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

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

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

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at the 2013 election was Julia Gillard’s introduction of a carbon price in 2012, which that great statesman Tony Abbott repealed in 2014.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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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We need to unclog the pipes of the capitalist machine

Of the many worthwhile economic reforms put on Treasurer Jim Chalmers’ to-do list after last week’s roundtable, I suspect the one that could – repeat could – produce the most lasting boost to our productivity is the one that didn’t sound like much: reform of the way we regulate the economy. Abolish more nuisance tariffs, anyone?

Economists are obsessed by taxes. So too are business people. So it wasn’t hard for those sitting round the oval table to convince themselves that reforming our system of taxes was the key to improving our “productivity” – the efficiency with which our capitalist economic machine converts inputs of resources into outputs of myriad goods and services.

But I doubt it. Our tax system does need major reform, but that’s much more about reducing its generational unfairness than increasing economic efficiency. Economists see taxes as just another price, and the “neoclassical” model of the economy they carry in their heads tells them prices are the key to understanding everything. That’s why they believe such absurd propositions as that every worker on the top tax rate – including all the worthies at the roundtable – is only doing it for the money, and is unmotivated by, for instance, the desire for power and status.

No, a more productive way to think of it is that, though many, many aspects of our lives need to be regulated – from outlawing theft and murder, to what and where we’re allowed to build things – there’s a real risk that the politicians and regulators will overdo it.

That, with the best of intentions, they’ll end up misusing their power. That they’ll make their regulation of the particular bit of our activity they’re responsible for too prescriptive, that they’ll try to perfect outcomes in their bit at the expense of all the other bits. That their demands will overlap with, or even contradict, the demands of other regulators.

This risk is greatly multiplied by our federal system of government, with at least two levels of government having the power to regulate most of the aspects of our activity.

As the Productivity Commission has confirmed, our businesses face a thicket of regulations. That thicket grows with each year of governments governing.

And then there’s the risk that multiple regulators will yield to the temptation to do their job in a way that makes things easier or cheaper for them, at the expense of those they’re regulating. Requiring too much form-filling, for instance.

Worse, regulators who take far too long to approve or deny applications to start a new business or build something. The delay probably saves them the cost of having to hire a few extra workers, but the cost to the rest of us, I now realise, is huge.

If ever there was a “negative externality”, as economists call it, this is it. The cost of regulatory delay has two aspects. It greatly reduces the productivity of the construction industry, affecting both housing, and commercial and infrastructure construction.

If ever there was a multifaceted problem it’s housing affordability; problems on both the demand and supply sides. But we’re indebted to Treasury for pointing out just how much of the problem is explained by the growing inefficiency of our home building industry.

It’s a cottage industry that’s done too little to seek economies of scale. But the average time it takes to produce a new home has worsened greatly in recent decades. This must surely be explained mainly by the growing time it takes for building permits to be issued.

So, if we were to greatly reduce the average approval time – which shouldn’t be too hard – we could expect this to significantly increase the number of homes the industry could produce each year, without any increase in its size. Productivity improvement doesn’t come more clearly than this. And this relatively easy policy measure could also put a decent dent in our home affordability problem.

The other respect in which delays in approvals are costly comes from what economists call “the time value of money,” and normal people call interest rates. Construction companies have capital – borrowed or from shareholders – tied up and waiting for the off from approval bodies. So for every day that capital lies idle, the business has funding costs that aren’t matched by income-earning work.

One of the most useful things about the roundtable is the way it has produced evidence of the extent of something we rarely notice: overlapping and conflicting regulations, the surprising number of approvals businesses must get and the growing delays in getting them, as well as all the forms that regulators demand be filled, repeating known information.

They want economic growth and rising living standards, but they also want to transition to renewable energy, protect the natural environment, keep people safe at work, ensure diversity in the workforce, and various other completely legitimate concerns.

Trouble is, we’ve got all these outfits busily regulating this bit and that bit, without any outfit sitting over the top, regulating the regulators. Making sure the various bits fit together without overlap and contradictions, finding the best trade-off between the conflicting objectives, and forcing all the regulators to rationalise their form-filling, using uniform definitions and common databases.

That would be hard enough at the federal level, but it has to be achieved by agreement between the feds and the states, with the states getting their local government into line.

When you think it through, it’s not hard to see how excessive, unco-ordinated and conflicting regulation of businesses, with all its approval processes and form-filling, is clogging up the capitalist machine. Unclog the pipes and the machine would produce more each year without any extra inputs.

But regulatory reform has been tried before and achieved little before being slipped quietly into the too-hard basket. And even if the roundtable decisions were to lead to an almighty clean-out of the Aegean stable and a one-off lift in the level of productivity, the capitalist pipes would start clogging up again as governments continued to govern and regulation expanded.

So what we need is another permanent government agency, whose only job is to regulate the nation’s regulators in the interests of the regulated and the continued success of the capitalist machine.

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I've changed my mind about red tape: it's well worth cutting

This is the week to understand something most people don’t: businesses don’t do productivity. Although the nation’s productivity happens – or doesn’t happen – mainly on the floors of the millions of Australia’s businesses, their dominant goal is to achieve higher profits.

So most of the “reforms” the business lobby groups are calling for in the name of improving productivity are really intended to help them increase profit.

There’s actually no reason businesspeople would want to spend any of their time contributing to the political debate other than to win favours from the politicians that make it easier for them to increase their profits.

Productivity and profit are related, but not the same. Productivity is a measure of the efficiency with which businesses (and other organisations) take raw materials, capital equipment and human labour and turn them into the myriad goods and services they produce to meet our needs.

So wouldn’t making a business more efficient in doing what it does also make it more profitable? It could – although economists are hoping the strength of competition in their industry will end up obliging businesses to pass on the benefit of their greater efficiency to their customers in the form of lower prices. But even if a weakening in competitive pressure – which seems to have occurred in recent years – could allow businesses to retain the benefit of any improvement in their efficiency, it’s still just one way to increase profit.

Business will always be seeking the easiest way to do it, and achieving greater efficiency – improved productivity – isn’t easy. It’s easier for big businesses to reduce competition by buying out their smaller competitors, thus making it easier for the remaining big boys to put up their prices.

And this is just what research by Treasury and the Reserve Bank says has been happening over the past decade or so.

Of course, the easiest way to increase after-tax profits would be to persuade the government to cut the rate of company tax. And – purely by chance, you understand – this is the top proposal to increase productivity that the business side is taking to this week’s economic reform roundtable.

Another favourite supposed productivity booster would be for the Albanese government to reverse the industrial relations changes it made in its first term, which were intended to shift the balance of bargaining power away from employers and towards employees.

Business’s third idea is for governments to cut back all the “red tape” that has tied business up in knots and to improve planning and the approval of major projects. It’s not hard to see how this would make businesspeople’s lives a lot easier and add a bit to their profits.

But here’s the thing: it’s equally easy to see that reducing excessive regulation and speeding up the approval of major investment projects and even ordinary homes could indeed make a probably small but worthwhile improvement to the economy’s productivity.

