the same as actually doing something. It’s just promising to do something sometime.

And don’t forget that pollies face elections every three or four years. This makes setting targets for the distant future the easiest thing a politician can do. You reckon Albo and Bowen will still be around in 10 years to face the music?

What about 2050? By then, every pollie associated with the net-zero commitment will be long dead. Know the great advantage of that? You won’t be around for your grandkids to ask you why you didn’t try a helluva lot harder to stop them ending up in the poo.

What’s lost when we debate whether 70 per cent is better or worse than 62 per cent, is that neither is sufficient to achieve the Paris Agreement’s goal of limiting the global average temperature increase to “well below 2 degrees Celsius above pre-industrial levels”, while also pursuing efforts to limit it to 1.5 degrees.

As the independent Climate Council has said, “to contribute to keeping heating well below 2 degrees C above pre-industrial levels, after which climate impacts become especially catastrophic and severe”, we’d need to set a net zero target for 2035.

And debating percentages avoids the question, 62 to 70 per cent of what? Well, annual emissions, of course. But why has Australia chosen 2005 as the base date for reductions? What’s special about 2005?

Let me tell you. That base was chosen in 2015 by the Abbott government. Why? Because by then, it was clear that 2005 was the peak year for emissions. They’d fallen a lot since then. That was a year of much land clearing for farming but, since then, state governments had been able to greatly reduce land clearing. Cutting down trees and shrubs releases carbon dioxide. Allowing them to continue growing absorbs carbon dioxide from the atmosphere.

Get it? In 2015, we picked 2005 as our base date knowing there’d already been a huge reduction in our total emissions because of changes in our land use. So, in the battle to reduce emissions, we gave ourselves a big head start.

As the Australia Institute has shown, if you exclude the marked decline in emissions from land use, our emissions have been flatlining. The modest reduction in emissions from electricity has been sufficient to offset the growth in other sectors. We’ve made no progress in transport or industry. But there’s little scope for land use emissions to continue falling.

So, apart from setting targets, what has the Albanese government been doing to reduce emissions over its three-and-a-half years in office? Not much. It has patched up the Coalition government’s “safeguard mechanism” which, in theory, will require some of our biggest polluting industries to reduce their net emissions. Trouble is, they can do so by buying dodgy carbon credits.

Labor hasn’t even saved itself about $12 billion a year by eliminating fossil fuel subsidies. In fact, the Albanese government has been making things worse by approving 10 coal projects, approving the drilling of more than 200 new gas wells and agreeing to extend Woodside’s North West Shelf gas project out to 2070.

Regardless of whether they’re sufficient, it’s not at all clear the government will be able to achieve its emission reduction targets for 2030 and 2035. If it was fair dinkum in trying to halt climate change it would have re-introduced the thing that could hasten the transition: a carbon tax.

But no, much safer to just have a bob each way.

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Why young women are beating men in the jobs market

By MILLIE MUROI, Economics Writer

COVID-19 changed the way we work, the skills we seek, and the types of jobs going around. But in the years since the pandemic, one of the biggest changes has been a leap in employment – especially for young women.

Since the pandemic, the unemployment rate of women under 35 has averaged about 1 percentage point below that of men the same age (the largest gap, in either direction, in two decades). And over the past decade, the gender pay gap per hour has narrowed from 11.5 per cent to 8 per cent.

We already know Australian women are finishing university at higher rates than men. But research by e61 economist Matthew Maltman reveals the boost in women’s job prospects and wages are largely driven by reasons linked to the expansion of the care economy, including childcare, aged care and disability care.

While the mining investment boom in the late 2000s and early 2010s led to more men than women climbing out of unemployment and into work, the growth in Australia’s care sector since the pandemic has seen young women be more successful than young men at securing work.

Since the National Disability Insurance Scheme (the third-largest program in the federal government’s budget, aimed at providing funding and support for those with permanent disabilities) was launched about a decade ago, the care economy has expanded sharply.

As Maltman points out, the care economy has been the biggest source of Australia’s economic growth over that time. And because it’s a sector that is labour intensive — meaning it relies on relatively large amounts of human work as opposed to work done by machines — it has also been the biggest driver of employment growth.

As demand for workers willing and able to provide care has soared, so have job opportunities in caring roles.

The people who have jumped to fill these opportunities, however, have tended to be women, and especially those who are relatively young.

Maltman notes young people tend to enter the field for two main reasons. First, care roles tend to offer a pathway for those in entry-level positions such as hospitality and retail to enter into more stable and better-paid work.

Second, while care jobs tend to pay less than the average job overall, that’s not the case for younger workers. Since the pandemic, the average hourly wage for 20-to-24-year-olds in the care economy has been about $3.50 higher than the average for workers of the same age across the economy more broadly (and $5 higher than in male-dominated sectors such as construction).

Women have also been more eager to take on these jobs. Caring roles — both in formal workplace settings such as hospitals and aged care facilities and informally at home — have long tended to be filled by women. And Maltman says that trend has continued.

Young women who weren’t previously working have moved into care roles at sharply higher rates since the pandemic, while only a slightly higher number of young men who weren’t previously working jumped into those same care roles. “While men face no formal barriers to working in care, and many already do, deep-seated gender norms and social factors have been slow to shift,” Maltman says.

This uneven uptake of care roles has contributed to a clear improvement in employment outcomes for young women compared with young men. While the care sector has morphed into a major destination for young women looking for work, the research notes there hasn’t been a similar industry or growth area that has appealed to young men.

The boom in the care economy, and growing demand for workers in the sector, has also led to higher wages — much of which has flowed to women who make up a majority of care workers.

Not only has the hourly gender pay gap narrowed over the past few years, but women now earn more than men per hour worked, on average, from age 15 to their early 30s.

Decisions made by the Fair Work Commission to significantly lift wages in the care sector (largely to make up for the historical undervaluing of care work) over the past few years has helped to boost wages for nurses and social workers — many of whom are women. And the rollout of the NDIS has led to a surge in demand for workers, resulting in shortages in labour and pushing bosses to boost wages in a bid to keep their workers.

Broadly, the health and social services sector (which includes the care economy) has had the highest wage growth of all sectors since the pandemic.

Maltman finds rising wages in the care sector account for about 15 per cent of the overall shrinking of the hourly gender pay gap.

Thanks to the expansion of the care sector over the past decade, the average full-time woman (across all sectors) is $440 closer to earning the same amount as an average full-time man per year.

Women becoming more educated explains a further 15 per cent of the improved hourly pay gap.

But a boost in the number of working age women in jobs (and those looking for jobs) has been about twice as important in narrowing the gap — part of which could be explained by the rise of work from home.

Over the past decade, the share of women working (and looking for work) has jumped, especially among those aged 30 to 40 – a time when earnings tend to start peaking, but also a time in which many women have historically had to reduce their professional work because they are taking care of family.

But Maltman says there are also other factors that have helped shrink the hourly gender pay gap — some of which are harder to put exact numbers on. That includes improved transparency in how much people are being paid and a continued fall in sex discrimination, but also what’s known as “spillover” effects.

That is, the growth in the care economy — and higher demand for workers — probably has knock-on effects for other sectors. More job opportunities for women in the care sector means they have greater bargaining power, not just in caring roles but also across other sectors as bosses fight to keep their workers (and maintain gender diversity in their workplaces), often through pay rises.

