Saturday, August 8, 2020

People on the dole don't want a job? Don't believe it

When Scott Morrison introduced the "coronavirus supplement" that temporarily added $275 a week to the dole’s $40 a day, he explained this was to help those who’d be losing their jobs "through no fault of their own". But it wasn’t long before he was finding fault.

"We are getting a lot of anecdotal feedback from small businesses, even large businesses, where some of them are finding it hard to get people to come and take the shifts because they’re on these higher levels of payment," Morrison told 2GB radio.

"What we have to be worried about now is that we can’t allow the JobSeeker payment to become an impediment to people going out and doing work."

These views would explain his decision to slash the supplement to $125 a week after September, and continue it only to December. What happens after that is still to be decided. But recipients will be required to prove they’ve looked for at least one job a week and will have their dole suspended if they refuse to take a job offer considered suitable.

Of course, it wouldn’t have escaped Morrison’s notice that this "treat ’em mean to keep 'em keen" approach would also help with his worries about the ballooning budget deficit.

I can’t say I’m surprised to hear small business people saying that, despite all the talk of high unemployment, they can’t get people to take the jobs they need to fill. I've heard that in all the previous recessions I’ve worked through.

And, indeed, the practice of denigrating the jobless goes back at least as far as the Great Depression of the 1930s. Then, there were newspaper reports of huge dole frauds that threatened to cripple the system and of a lazy, chicken-eating family living in luxury on the dole.

There’s just one problem with all this. There’s no hard evidence to support these anecdotes, and growing evidence that paying decent rates of unemployment benefit doesn’t discourage people from taking jobs.

These anecdotes don’t fit with a survey of employers conducted by the federal Department of Employment in June, which found just 6 per cent of employers said they were having difficulty recruiting due to a lack of applicants.

The trouble with anecdotes is that they’re anecdotal. The people telling you the stories never give particulars of why they had no takers. Were the vacancies well advertised? Were they paying below the legal award wage or wanting to pay in cash under the table? Were they wanting people to work overtime or at weekends without getting penalty rates? Was the job dangerous or especially unattractive – split shifts, for example.

In recent years, many casual jobs paying less than the law requires have been accepted by overseas students and others on temporary visas. Since the coronavirus hit, many of these people, being denied unemployment benefits or the JobKeeper wage subsidy, have been told to go back home, and have done so. Is that the problem?

In my experience, small business people can see their own perspective very clearly, but other people’s not so much. Many people who seek part-time work do so because they have other commitments that the work must be fitted around – full-time studies, for example, or young children. Maybe that extra shift Morrison refers to would have required people to pay more for childcare.

Then there’s the special circumstances of the virus. It’s likely many single parents have given up casual or part-time work to stay home with their kids when schools are closed. Some older people would have stopped working for fear of catching the disease.

I’ve met many business people (big and small, so to speak) who fall for the economists’ occupational hazard of assuming that, because money is a powerful motivator when it comes to work, money is the only motivation.

They can’t imagine that anyone would want to work rather than sit around at home because they like working, because they like being busy, like seeing their workmates, feel that healthy people should work, or even just to avoid the stigma many unkind people attach to being unemployed.

Many people have the attitude that anyone who really wants a job can find one. But while ever the number of unemployed exceeds the number of vacant jobs, this is a “fallacy of composition” – what may be true for the individual isn’t true for everyone.

Between February and May, the number of people on the JobSeeker payment (formerly Newstart) and the youth allowance rose by more than 90 per cent to 1.8 million whereas, according to the Australian Bureau of Statistics’ quarterly survey, the number of vacant jobs fell by 43 per cent to 129,000.

So there are about 14 jobseekers for every vacancy. Which means that, no matter how punishingly low you set the unemployment benefit – say, $40 a day – you can’t incentivise people to take jobs that don’t exist.

Even when the coronavirus supplement had almost doubled the dole to $550 a week, that’s just 73 per cent of the national minimum full-time wage of $754 a week. This percentage is one measure of what economists call the “wage replacement ratio”.

It’s also the most “conservative” measure - that is, likely to overstate the problem – since most full-timers would earn more than the minimum wage. In any case, the planned $150 cut in the supplement to just $125 a week will reduce the replacement ratio to just 53 per cent.

Not much of a disincentive to take a job there, I’d have thought. But this great fear of temporarily increased unemployment benefits being a great disincentive to work is a big issue in the United States and an argument Republicans have used to refuse to renew the supplement.

But as Catherine Rampell has written in the Washington Post, no fewer than five different academic studies have concluded the same thing: the Americans’ supplement does not appear to have adversely affected jobs growth.
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Wednesday, August 5, 2020

Virus reminder: governments need to be better, not smaller

One good thing the coronavirus has done is slow the pace of our lives, leaving us more time to think about them. And since the main device being used to stop the spread of the virus has been to reduce physical contact between people, it hasn’t been hard to see that what matters most to us is face-to-face contact with family and friends.

People of middle age fret about not being able to visit elderly parents. The great Dr Brendan Murphy, flat out advising the Prime Minister, really misses being able to hug his granddaughters. (Grandsons and granddaughter, in my case.) Teenagers take their family for granted, but miss their friends. Younger kids realise they actually like going to school and mixing with others.