Certainly, those hard-nosed folk at the Productivity Commission are convinced. In her speech on Monday, the commission’s boss, Danielle Wood, gave some hair-raising examples of excessive regulatory requirements.

One provider told the commission it is required to complete 15 separate accreditation processes across the health and social care services. Another said it is accountable to 350 pieces of legislation and regulations, and has a minimum of 16 program audits every three years – many of which require them to provide the same information over and over.

Yet another service provider said the cost of repetitive audits and accreditation processes runs into the hundreds of thousands of dollars each year.

Elsewhere, businesses complain of delays extending to years for the approval or rejection of major construction projects, and many months for ordinary homes.

Now, I used to be sceptical of demands to get rid of red tape, fearing they were disguised demands by business fat cats to be able to damage the natural environment wherever they saw fit and build housing anywhere and everywhere. But the greater specificity of the latest proposals has convinced me there’s a real problem that is indeed wasting a lot of the private sector’s time and money.

Part of the problem is government agencies responsible for protecting the environment, or occupational health and safety, or public safety who, in their zeal, set the highest standards without regard for all the other things we need to protect – including our standard of living.

They’re like the French teacher who wants their students to spend all their time preparing for their French test, at the expense of all the other subjects they’re being tested on.

But a further complication is overlap between our three levels of government. If businesses in particular fields are being regulated by federal and state and local government, with overlapping and conflicting regulations and separate forms to fill in, this is confusing as well as wasteful.

And then you’ve got the sad truth that government departments and agencies are constantly temped to abuse their power over the rest of us, and often do. We know how private monopolies commonly overcharge and give their customers poor service. They do this for no other reason than that they can.

But the government is also a monopoly, and its departments and agencies are just as commonly able to abuse their power over us. They are the law, we can’t take our business elsewhere, and if it suits them to make us wait many months for their approval to build something, that’s your problem, not theirs. They save a little by employing too few workers to keep the approval process to time, and you bear the cost of the delay.

The more you think about it, however, the more you realise that streamlining regulation, so that a better trade-off between the many conflicting objectives of government is achieved, and the many cases of overlap between the three levels of government, won’t be easily or quickly done.

Maybe it would take a royal commission, with a continuing monitoring authority, rather than a three-day roundtable.

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Want better productivity? Keep wages growing strongly

Our economy has become unbalanced and is in danger of slowing to a halt. But not to worry. The Reserve Bank is determined to ensure that, should we sink under the sea, we won’t have had an inflation problem to worry about.

This is the week we fix our productivity problem, but how far we get remains to be seen. The problem is that, while improving the efficiency with which the economic machine converts inputs of raw materials, capital equipment and human labour into outputs of goods and services has been the way we’ve raised our material standard of living over the past two centuries, there’s been no improvement in this productivity for a decade.

But if that’s the problem, we still have a problem: no one wants to accept responsibility for fixing the problem. That’s for the government to do. Even the Reserve Bank wants to pass the parcel to the government.

Last week, while finally cutting the official interest rate by a click, the Reserve lamented the need to lower its assumed annual rate of improvement in productivity from 1 per cent to 0.7 per cent, with governor Michele Bullock noting there was nothing the Reserve could do about productivity.

The weirdest thing about this episode is the way the business lobbies have got away with portraying the lack of productivity improvement as having been caused by the government. It’s as though productivity is something created on the Cabinet room table, the product of good – or not-so-good – policy decisions.

You’d never know that the figure for national productivity improvement is largely the summation of what’s happening in all our farms, mines, factories and offices. By how much have each of them become more efficient at doing what they do.

But no one ever bothers to ask the bosses – or even their Canberra lobbyists – why they’ve stopped getting better at what they do. If they did, they’d be told it was all the government’s fault. Too much regulation and red tape, too high taxes and too little freedom to change their employment arrangements.

Yeah, sure. You get closer to the truth when you remember Sims’ Law. Rod Sims, the former competition watchdog, never tired of explaining that improving their productivity was just one of the ways businesses could increase their profits.

So, why has productivity improvement stalled? Because businesses have found other, easier ways to increase their profits.

To be fair, there are other, more technical reasons that help explain the lack of productivity improvement. One is our continuing shift from capital-intensive goods to labour-intensive services: it’s easier to use better machines to achieve more output per hour than it is to speed up humans.

Another reason is our recent growth in employment in the “non-market sector”, particularly aged care. When the taxpayers are covering much of the cost, it’s hard to measure productivity. And when the care objective is as much about quality as quantity, it’s hard to replace a motherly nurse with a robot.

But the debate in the lead-up to tomorrow’s economic reform roundtable has done much to clarify the chief cause of the productivity pause. The main way we’ve made workers more productive is by giving them more and better machines to work with. Labour-saving technology keeps advancing.

However, Treasury tells us that, as a share of gross domestic product, business investment in equipment and structures is lower than it was in the early 2000s.

So, why have businesses slackened in their efforts to make their workers more productive? Most likely reason: because the increased “concentration” of many industries – more of the market served by fewer big firms – has reduced competitive pressure and given those big businesses greater freedom to keep their prices high.

This brings us back to the Reserve Bank. Last week it was at pains to point out that its reduction in the assumed annual rate of productivity improvement from 1 per cent to 0.7 per cent meant that average annual earnings can’t grow by more than 3.2 per cent – down from the previously assumed 3.5 per cent – without stoking inflation.

What? Sorry, this is the risk-averse, conventional thinking of a bookkeeper, that puts avoiding inflation ahead of getting productivity improving and the economy, growing. It’s saying I’m responsible for inflation; productivity is someone else’s worry.

It’s also thinking that’s biased in favour of business, at the expense of households – the people whose interests businesses are supposed to serve. It’s saying that businesses must be free to make profits any legal way they see fit: if this is bad for their employees and the households they come from, tough.

The pro-business bias comes from the neoclassical model of the economy every economist carries in their head, which assumes that businesses respond rationally to the incentives they face. No, they don’t. They’re just as susceptible to fads and fashions as the rest of us – fashions reinforced by the sharemarket and its analysts. “Everyone’s doing X, why aren’t you? What’s wrong with you?”

In the Reserve’s case, the pro-business bias coming from the model is reinforced by it having a board stacked with businesspeople but, at best, only one person coming from the employees’ perspective. As well, the Reserve consults extensively with businesses, while not bothering to talk to the union side. (Little wonder their forecasts for wage growth are so consistently wrong.)

So profits growth is unconstrained, while big pay rises are a terrible worry because they could add to inflation. Trouble is, the economy is circular: when business fattens its profits at the expense of its workers, those workers turn into households that don’t have as much to spend on the things businesses are selling.

When you tolerate businesses fattening their profits by finding ways to keep their wage bill down, you’re helping them cut their own throats. But no one will be able to accuse you of letting inflation get away.

Back on productivity. One big reason businesses haven’t been investing much in the labour-saving technology that increases their productivity is that they’re not paying a lot for their labour. Use generous pay rises to raise the cost of labour relative to capital, then watch our productivity improve, retrospectively justifying the generous pay rises.