But it’s not all good news.

The hourly gender pay gap measures income per hour of work, and because women still work fewer hours than men on average, the annual pay gap for 25-year-olds was still about 12 per cent in 2022 (although that’s down from 16 per cent in 2016).

And while their pay may have increased, work satisfaction has been relatively low for some care workers — especially those in aged care.

There also tends to be fewer opportunities for earnings growth and career progression in the care economy after the age of 25 than in many other industries. Maltman points out if young women currently in care work stay in these jobs, they may end up earning less than their male counterparts in other industries over time. That means 10 to 20 years down the line, the gender pay gap may end up widening again for these workers.

While care work tends to offer job stability, it’s also a sector in which workers do not tend to change roles or workplaces very often. That can slow down productivity growth (our ability to achieve more with our limited resources) because workers might be less able or willing to move to jobs that suit them — and their skills — better.

And while growth in the share of women in jobs (and their pay) is welcome, Maltman points out the lack of adjustment by men — especially young men — to the changing structure of the economy is concerning, with a growing number of young men choosing not to participate in work or education.

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AI: Much ado about something that one day may be important

AI. AI. AI. Maybe if I utter those magic initials one more time, you’ll reach peak ecstasy. Worried about our lack of productivity? Fear not. The economy will soon be rocketing ahead.

What’s that? You’re worried AI will soon put all of us out of our jobs? Never fear. You’re gonna love it on the dole. All that spare time.

What are we to make of all the fuss about AI – or A1, as someone at my place calls it? Well, I’ll tell you what I think, although I’m no expert on the technological marvels that will be unveiled any time soon.

But that’s the first point. None of us knows what AI involves except a few self-appointed experts, who are doing all the talking about how fabulously big and revolutionary it will be. Well, maybe. Maybe not.

I’ve been around long enough to notice when it’s the proponents of the world-shattering development – the people who stand to gain most from it being big, big, big – telling us how wonderful it will be. (I’m so old I can remember when AI stood for artificial insemination.)

The experts are generating much of the hype about AI and what a revolution it will be because they want to attract the attention of governments, whose approvals and co-operation the proponents need to do what they want to do.

Of course, some experts have broken ranks to warn about the many thousands of workers who could lose their jobs. But this, too, is probably part of the proponents’ efforts to attract governments’ support.

Which brings us to the sharemarket. It’s booming right now, thanks to all the excitement about AI and the big profits it will bring to investors. We’ve seen such booms before, and they don’t end well.

I remember the “dot-com bubble” in the late 1990s. Investors were greatly excited by the advent of the internet and all the opportunities it presented to make a buck. Many people put their money in website start-ups they hoped would make a killing.

Soon enough, people realised that these weren’t going anywhere. The bubble burst and the “venture capitalists” did their dough. But this, of course, didn’t stop the internet being the great change we now know it was, with a few tech giants – Google, Facebook/Meta etc – making a fortune.

In the present sharemarket boom, speculators have bought shares in those tech giants, hoping to make a motser from the development of AI. The companies probably will do well, but not as massively well – or as immediately – as the get-rich-quick brigade imagined.

So it’s safe to assume the present boom is a bubble that will burst. You can never tell when, but my guess is it won’t be long. When it happens, many smarties will do their dough, but it won’t be a great disaster for the economy. As I never tire of explaining, the sharemarket and the economy are two different animals. The sharemarket will take a hit; the boring “real” economy of production and consumption will steam on.

What the bursting of the AI sharemarket bubble will do, however, is kill off most of the hype. What I’ve concluded from years of watching these excitements wax and wane, is that they’re never as wonderful as the marketing department claimed, nor as terrible are their critics feared.

My third conclusion is that these world-changing technologies always take a lot longer to materialise than the advertising led us to expect. Often, the big firms jump onto the new technology, but the smaller firms take their time. This protracted dissemination stops the change being so overwhelming, giving firms and workers notice of what’s coming and time to adjust.

So, I’m not saying there’s no substance beneath all the hype – there is. A significant change in the way businesses and other organisations use workers to do whatever it is the outfit does is coming. This will involve numerous workers losing their jobs and having to find other ones.

What I don’t believe are the predictions that AI will spread through the nation’s employers like a bushfire, making many thousands of people jobless at much the same time, so that the economy’s hit for six and new jobs are impossible to find.

So you can forget the fear that we’ll soon be beset by mass unemployment and depression. I say this with great confidence because people have been predicting that some new technology or other would cause mass unemployment on and off for at least the past five decades, without it coming to pass.

Last time I looked, the rate of unemployment was only up to 4 per cent of available workers. Add to that the 6 per cent of workers who have part-time jobs but would prefer to work more hours, and you’re only up to 10 per cent.

Remember, businesses have been investing in labour-saving equipment – that is, using machines to get rid of workers – continuously since the Industrial Revolution. So why didn’t we hit an unemployment rate of 90 per cent decades ago?

Short answer: because having employers use better machines to cut the resources needed to produce all the goods and services we consume improves the nation’s productivity – the efficiency of the economic machine – and so leaves us better off.

Our higher real income – we’ve had to spend fewer resources to acquire the same quantity of the goods and services we want – means we can afford to pay the now unemployed workers to produce more, and often different, goods and services.

It’s because there’s no limit to our appetite for goods and services that the workers “displaced” by labour-saving technology shouldn’t have too much trouble finding other jobs to do. Some individuals may find themselves unsuited to the new jobs but, with a bit of retraining, most jobless workers won’t.

Find that hard to believe? Just look at the history of capitalist economies using machines to replace workers for the past two centuries. It’s worked pretty well so far.

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We're going up in the financial world, but no one's noticed

Economists like us to think they’re cooly rational in all things. Nah. They’re just as susceptible to fads and fashions as the rest of us. In my working life they’ve gone from being obsessively worried about Australia’s financial dealings with the rest of the world to neither knowing nor caring.

When the “balance of payments” figures – which summarise all our financial dealings with other countries – are published each quarter, they go almost totally unreported and unremarked, meaning most economists have no idea of how our position in the financial world has changed, or why.

But two honourable exceptions are the Reserve Bank’s Penny Smith, who gave an amazing but little-noticed speech about it in 2023, and Deloitte Access Economics’ John O’Mahony, who has written an eye-opening paper about it.

O’Mahony noted that, when you looked at rich countries’ “net international investment position” they could be divided into those that were always owed money by the rest of the world and those that always owed money.

The “creditor nations” included Germany, Switzerland and Japan, whereas the permanent “debtor nations” included Canada, New Zealand and ... Australia. But, O’Mahony said, we may be on the way to becoming a “switcher nation” – moving from global debtor to global creditor.

To Smith, there’d been an “extraordinary decline in Australia’s net foreign liabilities”. She noted that, after reaching a peak of 63 per cent of gross domestic product in 2016, our net foreign liabilities had fallen to 32 per cent, “the lowest level since the mid-1980s”. Since then, they’ve fallen to 24 per cent.

So what’s causing this extraordinary change? Many factors have contributed, but one stands out: the Keating government’s decision in 1992 to introduce compulsory superannuation. But first, when were economists so terribly worried about our international finances, and why?