The virus has also thrown into relief our rights as individuals versus our obligations to the group. The prevailing political and economic ideology highlights the individual and plays down the group, but in emergencies like this even our squabbling federal and state politicians see that the only way of coping is to co-operate rather than compete.

Looking at the Americans and the terrible disaster they’re making of it – including people refusing to wear masks because it’s a violation of their personal freedom – it’s not hard to see that individualism can go too far, and playing your part as a loyal member of the group has its virtues.

The virus reminds us that many of the problems we face can’t be solved by individuals acting alone, but by all of us acting together. For this we need leadership; we need the government to govern. To tell us what needs to happen, to issue instructions, provide support for those who need it, and then have all of us falling into line and pulling our weight.

That’s easy to see – and accept – in a crisis, but harder when we’re muddling along as normal. Fact is, however, our world abounds with problems that can’t be solved by individuals and businesses acting on their own initiative.

For these we do need somebody – or some body – with the authority to act on our behalf, calling the shots, fixing things, spending money and requiring us to cough up that money according to our ability to pay.

And yet the rise of individualism has been accompanied by the denigration of the role of government. It was the now-canonised Ronald Reagan who famously said that the nine most terrifying words in the English language are "I’m from the government and I’m here to help".

Obviously, governments can be far from perfect. Government agencies can be unhelpful, they can push us around for no good reason, be inefficient and waste our money. And yet the prevailing ideology’s response – influencing the behaviour of both sides of politics – hasn’t been to improve the functioning of government, but to chop it back as much as possible.

Any government business that can be sold, should be. Industries should be deregulated so private enterprise is given maximum freedom to be enterprising. There are services that governments need to pay for from the public purse, but their provision should be contracted out to private firms.

The trouble is, the advocates of Smaller Government have never persuaded the public of the wisdom of this approach, nor received a mandate. When governments try to cut back government spending in big licks – as Tony Abbott, despite promises to the contrary, tried to do in his first budget – they get repudiated.

So they end up forever trying to keep the lid on government spending – quietly cutting money going to politically unpopular causes (the unemployed, public servants), and ignoring all the people warning them to start preparing for possible problems in this field or that (a bad bushfire season, for instance).

They justify all this short-sighted penny pinching by saying no one wants to pay more taxes. Which is the message we so often send them, partly because we’ve grown distrustful that our money will be spent wisely.

See where this is leading? All the denigration and distrust of government does much to explain why we haven’t responded to the pandemic as well as we should have. National planning for a pandemic was discontinued after 2008 and it’s likely that the recommended national stockpile of personal protective equipment was a victim of successive "efficiency dividend" cut backs.

The ironically named efficiency-dividend cuts to the public service may help explain the inadequacy of Victoria’s contact tracing arrangements. There’s an inquiry into the failures of Victoria’s quarantine of returning travellers, contracted out to private firms.

Deregulation of wage-fixing has encouraged the growth in casual workers, whose lack of paid sick leave tempts them to go to work while at risk of having contracted the virus. Governments are scrambling to fill this dangerous gap.

Finally, the decades of wilful neglect and misregulation of aged care facilities, “left out of sight and out of mind” and “fragmented, unsupported and underfunded” – to quote the latest of many inquiries. All to keep taxes low.
Read more >>

Monday, August 3, 2020

Weak inflation tells us: it's the demand side, stupid

Despite the remarkable 1.9 per cent fall in the consumer price index in the June quarter, we face no imminent threat of deflation. But it’s not as improbable a fate as it used to be.

Apart from in headlines, one negative quarter does not deflation make. Deflation occurs when price falls are modest, widespread and continuous, the product of chronically weak consumer demand. Businesses cut their prices as the only way to get people to buy what they’ve produced. Their goal is not to make a profit, but to reduce their losses.

Paradoxically, deflation – which was dogging Japan not so many years ago – is to be feared. Why buy now if prices are falling? Why not wait until they’re even lower? But the longer consumers wait, the more prices fall. And the faster they fall, the more businesses cut production and lay off workers. The economy implodes.

By contrast, our fall was produced by cuts in two key government-controlled prices – for childcare and pre-schools – plus petrol prices. We already know these falls will largely be reversed in the present quarter.

Even so, all the other prices in the CPI basket of goods and services rose during the quarter by just 0.1 per cent. People are reluctant to buy during recessions, so businesses don’t raise their prices for fear of selling even less. It’s a safe bet inflation will stay negligible for as long as the recession lasts and for as long as it takes the economy to recover.

Trouble is, we had unduly weak price growth long before the coronasession. Our rate of inflation’s been below the bottom of the 2 to 3 per cent target range for almost six years. The Reserve Bank has been struggling to get it up into the target, "Goldilocks" range without success.

Point is, when you have a problem with high inflation, you have a problem with the supply side of the economy. Supply isn’t keeping up with demand, so something needs to be done to get the economy’s production growing faster and more efficiently.

Conversely, when inflation isn’t a problem but high unemployment is, you have a problem with demand side of the economy. Consumers aren’t spending enough and businesses aren’t investing enough.