The Reserve needs to switch to a “growth mindset”.

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Official modelling shows little benefit from a cut in company tax

Be sure your dodgy modelling will find you out. I’m starting to think economists have become so used to pretending to know more about the economy than they really do that they don’t notice the way they mislead the rest of us.

The Productivity Commission has proposed a radical change in the way companies are taxed which, it tells us, would improve the economy’s productivity and leave us better off. It has commissioned modelling that, it implies, supports its case for change.

But when you read its report – and add some knowledge of how “computable general equilibrium” models of the economy work – you’re left with nothing but doubts.

The proposal involves cutting the present 30 or 25 per cent rate of tax on company profits to 20 per cent for all companies except the 500 or so with annual turnover (total sales) of more than $1 billion.

But it also involves introducing a 5 per cent tax on the annual net cash flow of all companies. This new tax would include an allowance for the cost of companies’ equity capital, and an immediate write-off of the cost of newly purchased assets, but no allowance for interest paid on the companies’ borrowing.

The commission paid for two sets of modelling of the proposed changes, one from Chris Murphy, Australia’s leading commercial modeller, and the other from the leading academic modelling outfit, the Centre of Policy Studies (CoPS) at Victoria University.

The commission’s report compares the results of the two modelling exercises for just the first proposed change, cutting the rate of company tax to 20 per cent for all but the top 500 companies.

According to the Murphy model, this would cause companies to increase their investment in new equipment by 1.4 per cent, improve “productivity” by 0.4 per cent, increase real gross domestic product by 0.4 per cent and increase real before-tax wages by 0.6 per cent.

The CoPS modelling results are similar in some respects. It expects a smaller increase in business investment of 0.6 per cent, but improved productivity of almost as much, and the same increase in before-tax wages, even though GDP increases by only 0.2 per cent.

Does the modelling provide reasonably strong support for cutting company tax to make the economy bigger and better? Well, no, not really. Those results are shockingly small.

Economists have gone for years making their modelling results seem grander than they are by, in this instance, letting the rest of us conclude that the estimated increases of 1.4 per cent, 0.4 per cent and 0.6 per cent represent annual increases in the rate of growth in business investment, productivity, GDP and before-tax wages.

Wrong. What the people waving modelling results around rarely bother to make sure the punters understand is that these are once-only increases in the levels of investment, productivity, GDP and before-tax wages. What’s more, they’ll come about only “over the long run”.

And how long is the long run? They rarely bother to tell us – especially as it can vary with the modeller. But if you dig deep you can find out. CoPS sets it at five years, I’m told, but it’s more usually thought of as about 10 years. And the commission’s report seems to be saying that its comparison of the two modelling exercises is what they estimate will be the story in 2050.

Get it? We’re considering a hugely expensive cut in the rate of company tax in the belief that this will cause real GDP to be between 0.2 and 0.4 per cent greater in five to 25 years’ time.

Really? Its modelling shows the benefit from cutting the rate of company tax would take years to materialise, and still be trivial, but the commission thinks we should do it anyway.

See what this is saying? Even the economists who commissioned this modelling don’t take its results seriously. Why not? Well, for a start, they know how primitive and grossly oversimplified these modelling exercises are. It’s as though the economy they’ve been able to model is one inhabited by stick figures, not humans.

As modelling is such a dodgy exercise, economists know they don’t have to believe any results they don’t fancy – because, in truth, economics is based more on religious belief than scientific inquiry. What figures largest in the thinking of economists is the model of the economy they’ve been carrying around in their heads since about second year uni.

The model in their head tells them taxes discourage and distort economy activity, meaning lower taxes are always better. So if econometric modelling tells them a rate cut would make little difference, they’re undeterred.

Speaking of taxes, one reason the effects of a cut in company tax are so modest is the standard assumption that the lost government revenue has to be covered by tax increases somewhere else. The modellers here have assumed it’s covered by a “non-distorting lump-sum tax” (which doesn’t exist in the real world) or by bracket creep (a hidden, lasting increase in personal income tax).

Significantly, this would be why, under Murphy, the real wage increase of 0.6 per cent before tax, turns into an after-tax increase of zero. Really? We want to improve productivity to raise our material standard of living, but real after-tax wages would be unchanged under Murphy – or, under CoPS, would actually fall by 0.5 per cent. Great idea, eh?

Finally, economists at the Australia Institute reveal that what the commission chooses to call “productivity” is actually “output per worker”, which ain’t quite the same thing.

It turns out that, according to the modelling, national output per worker increases not because any worker becomes more productive, but because the company tax cut’s reduction in the after-tax cost of capital causes our capital-intensive mining industry (which thereby has higher output per worker) to expand at the expense of the labour-intensive health and education sectors.

And this would be progress, would it? The sad truth is that modelling is used to help sell policy changes someone thinks we should make, not to improve our understanding of what works and what doesn’t.

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PC wants our big mining companies to pay more 'rent'

If you get the feeling that the profits some big businesses make are far more than they deserve – exorbitant, in fact – you’re not wrong. “Super profits” are something economists are well aware of, though they rarely say much about. And they prefer to call it “economic rent”.

Economic rent has nothing to do with what you pay to live in someone else’s house. And it’s money you receive, not money you pay. Why economists call it “rent” is lost in the mists of the history of economic thought. Maybe they just like using jargon other people don’t understand.

But in one of the reports the Productivity Commission has produced for the economic roundtable, it wants to make sure we all understand economic rent. Why? Because it wants to partially replace the present company tax with a tax on companies’ “net cash flow”. And the great advantage of this new tax, we’re told, is that it taxes companies’ economic rents, not their ordinary profits.

When a company considers setting up a business, it needs to earn a certain rate of return – that is, an after-tax profit after allowing for all its direct costs. The after-tax return is the company’s shareholders’ reward for investing their savings in the business rather than, say, lending it to someone.

And for the company to stay in the business, the rate of return it receives needs to be at least as great as what it could earn by moving to some other industry. Economists call this its “opportunity cost”.

But here’s the point: if the company’s after-tax return exceeds its opportunity cost, the extra bit is its economic rent. This rent is a sign the company’s profits are bigger than they need to be.

Sometimes these extra profits are temporary. Other businesses see how much moolah is being made, enter the market and, in the process of getting their share, bid down prices and profits. So, competition has removed the economic rent.

Often, however, the economic rent is lasting. This can be because the existing business has a special advantage other firms can’t share or copy. They’ve got the best location or have cornered the market in some other way. (Or, of course, they may have persuaded the government to grant them some special advantage other firms or industries don’t get. This, by the way, is why economists call businesses that ask for government favours “rent-seekers”.)

For Australians, note that economic rent is common in mining. Some minerals are in high demand, but limited global supply. Some mines are better located, or have deposits that are higher quality or nearer the surface.

Note, too, that pop stars and film stars also receive economic rent. Some of them earn far more than others because they have more charisma or a bigger following. (Please don’t tell my boss, but even I make a bit of rent. I’d do this job for a lot less than I’m paid. And nor could I make as much in some other occupation. So why doesn’t the boss pay me less? I guess because he’s worried some rival editor might offer me more.)