It was in the late ’80s and early ’90s, after we’d been forced in 1983 to abandon our fixed exchange rate and float the dollar. Economists saw the current account deficit was blowing out, causing huge growth in the net foreign debt. In the 12 years after the float, the current account deficit averaged 4.5 per cent of GDP. Whoa! Not good.

I can remember that whenever the latest balance of payments figures were published, the radio shock jocks would read the government another lecture on the folly of allowing the country to “live beyond its means”.

The consternation continued until the ANU’s Professor John Pitchford told the econocrats to wake up. All the international borrowing and lending was occurring in the private sector between “consenting adults”. They should be free to act as they saw fit – and bear the consequences should any of their decisions prove unwise.

With hindsight, it’s easier to see, as Smith has, that the economy was simply adjusting to the removal of the controls on inflows and outflows of financial capital, which had been part of maintaining a fixed exchange rate. After the float, foreigners could more easily invest in Oz, and Australians could more easily invest overseas.

Plus, back then we had to remember that the balance on the current account of the balance of payments represents the difference between how much the nation’s households, companies and governments choose to invest in new housing, business plant and structures, and public infrastructure, and how much those three sectors choose to save via bank accounts and superannuation etc, company retained earnings, and budget operating surpluses.

To an economist, the current account deficit equals national saving minus national investment. So, invest more than you save during a period – as we almost always do – and your current account is in deficit. You fund that deficit by borrowing the savings of foreigners, or allowing them to own Australian shares, businesses or property.

Which brings us to compulsory super. Keating and his ACTU mate Bill Kelty decided to introduce the “superannuation guarantee” mainly to give ordinary workers something better than the age pension to live on in retirement, but also because the econocrats decided Australians should be saving more.

The other rich countries had introduced national retirement schemes after World War II, but Keating’s scheme was very different. Whereas their schemes had contributions going straight into the budget, and pension payments coming out of that year’s budget, our contributions go to a private sector super fund for investment, with the same fund sending you regular payments once you’re in “pension mode”.

It’s mainly because our scheme has money invested and piling up in super funds, and because roughly half that money is invested on foreign sharemarkets, that our net foreign liabilities have fallen so far relative to GDP – and may one day fall to the point where our foreign liabilities become our foreign assets. Our super savings now total $4.2 trillion, with O’Mahony estimating they could be as high as $38 trillion by 2063.

The national super scheme has been far more successful than expected in increasing Australia’s rate of saving. We’re not only saving more than we used to, we’re saving more than other rich debtor countries.

Largely as a consequence, we’ve been running a surplus on our international trade in goods and services since June 2018. And although we still run a current account deficit, it’s much smaller – about 2 per cent of GDP.

Back in the ’80s and ’90s, our net foreign liabilities were high because as well as our high and growing net foreign debt, we also had much foreign equity investment in Australia, particularly ownership of our mining industry.

But this equity liability to foreign owners of Australian companies and shares has steadily been outweighed by our growing ownership of shares in foreign companies. In June this year, our net foreign equity assets of $760 billion offset our (still-growing) foreign debt of $1420 billion, to reduce our net foreign liabilities to $660 billion, a mere 24 per cent of GDP.

And although it’s had help from an undervalued Aussie dollar and an overvalued world share market, most of the credit for this “extraordinary” fall in our net liabilities to the rest of the world goes to our unusual national super scheme.

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If we care about fairness, it's not the well-paid that are the worry

When we talk about inequality, we tend to focus on income. After all, if some people are raking in thousands of dollars a week while others get by on just a few hundred dollars, that would seem to be a key contributor to inequality.

Income inequality is certainly an issue, with the top one-fifth of Australian households taking home two-fifths of the country’s income. But it’s actually our distribution of wealth that’s the biggest driver of inequality between the “haves” and the “have-nots”. It’s also, crucially, holding us all back from economic growth.

A report by the Australian Council of Social Service (ACOSS) and the University of NSW last year found that in Australia, the top one-fifth of households hold nearly two-thirds of the country’s wealth.

With an average of $3.25 million locked away, these households have their hands on about 90 times the amount of wealth stocked up by those in the bottom one-fifth of households.

And if we look at the number of people with “ultra-high wealth” – more than $750 million – Australia ranks fifth in the world (probably not a ladder we want to be topping).

It’s little surprise that most of the inequality in wealth comes down to our distribution of housing: especially the big gaps in the value of the family homes people own, but also the wealth held in investment properties.

But the research found shares and investment properties were the most unequally distributed forms of wealth – the top 10 per cent holds nearly two-thirds of the total value of these assets.

Many young people – especially those without family help – are locked out of home ownership, and older generations (on average) tend to be wealthier, partly thanks to rising property prices and simply the build-up of wealth over time. But there’s also a big gap in the amount of wealth held within generations.

Picture this: the average “older” household (those aged 65 and older) – are about four times wealthier than the average “younger” household (aged under 35).

But it’s actually older households that also happen to be in the top 10 per cent of all households by wealth, that hold nearly one-fifth of the country’s wealth.

It’s a different story for the one in 10 older people who rent, about half of whom live in poverty.

That might be part of the reason why so few older households pay any income tax, compared with nearly all younger and middle-aged households.

But even the wealthy older households pay very low rates of income tax: about 16 per cent on average compared, with 28 per cent for wealthy young and middle-aged households, and more than one-third of wealthy older households pay nothing at all.

Basically, as ACOSS principal adviser Peter Davidson puts it, the issue isn’t that older people are generally rich, but there’s a decent chunk of older, wealthier Australians who pay very little or no tax.

But Davidson, who helped write the report, also points out the problem is not that young people pay too much income tax. “They don’t,” he says. “And young people’s share of income tax paid is diminishing.”

According to the Parliamentary Budget Office, the share of personal income tax paid by those aged 29 and under has shrunk steadily from more than one-quarter in 1979-80 to about one-tenth in 2021-22.

So while we talk quite a bit about younger working families being unfairly punished and being heavily burdened by tax, the issue is more with the way we tax (or don’t tax) wealth.

That’s especially the case because when we talk about wealth in Australia, it’s undeniably linked to the housing market: one of the biggest drivers of wealth and wealth inequality, but also one of the biggest areas of financial stress for those who don’t already have a foothold in it (or financial help to get there).

We’re also seeing a worsening of inequality within the younger household demographic. Not only do they have less wealth on average than older generations, but also the most unequal distribution of wealth within their age group.

The bottom 60 per cent of younger households by wealth, for example, have only about $80,000 in wealth each. Meanwhile, the wealthiest 10 per cent have more than $2 million each stashed away on average, meaning they account for more than half of the entire wealth of that age group.

“It is likely that transfer from parents [the bank of mum and dad] contributed significantly to this concentration of the wealth of young households in the hands of the highest 10 per cent,” the authors of the report said.

A lot of the wealth difference comes down to some people owning their own homes while most don’t. Very few of the bottom 60 per cent of younger households own their own home.

As older generations die and pass on their wealth, this gap will grow. From 2003 to 2022, the share of wealth held by the top 10 per cent has grown, while the wealth of those in the bottom 60 per cent fell.

Davidson says the problem areas are obvious: taxation of super, capital gains and private trusts, which tend to be taxed at lower rates or present tax loopholes.

