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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The RBA is spooked by pay rises. It should relax

By MILLIE MUROI, Economics Writer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Time for us to move on to other economic worries.

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Dutton's election campaign rout lets RBA off the hook

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Question for voters: Which party do I want deciding wages policy?

The craziest thing about this election is that we’re into the last week of the campaign without anyone much bothering to mention the word “wages”. Really? We’re too obsessed by the cost-of-living crisis to have any interest is what has happened, and will happen, to our wages?

Is it possible our voters could be so detached from reality that they don’t see the link between prices and wages? It reminds me of the person who voted for Trump because “prices went up, and they’ve never come back down”.

That’s right, sir, the general level of consumer prices goes up and rarely falls back. That’s why it’s nice to see your wage rising in line with the rise in prices, or even a bit faster than prices. If that’s what happens, you don’t have a lot to complain about.

Is it possible some people think the government can do something about rising prices but has nothing to do with wages?

Actually, the proportion of workers who are members of a union has fallen so far – to 13 per cent – that many workers may feel they have no say in what happens to their wage, and neither does the government. The boss increases your pay occasionally if she feels like it.

The fact is, the cost of living is always high on ordinary people’s list of complaints. But it became a particular concern in 2022 because of the huge surge in prices caused by the pandemic. The annual rate of increase in prices got to about 8 per cent, but is now back down to the 2 to 3 per cent range we’ve become used to.

Trouble is, wages didn’t rise as much as prices did and, to make matters worse, in its efforts to get the inflation rate down, the Reserve Bank caused interest rates on home loans to rise by more than 4 percentage points. As well, “bracket creep” took an extra bite out of workers’ after-tax pay.

That’s what explains the voters’ obsession with the cost of living. But the surge in prices was set in train before the Albanese government won the last election in May 2022. So the real questions are: what has this government done about it, and would a change of government improve the prospects for the cost of living?

We can learn a lot from a new research paper by one of the nation’s top labour-market economists, Professor David Peetz, of Griffith University and the Australia Institute’s Centre for Future Work.

Peetz finds that, despite a fall in “real” wages (that is, after allowing for price rises) during the COVID pandemic and the subsequent surge in prices, by December 2024, real wages had recovered to be equal to what they were at the end of 2011.

Two things to note. First, this is wages before taking account of income tax. Real after-tax wages would not have recovered to their level 13 years earlier, because of the bracket creep made greater by the price surge.

Second, over those 13 years, the productivity of labour improved by 15 per cent. So none of the benefit of that improvement was shared with workers – contrary to the assurances of businesspeople, politicians and economists that, by some magic process, productivity automatically increases real wages.

Sorry, there’s nothing automatic about it. If workers don’t have the bargaining power to insist on their fair share of the spoils, employers don’t pass it on.

What labour-market economists understand, but most economists (including Reserve Bank boffins) keep forgetting, is that wage rates are determined not simply by the balance of supply and demand for labour, but also by the employees’ bargaining power relative to the employers’ bargaining power.

Peetz’s examination of 16 factors that influence or indicate power in the jobs market shows that “almost all economic and labour market trends in the past half century have reduced workers’ power”.

To be precise, he finds that 14 of the 16 factors indicate reduced workers’ bargaining power.

Here’s a list of the 14 – reduced union membership, a reduced proportion of workers whose wages are bargained collectively by unions, fewer days lost through strikes, the advent of the gig economy, businesses’ increased use of labour-hire companies, increased casual employment, fewer workers changing jobs, increased outsourcing of work, industries dominated by fewer firms, more issuing of temporary visas to foreign workers, use of non-compete clauses in employment contracts, increased franchising of businesses, increased importance of share-market capital, and increased competition from low-wage imports.

The two factors indicating increased workers’ power are the gradual decline in the gender pay gap and the fall in the rate of unemployment since 2010, although it’s been creeping up since 2023.

Peetz sees the influence of this overall decline in workers’ bargaining power in figures for the average annualised wage increases under new enterprise agreements. They gradually declined from about 3.5 per cent in 2014 to 2.5 per cent by 2022.

But in the two years since then, the average reached a peak of 4.8 per cent, and was higher in every quarter than it was in any quarter between December 2014 and December 2022.

Why the improvement? Peetz argues it’s because of the change in government industrial relations policy since the election of the Albanese government in mid-2022.

Whether voters know it or not, the federal government does influence the size of wage rises via its regulation of the wage-fixing rules. It can shift the balance of bargaining power between employees and employers. Under the Howard and subsequent Coalition governments it was shifted in favour of employers; under the Albanese Labor government it’s been shifted back in favour of employees and their unions.

And whether voters know it or not, the many hundreds of minimum wage rates set out in industrial awards – covering about the bottom quarter of workers – are increased on July 1 every year by an amount determined by the Fair Work Commission.

The federal government can influence these decisions by urging the commission to be generous or stingy. I’ll leave it to you to guess which side of politics likes to see bigger increases, and which prefers smaller.

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Hey Dutton: Good economic managers don't try to panic the punters

A problem in economics is that you can’t use the economy to do experiments. But as economists realised some years ago, sometimes the economy presents you with circumstances that constitute a “natural experiment”. This happened last week, and Peter Dutton flunked the test.

In the days immediately after Mad King Donald’s big tariffs announcement on “Ruination Day”, sharemarkets around the world were crashing, people were feeling panicky and no one was sure what it meant or where it would lead, except that it sounded very, very bad. As usual, the media wasn’t helping.

Treasurer Jim Chalmers and his boss, and Reserve Bank governor Michele Bullock, were doing their job, calmly trying to calm everyone down. Acknowledging the great uncertainty, but trying not to add to it.

Treasury had done some initial modelling, and though it looked bad, it didn’t look that bad. Bullock and her boffins had thought hard about it and decided we’d weather the cyclone without too much damage. Certainly, we were well-placed to withstand the buffeting. (Translation: the Reserve had plenty of scope to cut interest rates if necessary, and unemployment was unusually low.)

So, how did the leader of the party claiming to be the best at managing the economy react? He should have resisted all his instincts as a good economic manager to join the authorities and help put out the fire, and just kept his mouth shut.

How did Dutton react? He thought: “You little beauty, here’s my chance to put the frighteners on. I’ll go for it.” So he stoked fears that a recession was imminent.

Asked if Australia was heading into recession, he replied, “it is under Labor” and “the government hasn’t prepared our economy”.

Elsewhere, he said: “We know that Australian families have lived through almost two years of household recession. That’s what Labor has already delivered during the term of government.

“The treasurer is talking about a 50-point reduction in interest rates, which means obviously he sees a recession coming for our economy.”

With that performance, Dutton has disqualified himself from high office. He’s been a cabinet minister for decades, but still hasn’t learnt – or doesn’t care – that people at the top don’t use the R-word until the numbers actually on the board leave them no choice.

He doesn’t know that, whereas individual commentators like me can say what they like without anyone taking much notice, when people in high office speculate about the likelihood of recession, confidence is further damaged, which risks making their predictions self-fulfilling.

Despite his bachelor’s of economics, Anthony Albanese has taken little interest in the economy, but at least he knows what not to say. Dutton’s problem is his Superman complex. He sees himself as responsible for the saving us from the rising tide of crime and pestilence that besets us.

His powers allow him to see what we can’t: the roaming African gangs keeping Melburnians trapped in their homes; the women in supermarkets with machetes being held to their throats.

This is how he knows he can do a deal with Trump that Albanese can’t; he can save us from the recession that’s inevitable under Albanese. He doesn’t need to know the details of economics because he has kryptonite to do his heavy lifting.