But too-low inflation isn’t the only indicator that demand and supply are out of whack. Another sign is record low interest rates. They’re low not just because inflation is so low, but also because “real” interest rates – the lenders’ above-inflation reward for letting other people use their money – have also fallen.

Why? It can only be because the amount of money savers have available to lend (the “supply of funds”) exceeds the amount home-buyers, businesses and governments want to borrow to cover their investment spending (the “demand for funds”). That real interest rates have been falling for years is another sign that our problem is chronic deficient demand, not inadequate supply.

One consequence of this is that the authorities’ ability to encourage borrowing and spending by cutting interest rates has been exhausted. So “monetary policy” has done its dash, leaving “fiscal policy” – the budget – as the only instrument left for the government to use to support the economy during the recession and then to stimulate growth.

If it wants more spending in the economy, the government must do it itself.

There’s just one difficulty. During the period in the 1970s and ‘80s when it was clear the developed economies had a major problem with inflation – meaning the supply side was chronically unable to keep up – the conventional wisdom emerged that the short-term management of the economy should be left to monetary policy, with fiscal policy reserved to help with other, medium-term issues.

This approach fitted neatly with the conservative side of politics’ preference for Smaller Government. Our Liberals have come to view macro-economic management in largely party-political terms: we use monetary policy; Labor uses fiscal policy. We follow neo-classical economics; Labor follows Keynesian economics. We cut government spending and taxation; Labor loves to spend and tax. We worry about deficient supply; Labor worries about deficient demand.

This political ideology approach to macro management can’t cope with the developed economies’ tendency to switch from long periods when supply and inflation are the big problem to long periods when demand and unemployment are the big problem.

You can see this in the Morrison government’s obvious reluctance to spend enough to limit the economy’s contraction to two successive quarters, despite our continuing struggle to contain the virus. You see it in Morrison’s desire to move on to “reforms” aimed at improving the supply side.

Both political sides see that wage growth is too weak at least partly because the productivity of labour is improving only slowly. But the Liberals’ ideological approach to macro tells them the answer to low productivity is more supply-side reform, whereas a pragmatic, more contemporary analysis says it seems obvious that if consumer demand is weak, business investment will be weak and if business investment in the latest technology is weak it’s no surprise that productivity improvement is slow. It’s the demand side, stupid.
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Saturday, August 1, 2020

Morrison’s not doing nearly enough to secure our future

It was obvious this time last week, but even more so a week later: Scott Morrison and Treasurer Josh Frydenberg are taking both the continuing threat from the coronavirus and the need to restore the economy far too cheaply. Figuratively and literally.

One thing another week of struggle by Victoria and NSW to contain the virus’s second wave has shown more clearly – plus the realisation of how vulnerable the neglect and misregulation of our aged care sector have left us – is the unreality of the government’s expectations about the effects of the pandemic.

Last week’s economic and budget update assumed Victoria would be back on track in six weeks and NSW’s struggles were too minor to matter. And also that we’ll start opening to international travel in January.

A more realistic assumption would be that the larger, virus-prone half of the economy (NSW and Victoria) will need to stay sealed off from the healthier, smaller half (the other states and the Northern Territory) indefinitely. Half a healthy economy is far from ideal, but it beats none.

Surely we should have realised by now that the pandemic will be a long-haul flight. Speaking of which, our barriers against the rest of the world are likely to stay up long after the 12th day of Christmas.

Economically, we must make the best of it we can – which won’t be anything like as good as we’d like. Forcing the pace on lifting the lockdown and removing the interstate barriers could easily end up setting us back rather than moving us forward.

What economists seem yet to understand is that, psychologically, what we have to do to keep the virus controlled is the opposite to what you’d do to hasten an economic recovery. To ensure people keep mask-wearing, hand-washing, sanitising, social-distancing and filling out a form every time they walk into a cafe for month after month, you keep them in a state of fear, afraid the virus may bite them at any moment.

How will this give them the confidence to get on with spending and investing? It won’t. Quite the opposite. But it’s the first indication Morrison and Frydenberg will need to spend more for longer.

The second thing that’s more obvious now than it was a week ago is that the setback in Victoria and NSW has put a question mark over the signs of an initial bounce-back in the economy as the lockdown has been lifted. The new payroll-based figures for the week to July 11 show jobs falling in all states, not just Victoria and NSW.

All this casts further doubt on the wisdom of the changes to the JobKeeper and JobSeeker programs announced last week. The initial reaction of relief that the government had not gone through with its original plan to end them abruptly in September has given way to the realisation that this threat of dropping the economy off a “fiscal cliff” has been delayed rather than averted.

The new boss of independent think tank the Grattan Institute, Danielle Wood, has estimated that the changes to the two job schemes will reduce the government’s support for the economy by close to $10 billion in the December quarter and thus “leave a substantial hole in the economy”.

In an earlier major report, Grattan argued that the government needed to spend a further $70 billion to $90 billion to secure a recovery. The measures announced last week amount to only about an additional $22 billion.

According to calculations by the ANZ bank’s economics team, the withdrawal of budgetary support amounts to the equivalent of about 10 per cent of quarterly gross domestic product during the December quarter.