The government’s decision to raise the discounted rate of tax (from 15 per cent to 30 per cent) on earnings from super balances over $3 million is a good start.

But we should also extend the 15 per cent tax on income from superannuation investments so that it applies to those who are retired. Currently, once people are retired, they can withdraw money from their super tax-free.

We also need to fix the way we tax housing to discourage – or at least stop encouraging – much of the speculative investment which tends to inflate home prices. That includes curbing negative gearing and reducing the 50 per cent capital gains tax discount to a rate closer to the rate of inflation.

Allowing – and encouraging – wealthy people to lock away their wealth, especially in things such as existing housing, worsens inequality and pushes home ownership further out of reach for many Australians. But it also reduces the potential of our economy by directing money away from more productive uses, such as investment in education or innovation, and encouraging wealth accumulation over work.

If we want a fairer society – and a stronger economy – we need to make sure wealthy Australians are paying their fair share and that we’re giving everyone a fair go.

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Our future prosperity is bright. We've hidden an ace up our sleeve

As you may have noticed, the nation’s economists are in a gloomy mood and warning of tough times ahead. Our standard of living stopped rising a decade ago and, they tell us, it won’t improve much in coming years unless we really lift our game.

Just this week one leading economist, Chris Richardson, predicted that real household disposable income per person – a common measure of living standards – wouldn’t get back to the temporary peak it reached in 2021 until 2037.

Why are our economists so downbeat? What’s worrying them? Well, unless you’ve been living under a rock, you’ve already heard about it – ad nauseam. The main thing that drives our material standard of living is ever-improving “productivity”.

Since the Industrial Revolution, we’ve used improvements in technology and education to make the economy’s output of goods and services grow at a faster rate that its inputs of raw materials, labour and capital. That is, we’ve made the economic machine a bit more efficient every year.

What’s worrying the bean counters is that this process of steady improvement seems to have stalled lately. There’s been no improvement in our productivity. They expect this lull to be temporary, but they have good reason to fear that the annual rate of improvement will be a lot slower than it used to be.

Whereas Treasury’s forecasts of economic growth used to assume that the productivity of labour would improve at an average rate of 1.5 per cent a year, this year the Reserve Bank has cut its assumption to 0.7 per cent a year.

In almost every sermon they preach about our need to lift our game on productivity, economists never fail to quote the American economist Paul Krugman saying that “productivity isn’t everything, but in the long run it’s almost everything”.

There’s much truth in this. But as John O’Mahony, of Deloitte Access Economics, has been the first of all Australia’s economists to realise in a paper written for the Australian National University, in Australia’s case it’s highly misleading.

Why? Because in 1992 we did something none of the big economies have done. The Keating government set up a national superannuation scheme which compelled almost all employees to contribute a certain percentage of their wage to an appropriate fund. It started out at 3 per cent, but in July reached a huge 12 per cent.

What’s unusual is that all this money doesn’t go to the government, but to non-profit “industry” and for-profit super funds, which invest it mainly in company shares. By now, the amount invested totals $4.2 trillion. O’Mahony estimates that, in about 40 years’ time, superannuation assets will be worth more than $38 trillion. (After allowing for inflation, this would be an increase of more than four times.)

If all that money was invested in listed Australian company shares, our sharemarket – and our economy – would be overwhelmed. So much of it is invested in foreign shares. This means that many dividends from foreign companies flow back to Australia, to be held in workers’ superannuation accounts. And this flow of foreign income will grow and grow in coming decades.

Because we’ve had a lot of foreign investment in Australia – including a lot of our mining companies – we’re used to shelling out a lot of dividend income to foreigners each year. But now we’ve got a lot of dividend income flowing in to help offset all the money flowing out.

Think of it this way. The introduction of compulsory super more than 30 years ago constituted a decision that working Australians would henceforth save more of their income toward their retirement, leaving less for immediate spending on consumer goods.

This meant the economy grew by less than it would have. That’s particularly the case over the past five years as, on July 1 each year, the compulsory contribution rate has been increased by 0.5 percentage points, taking it from 9.5 per cent of wages to 12 per cent.

(Legally, super contributions are made by employers, not employees. But economists have demonstrated that, in practice, employers pass that cost on to their employees in the form of smaller pay rises.)

But that’s the negative side. The positive side is that the extra money being paid into our super accounts hasn’t been sitting in a jam jar, it has been invested mainly in shares, both Australian and foreign. And those shares have been paying dividends. Those dividends coming from overseas constitute a net addition to Australians’ income, whereas the dividends on Australian shares are just a transfer from one part of our economy to another.

You may wonder what great benefit comes from those foreign dividends if they’re sitting in people’s super accounts, waiting for them to retire. But, remember, the scheme has been running for more than 30 years, with some older people retiring each year while their place is taken by younger people joining the workforce.

Remember, too, that every day, old people are dying. Increasingly, they’re dying with super balances unspent and inherited by their spouse and dependents. So, one way or another, the money from foreign dividends is spent.

Every five years Treasury prepares an intergenerational report, assessing the prospects for the economy over the following 40 years. The latest report in 2023 found that, over the 40 years to 2063, real gross national income per person – another measure of living standards - was projected to grow by 50 per cent to $124,000 a year.

But the report took no account of all the foreign income our superannuation savings would be bringing our way. When O’Mahony redid the numbers, he had real income per person 13 per cent higher. And whereas productivity improvement largely accounted for about 72 per cent of the increase since 2023, the projected growth in our foreign income accounted for 28 per cent. Who knew?

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Why we'd be mugs to cut the rate of company tax

Ask any businessperson if we should cut the rate of our company tax and, almost to a pale and stale male, they’ll unhesitatingly tell you we should. Why? Because our rate of 30 per cent is high among the rich countries, and this must surely be discouraging business investment. Sorry, not that simple.

Just how un-simple was something I didn’t realise until the Productivity Commission proposed cutting the company tax rate to 20 per cent in one of the reports it issued in preparation for last month’s economic reform roundtable.

At present, the general rate of company tax is 30 per cent, although smaller companies with annual turnover (total sales) of less than $50 million pay 25 per cent. The commission wants to cut the rate to 20 per cent for all companies with annual turnover of less than $1 billion.

The commission got two different modelling outfits – Chris Murphy, and Professor Janine Dixon’s Centre of Policy Studies (CoPS) at Victoria University – to use their “computable general equilibrium” econometric models of the Australia economy to estimate the likely effects of the company tax cut on the economy.

On the face of it, the two models’ findings were similar, though Murphy gave the change higher marks, so to speak. He found that, by 2050, the tax cut would cause the level of business investment spending to be 1.4 per cent higher than otherwise, with the level of output per worker 0.4 per cent higher, and real gross domestic product 0.4 per cent higher.

In contrast, CoPS found an increase in the level of business investment spending of only 0.6 per cent. It found a similar improvement in the level of output per worker of 0.3 per cent, and a smaller rise in the level of real GDP of 0.2 per cent.

But get this: whereas Murphy had the level of something called “gross national income” increasing by 0.2 per cent by 2050, CoPS had it actually declining by 0.3 per cent. What’s that all about? Good question.

Among economists, it’s a long known, but long forgotten truth that GDP isn’t the best way to measure our economy and its growth. The better way is what used to be called GNP – gross national product – and these days is called GNI, gross national income.