Note that Dutton’s shadow treasurer, Angus Taylor, hasn’t joined him in his fearmongering. Taylor is a qualified economist of good repute. His trouble is that, not having served an apprenticeship in a minister’s office, he can’t play politics at a professional standard. He can’t tell lies with a straight face.

He wouldn’t have resorted to the muddled thinking Dutton used to justify bandying the R-word about. Dutton thinks Chalmers’ self-serving prediction of imminent hefty interest rate cuts is proof a recession is coming. It doesn’t occur to Superman that, if rates were cut sharply, the objective would be to forestall a recession. Is he implying that he could prevent recession without cutting rates?

It’s true that, thanks partly to high rates (but also an earlier fall in real wages, and massive bracket creep), consumer spending has been weak, so that only strong growth in the population has kept gross domestic product struggling on. Many have said this means we’ve suffered a “per-person recession” for the past two years.

But let’s get real. And let’s not be misled by the money market and media-promoted nonsense that two successive quarterly falls in real GDP constitute a “technical” recession. Why is it that sensible people live in fear of recessions and responsible political leaders never use the R-word until they have to?

Well, it’s not because GDP has fallen backwards for a couple of quarters. What can take a bit longer to appear is the consequence of a significant fall in economic activity: falling employment and rising unemployment. It’s the sight of thousands of people losing their jobs, the fear you may be next, and the knowledge that it would take weeks or months to find a new job, that scares the pants off normal people.

So, if we’ve been in “per-person recession” for two years, what’s happened to the jobs market in that time? Total employment has risen by more than 750,000, the proportion of working-age people with jobs is almost the highest it’s ever been, and the rate of unemployment has crept up just 0.5 percentage points to a still-amazingly-low 4 per cent.

Does that sound like a recession to you? It’s the complete antithesis of a recession, which is why the Reserve has been so reluctant to cut interest rates.

In this campaign, there’s been far too much whingeing about the cost of living with almost no acknowledgement of one fact that should have all of us thanking our lucky stars: our jobs market has never been better. Almost everyone who wants a job can find one – or more than one.

In all Dutton’s efforts to convince us life is insufferable, and it’s solely Albanese’s fault, there’s been zero mention of our tip-top jobs market. In all our self-pity, we’ve allowed a man with no interest in the economy, and little knowledge of economics, to mislead us.

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Supermarkets: Be polite, say "excessive pricing" not "price gouging"

 By MILLIE MUROI, Economics Writer

They’re the villains that return in every episode of the cost-of-living fight. And despite the competition watchdog swallowing any mention of “price gouging” in its recent inquiry, supermarkets are still copping heat.

They’re an easy target because there’s little competition for places where people have been noticing price spikes more than in the aisles – and checkouts – of their local Coles or Woolworths.

We also know consumers tend to overestimate price pressures. Why? Because eye-popping price rises are more memorable than the deals and discounts we land. Humans are programmed that way because it’s more important for our survival to spot bad things – like a tiger in the trees – than good things, like a warm patch of sunshine.

But eagle-eyed customers were a key reason supermarkets got bitten by the watchdog for their illusory discounts last year, and both Labor and the Coalition know that cost of living is the single biggest issue they have to win voters over on for a chance to form government.

That’s why Opposition Leader Peter Dutton has pushed for powers that would give him the ability to break up the major supermarkets, and Labor has been cracking down with a mandatory food and grocery code and a promise to outlaw price gouging.

But there’s been a key bullet point missing on the shopping list: a clear idea of what “excessive prices” actually mean. One shopper’s idea of price gouging could be vastly different to that of their neighbour – and almost certainly different to that of the bosses of Coles and Woolworths.

Now, the competition watchdog this year released a damning report revealing Australian supermarkets nudged up their profit margins during the cost-of-living crunch and are among the most profitable supermarkets in the world.

But they stopped short of calling Coles and Woolworths out for “price gouging”: a subjective and pejorative term for when businesses increase their prices much more than is considered “reasonable” and “fair” – which are also subjective.

And in their list of 20 recommendations, not once did the Australian Competition and Consumer Commission mention the need to ban the practice.

So, if the ACCC didn’t suggest it, where did the idea come from? And why is a ban on excessive mark-ups on the cards?

Well, it’s another case of Labor proposing a small but worthwhile reform. These ideas have to be ticked off by big-wigs, but the heavy lifting is done behind the scenes.

Pull back the curtains of government, and you’ll find a section of Treasury beavering away under the leadership of assistant minister and former economics professor Dr Andrew Leigh.

The Competition Taskforce, established by the government in 2023, is a response to the increasing concentration of the Australian economy over the past 20 years. It’s made up of a couple of dozen people and Leigh says it’s not just a handful of men with grey beards tapping out once-off reports, which has traditionally been the way economic reform has been put on the table.

Instead, he labels it a “crack team” of about a dozen people, churning out policy advice on an ongoing basis and tick-tacking with stakeholders – in a way that experts tasked to do a single report may not.

While the ACCC has taken the reins on scrutinising supermarkets recently, most memorably through its scathing report, Leigh says the government’s policies have been informed by the taskforce’s previous work in the space, such as the mandatory food and grocery code – aimed at protecting suppliers and farmers – which came into play at the beginning of this month.

And while the ACCC might have shied away from slapping the “price gouger” label on the supermarkets, Leigh says the weight of the evidence suggests there’s a clear problem.

“We’ve seen their margins increase over COVID,” he says. “We’ve got them in court with the ACCC. The supermarkets have not exactly covered themselves in glory over the last couple of years.”

And compared with the last time the competition watchdog probed the supermarket sector in 2008, Leigh says the 2025 inquiry is awash in data. “[The ACCC] has analysed more than a billion prices so they’ve got data on more than a million prices from the two supermarkets, every week, over a five-year period,” he says: something that was unheard of two decades ago.

The availability of information and the ability to crunch and analyse huge amounts of data has given the government confidence to make the call – or at least to take action on an issue they know voters are still eyeing very closely and passionately.

It’s far from an immediate fix. The government’s promise to ban price gouging by supermarkets will first require them to form a new taskforce to give advice on what “excessive pricing” might actually look like.

And chasing the two giants around with a stick doesn’t necessarily remove some of the key barriers to stronger competition in the supermarket sector, such as inconsistent zoning laws which lock out competitors in many areas around the country. While the government has, in principle, agreed with all the recommendations from the ACCC, we’re yet to see follow-through on most of them.

That doesn’t mean that setting out to define “excessive pricing” is a bad thing. It’s one of those concepts that seems obvious but which people still disagree over. And without a yardstick, the supermarket giants – and every other business – know there’s a grey area they can play in and take advantage of.

The government’s latest action on supermarkets is good because it puts Coles and Woolworths on notice. If they are misbehaving or pushing their luck with questionable pricing, the bosses should be gathering at their drawing boards, rethinking their approach and preaching some caution.

If they’re not doing anything wrong, they have nothing to worry about.

Either way, it also puts every other sector on notice – especially given the taskforce’s current work on identifying concentration hotspots: areas of the economy where big firms dominate and competition is especially weak.

And by clearly setting out what “excessive pricing” means, we can more easily deter firms from crossing the line, identify when and where it’s happening and crack down on the practice – and ultimately the prices we pay.

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Are you better off now? That's Dutton's trick question

For most people, the simple answer to Peter Dutton’s repeated question – are you better off today than you were three years ago? – is “no, I’m not”. But if Dutton can convince us this is the key question we need to answer in this election, he’ll have conned us into giving him an easy run into government.

Why? Because it’s the wrong question. It’s the question of a high-pressure salesman. A question that makes the problem seem a lot simpler than it is. A question for people who don’t like using their brain.

And it’s a question that points us away from the right question, which is: which of the two sides seems more likely to advance the nation’s interests in the coming three years?