In consequence, although the bank agrees with Treasury that real GDP will grow in the present September quarter, it sees the economy returning to contraction in the December quarter. What would that do for business and consumer confidence?

In its earlier report, Grattan said the government should aim to get the unemployment rate back down to 5 per cent or below by mid-2022. Why the hurry? To “reduce the long-term economic pain and avoid scarring people’s lives”.

Particularly young people’s lives – as this week’s report from the Productivity Commission has reminded us.

But the economic update last week forecast the unemployment rate would peak at 9.25 per cent in the December quarter and still be sitting at 8.75 per cent in the middle of next year.

That’s simply not good enough. It puts the interests of the budget deficit ahead of the interests of tens of thousands of Australians thrown out of work through “no fault of their own”, to quote a Mr S. Morrison.

Grattan’s Wood stresses that she has no problem with making the JobKeeper wage subsidy scheme better targeted. But that’s not all the government did. It cut back the size of payments and extended the scheme only for another six months.

After the cutback in income support for the jobless and potentially jobless was announced two days before the presentation of the budget update, she hoped the update would include announcements about the new spending programs that would fill the “substantial hole” the cutback left.

It didn’t. Not a sausage.

“The missing piece of the puzzle,” she now says, “remains a plan to stimulate the economy and jobs growth as the income supports are phased out and social distancing restrictions are eased in many parts of the country.”

So what should the government be spending on? She suggests measures that would both create jobs and meet social needs. “Social housing, mental health services, and tutoring to help disadvantaged students catch up on learning lost during the pandemic would deliver on this double dividend.

“Boosting the childcare subsidy to support family incomes and workforce participation should also be in the mix,” she says.

To that you could add fixing aged care, spending more on research and development and universities, not to mention renewable energy.

There’s no shortage of good things worth spending on.
Read more >>

Wednesday, July 29, 2020

Thatcherism: our conservatives prefer punishment to 'reform'

If your citizen-strength bulldust detector isn’t pinging like blazes, you need a new one. And if Scott Morrison and Josh Frydenberg have a fraction of the courage of Margaret Thatcher and Ronald Reagan, I’ll eat the hat I’m not yet bald enough to need.

Speaking from experience, Frydenberg is like the fat man whose eyes are bigger than his belly and orders more than he can eat. He wanted to give his hardline Liberal backbenchers a thrill by invoking the holy names, but he and his boss don’t have the appetite for tough “reforms”.

The truth is that only conservatives of a certain age (and failing memories) hanker after the glory days of Thatcher and Reagan. No one else wants to return to the halcyon era of privatisation and deregulation because by now most people realise how lacking in halcyonicity those things are.

In any case, all the obvious reforms have already been made. When you’ve privatised Telstra, Qantas, the Commonwealth Bank, the Commonwealth Serum Laboratories and much else, what’s left? Selling off Australia Post?

The further you go down that road, the more dubious and distasteful your sell-offs become. The more recent privatisation of Medibank has effectively opened private health insurance provision to profit-seeking companies, adding a further problem to all that sector’s other life-threatening ailments.

The states’ privatisation of the electricity industry has turned five state monopolies into three big money-hungry oligopolists and raised electricity prices far higher than a carbon tax ever could.

The admission of for-profit businesses to childcare and aged care has hardly been a roaring success (on the latter, just ask Victorians). Bringing private companies into vocational training has turned technical education into a disaster area that’s still to be cleaned up.

The public is strongly opposed to privatisation. When the Coalition was considering privatising Medicare’s back-office processing, Labor portrayed this as a plan to privatise Medicare proper which, apparently, cost Malcolm Turnbull a lot of votes in the 2016 election.

Speaking of which, remember that Thatcher’s initial reforms were so unpopular she needed a war with Argentina to get re-elected. John Howard’s goods and services tax was so unpopular he went perilously close to losing the 1998 election.

I was puzzled to see Frydenberg associating Thatcher and Reagan with removing red tape. They aren’t remembered for anything so minor. Then I realised removing red tape was his euphemism for “deregulation”. The word now has such negative connotations he didn’t even want to say it – much less do it.

No, I don’t think we have anything to fear from Morrison’s inner Maggie.

For another thing, she wanted to close Britain’s inefficient coal mines, not defy economic reality and keep them going at all cost. And she, being a scientist, never had any doubt about the reality of climate change and the need to stop it.

The historian Manning Clark argued that, thanks to the circumstances of white settlement, Australia’s leaders could be divided into two groups: the “enlargers” and the “punishers and straighteners”. The enlargers wanted to get on with exploiting this land’s huge opportunities, whereas the punishers and straighteners, successors to the governors and prison guards, just wanted to go on running the place and keeping the lower orders in line.

If today’s Liberals were enlargers, they’d be resisting the temptation to help our coal and gas industries postpone their inevitable demise, and embracing this great opportunity to transform Australia into a global superpower in the production and export of renewable energy.

The Libs’ continuing role as punishers and straighteners is seen in their penchant for playing friends and enemies. Honourable friends and disreputable enemies. Honourable friends get rewarded with big tax cuts, which probably need to be brought forward – in the national interest, of course.