In other words, there are many companies and individuals earning economic rent that we can’t do much about. The commission sees this as a problem because the ability of some businesses to charge higher prices than necessary reduces the economy’s efficiency and causes living standards to be lower.

Which brings us to company tax and taxes generally. Economists worry that imposing taxes on certain activities distorts people’s behaviour. Taxing companies’ profits, for instance, may discourage them from expanding – or setting up in the first place.

So how widespread is economic rent? The commission says that modelling undertaken for its inquiry estimates that 54 per cent of the company income tax base takes the form of economic rent. This is up from an estimate of 41 per cent in 2018.

Taxing individuals’ incomes may (repeat, may) discourage them from working as hard. And taxing the purchase of some goods and services but not others may encourage people to buy stuff that’s not what they would prefer.

See where this is leading? We often need higher taxes to cover increased government spending and stop the government’s debt getting too big. However, economists worry that higher taxes will discourage people from working and investing, as well as distorting their purchases.

But if economic rent is bad for the economy – if it reduces efficiency and holds back living standards – doesn’t that mean taxing it, even taxing it quite heavily, can help reduce the budget deficit without harming the economy?

This is why the commission wants us to cut back ordinary company tax and start moving to a new 5 per cent tax on companies’ net cashflow. On one hand, ordinary company tax discourages investment even in companies that aren’t earning economic rent because it reduces their after-tax rate of return.

On the other, the commission argues, a cashflow tax would not distort decisions to invest via companies because it’s designed to tax only their earnings above their required rate of return. That is, it’s designed to tax only the companies’ economic rent – if any.

Remember, we’re supposed to be finding ways to improve our productivity. The commission notes that one of the main ways businesses have increased the productivity of their labour over the years has been to give their workers more and better machines to work with. Lately, however, firms’ spending on plant and equipment has grown only slowly.

That would be another benefit of transitioning from ordinary company tax to a cashflow tax. Under the old way, spending on new equipment reduces taxable income only over a number of years via annual depreciation.

Under the cashflow tax, they would get a full deduction for such spending in the year it was made – which should encourage companies to spend a lot more on productivity-enhancing equipment.

Now, tax economists have long been huge supporters of a cashflow tax. But no country has been game to try it yet, and I doubt if Anthony Albanese is the guy who would like to go first.

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Big business quick to veto productivity tax reform

Well, you can forget about Treasurer Jim Chalmers’ three-day roundtable discussions leading to any improvement in the economy’s productivity and growth, let alone getting the budget back under control.

Late last week, the Business Council of Australia persuaded all of Canberra’s many other business lobby groups to join it in rejecting out of hand the Productivity Commission’s proposal for reform of the company tax system which, the commission argued, would increase businesses’ incentive to invest more in productivity-enhancing plant and equipment, without any net reduction in company tax collections.

The proposal is for the rate of company tax to be cut for all but our biggest 500 companies, while introducing a 5 per cent tax on the net cash flow of all companies.

The join statement by 24 business lobby groups says that “while some businesses may benefit under the proposal, it risks all Australian consumers and businesses paying more for the things they buy every day – groceries, fuel and other daily essentials”.

Get it? This is the lobbyists’ oldest trick: “We’re not concerned about what the tax change would do to our profits, dear reader, we’re just worried about what it would do you and your pocket. It’s not us we worry about, it’s our customers.”

Suddenly, their professed concern about the lack of productivity improvement and slow growth is out the window, and now it’s the cost of living they’re deeply worried about. They’ve been urging governments to increase the GST for years, but now they don’t want higher prices. Yeah, sure.

Bet you didn’t know there are as many as 24 different business lobby groups in the capital. Their role is to advance the narrowly defined interests of their paying clients back in the rest of Oz by means fair or foul. They’re not paid to help the government reach a deal we can all live with, nor to suggest that their clients worry about anything other than their own immediate interests.

Canberra calls this lobbying. Economists call it rent-seeking. You press the government for special deals at the expense of someone else, while ensuring you contribute as little as possible. This, apparently, is the way democracy is meant to work.

And if the lobbyists can play this game, why can’t the business press join in? As its blatantly partisan commentary makes clear, big business’ only interest in attending the government’s roundtable was to come away with some new concession, ideally a cut in company tax.

At the summit after Labor was elected in 2022, business came away with nothing, we’re told, while the unions got all they wanted. Well, not gonna play along with that again.

It’s no surprise the Business Council is so opposed to the Productivity Commission’s proposal, which would reduce the tax paid by all companies bar the top 500. They’d get no cut in conventional company tax, but would pay the new 5 per cent cash flow tax.

Which lobby group roots for our biggest companies? The Business Council. What is surprising is the ease with which it was able to persuade all the other business lobbies to join it in helping protect the Big 500, even though most of their own members should have benefited from the deal.

Huh? I think the explanation is in the first sentence of the joint statement: the “proposal to tax business cash flow is an experimental change that hasn’t been tried anywhere else in the world”.

True. So, a simple case of resistance to radical change. And who could blame them? Economists – and the Productivity Commission itself – don’t have a good record in promoting radical changes that look good on paper and also work in practice. Think: the whole neoliberal project and, especially, the notion that creating from nowhere a market for the supply of disability services would be easy and efficient. It’s wasted billions.

When we wonder why productivity has stopped improving, the obvious suspect is the huge decline in the growth of business investment in new plant and equipment. Giving workers more and better machines to work with is the main way we’ve increased their ability to produce more per hour.

On paper, the commission’s partial switch from conventional company tax to a tax on companies’ net cash flow – which allows them to write off the full cost of new assets immediately – ought to improve productivity.

But the budget’s projected decade of deficits prohibits the Albanese government from giving tax cuts to companies or anyone else. So, while the commission’s plan would cut the tax paid by almost all companies, this cost to government revenue would be recouped by the extra tax paid by the Big 500.

Guess what? Many if not most of those companies pay far less tax than you’d expect. In particular, many of them are the subsidiaries of foreign multinationals using profit-shifting to pay laughably small amounts of tax in Australia.

The commission readily explains that the tax saving to most companies would be covered by tax-dodging foreign companies. Australia’s rare system of dividend imputation (“franking credits”) means that the Australian shareholders of Australian companies get their share of company tax refunded.

Only the foreign shareholders of Australian companies bear the cost of company tax. So why does the Business Council bang on unceasingly about the need to cut the rate of company tax? Because, when it gets down to cases, the Business Council represents the interests of foreign multinationals operating in Australia. That’s its guilty secret.

Footnote. When I wrote last week about the way “modelling” is used to make estimates of the favourable effects of a proposal sound more scientific and reliable than they are, I didn’t know the first offender would be the Productivity Commission, quoting results produced by Australia’s leading commercial modeller, Chris Murphy.

It says modelling suggests its proposal could increase investment by $7.4 billion, Gross Domestic Product by $14.6 billion and labour productivity by 0.4 per cent.