Economists have a concept called “sunk costs” – money (or time) that you’ve spent, and you can’t unspend. Economics teaches an obvious lesson: you can’t change the past, so forget it and focus on what you can change, the future.

But, since it’s become such a central issue in this election, let’s dissect Dutton’s magic question. For a start, it’s completely self-centred. Focus on what’s happened to you and your family and forget about what’s happened to anyone else.

Similarly, the implication is to focus on the monetary side of life. Forget about what’s happened to the natural environment, what we’ve done to limit climate change, and what we’ve done about intergenerational equity – the way we rigged the system to favour the elderly at the expense of the young.

Next, Dutton’s question is quite subjective. He’s not asking us to do some calculations about our household budget or to look up some statistics, just to say whether we feel better or worse off.

Guess what? This subjectivity makes us more likely to answer no. As we’ve learnt from the psychologists, humans have evolved to remember bad events more strongly than good events.

This is why most people believe that inflation is much higher than the consumer price index tells us. As they do their weekly grocery shopping, they remember the price rises much more clearly than any price falls. And in the personal CPI they carry in their heads, they take no account of the many prices that didn’t change – which they should, and the real CPI does.

Humans find the bad more interesting and memorable than the good because the bad is more threatening, and we have evolved to search our environment for threats.

In this case, however, objective measurement confirms that most people are right in thinking their household budgets are harder to balance than they were three years ago. There are various ways to measure living standards, but probably the best single measure is something called “real net national household disposable income per person”.

Between June 2022 and March 2024 (the latest quarter available), it fell by 3.6 per cent. It may have recovered a bit in the 12 months since then, but not by enough to stop it having fallen overall.

But that’s just an economy-wide average. We can break it down into more specific household categories. Those dependent on income from wages are worse off because consumer prices rose a little faster than wages – though wage rises fell well short of price rises in the couple of years before Labor came to power. This is a shortfall wage-earning households would still be feeling in their efforts to balance their budgets.

The rise in interest rates since the last election means the households feeling by far the most pain over the past three years are those with mortgages.

This also means those who own their homes outright have felt the least pain. Most people on the age pension have done OK because most of them own their homes and the age pension is fully indexed to the rise in consumer prices.

As for the so-called self-funded retirees, they’ve been laughing. Not only do they own their homes, their super and other investments earn more when interest rates are high.

True, it’s common for elections to be used to sack governments who’ve presided over tough economic times. Be in power during a recession and you’re dead meat. So elections are often used to punish governments, on the rationale that the other lot couldn’t possibly be worse.

But the side that benefits from such circumstances, taking over when everything’s a mess, won’t have it easy getting everyone back to work and having no trouble with the mortgage in just three years.

I can remember when the Morrison government was tossed out in 2022, smarties among the Liberals telling themselves this probably wasn’t a bad election to lose. Why? Because they could see consumer prices had taken off and had further to go. Using higher interest rates to get the inflation rate back down would be painful and protracted, possibly inducing a recession.

This is why Dutton’s question is so seductive to people who don’t follow politics and the economy, and don’t want to use their grey matter. “If I felt the pain on your watch, it’s obvious you’re to blame and you get the sack. Don’t bother me with the details.”

Remember, however, that all the rich economies suffered the same inflation surge we did, all of them responded with higher interest rates, and most suffered rising unemployment and even, like the Kiwis, a recession. But not us.

So let me ask you a different question: over the past three years have you ever had cause to worry about losing your job? Have you spent a lot of time unemployed while you find one? Have more people in your house been able to find work?

Our employment rate is higher than it’s ever been. Our rate of unemployment is still almost the lowest it’s been in 50 years. This has happened because the Albanese government and the Reserve Bank agreed to get inflation down without a recession.

But the price of avoiding recession is interest rates staying higher for longer. If you think Labor jumped the wrong way, kick the bastards out.

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It's official: supermarkets are overcharging. So change the subject

Why does a government release a highly critical report on the conduct of Woolworths and Coles on the Friday before a budget that will lead straight into an election campaign? Short answer: not for any worthy reason.

One worthy reason could have been to show Anthony Albanese and Treasurer Jim Chalmers really wanted to do something about fixing the cost of living, by making the question of what we should do about our overcharging grocery oligopoly a major issue for discussion in the campaign.

Since the remedies proposed by the Australian Competition and Consumer Commission in its report seem so inadequate, should the two grocery giants be broken up? As, indeed, Opposition Leader Peter Dutton says he would do if elected.

As the business press so indelicately put it, the competition watchdog’s mild-mannered recommendations despite all its evidence of what the punters see as “price gouging” meant the supermarket giants had “dodged a bullet”. But should they have? Let’s discuss it.

Sorry, I’ve been observing the behaviour of politicians for too long to believe Labor’s motives for releasing the report at such a time could possibly be so pure. It’s more likely the reverse: Labor wants to close the issue down.

What Labor did last week looks suspiciously like what’s known in the trade as “taking out the trash”. When you’ve got an embarrassing report you hope won’t get much notice from the media, you release it on a Friday, when the media’s busy packing up for the weekend. The reporters ought to return to the topic on Monday, but they don’t because of their obsession with newness. Spin doctors 1; press gallery 0.

Or governments can achieve the same result by releasing an embarrassing report at a time when everyone’s attention is turned to a much bigger issue – say, a budget, or an election campaign.

But why didn’t Labor just keep the report to itself until after the election? Because, I suspect, it wanted to show it had been on the job, investigating complaints about supermarket overcharging.

And it probably wanted to arm itself to reply to Dutton’s promise to break up the two giants. “We had the competition watchdog investigate the matter, and it explicitly declined to recommend divestment. But it did make 20 recommendations, and we’ve accepted them all.”

(The last time I heard that one was before the 2019 federal election, when the Morrison government released the report of the royal commission into misconduct in banking and said it had accepted all its recommendations. After the election it dropped many of them.)

But if even Labor isn’t game to touch the thought of breaking up Coles and Woolies, why are the Liberals promising to do it? Because they wouldn’t really.

Why does the notion of divestment frighten Labor? Because it doesn’t want to get offside with business. However, in the case of the two supermarket giants, their interests are defended inside Labor’s corridors of power by their union, “the shoppies”, aka the Shop, Distributive and Allied Employees Association.

Trouble is, the report’s findings show there’s a lot to try sweeping under the carpet. The two chains account for two-thirds of all supermarket sales, and their market share has increased since 2008 despite the advent of Aldi. Their profitability is among the highest in the world and their profit margins have increased over the past five financial years.

“Grocery prices in Australia have been increasing rapidly over the last five financial years,” the report says. “Most of the increases are attributable to increases in the cost of doing business across the economy, including particularly production costs for suppliers, which has increased supermarkets’ input costs.

“However, Aldi, Coles and Woolworths have increased their product [margins] and earnings-before-interest-and-tax margins during this time, meaning that at least some of the grocery price increases have resulted in additional profits.”

So if the Libs don’t seize on the report’s findings to step up their claim to want to do something real and lasting about the cost of living, it will be a sign they’re not genuine in their professed desire to break up the grocery oligopoly. A sign both sides of politics want the report and its disturbing findings buried ASAP.

But it’s not just the political duopoly that doesn’t want to know about the pricing power of the grocery market’s big two. Most of the nation’s economics profession don’t want to think about it either. Why not? Because it’s empirical evidence that laughs at their conventional model – whether mental or mathematical – of how the economy works.

There’s a host of contradictions in their model, and the profession long ago decided that the easiest way to leave its beliefs unchallenged and unchanged was to avoid thinking about them. (And for all those economists snorting with derision as they read yet more of Gittins’ nonsense, I have five words: “theory of the second best”. Those words strike terror into the heart of every conventional economist.)