Although the Libs have lacked the mandate to cut government spending generally, they’ve selected various enemies whose lack of public sympathy means their money can be cut with impunity. Amid the massive government spending to counteract the lockdown, they’ve still singled out the universities for exclusion from the JobKeeper wage subsidy scheme or any other help of consequence.

But the people the Libs have most wanted to punish are the unemployed. When the lockdown caused unemployment to more than double, they had no choice but to increase the dole. But they kept their measures temporary, and introduced a two-class system.

Those travelling second class – who’ve lost any link to an employer – were given the JobSeeker unemployment benefit of $558 a week, about a quarter less than those in first class on JobKeeper.

We learnt last week that, after September, this will drop to $408, about a third less than the reduced JobKeeper payment. Means-testing will be resumed, as will penalties for failing to search for jobs. JobKeeper has been extended for six months, but the JobSeeker supplement only for three, with no guarantee it then won’t revert to $40 a day.

Why so tough? Because the unemployed aren’t like you and me. They’re shirkers. If you want them to work, you have to threaten punishment.
Read more >>

Monday, July 27, 2020

Why we don't need to panic over big budget deficits

Despite the great majority of economists – including Reserve Bank governor Dr Philip Lowe – telling Scott Morrison and Treasurer Josh Frydenberg not to worry too much about a record blowout in the budget deficit at a time of a once-in-a-100-year pandemic, it’s clear many people – including many members of the Parliamentary Liberal Party – are very worried.

So much so, they think it’s a more pressing problem than sky-high unemployment. In consequence, the government’s nerve has cracked. The unspoken message from last week’s policy announcements and budget update was: we’re prepared to spend a further $22 billion to turn the feared "fiscal cliff" in September into a less precipitous fall, but after that all you’ll get to help the economy is the airy objectives and cold comfort of "reform".

When the Economic Society of Australia polled 50 leading economists recently, 88 per cent of them agreed that governments should provide ongoing budgetary support to boost demand during the economic crisis and recovery, "even if it means a substantial increase in public debt".

In a speech last week, Lowe said the budget blowout might seem quite a change to people used to low budget deficits and low levels of public debt. "But this is a change that is entirely manageable and affordable and it’s the right thing to do in the national interest," he said.

So why don’t most economists share the worries of so many conservative politicians, headline writers and ordinary citizens? Five reasons.

The first is, these are extraordinary times. I’m not sure Frydenberg is right in claiming the pandemic is "without doubt, the biggest shock this country has ever faced," but it’s certainly one of them. And it’s certainly the most economically devastating pandemic since the Spanish flu of 1919.

As we can see even more clearly in countries that have been less than successful than we have in containing the virus, between the direct damage caused by the lockdown and the psychological damage of great fear and uncertainty about what the future holds, the economy has been flattened.

The pandemic will be working to keep the economy down until an effective vaccine is widely available worldwide, which may be several years way. Just as World War I wasn’t all over by Christmas, nor will this be.

It’s thus not surprising that such extraordinary times should be leading to previously unknown levels of government spending, budget deficits and public debt. Except, of course, that nothing we’re likely to do comes anywhere near where we were by the end of World War II.

Second, as AMP Capital’s Dr Shane Oliver has said, "it makes sense for the public sector to borrow from households and businesses at a time when they have cut their spending, and to give the borrowed funds to help those businesses and individuals that need help".

People ask me where will all the money the government’s spending come from? Mainly from other Australians, who have money they’ve saved and want to lend. Others ask, who buys all those government bonds? There’s no shortage of financial institutions keen to buy, starting with your superannuation fund and other fund managers.

So much so that recent offerings have been way oversubscribed, allowing the government to borrow for five years at a yield (interest rate) of just 0.4 per cent, and for 10 years at just 0.9 per cent. With the inflation rate at 1.7 per cent, this means it’s costing us nothing to borrow.

Third, the federal government has run budget deficits in more than 80 per cent of the years since federation. If deficit and debt is such a terrible thing, how come we’re not in debtors’ prison already?

Fourth, just because our latest levels of debt and deficit are high by our standards, doesn’t mean they are by anyone else’s. Relative to the size of our economy, Australia’s net public debt is much smaller than the Eurozone’s, a hell of a lot smaller than the United States’ and almost invisible compared to Japan’s.

That’s why the International Monetary Fund – the outfit responsible for bailing out countries that get too deeply into debt – keeps assuring us we have plenty of "fiscal space". Translation: Why do you Aussies fret so much about so little debt?

Finally, it’s fine to fret about debt, but what’s the alternative? The alternative to using government spending to support the economy until the crisis finally passes is to let it continue shrinking, with more and more people being thrown out of work and businesses failing.

But this wouldn’t get the budget back to balance, it would cut tax collections even further and increase government spending on unemployment benefits, thus worsening the deficit and adding further to the debt. Why would that be a good deal?
Read more >>

Saturday, July 25, 2020

Frydenberg decides to favour limiting debt and deficit

Well, that’s a relief. The economy faced falling off a “fiscal cliff” if Scott Morrison had gone ahead with his plan to end the expensive JobKeeper and JobSeeker schemes in September, but he decided to keep them going at lower rates for another quarter or two. So, another expansionary (mini-) budget.