Sorry, no “computable general equilibrium” model can tell you the likely effect of some policy change on productivity. Someone has to insert their best guess at the effect on productivity, and all the model does is calculate what, given a host of other assumptions, such an improvement would mean for GDP.

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Roundtable: When they say 'modelling' grab your bulldust detector

The warm-up for next month’s three-day economic roundtable has begun, and this week we’ll start hearing from worthies who know exactly what we should do to improve our productivity. What’s more, they have the modelling to prove it.

Did you see last week’s headline that “Productivity boost would make workers $14,000 richer”? It was attached to the news that this week Productivity Commission boss Danielle Wood will release a report recommending the government overhaul company tax, speed up planning approvals for infrastructure projects and embrace artificial intelligence.

And doing this would lead to Australia’s full-time workers being $14,000 a year better off within a decade, would it? Well, no. That’s not what she said. It was that if our productivity performance could return to its long-term average, then that would translate into every full-time worker being $14,000 a year better off by 2035.

So, there was no actual link between what she wanted us to do and this mere calculation of what a return to the higher rate of productivity improvement in our past would do to our pay cheques in the present.

But even this simple calculation assumes that, should a return to a higher annual rate of improvement in productivity come about, the workers would get their fair share of the proceeds.

My point is, we’re about to hear many worthies proposing we do more of this or more of that particular thing because it will improve the economy’s “productivity” – its ability to turn the same quantity of labour, capital equipment and raw materials into a greater quantity of goods and services than before.

Sometimes they’ll advocate change X because they genuinely believe it would make the rest of us better off, and sometimes it’s just themselves they’re hoping to benefit. But, either way, many of them will try to make their argument more persuasive by producing “modelling” showing how much better off we’d be.

Let me tell you something, the politicians, businesspeople and economists who wave it in our faces never bother to: modelling isn’t all it’s cracked up to be. It can’t tell you much you didn’t already know except the answer to very complicated sums.

It allows to you to say, “if I assume A, B, C ... and K, what would that do to the rate of economic growth, employment and incomes, given that the economy works the way economic theory says it does?”

There’s a class of modelling using “computable general equilibrium” (CGE) models that’s very popular in Australia, though less so overseas. These models are often used to measure the likely effects of a change in government policy or of a proposed major infrastructure project.

It’s a safe bet we’ll be told the results of a lot of such modelling exercises before, during and after the roundtable. Just remember that modelling is more about helping me sell my idea to you than about finding out whether my great idea would actually work and, if so, how well.

The problem with economists is that they’re much more about religious faith than scientific inquiry. Our economics profession’s leading sceptic is Dr Richard Denniss, director of the Australia Institute. Other economists know what he knows and share his reservations, but they keep it to themselves.

With Matt Saunders, Denniss has written a paper on the limits of CGE modelling, which would make enlightening reading for many. “General equilibrium” means the model is designed to take in the whole economy, not just one part of it.

“Part of the persuasive power of CGE models comes from the perception that they contain a large amount of objective mathematics and theory,” they say. But while these models “contain many equations, this is not the same thing as a large amount of objectivity.

“The modeller needs to make decisions about the values of thousands, potentially millions, of model variables. It is not the model that estimates the many inputs for which no good data is available, it is the modeller and the modeller’s client that makes such choices.”

One way of viewing the economy is to say that the growth in real gross domestic product is determined by “the three Ps”: population growth, the proportion of the population that participates in the labour force, and the rate of improvement in the productivity of labour.

With these models, all three of those Ps are “exogenous variables”. That is, the modeller makes their best guess on what will happen to population growth, the rate of participation and the rate improvement in labour productivity, then punches them into the model and turns the handle to see what it says will happen to economic growth, employment and all the rest.

This means modelling can tell us little about productivity. If you had a list of things you wanted to do because you thought they’d improve productivity, the model couldn’t tell you whether each of them really would improve productivity, nor by how much all of them would improve it.

So, for instance, modelling can’t tell us whether cutting the rate of company tax would do more for productivity than, say, doubling government support for research and development. When it comes to productivity, it’s always the modeller telling the model what to think, not the other way around.

The great contradiction of modelling is that, while you have to be really good at maths to run a model, let alone build one, and really good at economics to build one that makes sense, the economy you end up modelling is so grossly oversimplified it’s like a world inhabited by stick figures.

Unlike all the people happily quoting modelling results to us, Denniss and Saunders tell us that, although these models spit out many numbers with dollar signs in front of them, there is no actual money in the model, no interest rates, credit, loans or savings.

The models usually assume that inflation has no effect on the real economy, most assume that the profits in each industry are minimal because competition competes them down, and capital equipment can be repurposed at no cost.

It’s fortunate for economists that their profession has never worried too much about ethics.

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How Chalmers can fix the budget despite stagnant productivity

As if Treasurer Jim Chalmers didn’t have a big enough problem trying to improve the economy’s productivity, we now know Treasury has privately reminded him he’ll need to find additional tax revenue and reduce government spending to keep the budget “sustainable” – that is, to stop the government’s debt getting a lot higher.

Some of the measures he’d like to take to get the economy’s productivity improving could involve reducing certain taxes but, with the budget already overextended, he can’t afford them. He’s had to stipulate that all proposals for improving productivity at the productivity roundtable next month must involve no net cost to the budget.

This suggests productivity improvement and budget repair will need to be kept in two separate buckets. If so, Chalmers will probably end up avoiding tax changes and sticking to reforming the regulation of certain industries, which would have little cost to the budget.

But some measures to improve productivity may lead to increased tax collections. If so, it may be better to put together a big package of interlocking measures that together would help improve both problems.

The successful reforms of the 1980s involved big packages, with their size actually helping to reduce opposition to them. When you propose reforms one at a time, those who lose from the measure can make such a fuss that the government decides it’s not worth insisting.

But you can put together a package so big that most industries and individual taxpayers would gain something as well lose something. So if I oppose the package because of my loss, I put my gain at risk. And not only that; I get a lot more pushback from the many groups and individuals who see themselves as net winners from the package.

Even so, if I were Chalmers and cuts in government spending were needed, I’d tread carefully. The independent economist Saul Eslake sees government spending likely to be about 2 percentage points of gross domestic product higher in coming years than it averaged over the 40 years before COVID.

In contrast, the former top econocrat Dr Mike Keating thinks that to balance the budget while making adequate provision of government services will leave a gap to be filled of about 4 per cent of GDP.

We know from the voters’ frighteningly hostile reaction to the big spending cuts proposed by Tony Abbott in the 2014 budget that proposals to slash government spending are delusional. Voters want more services not fewer.

But smaller, more carefully considered spending cuts ought to be possible. Years of performance audits by the federal auditor-general have revealed how common it is for particular spending programs to be failing to achieve their stated objectives.

Trouble is, it’s just as common for such programs to roll on with only superficial efforts to fix their ineffectiveness. That’s partly because even programs that aren’t working still put money in the hands of their recipients, who will fight hard to keep their money coming.

What’s more, the people who earn their living delivering ineffective programs – the public servants and private-sector providers – have little interest in changing the status quo. The truth is, the auditor-general’s performance audits reveal a public service that doesn’t put enough effort into ensuring taxpayers are getting value for money.