Economists divide their discipline into micro (the study of how individual markets work) and macro (study of how the whole market economy works), but they’ve given up trying to make the two approaches fit together. This groceries report is a classic example of how the two lines of thinking don’t fit.

Every microeconomist studying “imperfect competition” (aka “industrial organisation”) knows oligopoly brings market power and allows firms to avoid competition on price. But every macroeconomist assumes – explicitly or implicitly – that market power isn’t a relevant problem.

As we saw with the conventional wisdom on the domestic causes of the recent inflation surge, the Reserve Bank assumed it was caused by excessive monetary and budgetary stimulus. That is, it was caused by “demand-pull” not “cost-push” inflation pressure.

The fact that, through our own neglect, we have one of the most oligopolised economies in the developed world, is assumed away. We’ve allowed our economy to become inflation-prone, while economists in general, and the supposedly inflation-obsessed Reserve Bank, have said not a word.

But not to worry. We’ll compensate for our negligence by punishing people with home loans all the harder.

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Maybe the inflation surge didn't happen the way we've been told

According to Reserve Bank deputy governor Andrew Hauser last week, we’ve entered a world characterised not just by volatility, complexity and uncertainty, but also by “ambiguity” – a world where “you don’t know the model”, meaning that “judgment and instinct are as important as formal analysis”.

At last, someone is talking sense.

Academic economists may be locked into their maths and econometric models, but practising economists know it ain’t that simple. Economics is as much an art as a science.

Economics would be much easier if only human consumers and businesspeople behaved like rational automatons, reacting automatically and mechanically to known incentives, as you implicitly assume they do when you use a set of equations to guide you through the inevitable uncertainty caused by the lamentable truth than the humans who constitute the economy are . . . human.

Keynes reminded his fellow academics of the need to take account of people’s “animal spirits”. Anyone familiar with markets knows they tend to alternate between periods of optimism and pessimism. I prefer to say that maths without psychology will usually get it wrong.

Contrary to the assumption of the simple model that dominates the thinking of almost all economists, humans are not rugged individualists who decide for themselves the best thing to do, then do it without regard to what anyone else is doing.

In reality, consumers and businesspeople are heavily influenced by what other people are doing. We’re susceptible to herd behaviour, fads and fashions. And we live in a permanent state of uncertainty.

In their landmark book, Radical Uncertainty: Decision-making Beyond the Numbers, John Kay and Mervyn King say it’s not true, as economists assume, that businesses are “profit maximising”. That’s not because they wouldn’t like maximum profits, but because they don’t know the magic price to charge that would do the trick.

As the punters often forget, when a firm raises its price, it’s taking a risk. It’s taking a bet that what it gains in higher revenue won’t be cancelled out by the sales it loses from customers unwilling to pay the higher price.

In the real world, firms feel their way with price increases, hoping to avoid going over the top and ending up worse off. But get this: they feel a lot more comfortable putting up their prices when everyone else is putting up theirs. You know, like our firms were doing a year or two ago.

Hauser says that, at present, “we don’t know the model” but, in fact, the Reserve and everyone else are using the same orthodox, mainstream model to explain why, after staying low for almost 30 years, the annual rate of inflation took off in late 2021 and reached a peak of 7.8 per cent by the end of 2022.

As I’ve written incessantly, this first inflation surge in three decades was caused by the COVID-19 pandemic (with a little help from Russia’s attack on Ukraine). The pandemic caused worldwide disruptions to supply, in turn causing the prices of many goods to leap. The second factor was the massive monetary and budgetary stimulus the authorities let loose to keep the economy alive during the lockdowns.

This conventional wisdom is easily accepted because it blames most of the problem on the government. Inflation surged because the authorities cut interest rates and increased government spending by far more than proved necessary. All of us borrowed more and spent more, causing demand to run ahead of supply and prices to rise.

But I’ve long suspected this isn’t the whole story, or even the main story. So, since even the Reserve Bank isn’t sure we’ve got the right model to explain what’s happening in the economy, let me show you my model, which puts most emphasis on psychological factors.

When people in many countries were confined to their homes, they could still use the internet to buy goods, but they couldn’t spend on personally delivered services. So spending on goods surged to levels far greater than businesses were used to supplying. And, since most manufactured goods are imported, we got shortages of ships and shipping containers to go with shortages of cars, silicon chips, building materials and much else.

When Russia’s invasion of Ukraine caused oil and gas prices to soar as well, the media went for weeks with stories of how much prices would be rising. Reporters would go to industry lobby groups, whose shills would regretfully affirm that, yes, prices would be rising hugely. The ABC gave much publicity to some wiseguy claiming the price of a cup of coffee would jump to $8. Great story; pity it was BS.

I could see what was happening at the time. Businesses were using the media to soften up their customers for big price rises. They were setting up a self-fulfilling prophecy.

Only in recent times have academic economists begun to understand the important role played in the economy by “signalling” – a role not captured by their equations. Not only were firms signalling to customers that, due to causes entirely beyond their control, big price rises were unavoidable, they were signalling to all their mates that now would be a great time to whack up their own prices.

But my alternative explanation doesn’t start there. Remember that, for seven whole years before this latest price surge, the inflation rate was stuck below the bottom of the 2 to 3 per cent target range, despite the Reserve’s efforts to get it up.

Why was inflation unacceptably low? My theory is it was another self-fulfilling prophecy. Businesses weren’t game to raise their prices because no other businesses were raising theirs. Everyone was waiting for some inflationary event to give them some cover, but nothing turned up.

Until the pandemic’s supply disruptions and the Russia-induced jump in oil and gas prices turned up. As soon as it did, everyone breathed a sigh of relief and began wondering how big an increase they could get away with.

The irony is that the pandemic-induced supply disruptions – and even, to an extent, the oil and gas price rises – proved temporary and were reversed. Leaving all the unrelated price rises to stand.

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In 50 years, Trump will be remembered as just a puzzling footnote

I know I’m a bit late, but welcome to 2025. Before we get on with a year of absolutely gratuitous economic angst courtesy of a great American conman’s second coming, let’s take a breath and realise we’re already a quarter of the way through what many still think of as the “new” century.

How time flies while you’re preoccupied with one crisis – one damn thing – after another. I hate to undercut the media’s business model, but old age has taught me that most of the things we find so momentous at the time don’t leave much of a mark on the course of history.

In the heat of battle, we imagine the distant future having been irreversibly shaped by the latest unexpected excitement. A global trade war, for instance. Sorry, a beginner’s error.

Late last year I learnt that, in 1975, “15 leading Australians” had produced a book titled Australia 2025, which examined “the changing face of their country 50 years from now”. It was published by Electrolux, maker of vacuum cleaners.

What a great way to kick off another year of columns, I thought as I asked our library to disinter this gem from the archives. To be honest, I expected it would be great fun. All those fearless predictions about how, by 2025, we’d be flying to work in our spaceships. Or maybe by then computers would mean everyone was working from home.

Wrong. The chapter on the economy was written by someone I dimly remember, BHP’s chief economist at the time, John Brunner. He was far too smart to get caught making fanciful predictions about spaceships or anything else much. He devoted most of his 10 pages to explaining why anything he predicted was likely to be wrong.

He listed all the country’s recent problems, which many more impetuous observers could be tempted to foresee changing our future, while then expressing his doubts. For example, at that time, and still under the Whitlam government, we had a big problem with double-digit inflation. Would this problem be with us for another 50 years?

Brunner recorded all the reasons for thinking it might: “the increasing power of the unions, more generous unemployment benefits, vulnerability of capital-intensive industry to strikes” and “perhaps most potent of all, the commitment of governments to full employment”.

Even so, Brunner doubted it. And he was right. “What?” you say. “We’ve had a problem with high inflation in just the past few years.”