Is that what you think? It’s certainly what Treasurer Josh Frydenberg wants you to think. He’d like to have his cake and eat it: be seen to be continuing to stimulate (he’d prefer the term “support”) the recessed economy, while actually cutting back that support as he succumbs to his party’s ideology of putting fixing the budget ahead of fixing the continuing rise in unemployment.

Judged strictly, however, this week’s measures and mini-budget aren’t expansionary, they’re contractionary. While it’s true Morrison will continue the JobKeeper wage subsidy scheme for another six months from September, and continue the increase in the amount of the JobSeeker unemployment benefit for another three months, both will involve greatly reduced support.

Between September and February, the JobKeeper payment to workers will be cut from $1500 a fortnight to $1000 a fortnight for those who work more than 20 hours a week, and to $650 a fortnight for those working less than 20 hours a week. Either way, the whole scheme will be wound up after another six months.

After September, the JobSeeker supplement to the dole will be cut from $550 a fortnight to $250 a fortnight, and wound up after December.

Over the six months to September, JobKeeper is expected to cost something less than $70 billion, whereas the following six months will cost $16 billion. Slashing the JobKeeper supplement will reduce the additional cost to less than $4 billion.

And if a sharp recovery in private sector spending doesn’t occur in the next six months – it would be another of Morrison’s miracles if it did – then the reduction in fiscal (budgetary) support will leave the economy growing more slowly than it would have.

The point is, according to the strict Keynesian way of judging it, for a budget to be “expansionary”, the extra stimulus it provides has to be greater than the stimulus it previously provided. If you cut back the amount of stimulus being provided, that counts as “contractionary”.

Now, you can argue that, in its original form, JobKeeper was too generous, giving those few casual workers it helped more money per fortnight than they’d been earning.

There’s no denying that the scheme, having been pulled together in a great hurry, had its flaws. But to say it needed to be made fairer or more efficient, doesn’t change the fact that, if you fix those flaws in a way that hugely reduces the amount of money the government is pumping into the economy to limit its contraction, your policy change is contractionary.

From the perspective of keeping the government spending big while households and firms have good reasons to spend as little as possible, if you decide Ms X is being paid too much, you need to give the saving to someone else.

In other words, if you think like an accountant rather than an economist, you get the wrong answer. That’s the trouble with Liberal Party ideology: it’s the thinking of an accountant (“Oh no, that woman’s getting more than she should.” “Oh no, look at all that deficit and debt mounting up.”) rather than the thinking of an economist (“If the government isn’t spending at a time like this, who will be?”).

Putting it another way, in the Liberals’ drift to the Right, their way of thinking about how the economy works has reverted to being “pre-Keynesian” – to thinking about the economy the way their grandfathers did in the Great Depression when economic orthodoxy’s answer to the problem was to cut wages and balance the budget.

John Maynard Keynes convinced the economics profession that such thinking was exactly the wrong way to fix a recession or depression. That’s why few economists deny that he was the greatest economist of the 20th century – and why, at times like this, the thinking of almost every economist is heavily influenced by “the Keynesian revolution”.

When it suits them, however, the Libs are not averse to using a very Keynesian concept: that the budget has “automatic stabilisers” built into it. This week Frydenberg has been anxious to point out (mainly, I suspect, to Liberal voters) that the huge blowout in the budget deficit isn’t explained solely by his stimulus spending.

No, the deficit is up also because tax collections have collapsed. Many companies have had their profits greatly reduced or even turned to losses, meaning they’ll be paying much less company tax. More significantly, many people have had their incomes reduced, meaning they’ll be paying much less income tax.

As well, with many more people eligible for unemployment benefits, government spend on these payments has jumped (and would have even without the temporary supplement).

This week’s budget update shows that, over last financial year and the present one, Treasury expects the budget balance to worsen by $281 billion. The government’s discretionary policy measures explain just $177 billion of this, leaving the remaining 37 per cent - $104 billion – explained by the budget’s automatic response to the downturn in the economy.

As the budget papers explain, economists call this the work of the budget’s inbuilt automatic stabilisers, which reduce tax collections and increase government spending automatically when the economy turns down. (And do the opposite when the economy’s booming.)

The automatic stabilisers have thus helped to stabilise demand – stop it falling as much as it would have – without the government doing anything. Any explicit decisions the government makes to increase its spending or cut taxes thus add to the stabilisation already provided automatically.

And the budget papers add an important point: our progressive income tax system means that people’s after-tax income falls by less than their pre-tax income does – another aspect of the budget’s automatic role in limiting the fall in demand.
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Thursday, July 23, 2020

Complacent government cutting back support far too early

Sorry, but this is the economic statement of a government that’s complacent about controlling the coronavirus and about getting a million unemployed people back to work. It sees its job as largely done. Now it’s time to quickly wind back its spending on supporting the economy and call for the bill.

You can tell Prime Minister Scott Morrison and Treasurer Josh Frydenberg decided this before the extent of the setbacks in Victoria and NSW became fully apparent. They have assumed that after the six-week lockdown in Melbourne, everything will be fine again.