As you know, GDP measures the value of all the goods and services produced in Australia during a period. But this includes goods and services produced by foreign companies, so the profits made by those foreign companies in Australia belong to foreigners, not us.

Australians’ savings have always been insufficient to finance all the investment opportunities in the Wide Brown Land, so since white settlement we’ve gone on inviting foreigners to bring their savings and expertise to Oz and help us develop the place. We’ve ended up with a lot of foreign ownership of our economy.

That’s why GNP/GNI is the better measure of our economy. It measures the value of the goods and services produced by Australian citizens. It’s our bit of our economy. But that’s why GDP is bigger than GNP/GNI – although the two probably grow at much the same rate.

Historically, foreign investment in Australia is the big story. In recent decades, however, we’ve had investment going the other way: Australians investing in overseas businesses. That’s particularly the case since the introduction of compulsory superannuation in 1992. Rather than swamp the local share market, about half our total superannuation savings of $4.1 trillion is invested offshore.

So GNP/GNI is GDP minus income paid to foreigners, but plus foreign income paid to Australians. Combine those last two and you get NFI – net foreign income.

It’s after allowing for net foreign income that Murphy’s estimate of real GDP being 0.4 per cent higher turns into real GNI being only 0.2 per cent higher. But here’s the point: under the CoPS modelling, higher real GDP of 0.2 per cent turns into real GNI being 0.3 per cent lower. This translates as Australians being less prosperous by almost $300 a person.

How does that come about? It’s because Murphy’s model is “comparative static” whereas CoPS’ model is “dynamic”. Murphy compares the state of the economy before the tax change with its expected state after it has returned to equilibrium over the “long run” (about 20 years in this case).

In contrast, the CoPS dynamic model traces the economy’s path year by year between the pre-change equilibrium and its return to a new equilibrium X years later. But why should this approach suggest that the company tax cut would leave Australians worse off rather than better off?

Well, the first thing to remember is that Australia’s rare system of “dividend imputation” (franking credits) makes our story very different to most other countries. Because the Australian shareholders in an Australian company get a tax credit for their share of the company tax their company paid, they don’t have to care what the rate of company tax is.

So it’s really only the foreign shareholders in Australian companies who end up paying company tax. Thus, if we were to cut our company tax rate from 30 per cent to 20 per cent, it’s really only foreign shareholders who’d benefit.

And, as the CoPS people point out, cutting the company tax rate by 10 percentage points would deliver a massive windfall gain to the foreign owners of Australian companies. They were perfectly happy to invest in Australian companies when the tax rate was 30 per cent, but we cut it anyway.

And if foreign investors are paying less tax to our government, that leaves Australians bearing more of its costs. That’s true even if the lower company tax rate were to induce foreigners to invest more in Oz. We’d start with a big minus before we got any pluses.

But if our company tax rate is so high, how come foreigners have always been happy to invest here? Because we’re a highly attractive investment destination for many obvious reasons. Other countries may need to offer a low tax rate to attract the foreign investment they need, but we don’t.

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If you've been treating yourself more, you're not alone. Here's why

By MILLIE MUROI, Economics Writer

If you’ve recently bought a new car or furniture, have a big holiday on the horizon, or are eating out a bit more, welcome to the club. After years of squirrelling money away, households are finally coming out of hibernation.

We know some – especially affluent Australians with heaps already stashed away and no big home loan to worry about – breezed their way through the cost-of-living crisis. Some even spent more or became richer thanks to higher interest rates on their savings.

But for others – including many mortgage holders and lower-income Australians – the years since the COVID-19 pandemic have been all about sacrifice: cutting back spending and trying to keep up with home loan repayments and bills.

That seems to be changing according to the latest national accounts figures from the Australian Bureau of Statistics.

Those numbers show real gross domestic product – a measure of the economy’s production of goods and services (and equally a measure of spending and income) – grew by 0.6 per cent over the three months to the end of June. That took growth over the year to June to 1.8 per cent.

That’s not to say the economy is roaring. Generally, a healthy growth rate for a developed economy such as Australia is 2 per cent to 3 per cent a year. But it’s a sign things are finally looking up for many Australians and that they don’t mind loosening their purse strings a little.

The biggest contributor to economic growth – or weakness – is always households. Spending by households accounts for more than half of Australia’s GDP, so when they’re having a good time, generally speaking, so is the economy.

In the three months to June, household consumption spending grew nearly 1 per cent, contributing 0.4 percentage points, or two-thirds, of the country’s economic growth.

Spending on essentials was a little higher as households coughed up more on medical services thanks to an especially strong flu season and forked out more to keep the lights on as energy bill relief ended in states such as Queensland and Western Australia.

But it’s spending on non-essentials including holidays, concerts and eating out, that generally gives us the best idea of how households are feeling.

This non-essential spending jumped 1.4 per cent in the June quarter. And according to Commonwealth Bank’s head of Australian economics, Belinda Allen, who gets to see overall, anonymised data from the bank’s huge customer base, it’s not just older or richer Australians starting to enjoy themselves a little more. Younger and lower-income households – which scrimped the most over the past few years – are finally regaining their mojo.

The bureau’s head of national accounts, Tom Lay, says end-of-financial-year sales and new product releases helped nudge people to spend more on things including furnishings, cars, and recreation and culture goods: things such as books, music and sporting equipment.

Australians also took advantage of the closeness of Easter to Anzac Day this year to extend their holiday break, meaning they ended up spending more on services such as hotels, cafes and restaurants and artistic, sporting or cultural experiences.

But Allen points out there are also some broader economic drivers of households’ willingness and ability to spend.

While many of us are still facing a cost-of-living crunch (prices, after all, aren’t going backwards for the most part), there has been a slowdown in price rises of most things. The latest inflation figure for consumer prices, for instance, came in at 2.1 per cent in the year to June – well down from the peak of 7.8 per cent in December 2022.

Then, there’s the growth in disposable income (the money households have left to spend or save after tax). Over the past year or so, wages have climbed a bit faster than inflation, meaning many households have a bit more cash to play with.

Add to this, the fact that interest rates have been coming down. This year, the Reserve Bank has cut rates three times, saving many mortgage holders hundreds of dollars a month in repayments.

Finally, Allen says there’s been a notable fading in the “scarring effect”.

Essentially, households have been “scarred” from the pandemic and inflation surge, preferring to save and continuing to be cautious about spending even as their financial situations have improved.

But that’s beginning to change. The household saving ratio – the share of disposable income people choose to save – has dropped to 4.2 per cent in the June quarter. That’s down from 5.2 per cent in the three months to March, and below its pre-pandemic average of about 5 per cent. Households are becoming happier to spend rather than save.

For some time following the pandemic, Australia’s economic growth was being propped up by two things: population growth and government spending. In fact, without these things, Australia would have dipped into a recession last year.

Government spending still grew by 1 per cent in the June quarter, largely because of stronger federal government spending on social benefits including Medicare and the Pharmaceutical Benefits Scheme (again, partly because of the strong flu season). While state and local government spending dropped, mostly because of the winding down of energy bill relief measures, federal government spending was also higher because of spending to run the election in May and a step-up in defence spending.

But combined with less investment spending by the government on things such as building infrastructure, the overall effect of government spending on economic growth was zero.