True. But much of the reason we’ve found it so disconcerting is that we’ve become so unused to high inflation. This latest, pandemic-caused surge in prices ended a period of about 30 years in which inflation stayed low, in Australia and all other rich countries.

Why is it so rare for the problem of the moment to be the thing that shapes the next 50 years? Because, as Brunner well understood, when big problems emerge, ordinary businesses and consumers look for ways around them, while governments look for ways to fix them. Action leads inevitably to reaction. And market economies like ours are adept at finding solutions to problems.

Consider Brunner’s list of reasons for predicting eternal high inflation. Powerful unions? Globalisation stopped that. So did the deregulation of wage-fixing. Generous unemployment benefits? Tell that to the Australian Council of Social Service. These days, every sensible person thinks the dole is too low.

As for “the commitment of governments to full employment”, it became a commitment in name only just a few years after Brunner was writing. Overseas economists invented an escape clause they called the “non-accelerating inflation” rate of unemployment, or NAIRU, and naturally, our government and its econocrats jumped at it.

For about the first 30 years after World War II, our rate of unemployment rarely got above 2 per cent. Allow for the workers who happened to be between jobs at any given time and that really was full employment.

But by 1975, inflation was in double digits and the unemployment rate had jumped to 4.6 per cent. The governments of the rich economies dumped the full-employment objective and turned every effort towards getting inflation down.

Thanks mainly to all the extra money the Morrison government spent during the pandemic, our unemployment rate fell to 3.5 per cent early in the Albanese government’s term. As I hope you remember hearing, this was the lowest unemployment had fallen to “in about 50 years”.

Quite accidentally, we’d got back to something like full employment. But get this. If you wonder why the Reserve Bank is so reluctant to cut interest rates, it’s because its battered old NAIRU machine keeps telling it unemployment is still too low.

This brings me to a bit of Brunner wisdom worth repeating 50 years later. “One of the superstitions to which modern man is particularly susceptible is the idea that what comes out of the computer must represent the law and the prophets [the Old Testament].”

“But of course what comes out of a computer depends on what goes into it and if you feed in neo-Malthusian assumptions you will get gloomy answers.” (Thomas Malthus was a notoriously pessimistic English economist from the 18th century.)

Finally, this: “Probably no profession spends more time contemplating the future than the economics profession and yet few are worse equipped for the task. For whatever facility they may have for manipulating economic variables, economists really know very little indeed about what determines economic magnitudes, particularly in the long run.

“The long-term rate of economic growth, for instance, will be determined by a host of political, technological and cultural factors which no economist has any special claims to be able to predict.”

Ah. They don’t make business economists like him any more.

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Think the measurement of inflation's a bit off? You're probably right

By MILLIE MUROI, Economics Writer

If you’ve ever looked at the latest inflation figures and thought to yourself it doesn’t really reflect the ballooning or shrinking prices you’ve been paying, you’re probably right.

Like most measures of our economy’s health, the consumer price index (CPI) – our main inflation gauge – is only a rough estimate of what’s happening to prices. It tracks changes in the costs of a vast range of things but also skips over some key items we spend on.

This week, we learned prices at the end of last year were climbing at the slowest annual rate since March 2021 at 2.4 per cent (a much more reassuring figure than the 7.8 per cent we were seeing two years ago). But if you feel like the prices you’re paying are moving to a different tune, they probably are.

The index, measured by the Australian Bureau of Statistics, basically tracks the change in the price of a typical “basket” of goods and services that we, as households, consume. Think: a big shopping trolley that carries a lot more than what you’d find in a supermarket. Sure, it includes eggs and fruit, but it also includes things like school fees, specialist visits and subscriptions to your favourite streaming platform.

Of course, you probably don’t spend on the exact same things, or buy the exact same amount, as people on the other side of the country – or even your neighbours – which is why the inflation measure isn’t a perfect fit for specific households.

The CPI is based on the average spending habits of everyone (well, at least those living in the capital cities). Then, based on this data, the bureau gives different “weightings” – a measure of an item’s relative importance in the total basket – to different items and categories. Things we spend a lot of our money on – like housing costs and food – get a bigger weighting in the index, meaning any changes in prices in those categories will shift the dial more when it comes to the final inflation figure.

Since the things we tend to spend on change over time, the bureau frequently updates these weightings.

The first ever “basket” in 1948, for example, put the proportion of our spending on food and non-alcoholic beverages at nearly one third, with dairy products alone taking up nearly a quarter of our food budget. Women’s clothing, meanwhile, accounted for about 10 per cent of our total spending. Combined with spending on men’s attire at nearly 5 per cent, our total spending on clothing back then took a bigger bite out of our budget than the 12 per cent we used to spend on housing!

Today, food and non-alcoholic drinks account for 17 per cent of the typical household’s spending, and both dairy products and women’s clothing just 1 per cent each – the latter being largely thanks to the rise of mass-produced and cheap imported garments. It’s perhaps little surprise that the biggest share of our spending is now on housing at more than 20 per cent, while transport, including our spending on cars, burns about 11 per cent (transport spending was measured through fares – such as the price of train tickets – which took up about 6 per cent of the typical household budget in 1948 before cars became widespread).

So, how does the bureau know what we’re spending on?

One way is through the household expenditure survey, which is conducted roughly every five years and gives the bureau an indication of how much we’re spending on different goods and services. It’s the reason why, for many years, the CPI weightings – only changed about every five years. Now, as collecting information has become easier and more digital, the weightings are updated every year and rely on various sources including retail trade and transaction data.

The bureau gets its pricing data by monitoring the prices of thousands of products. It looks for this information through everything from websites, to supermarket and department store data, as well as pricing data it receives from government authorities, energy providers and real estate agents.

Combining the pricing and weighting data gives us the consumer price index which is released in its complete form every three months. Since September 2022, the bureau has also published a monthly CPI reading, although the goods and services measured each month tend to alternate, giving us an incomplete picture of what’s going on.

As we’ve talked about, the CPI isn’t an accurate measure of our cost of living, although we all assume it is.

A better measure is the bureau’s “selected living-cost indexes” which break down changes in the cost of living for different types of households. Working households, for example, saw their annual living costs rise by 4.7 per cent last September quarter, while self-funded retirees only experienced a 2.8 per cent increase.

That’s mostly because different household types tend to splash cash on different things. Self-funded retirees and age pensioners might, for instance, spend slightly more on health, meaning any price changes there may bump their cost of living more than it would for working households.

But by far the biggest reason for the difference between working households and older cohorts is that working households are more likely to have a mortgage they are paying off. This means changes in interest rates – which are included in the selected living cost indexes but not the CPI – have a bigger impact on their overall cost of living.

It’s also one of the biggest shortcomings of the CPI. In the early 1990s, the Reserve Bank started using interest rates to target inflation: a practice that’s now become very familiar to us all. But later that decade, the bank asked the bureau to remove interest rates from the consumer price index. Why? Because the bank didn’t want the instrument it was using to control the rise in prices — interest rates — to be included among the price rises being measured. Your instrument should be separate from your target.

Instead, since 1998, the CPI has measured housing prices through changes in components such as rents, the cost of building new homes, and the cost of maintenance and repairs. But that means for the roughly one third of Australian households with a mortgage, the CPI is not a very good measure of the price pressures they are facing.

While the CPI is a rough estimate of the cost of living pressures we’re facing, if you feel like the pinch you’re feeling is harder or softer than the latest figures suggest, you’re probably right.

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Why we'd be mugs to focus on the cost of living at the election

It’s a good thing I’m not a pessimist because I have forebodings about this year’s federal election. I fear we’ll waste it on expressing our dissatisfaction and resentment rather than carefully choosing the major party likely to do the least-worst job of fixing our many problems.