That’s quite an assumption, especially because those two states account for more than half the national economy.

A less complacent assumption would have been that, in the many months likely to pass before a vaccine is widely available, several further major setbacks could occur and delay the return to confidence by consumers and businesses that normal economic times had resumed and it was time to get on with spending and investing.

If so, the government might have a lot more spending to do to keep the economy above water until the pandemic’s “once-in-a-century shock” to the economy has passed.

Were you shocked by the news of the highest budget deficits since World War II, leading to net public debt already up to $488 billion and expected to hit $677 billion by next June?

Such shock seems to have been the main goal of Thursday’s budget update. The government’s spin doctors announced the fate of both the JobKeeper wage subsidy scheme and the temporary doubling of the JobSeeker unemployment benefit two days earlier so as to now heighten public concern about all that money being spent, and get us to accept the government’s decision that spending should be wound back pronto.

And that’s what Morrison announced on Tuesday – though you could be forgiven for not noticing it through all the spin. The government had gone for weeks threatening to end both schemes in September.

So when Morrison announced that they would be continued for another six months, in modified form, there was a sigh of relief. Few people noticed that the threatened “fiscal cliff” would now be just a precipitous incline.

It’s estimated that two-thirds of companies – and their employees – will be off JobKeeper by early next year. Which will be fine provided the economy bounces back as strongly as the government seems to believe it will.

But Treasury’s forecast that the economy will grow by 2.5 per cent in 2021 seems optimistic to me – and in any case, wouldn’t be sufficient to do much to turn around the 870,000 jobs lost between March and May this year and the million workers who saw their hours cut.

What seems clear is that the government is anxious to rein in the growth in its spending so as to limit the growth in its debt. What’s much harder is to find economists who agree that, with the economy’s prospects still so worrying, now is the time to be cautious and pull back.

A poll of 50 leading economists, conducted by the Economic Society of Australia, found that 44 of them agreed the government should use its budget to boost demand during the economic crisis and recovery, “even if it means a substantial increase in public debt”.

And if Reserve Bank Governor Philip Lowe shares the government’s worries about debt and deficit, he’s got a strange way of showing it.

Only on Tuesday he said that “debt across all levels of government in Australia, relative to the size of the economy, is much lower than in many other countries and it is likely to remain so. The Australian government can borrow at the lowest interest rates since Federation.”

So it is “well placed to smooth out the shock to private incomes and support the economy through the pandemic”.

It all translates to economists telling the government it’s the “eye-watering” levels of unemployment it should be most worried about.
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Wednesday, July 22, 2020

How Morrison could reward mothers hit hard by the recession

This recession is different in many ways. One is that it has hit female workers harder than male workers. So a good test of the adequacy of Scott Morrison and Josh Frydenberg’s mini-budget on Thursday will be how much it focuses on the needs of women.

Past recessions have hit men a lot harder than women because they’ve been concentrated in male-dominated industries such as manufacturing and construction. In this coronacession, manufacturing and construction have largely been able to continue working while the lockdown has closed female-dominated service industries such as accommodation and food services, retail, arts and recreation.

Recessions always hit part-time and casual workers harder, and these categories too include more women than men. Similarly, recessions always hit the lower-paid harder, and women are generally paid less than men. The imbalance did reduce a lot in June, however, as some service industries have been able to resume trading.

There’s evidence that a higher proportion of employed women than men have been able to work from home, making it even more likely that, when schools have been closed, women have done more of the home schooling. It’s also likely that some women have chosen to work fewer hours so as to mind kids at home.

But the case for the needs of women being front-of-mind in the government’s budgetary response to the recession rests on more than gender fairness. In recessions, governments use their budgets not just to help those who lose their jobs and to bolster the economy at a time when even those who’ve kept their jobs are limiting their spending, but also to give the economy a positive boost. To get things moving again.

Morrison has already started talking about the need for reforms to the structure of the economy to encourage faster growth in the years ahead. (The unmentionable truth is that, in the months before the arrival of the virus, the economy had lost momentum and was growing only slowly. Ending the recession to return to that status quo is not an exciting prospect.)


If Morrison decides to bring forward either or both of the second and third stages of the tax cuts he promised in last year’s budget (presently legislated to take effect in July 2022 and July 2024), it’s a safe bet he’ll justify that not just as giving the economy an immediate boost but also improving incentives for people to work and invest in coming years.

It’s a nice idea. But it’s a nicer idea from the perspective of a well-paid male. From the perspective of less well-paid females, not so much. When the cuts are fully implemented, the income tax I and others on the top tax rate pay will have been cut by 6 cents in every dollar of earnings. Will this motivate me and other high income-earners to work a lot harder than we already do? Oh gosh yes. Please believe that.

By contrast, the total saving for most women working part-time or in typical jobs done by females will be no more than about 1 cent in the dollar. That will motivate no one.

When well-paid men think about reform, their thoughts go immediately to the enticing idea of paying less income tax. They see the world from their point of view and are quick to tell you that any women earning as much as they do will get the same tax cuts they get. Sorry, gender doesn’t apply to the tax scales.