That’s a good thing according to Treasurer Jim Chalmers, who told journalists this week that the private sector was now taking its “rightful” place as the primary driver of growth. “This is the private sector recovery that we were planning for, preparing for and hoping for,” he said.

Private business investment rose 0.1 per cent but made no significant contribution to overall economic growth, while net international trade (the real value of exports minus imports) helped to expand the economy slightly. Iron ore production ramped back up after suffering some setbacks because of bad weather in the March quarter, while a strong grain harvest added to the country’s exports.

GDP per person ticked up a little to 0.2 per cent in the three months to the end of June (a better result than the falls we’ve been seeing for much of the past two years), meaning our economy isn’t just growing because there are more people.

Reserve Bank governor Michele Bullock, taking questions after a lecture at the University of Western Australia this week, said the bank had expected the increase in household spending but that it was a gradual recovery with people searching for bargains.

“For some time, we have been predicting that the Australian consumer would start to spend a bit more,” she said. “Real disposable incomes have been rising for about a year now, wealth is rising because housing prices are rising, and normally under those circumstances, you would expect to see consumptions starting to rise.”

But Bullock also warned that continued strength in spending could also mean fewer interest rate cuts to come. “It’s possible that if [household spending growth] keeps going, then there may not be many interest rate declines left.”

That might be bitter news for those with big home loans to pay off. And the economy still has to grapple with the stubborn problem of stagnating productivity. But alongside historically low unemployment, and inflation within the bank’s target band, the latest GDP figures are a sign of the end to a long winter for many Australians.

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If Albanese has lost his bottle, he should retire

Sometimes I think that Sussan Ley and the Liberals’ big problem is that Labor has stolen their clothes. What the Liberals stood for in the good old days was minimum change. Only when changes could no longer be avoided were they made. The Libs’ big selling point was: “Vote for us to keep Labor out. Labor’s never happy unless it’s ‘reforming’ something.”

Well, not any more. Under the leadership of Anthony Albanese, Labor has lost its reforming zeal. It knows we have plenty of problems, and would like to do something about them, but not yet.

Albanese always has a reason for caution. Having lost the 2019 election against Scott Morrison that many thought it would win, Labor’s been in living in fear of that three-letter word “tax”.

Along with its policy to help first home buyers by restricting property investors’ use of negative gearing, Labor planned to help pay for its promises by making a small change to the “franking credits” that go to people who own shares.

Its Liberal opponents made this sound like Labor was planning an almighty tax grab, and Labor lost the election. Now that frightening three-letter word never passes its lips.

To ensure he won the 2022 election, Albanese made Labor a “small target”, promising to do a few nice things, but nothing nasty. The plan to fix negative gearing was gone, as was any threat to franking credits.

Once in power, Albanese discovered another reason for not doing anything someone mightn’t like. He’d won with a very narrow majority, so had to focus on consolidating Labor in power. This would set him up to really start fixing things in his second term.

With considerable help from the Liberals’ unpopular Peter Dutton, this strategy worked a treat at this year’s election. Labor won 94 seats in the lower house, the most seats any single party has ever won. And with a buffer of 18 seats, Albanese was now perfectly placed to get on with some controversial measures.

With the Liberals decimated and almost all the teal independents re-elected in the big-city seats they’d taken from the Libs, it was hard to see how Labor could lose the next election in 2028.

But no. Albanese had a new reason for proceeding with caution. With at least three terms almost guaranteed, he wants to steal the Libs’ status as the natural party of government.

If you can argue that the low risk of losing government in 2028 at last empowers Labor to make controversial reforms, you can just as easily argue it allows Labor to get away with doing as little as possible.

Labor much enjoys the big ministerial salaries and being driven around in big white cars. If you can enjoy the perks without doing the heavy lifting, why wouldn’t you? Albanese can’t think of a reason. He may have been a lefty firebrand when he entered parliament almost 30 years ago, but those embers have had a long time to cool.

These days, there’s no great ideological divide between Labor’s Left and Right factions. As one of the Left’s luminaries explained to me, these days they’re just rival management teams.

But the public doesn’t know that, and I have a theory that those from the Left faction who make it to the prime ministership – Albanese, and Julia Gillard before him – go to great lengths to demonstrate that they’re in no way left wing.

So what are the big problems Albanese isn’t game to get on with? Well, a big one is our contribution to global efforts to limit climate change by achieving net zero emissions of greenhouse gases by 2050 – and, since scientists’ modelling of how long we’ve got is proving optimistic, preferably much earlier.

The government keeps assuring us we’re “on track” to transition to renewable energy and achieve our commitment to reducing emissions by 43 per cent by 2030, but scientists aren’t so sure.

In any case, this month the government will need to announce our commitment for 2035, and anything less than a 75 per cent reduction will show a lack of resolve. By the same token, such a commitment won’t have much credibility without Labor having the courage to bring back an improved version of the carbon tax Gillard introduced in 2012 but that great statesman Tony Abbott abolished two years later.

As former competition boss Rod Sims has explained – and we experienced last time – the point of a carbon tax is to make building solar and wind farms more profitable relative to coal and gas, not to make people pay more tax. The proceeds of the tax would be used to compensate all but the high-earning taxpayers.

But Albanese and his troops have wrongly convinced themselves that Gillard’s carbon tax was the main reason the infighting rabble that was the Rudd-Gillard-Rudd government got tossed out in 2013 – which is why, in all the economic reform roundtable’s talk of tax reform, a carbon tax went conspicuously unmentioned.

The other big problem the government isn’t doing enough on is “intergenerational inequity” – the rough deal we’re giving our younger adults. You see this most clearly in the difficulty young people have affording a home of their own.

To be fair, the Albanese government has been working with the states to increase the supply of homes in the parts of our big cities where people most want to live, although we’re yet to see much progress.

But as well as seeking to increase the supply of homes, Albanese should also help by reducing the demand for the kind of places first home owners buy from better-off, negatively geared investors. These days, however, all mention of negative gearing is verboten.

And that’s before you get to the awkward truth that a young to middle-aged worker pays far more income tax on the same income than if it’s earned by a retiree with loads of superannuation or other investment income.

Speaking of retirement, that’s what Albanese should do if he wants to run a government but can’t bring himself to govern. No shame in being past it.

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The one big reform no one discussed at Labor's roundtable

Despite the strong support for tax reform at last month’s economic reform roundtable, perhaps the most important single reform hardly rated a mention: a carbon tax – or, in the economists’ preferred euphemism, “a price on carbon”.

I don’t doubt that virtually every economist attending the meeting would have agreed that a carbon price is needed.

So why was it unmentionable? Because Anthony Albanese and his faint-hearted troops have convinced themselves that the main reason the infighting-riddled Rudd-Gillard-Rudd Labor government was sent packing at the 2013 election was Julia Gillard’s introduction of a carbon price in 2012, which that great statesman Tony Abbott repealed in 2014. Yeah, sure.

Add in Labor’s promise to make a minor change to “franking credits” at the 2019 election, the misrepresentation of which probably does most to explain why it lost, and you see why Labor’s brave warriors have concluded that any mention of tax changes brings instant political death.

But in a speech last week, Rod Sims, chair of Professor Ross Garnaut’s Superpower Institute and a former senior econocrat, decided to take his life in his hands and speak truth to power. He offered five reasons why a carbon price is both “necessary and urgent”.