Rather than doing some hard thinking, we’ll just release some negative emotion. We’ll kick against the pricks – in both senses of the word.

We face a choice between a weak leader in Anthony Albanese (someone who knows what needs to be done, but lacks the courage to do much of it) and Peter Dutton (someone who doesn’t care what needs to be done, but thinks he can use division to snaffle the top job).

By far the most important problem we face – the one that does most to threaten our future – is climate change. We’re reminded frequently of that truth – the terrible Los Angeles fires; last year being the world’s hottest on record – but the problem’s been with us for so long and is so hard to fix that we’re always tempted to put it aside while we focus on some lesser but newer irritant.

Such as? The cost of living. All the polling shows it’s the biggest thing on voters’ minds, with climate change – and our children’s future – running well behind.

Trouble is, kicking Albanese for being the man in charge during this worldwide development may give us some momentary satisfaction, but it will do nothing to ease the pain. Is Dutton proposing some measure that would provide immediate relief? Nope.

Why not? Because no such measure exists. There are flashy things you could do – another big tax cut, for instance – but they’d soon backfire, prompting the Reserve Bank to delay its plans to cut interest rates, or even push them a bit higher.

We risk acting like an upset kid, kicking out to show our frustration without thinking about whether that will help or hinder their cause.

Rather than finding someone to kick, voters need to understand what caused consumer prices to surge, and what “the authorities” – in this case, Reserve Bank governor Michele Bullock and the board, not Albanese – are doing to stop prices rising so rapidly.

The surge was caused by temporary global effects of the pandemic – which have since largely gone away – plus what proved to be the authorities’ excessive response to the pandemic, which is taking longer to fix.

It’s primarily the Reserve Bank that’s fixing the cost of living, and doing it the only way it knows: using higher mortgage interest rates to squeeze inflation out of the system. But doesn’t that hurt people with mortgages? You bet it does.

What many voters don’t seem to realise is that, by now, the pain they’re continuing to feel is coming not from the disease but the cure. Not from further big price rises but from their much higher mortgage payments.

So it’s the unelected central bank that will decide when the present cost-of-living pain is eased by lowering interest rates, not Albanese or Dutton. A protest vote on the cost of living will achieve little. Of course, if you think it would put the frighteners on governor Bullock, go right ahead. She doesn’t look easily frightened to me.

But there’s another point that voters should get. When people complain about the cost of living, they’re focusing on rising prices (including the price of a home loan). What matters, however, is not just what’s happening to the prices they pay, but what’s happening to the wages they use to do the paying.

When wages are rising as fast as prices – or usually, a little faster – most people have little trouble coping with the cost of living. But until last year, wages rose for several years at rates well below the rise in prices. Get it? What’s really causing people to feel cost-of-living pain is not so much continuing big price rises or even high mortgage payments, but several years of weak wage growth.

Why does this different way of joining the dots matter? Because, when it comes to wages, there is a big difference between Albanese and Dutton.

Since returning to government in 2022, Labor has consistently urged the Fair Work Commission to grant generous annual increases in the minimum award pay rates applying to the bottom fifth of wage earners.

This will have helped higher-paid workers negotiate bigger rises – as would Labor’s various changes to industrial relations law. Indeed, this is why wages last year returned to growing a fraction faster than prices.

These efforts to increase wage rates are in marked distinction to the actions of the former Coalition government. So kicking Albanese for presiding over a cost-of-living crisis risks returning to power the party of lower wages.

But here’s the trick: it also risks us taking a backward step on climate change. The party that isn’t trying hard enough could be replaced by a Coalition that wants to stop trying for another decade, while it thinks about switching from renewables to nuclear energy.

From the perspective of our children and grandchildren, the best election outcome would be a minority government dependent on the support of the pollies who do get the urgency of climate action: the Greens and teal independents.

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What's happened to the cost of living is trickier than you think

It’s been a year of wearying in the fight against inflation. But if you think you know what it all proves, you’re probably kidding yourself. The first mistake is to subject it to too much rational analysis.

While voters in Oz complain incessantly about “the cost of living”, the mug punters who put Donald Trump back in the White House were said to be on about “inflation”. Aren’t they the same thing? Well, maybe, maybe not.

A penny dropped for me when I heard some woman in America justify voting for Trump by saying that the prices went up and they never came back down. What? Since when does inflation go away because retail prices have come back down?

Well, only in economics textbooks. In the real world, inflation is the rate of increase in prices, and you fix it not by reducing the level of prices, but by reducing the rate at which they continue rising.

So what was that woman on about? Don’t ask an economist. Ask a psychologist, however, and they’ll tell you that the reason people give you for doing something – buying this house rather than that one; voting for Trump rather than Joe Biden – isn’t necessarily the real reason. Indeed, the person may not actually know why they jumped the way they did.

Their subconscious mind made a snap decision to favour A rather than B and then, when asked why, their conscious mind came up with a reason they thought would sound plausible. The woman’s subconscious may simply have liked the look of Trump rather than Biden. Or maybe a lot of the people she knew were voting for Trump, so she did too.

Biden and his supporters – plus many rational economists – couldn’t see why everyone was so upset about inflation. The rate of inflation had come back a long way, wages were growing solidly and all without unemployment worsening much. Pretty good job, I’d say. What’s the problem?

Ah, said the smarties, you don’t understand that people care far more about inflation than about unemployment. Inflation hits everyone, whereas unemployment affects only a few.

Is that what you think? If so, you’re probably too young to know what happens in a real recession. When unemployment is soaring and the evening news shows pictures of more workers getting the sack every night, believe me, the punters get terribly frightened they may lose their own job.

It’s a Top 40 effect. No matter how few tunes are selling, there’s always one that’s selling a fraction more copies than the others. That’s what’s topping the pops this week. If people aren’t worried about their jobs, they can afford to be worried about high prices. When they are worried about their jobs, they stop banging on about prices.

This means the managers of the economy – and the government of the day – are often in the gun. Whatever dimension of the economy, and people’s lives, isn’t travelling well at the time is what the punters will be complaining about.

But also, it’s worth remembering that whenever pollsters ask Aussies what’s worrying them, “the cost living” always rates highly – even at times when economists can’t see there’s a problem. Why? Ask a psychologist. It’s because retail prices have “salience” – they stick out in the minds of people who shop at the supermarket every week.

The one thing voters know is that prices keep rising. And they’ve never liked it. They don’t like it whether prices are rising by 2 per cent or 10 per cent – and the highly selective consumer price index they carry in their heads always tells them it’s nearer 10 per cent than 2.

Why? Salience. They remember every big price rise indelibly, but soon forget any falls in prices. And get this: in their mental CPI, all the prices that don’t change get a weighting of zero.

When Australian voters complain about the “cost of living” and American voters complain about “inflation”, are they talking about the same thing? Logically, they shouldn’t be, but actually, they are.

To a rational economist, determining what’s happening to the cost of living involves comparing what’s happening to prices on the one hand with what’s happening to wages and other income on the other. Strictly, the comparison should be with after-tax income.

But that’s not how voters in either country see it. They keep prices in one mental box, but wages in another. The pay rises they get are taken for granted as something they’ve earned by their own hard effort. But then, when I got to the supermarket, I discovered the cheating bastards had whacked up all their prices. I’ve been robbed!

Does this mean workers don’t mind if their take-home pay isn’t keeping with prices? Of course not. They feel the loss; they’re just confused about what’s causing it. I think that, for many people, what matters, and sticks in their mind, is how often they run out of money before their next payday.

My theory is that, because wages rose a bit faster than prices for so many years, many people have developed the unconscious habit of spending a little more each year. But when wages stop rising a little faster than prices – as they have done since March 2021 – people do feel it. They look around for someone to blame and the first thing they see is Woolies and Coles.