Except that it does when you add in our means-tested social benefits system. As female tax economists have been trying to tell male econocrats and politicians for ages, the one really significant disincentive to working in our tax-and-transfer system applies to mothers (and the occasional house husband) who want to go from working part-time to working full-time.

Naturally, every extra hour they work is taxed. But because eligibility for the family benefit is based on the combined income of couples, they soon find that each extra dollar of wages cuts back the amount of family benefit.

Professor Miranda Stewart, of the University of Melbourne, calculates that “second earners” wanting to work more days a week face an effective marginal tax rate of roughly 90 cents in the dollar. Add the extra cost of childcare and working more days will often leave mothers actually out of pocket. That doesn’t affect incentives?

If Morrison really wanted to change the structure of the economy in a way that, once the recession was behind us, would encourage faster economic growth, he’d drop his tax cuts for high earners and use this opportunity to remove a barrier to women putting their ever-higher levels of education to work in paid employment.

If that’s all too hard, he could do much good for women simply by making permanent his now-abandoned emergency measure of making childcare free. Too expensive? It would cost a lot less than his tax cuts for high (mainly male) income-earners.
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Monday, July 20, 2020

The economy can't fully recover until the virus is gone

It’s time we stopped debating suppression versus elimination of the coronavirus and got serious: let’s make it a party-political issue. Liberal voters should defend suppression and denigrate elimination, while Labor voters do the opposite. Or vice versa.

This wouldn’t get us anywhere, of course, just as the politicisation of climate change has long crippled our efforts to make real progress. But it would gratify those who follow politics like others follow sport, and it would be a fillip for a media more interested in controversy than solutions.

But above all, it would relieve the rest of us of the mental effort of judging the merits of suppression versus elimination. To decide what our opinion was, all we’d need to do is remember which party we vote for.

We sub-contract the job of thinking through important policy issues to our ever-trustworthy political representatives, who can always be relied on to put our interests ahead of their own. And then we wonder why we’re making so little progress in solving the nation’s problems.

What thinking I’ve managed to do about our setback in getting on top of the virus makes me unconvinced that the policy of suppression – or “aggressive suppression” as Scott Morrison prefers to call it – rather than elimination explains the relapse. Nor that switching from suppression to elimination would prevent further relapses.

This controversy – which the hugely “aggressive” responses of Morrison and NSW premier Gladys Berejiklian have done much to puff up – is a distinction in search of a difference. Certainly, it’s a distinction much easier to see on the pages of a textbook than on the ground.

Morrison and Berejiklian want us to believe the economic cost of elimination would be much higher than for suppression. I doubt that – just as I doubt their critics’ retort that they’re putting the interests of The Economy ahead of Australians’ lives.

This debate is spurious because it reads the problem wrong. The eradication party is preoccupied with “community spread” and their belief that asymptomatic carriers mean there is huge community spread lurking under the radar, waiting to rear its head. If so, it’s gone well hidden for many weeks.

The simple truth is, the virus comes to us from abroad. Our biggest problem is its continued spread in the rest of the world. Every time we let through a carrier from abroad it spreads exponentially, triggering much community transmission. We then have to frantically identify everyone who’s been infected and stop them infecting others.

Which is just what we have done – with great success in every state. The Kiwis have done the same. What’s changed? As best we can tell, a breakdown in Melbourne’s quarantine of returning travellers – including the people staffing the quarantine – combined with poor contact tracing has allowed a flare-up in cases.

And again, as best we can tell, Sydney’s smaller outbreak is best explained by the arrival of a super spreader from Melbourne. Perhaps more than one.

The point is, if you have weaknesses in your quarantine regime, or deficient contact tracing, it doesn’t matter whether the label on the policy you’re pursuing says “elimination” or “suppression”. As economist-turned-businessman Andrew Mohl has reminded us, in real life what matters more is not the strategy you choose, but how well you execute it.

The saintly, eliminating Kiwis, are just one badly handled quarantine breach away from ignominy. It follows that what we should be doing now is tightening up our quarantine arrangements and, in Victoria at least, greatly improving contact tracing.

It also follows that Sydney and Melbourne have had – and always will have – the greatest infection problem, simply because they’re the country’s two main international gateways. While ever there’s some doubt about the effectiveness of these two’s quarantine arrangements, the other states are justified in closing their borders to the south-eastern reprobates. Better four states virus-free than none.

It’s easier to see now than it was a month ago that, with the rest of the world still highly virus-prone, lapses and setbacks were inevitable. And with no vaccine yet on the horizon, that may remain true for months, even years to come.

There seems little doubt that Melbourne’s return to lockdown will set back the recovery in the national economy both directly (because of Melbourne’s one-fifth share of it) and indirectly, because of the fears and uncertainty it engenders in the rest of the county.

There may be many further bumps in the road ahead, which will weaken the economy and slow the recovery. Until a vaccine is available globally, lasting elimination is a delusion. We shall either have to hide under the bed till then, or become inured to living in a much riskier world.

The one good thing is that this nasty return to reality has come before rather than after Thursday’s mini-budget reset.
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