For a start, our present policies won’t allow us to meet our climate targets without further piecemeal, unpopular and “hideously costly” measures. When Labor regained office in 2022, it cobbled together arrangements intended to ensure we reached our climate targets – a 43 per cent reduction in greenhouse gas emissions by 2030, and net zero emissions by 2050 – despite the absence of the obvious solution: a carbon price.

To largely eliminate our emissions, we need to transition from fossil fuels to renewable energy. Trouble is, though renewable energy is much cheaper than coal and gas, its installation costs are high – much higher than the cost of coal-fired electricity from established power stations, plus a bit of gas.

Albanese and Co introduced a “capacity investment scheme” under which the government largely underwrites the commercial viability of renewable generation and storage projects. The government picks the applications it prefers. But the scheme may involve project delays and higher electricity costs that could become a political problem for Labor.

The Labor government also took over and beefed up the Coalition’s main substitute for a carbon price, the “safeguard mechanism”, which requires various carbon-intensive industries to continuously reduce their emissions from arbitrary baselines.

Trouble is, the mechanism covers only about 30 per cent of emissions. And businesses can avoid reducing their emissions by buying “carbon credits” from other companies that have been able to reduce emissions cheaply by sequestrating carbon in soil, plants or old mines.

This would be fine if it was all rigorously measured and accounted for but, in practice, the system is full of holes, meaning net emissions aren’t really reduced.

There are various other more specific measures to reduce emissions – such as exempting electric vehicles from certain taxes – but the Productivity Commission has found them to be hugely expensive ways to reduce emissions.

All these shortcomings of the substitute arrangements would be avoided if only we had a “price on carbon”. The price – or tax – raises the cost of fossil fuels relative to the cost of renewables, thus improving the incentive to build more solar and wind farms.

So the substitutes achieve the objective much less efficiently than a carbon price would – meaning that replacing them with a tax could be expected to improve the economy’s productivity. (Productivity is the big reason economists like taxes – which are price incentives – rather than government regulation and picking winners.)

And whereas the substitute arrangements add to consumers’ energy costs, they don’t raise any revenue for the government. As with Gillard’s carbon tax, the extra cost of fossil fuels goes to the government, which it can then use to fully compensate all consumers bar the high earners.

Sims reminds us that in the two years before it was abolished, Gillard’s tax did work the way intended. Overall emissions declined by 8 per cent. Use of black coal increased relative to dirtier brown coal; gas power expanded relative to coal, and renewables expanded relative to gas.

Exit polls at the 2013 election found only 3 per cent of Coalition voters thought that scrapping the carbon tax was the most important issue the Coalition was offering. This is hardly surprising since, by then, voters knew they had been compensated with a tax cut and higher benefit payments, while honest Barnaby Joyce’s scare campaign of soaring consumer prices and “$100 lamb roasts” was bulldust.

But Sims isn’t proposing a return to the Gillard carbon tax. He advocates a simpler, more user-friendly scheme, a “carbon solutions levy” as developed by Garnaut and himself in 2024. It would be levied on only 108 sites of coal and gas production, and on petroleum imports, at the rate of the European Union’s carbon price. You see how much simpler it would be.

It would be levied on the emissions from these products, no matter where the emissions were released. So it would apply to the fossil fuels we exported, except if the receiving country had its own carbon price, such as the EU’s “carbon border adjustment mechanism,” which will take effect next year.

This tax on our exports would answer the calls for our government not to license new coal mines and gas fields. If the proposed new projects couldn’t cover the full social cost of the greenhouse gas they’d produce (that is, production cost plus the cost to society of the pollution they cause), they’d simply be unviable and they wouldn’t proceed.

At the time, Garnaut and Sims estimated that if the levy applied only to domestic emissions at the Europeans’ carbon price, it would raise about $20 billion a year, “more than enough to generously compensate households for higher electricity, gas, petrol and diesel prices”. That would leave money for repair of the budget.

Finally, Sims estimates that our present pace of reducing emissions needs to be increased by 25 per cent if we’re to meet our 2030 target. This month, Albanese will announce his target for 2035. Reintroducing a carbon price would also allow, and give credibility to, a much more ambitious target for 2035. And all it would take is a little political courage.

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If you think you had it harder back in the day, think again

By MILLIE MUROI, Economics Writer

Whenever I write about intergenerational fairness, or lack thereof, there are a heartening number of supportive responses. But, without fail, there’s always a handful who (perhaps to try to make me feel better), point out they had it harder.

But these people are missing a few things laid bare in one of Deloitte Access Economics’ latest reports written about – and for a change, almost exclusively by – young people.

It’s not wrong to say previous generations had it hard. And within any generation, there are people who have been flung through the wringer more than their peers because of individual circumstances and plain old luck.

The biggest mistake, according to the report, is assuming today’s young people (Millennials and Gen Z) are behind only because they are young – and that they will eventually catch up.

Deloitte Access Economics associate director Rhiannon Yetsenga, lead author of the report, says sitting back and waiting for the problem to be resolved – or waiting for young people to climb into positions of power – is not an option.

“We can’t afford to wait,” she says. “The future of Australia is being shaped by decisions that are being made today … and we need to make sure it works for the very people who will inherit that future.”

There’s clear evidence from the report that some of the most consequential parts of our lives have changed.

Despite being the most educated generation, young people’s incomes have been growing more slowly than older cohorts and grinding backwards since the pandemic. Despite being the most digitally connected generation, Australians aged 15 to 24 have shifted from being the least lonely to the loneliest age group in just a decade.

It’s easy to blame the latter on young Australians being chronically online: nearly nine in 10 young people aged 18 to 34 are on social media, more than any other age group. And nearly two in five say it’s easier to connect with people online than in person.

But delve into the research and the young people surveyed say social media is useful for maintaining existing connections, such as with friends or family, rather than developing new ones. They also emphasise online connections alone are not enough to form a sense of belonging.

Perhaps it’s not social media usage most responsible for young people’s growing loneliness.

One of the biggest changes across the past few decades has been the monumental increase in the cost of housing: something that has enriched a large share of older Australians at the expense of younger people.

“Australia’s housing crisis is locking out prospective buyers and driving up costs for renters, leaving young people with fewer pathways to secure housing,” Deloitte’s report states.

Not only does the average Australian home now cost 16.5 times the average household income (up from 9.5 times in 1990), but for young Australians aged 21 to 34 living in our capital cities, rent chews up nearly half of their average wage.

That’s far beyond the 30 per cent figure which generally means people are experiencing housing affordability stress.

It’s no wonder only about one-third of 25 to 29-year-olds own a home, down from more than half in 1981: it has become almost impossible to save a deposit without family help. And it’s no wonder their mental health has taken a hit when their financial stability is on the rocks.

Nearly two in three Gen Z Australians report living paycheck to paycheck despite cutting back spending more than any other age group in 2023-24.

With cost of living pressures – and the dream (very literally) of homeownership drifting further away – it’s little surprise that more young people are taking on multiple jobs, hitting a record share of 7.6 per cent in December 2024.

Money might not buy happiness, but it buys stability and the ability to build relationships and a support network.

With most renters (who are mostly under the age of 35) on rolling monthly or one-year contracts, and vacancy rates stuck at historical lows across the country, there’s very little security.