But there’s one factor causing pain that’s so well concealed that few people – even few economists – have noticed. One reason take-home pay has fallen well behind prices – a reason the unions and Labor thought was a great thing, and the Morrison government was too weak-kneed to stop – was the mandatory rises in employers’ contributions to their workers’ superannuation savings, which have lifted it from 9.5 per cent of your wage in 2021 to 11.5 per cent in July this year, and will take it to 12 per cent in July next year.

To the naked eye, it’s the employers who’re paying for this. But there’s strong evidence that the bosses reduce their ordinary pay rises to fit. If so, this will be a pain wage earners are feeling without knowing who to blame.

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Memo to RBA: If wages growth isn't the problem, what is?

 I can’t help wondering if the Reserve Bank isn’t misreading the economy. And it seems I’m not alone.

When you’re seeking to manage the economy through its ups and downs, it’s critically important to diagnose its problems correctly. If you’ve misread the symptoms, you can make things worse rather than better. Or, for instance, you can single out citizens who had the temerity to borrow heavily to buy their home and subject them to needless punishment.

Last week, several things made me start wondering if the Reserve needs a rethink. The first was a paper by America’s highly regarded Brookings Institution, that I should have got onto in August.

The world’s central banks – including ours – have concluded that this unexpected burst of inflation is explained partly by temporary disruption to the supply of goods caused by the pandemic (and Russia’s attack on Ukraine), and partly by excessive demand following the authorities’ excessive economic stimulus to counter the lockdowns.

Sorry, not true says the Brookings study, which looked at new data.

“The vast majority of the COVID-19 inflation surge is accounted for by supply-linked factors, especially a rise in company [profit] margins that followed severe delivery delays at the height of the pandemic. Demand-linked factors, notably indicators of labour market overheating, play almost no role.

“As a result, the argument that policy stimulus was excessive is weak,” the study says. And, since company profit margins have yet to return to their previous level, this suggests the inflation rate has yet to fall as the effects of the pandemic continue to unwind. If so, the US Federal Reserve may have overtightened.

Now, all that refers to the US economy and may not apply to ours. May not, but I doubt it.

Despite four successive quarters in which the economy’s rate of growth in “aggregate demand” has been very weak, our Reserve is delaying a reduction in interest rates because, it says, the level of demand is still higher than the level of supply. If so, the rate of inflation may not keep falling, or may even start rising.

How does the Reserve know the level of supply is too low? Mainly by looking at the measure of idle capacity in the jobs market – aka the rate of unemployment.

So, when we saw the figures for October last week, and they showed unemployment still stuck at an exceptionally low 4.1 per cent, no higher than it was in January, it wasn’t surprising that many concluded the Reserve wasn’t likely to start cutting the official interest rate until May next year.

But hang on. One good measure of the job market’s ability to supply more labour as required is the “participation rate” – the proportion of the working-age population willing to participate in the paid labour force by either having a job or actively seeking one.

Now, the econocrats have been predicting that the ageing of the population would cause the “part rate” to start falling for at least the past 20 years. But in that time, it has kept going up rather than down, and is now higher than ever. Last week’s figures show it’s risen by a strong 0.5 percentage points to 67.2 per cent over just the past year.

So where’s the evidence the economy’s reached the end of its capacity to supply more workers?

My guess is that all the Reserve’s unaccustomed talk about the level of supply being too low relative to demand is just a way for it to avoid admitting that its judgment about when to start cutting interest rates is still – as it has been for all macroeconomists for the past 40 years – heavily reliant on its calculation of the present NAIRU: the “non-accelerating-inflation rate of unemployment”, which is the lowest the unemployment rate can fall before shortages of labour cause wage inflation to start going back up.

I think the Reserve’s reluctance to cut is driven by its (undisclosed) calculation that the NAIRU is well above 4.1 per cent. But earlier this month, Treasury secretary Dr Steven Kennedy told a parliamentary committee that, though such calculations are “uncertain”, Treasury estimates that the NAIRU is “around 4.25 per cent, close to the current rate of unemployment”.

Another thing we learnt last week was that a key measure of the rate at which wages are rising, the wage price index, rose by 0.8 per cent during the September quarter, causing the annual rate to fall from 4.1 per cent to 3.5 per cent.

According to Adam Boyton and other economists at the ANZ Bank, this caused the six-month annualised rate of wages growth to be unchanged at 3.2 per cent. “Wages growth has slowed across awards, enterprise bargaining agreements and individual agreements, pointing to a broad-based slowdown,” they said.

This – combined with the lack of increase in the rate of unemployment over the past year, and allowing for the delay before what’s happening to unemployment affects wage rates – has led these economists to conclude the NAIRU is closer to 3.75 per cent.

Finally, Westpac chief economist Dr Luci Ellis noted last week that another measure of wages pressure, the cost of labour per unit (which takes account of changes in the productivity of workers), has fallen from an annualised rate of 7 per cent to 3.5 per cent in just the six months to September.

She said that even if the annual improvement in the productivity of labour averages a touch below 1 per cent, which would be worse than our recent performance, annual wages growth averaging 3.2 per cent – as it has for the past three quarters – is “well and truly consistent with inflation averaging 2.5 per cent or below”.

Get what all this says? Ever since the Reserve began raising interest rates in May 2022, it has worried about the possibility of excessive growth in wages keeping inflation above the Reserve’s target zone. In all that time, and particularly now, it’s shown absolutely no sign of doing so. Neither shortages of labour nor the (much reduced) power of the unions has caused a problem.

The Reserve needs to lose its hang-up about wages and think harder about the need to ease the pain on innocent bystanders.

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You can blame Albanese for all our woes - except the cost of living

I try not to be a pollie basher – we get the politicians we deserve – but I can’t remember a time when I’ve been more disillusioned and disheartened by the performance of both major parties. It’s fair to criticise them on every topic except the one that obsesses us: the cost-of-living crisis.

Let’s start with that. For several years, we had prices rising at a rate that was actually lower than the Reserve Bank and economists regarded as healthy: less than 2 per cent a year. But then, in the months before the federal election in May 2022, at which Scott Morrison and crew were tossed out, prices took off.

By the end of that year, consumer prices had risen by almost 8 per cent. As you remember, the Reserve Bank began trying to get inflation back under control the only, crude way it knows: to discourage households from spending so much by using higher interest rates – particularly on home loans – to leave us with less to spend on other things.

Why did the Reserve Bank start raising rates during the election campaign, rather than waiting until it was over? Because it foresaw that a change of government was likely and didn’t want anyone getting the idea that it was the new government that had caused the problem.

By the same token, it’s hard to blame the surge in prices on the Morrison government. Prices took off in all the rich economies for much the same reasons. First, because the pandemic caused major disruption to supply of many goods, and because Russia’s attack on Ukraine disrupted world gas and oil markets.

But second, because the efforts to prop the economy up during the lockdowns – by slashing interest rates almost to zero, and the shedloads of government spending on the JobKeeper scheme, the temporary doubling of unemployment benefits, and on many other things – proved to be wildly excessive. When people started spending all that extra money, demand for goods and services grew faster than businesses’ ability to supply them, so they whacked up their prices.

You could blame this gross miscalculation on Morrison & Co – except that it was the first pandemic the world had seen in a century, the medicos had no idea how bad it would be or how long it would take to develop a vaccine, and like all governments everywhere, our government and its econocrats decided it would be safer to do too much than too little.

Since then, the passing of the international supply disruptions and the Reserve Bank’s many interest-rate increases have succeeded in getting the rate of price increase down a long way. But the bank won’t start cutting interest rates until it’s convinced our return to the 2 to 3 per cent inflation target zone will last.