This may be because, under previous governments, public service numbers were run down, and more money spent on expensive private sector consultants, none of whom had any great interest in ensuring government spending delivered the expected benefits.

Another part of the problem was the many failings of the grand experiment of attempting to increase “efficiency” by transferring the provision of public services to private businesses. Too often, the private businesses did what came naturally and sought to maximise their profits at the expense of a government driven by ideology – “public bad/private good” – rather than common sense.

The governments’ neoliberal delusions stopped them remembering to make sure the remaining public servants managed all the private businesses to stop them overcharging and underdelivering to a customer they regarded as an easy cop. Meanwhile, the remaining public servants went into a sulk, watching the private providers rip off the government, but not bothering to tip the pollies off.

The point is, while it’s idle to imagine governments can simply slash spending on public services, there’s solid evidence that much money is being misspent. So there is scope for reducing spending on particular programs without great loss to voters.

Just stop spending on programs that aren’t achieving their stated objectives. Governments should try a lot harder to reduce waste, and the public service should be made to see that alerting their political masters to instances of waste is a big part of their job.

Reducing wasteful spending matters also because voters’ misperception that most of their taxes are wasted is a big part of their justification for opposing increases in tax. It strengthens the argument so many pollies are afraid to make: “Guess what? If you want more and better government services, you’ll have to pay for them.”

But if I were Jim Chalmers, I wouldn’t consider simply increasing the rate of taxes such as the goods and services tax before I’d tackled the “waste” in the existing tax system. The people – usually the well-off – and industries that should be paying more under the present arrangements but aren’t, thanks to deliberate exemptions or inadvertent loopholes. Picking off the undeserving should cost fewer votes than just whacking up the tax on the unfavoured majority.

As Treasury told Chalmers, the first place to look for higher revenue is the superannuation tax concessions, which offer the well-off (including me) huge scope to minimise the tax they pay. The well-off get a much higher proportion of their income from sources other than wages, sources that are taxed far more lightly.

So, as Saul Eslake says, much extra revenue could be raised by reducing the 50 per cent tax discount on capital gains, curbing negative gearing, taxing trusts as though they were companies, and taxing payouts from super. And that’s before you get to the hugely undertaxed mining industry.

Balancing the budget wasn’t meant to be easy, but less politically risky solutions are there if you hunt them out.

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Like ChatGPT, we need clear goals and rules - on the environment

By MILLIE MUROI, Economics Writer

If there’s one thing that ChatGPT has taught us, it’s that what we get from it is heavily dependent on the goals we set and the boundaries we spell out for it.

The chatbot is not always predictable (and sometimes outright wrong), but it often works much better when we give it specific targets and clear confines to work within.

We humans are remarkably similar. Most of us like to think we make good decisions with the information we have. We even have a field that looks at optimising our choices: economics.

Yet, we make plenty of bad decisions daily and, when it comes to the environment, over many decades, despite knowing better.

It’s why former Treasury secretary Ken Henry, who led possibly one of the best-known reviews of the Australian tax system, is so furious.

He has previously described our failure to manage our natural resources as an “intergenerational tragedy”, “intergenerational theft”, and a “wilful act of intergenerational bastardry”.

“I guess I’m in danger of running out of printable descriptions to convey the gravity of the situation,” he admitted in a speech to the National Press Club this week.

It was in this speech, too, that Henry pointed out why we seem to be failing so badly at protecting our environment.

Opposition Leader Sussan Ley and Social Services Minister Tanya Plibersek – both former environment ministers – have spoken about the need to fix our national environment laws.

And, after an independent review led by the former chair of the competition watchdog Graeme Samuel recommended a series of big reforms in 2020, both ministers – from opposite sides of the political fence – promised to act on them.

“Yet here we are, in the winter of 2025, and nothing has changed,” Henry points out.

That’s despite the clear warning signs and relatively broad support for such change.

Could it be that political focus has shifted to the economic issue of the day? Treasurer Jim Chalmers, having moved past inflation, has made it clear the government’s second term will be focused on boosting the country’s lagging productivity growth. Never mind the existential issue we face.

But as Henry points out, even if productivity is our focus, no reform is more important to the country’s ambition to pump out more of what we want (with less work hours or materials) than environmental law reform. “If we can’t achieve [that], then we should stop dreaming about more challenging options,” he says.

There’s been no shortage of activity on environmental reform – from policy papers to bills and endless rounds of consultation – yet little to show for it.

Henry rejects the idea that this “policy paralysis” comes down to a conflict between climate warriors and those wanting to charge ahead with economic growth. If this were the case, then why, he asks, is the pace of environmental damage speeding up at the same time our economy is stagnating?

Henry acknowledges reforms won’t be easy. Businesses and politicians are good at seizing moments of uncertainty when new changes are floated to send those changes to the graveyard.

For some, he says, the stakes are high: “We have whole industries with business models built on the destruction of the natural world.”

But we’ve done hard things before. And Henry points out it’s now or never.

While Prime Minister Anthony Albanese and his team won’t want to hear it, changes have to be made within this term of parliament.

The Labor Party may have been swept into a second term in power with a huge majority despite doing little to improve environmental laws. However, the growing national vote for the Greens is solid proof that voters have more appetite for environmental reform than the major parties have been serving.

Many of these reforms are clear and supported by a wider range of people with different interests.

So, what reforms are we actually talking about?

Well, Graeme Samuel’s review made 38 recommendations. But a big focus was on fixing what’s known as the Environment Protection and Biodiversity Conservation Act, which Samuel said was complex, cumbersome and essentially powerless.

Samuel’s suggestions ranged from introducing a set of mandatory National Environmental Standards and enforceable rules to apply to every environmental decision made around the country. These standards would be detailed, based on data and evidence, use clear language and leave very little wriggle room.

He also recommended wiping out all special exemptions and moving from a species-to-species and project-by-project approach, to one that focused on the needs of different regions: areas that shouldn’t be developed, those needing to be revived, and those where development assessments could be waved through more quickly.

This would help give businesses greater certainty, but also help us overcome one of our biggest shortcomings.

Because nature is so vast, when we assess the negative environmental impact of one project at a time, it will often seem tiny and irrelevant. That leads us to underestimate the environmental damage we are allowing over time, especially in particularly vulnerable ecosystems.

The remarkable thing is that Samuel’s recommendations were – and still are – widely supported by both business and environmental organisations.

Yet, there has been no movement five years on.

That’s a problem because there are plenty of big projects we need to get cracking on: huge investments in renewable energy generation and the government’s ambitious target of building 1.2 million homes by 2030.

In 2021, assessment and approval of a wind farm or solar farm blew out to 831 days – up from 505 days in 2018.

And between 2018 and 2024, 124 renewables projects in Queensland, NSW and Victoria needed to be assessed under the Environment Protection Act. Only 28 received a clear “yes” or “no” answer.

There could also be a way to give accreditation to state and territory decision-makers if they proved they could protect the national interest. That would remove the double-ups and complexity in approvals processes, and cut down the time taken to assess development proposals.