And with property prices and rents constantly surging, and higher-density buildings being knocked back, many young people are being priced out and forced further away from their family and friends. That’s a bad thing for everyone.

As Yetsenga points out, having young people in cities means they’re closer to work and costing the government less by reducing the need to build more expensive infrastructure further out from the city.

The constant uprooting – and simply the threat of it – is costing time, energy and mental bandwidth, and making it difficult for young people to build and maintain relationships.

It’s probably one of the key reasons young people are less likely to be married and more likely to delay having children. Financial stress, insecure housing and being further away from family also aren’t compelling reasons to introduce a child into the world.

Of course, having fewer or no children is not necessarily bad if it’s purely a personal preference.

But it’s an issue if younger generations are being barred from having kids because of external pressures.

A drop-off in the number of children is also consequential for older Australians as they enter aged care and make more hospital visits. Not only does it limit the number of future health and aged care workers, but it also means there will be fewer workers to tax to pay for these essential services.

Yetsenga also points out full-time work weeks were designed when it was common to have someone at home to do most household chores and child-rearing.

She raises questions about whether a childcare system where children need to be picked up at 3pm is fit for purpose, especially at the same time as there is a big push to make office attendance mandatory despite most young people explicitly saying this isn’t what they want and that they require flexibility.

These are all things we need to act on. But chief among them is the housing market.

As the report notes, there is support across the political spectrum aimed at helping first homebuyers, but the “fixation on short-sighted political wins” fails to fix the biggest barriers.

The problem is that most of these barriers are in place to protect the interests of existing property owners at the expense of those who just weren’t born early enough.

Zoning laws, for example, which place restrictions on density in certain areas, are largely put – and kept – in place by homeowners who want to protect the value of their property or gatekeep their suburbs from apartment blocks and construction. Understandable … if we weren’t facing a housing crisis.

Then, there are the even more baffling tax concessions we provide to investors (including those with multiple properties) which incentivise them to treat housing as a wealth-building tool.

The capital gains tax discount – where only 50 per cent of the profit from the sale of a property held for than 12 months is taxed – is far too generous, especially for existing dwellings, and makes it more difficult for first homebuyers to get a foothold in the market by pushing up demand and therefore property prices.

For many young people, the only ticket out of financial insecurity and renting is money gifted to them by family.

At the very least, we need longer rental contracts to give renters the reassurance they can establish their roots in a place without fear they’ll be ripped away within months. It would also save many of them days or weeks every year worrying, searching for a new lease, inspecting and applying for rentals, and moving their belongings.

Young people today are the first generation at risk of being stuck with living standards below that of their parents and grandparents. For those who say they had it harder back in the day, too: we shouldn’t be aspiring for that.

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We have arrested the development of our young

I hope you’re not among those silly people who concluded last week’s economic reform roundtable was just a talkfest that will lead to nothing concrete. Breaking news: we have to get together and talk about things before we agree on what our biggest problems are and what we will do about them.

Lots of bits and pieces came out of the roundtable, but by far the most important thing was universal agreement that something had to be done about “intergenerational inequity” – an economist’s way of saying that our young people have been getting a raw deal.

This came after Danielle Wood, the boss of the Productivity Commission, drew on its research to warn we were in danger of breaking Australia’s generational bargain – that our children will live better lives than their parents, as their parents did of their own parents.

Economists, naturally, see this largely in terms of reforming our system of taxes and benefits. The independent economist Saul Eslake summarises this by saying that our tax system “imposes a disproportionately high burden on younger working Australians, and a correspondingly lower burden on older, asset-rich Australians”.

Much of this disproportionate burden is accounted for by a problem we all know about – young people’s inability to afford a home of their own unless they have considerable help from their parents.

But a report to be released on Wednesday by Deloitte Access Economics reveals there’s much more to it than that. (The report has been prepared by Deloitte’s own young people.)

It says there has been an unprecedented shift in how young people under 35 work, vote and live. They’re navigating a version of adulthood that feels less like a rite of passage and more like a locked door.

The Hungarian sociologist Karl Mannheim argued that the economic and social conditions of our youth leave a lasting imprint on collective values, expectations and behaviour.

“Through this lens,” the report says, “Millennials and Gen Z are not merely younger versions of ourselves. They are products of their own formative experiences. The greatest mistake is to assume today’s young people are simply behind because they are young – and that, with time, they will catch up.”

Today’s young Australians are more educated than any generation before them, the report says, yet they face more insecure work and delayed financial independence. They are the first generation to live entirely online, and yet they report rising loneliness.

“They show up for issues and are determined to find balance, but remain locked out of the systems their parents helped to build.

“When the rules were written before they arrived, and the road ahead offers little promise of change, it is no wonder young people feel sidelined. In fact, 42 per cent of young Australians (18 to 24) feel they are missing out on their youth, and 41 per cent worry they won’t be able to live a happy and healthy life as they grow older,” we’re told.

Deloitte has used the census results for 1991 and 2021 to see how people aged 25 to 39 have changed between the Baby Boomers and the Millennials.

For a start, Millennials are better educated. The proportion of young people with post-school qualifications has gone from just under half to almost 80 per cent. The proportion of women with bachelor degrees has gone from one in eight to one in two.

Next, today’s young people are less likely to be married. The proportion which has not yet married has doubled from 26 per cent to 53 per cent. The median age at which the young marry has risen from 27 to 34. And whereas the proportion of 25- to 39-year-olds living as a couple used to be just over half – now it’s one-fifth.

Thanks to better economic management, the rate of unemployment among older young people has more than halved, falling from 8.4 per cent to 3.5 per cent.

The proportion of people with bachelor degrees whose earnings are in the top 15 per cent has risen from 38 per cent to 65 per cent. This may be because more of the female graduates have jobs and are working full-time. We know that the rate of participation in the labour market for all women has gone from almost two-thirds to more than three-quarters.

Now we get to home ownership. We know Millennials are likely to be better educated, more likely to be working and more likely to be in well-paid jobs but, even so, are less likely to be home owners. Whereas 66 per cent of Boomers aged 25 to 39 were home owners, for Millennials, it’s down to 55 per cent.

And whereas by that age, 19 per cent of Boomers owned their home outright, it had fallen to just 6 per cent for Millennials.

Elsewhere, we’re told that the younger generations are having children later, and more than half say they’re unlikely to have children.

The report argues that today’s young Australians are fundamentally different from previous generations, noting that they’ve grown up amid intensifying globalisation, a climate emergency, the rise of social media and now generative AI. Those young enough to have been at school during the COVID lockdowns had their educations significantly disrupted.

The report tells us how much a rapidly evolving labour market and financial instability are narrowing young people’s opportunities for economic prosperity. The way they see it is that the system has persistently moved the goalposts: you stay longer in education, you take longer to earn good money and longer to afford to buy a home. You marry later and have kids later (and maybe don’t have time to have as many as you’d have liked).

Little wonder the report tells us young Australians feel sidelined and unheard by political decision-makers, with only one in three trusting the federal government to do the right thing.

The way I’d put it is that, by our neglect, we’ve allowed our young people to suffer a bad case of arrested development. But thanks to the roundtable, I think we may be ready to do something to give the young a fairer deal.

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