Despite the unceasing criticism of a largely partisan news media, the Albanese government’s part in helping get inflation back under control has been as good as it’s reasonable to expect.

One reason it’s taking so long is that both the government and the Reserve Bank have been trying to avoid causing a huge rise in unemployment, and in this, they’ve been spectacularly successful. The proportion of the working-age population with jobs is at a record high.

So if it’s not fair to blame Albanese and his ministers for the cost-of-living crisis, why am I so critical and disapproving of the government – not to mention the opposition?

Because on almost every other matter Albanese has touched, he’s done far less than he should have. And in their time on the opposition benches, the Liberals and their Coalition partners have laboured mightily to make themselves more extreme and less electable.

As always, we turned to a new government in 2022 full of hope that it would make a much better fist of dealing with our many problems. And it’s always been true that Albanese and his people knew what needed doing. It’s just that, somewhere along the line, he seems to have lost his bottle.

He’s done a bit to tackle each of our big problems, but with one exception, he’s stopped short of doing nearly enough. Everything gets a lick and a promise.

The one exception has been the government’s significant efforts to reduce job insecurity – to improve the wages and conditions of less-skilled workers – for which we can thank the unions. Under the Labor Party’s constitution, the union movement holds a mortgage over the party and its members of parliament.

On everything else, Albanese seems to live in fear of annoying some interest group somewhere. So he always does something, but never enough. When business and other interest groups lobby the government privately to tone down its planned changes, he invariably obliges.

You can see this in the government’s changes to gambling advertising, Medicare bulk-billing, the adequate taxation of mining and gas, the National Anti-Corruption Commission (no public hearings), the housing crisis, vocational education and training, aged care and so forth.

But on no issue has Albanese failed so badly as on the one most vital to our future: climate change. Sure, he’s shored up the Coalition government’s “safeguard mechanism” and legislated the target of reducing emissions by 43 per cent by 2030. At the same time, however, he’s acted to secure the future of natural gas extraction and authorised expansion of three big coal mines.

It’s as though he’s taking an each-way bet. He seems desperate to stay in office, but has no great plans to govern effectively.

Meanwhile, under Peter Dutton, the Liberals and their pro-mining National Party colleagues have used their time in opposition to make themselves negative, divisive and utterly unworthy to take over from a weak government. Their one substantive policy is to be off with the nuclear fairies.

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How weak competition forces up food prices along the supply chain

By Millie Muroi, Economics Writer

The first most of us see of our groceries is the end product – after all the planting, growing, shipping and packaging has happened. So when we’re hit with a big bill at the checkout, it’s easy to blame supermarkets for the expensive beef, carrot or turnip that ends up on our forks.

We know Coles and Woolies have received raps on their knuckles for their behaviour recently, including alleged false discounts to lure in customers. But it’s not just customers or the competition watchdog dishing out their disdain. And it’s far from just the supermarkets that have pointed questions to answer.

Dr Andrew Leigh, former economics professor and now assistant minister for competition and treasury, has had a deep-dive into the topic. It turns out the list of possible culprits when it comes to the costly lack of competition is longer than just the supermarkets – and it’s our farmers bearing the brunt of it.

Basically, while our household budgets are getting pushed by pricier produce, farmers are getting squeezed. They’re not just facing higher prices when it comes to key ingredients such as fertiliser and machinery, but also higher costs and unfair terms once their produce is ready to be processed, shipped off and sold.

How do we know this? There are a few key signs.

Concentration is one. “Industries with plenty of competitors tend to deliver better prices, more choices and stronger productivity growth,” Leigh said in a speech this week.

The fewer players there are in a market, the less competitive it tends to be. Less competition usually means lower wages, less choice for consumers and less innovation, with dominant businesses able to charge higher prices than they might otherwise be able to, since they don’t have to worry so much about being undercut or fighting to win over customers with bargains.

Analysis by economic research institute e61 last year found all Australian industries were more concentrated than those in the US, especially in mining, finance and utilities, in which the top four firms have more than 60 per cent market share.

Generally, we see a market as “concentrated” if the biggest four firms control one-third or more of it. In 2016, Leigh and his colleague Adam Triggs found more than half of industries in the Australian economy were concentrated markets. Since then, concentration in Australia has become worse.

Farming, though, is surprisingly competitive – at least for most commodities. So why are we still seeing higher prices at the check-out?

Part of it is thanks to supply chain issues, especially during the pandemic, which meant we couldn’t get as many materials and produce from overseas, reducing supply and driving up prices. Then there’s always the temperamental weather, which can dramatically cut harvests.

But it’s a growing domestic issue which is causing headaches for farmers.

Before anything even springs out of the ground or fattens up in a paddock, farmers are dealt a tricky hand. The largest four fertiliser companies, for example, control nearly two-thirds of the market and the top four hardware suppliers control roughly half of the market, according to Leigh’s analysis of data from IBIS World.

From high-tech harvesters to tractors and seeding equipment, machinery is a big cost paid by farmers. That means when there’s a lack of options and farmers aren’t able to shop around as much, their hip-pockets – and ours – are worse off.

If you think that lack of choice is bad, Leigh says it’s even worse when farmers go to repair and service their equipment.

Farming machinery makers have a lot of power – even more than carmakers – thanks to warranties forcing farmers to go to a specific dealer for servicing, and tech restrictions holding farmers back from accessing the parts, manuals and diagnostic software they need to make repairs themselves.

Then there are seeds. From these little things, big costs can grow. One paper from the US Department of Agriculture’s Economic Research Service in 2023 found the seed sector had become more concentrated. Between 1990 and 2020, the average seed price soared 270 per cent, and 463 per cent for genetically modified types.

The huge price increase partly accounts for the fact seeds have become better – for example, GMO varieties which have made farming more productive. But as Leigh points out, “there are not many other industries where the price of a key input has grown five-fold in 30 years.”

But that’s not all. Once the cattle has been raised or the blueberries grown, farmers have little choice or bargaining power when it comes to processing, transporting and selling produce.

When it comes to slaughtering cattle, the top five Australian processors accounted for about 57 per cent of the market in 2017, meaning cattle farmers had little choice in the prices and options they accepted. For fruit and vegetable processing, the biggest four companies hold about one-third of the market.

When the produce is ready to be sent out, farmers have even less choice. Two companies – ANL and Maersk – account for 85 per cent of the shipping freight industry in Australia, and four companies control 64 per cent of the market if farmers want to send things via rail.

Farmers, especially those who produce at a smaller scale, often become the “meat in a market concentration sandwich”. 

Farmers, especially those who produce at a smaller scale, often become the “meat in a market concentration sandwich”. Credit:Louise Kennerley

As Leigh points out, the risk of spoilage further limits viable options available to farmers.

Then there’s the supermarket sector, where Coles and Woolies control about two-thirds of the market – a higher share than every OECD country except New Zealand and Norway.

Concentration at all these points means farmers are at greater risk of facing power imbalances, which show up in things such as unfair contracts, where terms are obviously lopsided. Bigger players in these concentrated industries can generally muscle in with terms which are worse for farmers, such as restricting them from raising issues or selling things at unfairly cheap prices.

All of this not only puts pressure on farmers, but can reduce their ability and incentive to invest in improving their product and the way they do things.

As Leigh puts it, farmers, especially those who produce at a smaller scale, often become the “meat in a market concentration sandwich”.

There’s no easy fix in all this, but preventing too many mergers, where companies combine and gobble each other up to become even bigger, is key to promoting competition.

Of course, bigger companies are not always worse. Their scale can allow them to do things more cheaply. But too little competition can lead to pumped-up prices which flow all the way through from more expensive seeds and fertiliser to the prices charged by supermarkets.

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