Of course, developers have stressed the importance of the types of reforms which fast-track development, while environmentally-focused groups have pushed for more focus on new protections.

Samuel also recommended an expert, independent and trusted decision-maker, in the form of a national Environmental Protection Authority, to work with the government to protect the national interest.

Us humans are full of shortcomings, but by recognising them and changing the frameworks we work with, we can improve the way we look at our choices and make decisions.

One of our problems is that, under the current Environment Protection Act, we tend to undervalue the environment. Part of that, as we’ve discussed, comes down to the vastness of nature (which needs to be matched by a broader regional lens, rather than our project-by-project approach).

The other is our short-sighted view. Because the cost of damaging nature is overwhelmingly shouldered by future generations, Henry points out we have found it very difficult to stop ourselves stealing from the future.

Like bad eyesight, these issues are not unsolvable. We just need clear goals, rules and accountability measures to keep us on track.

As Henry puts it, economics is concerned with optimising choices. That requires carefully defining what we’re wanting to achieve and, just as importantly, determining the constraints that shape the choices we’re incentivised to make. “If the constraints are mis-specified, then decisions will be suboptimal,” Henry says.

Unlike ChatGPT, we can set our own rules and guardrails. But we must choose – and act on – these ourselves before the damage we do forces limitations on us against our will.

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How Canberra's favourite book might help my hunt for a first home

By MILLIE MUROI, Economics Writer

Anyone who has rented (or knows a renter) knows the woes of living on someone else’s terms: unresponsive landlords, rent hikes and the threat of getting evicted despite doing everything right. There’s also the bitter aftertaste of effectively paying off someone else’s mortgage – or simply topping up their bank balance while watching your own dwindle.

Recently, I’ve started looking for an exit – or rather an entry. House and unit price growth across most of our capital cities has slowed recently, but they are still steadily climbing, meaning many home owners continue to watch their wealth grow. That’s made it harder for many first home buyers to get a foothold in the housing market, but I’m also increasingly getting the sense that I’m missing out on boarding the growth train so many people seem to be on.

Between inspecting some properties this week (as a hopeful home buyer rather than a renter for the first time), I started chewing through a copy of the book finding its way onto the bedside tables of our top decision-makers and their staffers.

Two American journalists, Derek Thompson and Ezra Klein, have lit a bit of a fire under the seats of left-leaning governments – and lefties more broadly – with their new book: Abundance.

While both ends of Australia’s political spectrum have zeroed in on housing affordability recently, those on the left have generally believed in the power of government to look after people, including yanking housing back into the reach of everyday Australians.

Thompson and Klein have plenty of qualms about the political right, too. But their speciality lies in getting lefties around the world to reflect on ways they might be letting good intentions get in the way of solving some of our most pressing problems. Chief among them? The housing crisis.

Why, when we’ve become better and faster at doing so many things, have we seemed to become slower at building one of the most basic necessities of life? And why is homeownership stuck at such low rates?

There’s no shortage of answers – many of which help to explain part of the problem. But the big one, write the American duo, is this: the thicket of red tape we’ve wrapped ourselves in.

Abundance brings a fresh left-wing twist to a topic often seen as a buzzword of the right-wing anti-government crusade.

A lot of our regulation has important aims: protecting the environment, making sure workplaces – including construction sites – are safe, and stopping that big company from setting up a huge, noisy factory right next to your house.

When businesses need to comply with hundreds of rules at federal, state and local levels on where and how houses are made, it becomes a hugely time-consuming process that not only slows down construction but discourages would-be developers or builders from giving it a go.

It’s like trying to send a truck to a flood-affected region, stocking it up with so much stuff – medicine, sandbags, food, tools, life vests – that it takes weeks or months to get there. You might get all the important aid there, but it will take so long it may have been better to leave some things behind.

The Productivity Commission warned this year that Australia is building half as many homes for every hour worked compared with three decades ago. Among the biggest handbrakes? Planning regulations have increased markedly and can run into thousands of pages.

This “unambiguously” jacks up the cost of development and construction, and ultimately the cost of housing for Australians, the commission’s experts said.

Even when all existing laws are met, minor objections from residents can cause delays to housing projects. And some regulations, as my colleague Shane Wright pointed out last week, just seem arbitrary: a bedroom by Victorian standards, for example, is not liveable if it’s not at least 3 metres by 3.4 metres in size.

This build-up of regulation and processes comes with several costs. Economists are especially obsessed with one otherwise invisible problem called “opportunity cost”: essentially what we give up or miss out on by taking a certain path.

If you buy a boat, you can’t use that cash to get a new car or renovate your house. Life, and economics, is about trade-offs.

By having lots of regulation, we might ensure only “perfect” buildings get built. The opportunity cost means we end up with fewer buildings that are built slower.

It’s harder to recognise because it’s not a cost most people can see. Even when you’re shopping for a home and struggling to nab one because there’s not enough of them, you probably don’t realise that regulation has choked supply.

The growing pile of regulations is also a great example of what economists call “diminishing marginal returns”. That’s the principle that the more you have of something, the less benefit you tend to get out of adding more of that thing. One block of chocolate, for example? Delicious. By the time you’ve eaten two, it’s probably getting a bit much. And by block five? You might be taking a queasy trip to the bathroom.

Regulation, similarly, can be great. But having too much can lead to more harm than good, including blocking the new housing we so desperately need.

Of course, concerns such as environmental protection are important. But there are plenty of other cumbersome requirements and processes we can start to chop down. And as our American authors point out, there’s an abundance of other ways, including investment in the energy transition, we should be looking at to preserve our environment (that’s a column for another time).

Treasurer Jim Chalmers said last month that Abundance had been a wake-up call for the left and that a roundtable on productivity he is organising in August would tap into the ideas outlined in the book. Just how much the government will get out of its own way as it pushes to build 1.2 million homes by 2029 is unclear.

If I manage to buy my own shoebox flat, I’ll join the army of Australian home owners whose wealth is almost entirely locked away in housing, and whose self-interest will therefore be a continued surge in home prices. That cannot coexist with the vision to make housing more affordable. I probably won’t be a direct winner of the government’s long-term Abundance agenda. But I hope by the time I’m at dire risk of forgetting the struggle of buying my first home, the government has done what it takes to make it easier for the generations to come.

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If bulldusting about productivity was productive, we'd all be rich

It seems the longer we wait for a sign that productivity has stopped flatlining, the more and the sillier the nonsense we have to listen to, brought to us by a media that likes to stand around in the playground shouting “Fight! Fight! Fight!″⁣.

The combatants are led by Canberra’s second-biggest industry, the business lobbyists, unceasing in their rent-seeking on behalf of their employer customers back in the real world. Their job is to portray all the problems businesses encounter as caused by the government, which must therefore lift its game and start shelling out.

In your naivety, you may have imagined that if a business isn’t managing to improve its productivity, that would be a sign its managers weren’t doing their job. But, as the lobbyists have succeeded in persuading all of us, such thinking is quite perverse.

Apparently, productivity is something produced on the cabinet-room table, and those lazy pollies haven’t been churning out enough of it. How? By deciding to cut businesses’ taxes. Isn’t that obvious? Bit weak on economics, are you?

Unfortunately, those economists who could contribute some simple sense to the debate stay silent. The Chris Richardsons and Saul Eslakes have bigger fish to fry, apparently.

The latest in the lobbyists’ efforts to blame anyone but business for poor productivity was their professed alarm at the Fair Work Commission’s decision last week to increase award wages, covering the bottom 20 per cent of workers, by 3.5 per cent, a shocking 1.1 percentage points above the annual rise in the consumer price index of 2.4 per cent.

According to one employer group, this was “well beyond what current economic conditions can safely sustain”. According to another, the increase would hit shops, restaurants, cafes, hospitality and accommodation the worst.

Innes Willox, chief executive mouth for the Australian Industry Group and a leading purveyor of productivity incomprehension, claimed that “by giving insufficient attention to the well-established link between real wages and productivity, this decision will further suppress private sector investment and employment generation at a time our economy can least afford it”.

The least understanding of neoclassical economics shows this thinking is the wrong way round. It’s when the cost of labour gets too high that businesses have greater incentive to invest in labour-saving equipment.

At present, we’re told, business investment spending as a proportion of national income is the lowest it’s been in at least 40 years. If so, it’s a sign that labour costs are too low, not too high.

The other reason firms are motivated to invest in expanding their production capacity is if business is booming. But this is where business risks shooting itself in the foot. Whereas keeping the lid on wages may seem profit-increasing for the individual firm, when all of them do it at the same time, it’s profit-reducing.

Why? Because the economy is circular. Because wages are by far the greatest source of household income. So the more successful employers are in holding down their wage costs, the less their customers have to spend on whatever businesses are selling. If economic growth is weak – as it is – the first place to look for a reason is the strength of wages growth.

Fortunately, however, while sensible economists leave the running to the false prophets of the business lobby, my second favourite website, The Conversation, has given a voice to Professor John Buchanan, of the University of Sydney, an expert on the topic who isn’t afraid to speak truth to business bulldust.

“In Australia, it has long been accepted that – all things being equal – wages should move with both prices and productivity,” he says. “Adjusting them for inflation ensures their real value is maintained. Adjusting them for productivity [improvement] means employees share in rising prosperity associated with society becoming more productive over time.”

In recent times, however, all things ain’t been equal. Depending on how it’s measured, the rate of inflation peaked at 7.8 per cent (using the CPI, which excludes mortgage interest rates) or 9.6 per cent (using the living cost index for employed households, which does include them).

So the Fair Work Commission has cut the real wages of people on award wages by about 4.5 per cent – something the lobby groups somehow forgot to mention. That’s what honest dealers these guys are. If there’s a way to fiddle the figures, they’ll find it.

The supposed real increase of 1.1 per cent in award wages is actually just a reduction in their real fall to about 3.4 per cent. So much for the impossible impost that will send many small businesses to the wall.

The commission has always been into swings and roundabouts. Cut real wages now to get inflation down, then, when things are back to normal, start getting real wages back to where they should be. So we can expect more so-called real increases – each of them no doubt dealing death and destruction to the economy.

Speaking of fiddling the figures, the commission points out a little-recognised inaccuracy in the conventional way of measuring real wages. It says that, if you take into account that prices rise continuously but wages rise only once a year, award wage workers’ overall loss of earnings since July 2021 has been 14.4 per cent.

What the lobbyist witch doctors have been doing is concealing the truth that the best explanation for our weak productivity performance is that employers have been seeking to increase their profits by holding down wage costs, rather than by investing in labour-saving technology.

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Why we need our economists to try a lot harder

I noticed in The Psychologist magazine one of that profession’s old hands advising newbies to “think outside the box and question everything”. What? With economists, such heretical advice would be unthinkable.

In their profession, all the advice is to learn the orthodoxy and never question it. Why? Because it’s the revealed truth.

The weird thing is, the great project for academic economists since the 1960s has been to make their discipline more scientific. Within their universities, economists get looked down on by the physical scientists, and they hate it.

They hate being regarded as one of the soft “social” sciences, such as psychology, or worse, those lefty lightweight sociologists. So for decades they’ve been working to make their discipline more “rigorous”. How? By expressing ideas about how the economy works in equations, not mere words.

Trouble is, there’s more to science than maths. The hallmark of a scientist is that they’re searching for the truth. They have a theory about how something works, but they’re beavering away to improve it, get it a bit closer to the truth. So their best guess at the truth is slowly evolving and is significantly different today than what it was 50 years ago.

That’s a million miles from academic economics. With most economists – practising as well as academic – their view of how the world works is virtually unchanged from one decade to the next. They’ve already found the truth, so nothing needs changing.

What do you call it when you know the unchanging truth? A religion. Economics is a secular religion, but a religion nonetheless. And when you know the truth, all that’s left to do is convince the rest of the world of its truth.

It’s true that a minority of leading academic economists have been working on new ideas about how the economy works. The annual Nobel Prize in “economic sciences” – which is sponsored by the Swedish central bank – is awarded to academics (not all of them economists) who have important new thoughts on economic questions.

Most of the new discoveries acknowledged by the award of a Nobel Prize – such as about the role of information – are attempts to learn more about aspects of the economy’s workings that are oversimplified or simply assumed away in the “neoclassical” model of markets and the economy that was set in concrete by the late 19th century, but which still dominates economists’ thinking about the economy.

Trouble is, apart from some modifications arising from the work of John Maynard Keynes and his followers after the failure of conventional economics at the time of the Great Depression, few of these advances in thinking get incorporated into the model all economists carry in their heads, nor the mathematical models that academic economists spend so much of their time playing with.

Why not? Because if you want to express economic ideas in equations rather than words, you have to keep it simple. There’s little room for complications or nuance in econometric models.

This is particularly true of the findings of behavioural economics, which uses social psychology to test the assumptions of neoclassical economics – such as that all of us always act rationally, and that we’re rugged individualists, whose decisions are never influenced by what other people are doing. Almost always, behavioural economics finds those assumptions grossly oversimplified at best.

The great test of any model is the accuracy of the predictions it makes about what will happen next. Even the most sophisticated models’ forecasts are often wrong and, not infrequently, seriously wrong. Every economist knows this, but desperately tries not to think about it.

The forecasts in the federal budget, for example, which are given great attention on budget night are quite unreliable, but nobody does anything about it. The Reserve Bank went year after year predicting that wages would grow far more than they actually did.

Clearly, the Reserve may know a lot about money, but its understanding of how the labour market works is woeful – something I’m not sure its boffins admit even to themselves. To them, the labour market works the same simple way every market works.

Their basic mistake comes from the neoclassical model’s implicit assumption that both parties to every economic transaction have roughly equal bargaining power. A boss bargaining with an individual worker? No probs.

The point is, rather than the mathematising of economics making the discipline more rigorous, it’s diverted the profession’s attention from what it really should be doing: being like a scientist and working to fix their model’s oversimplifications and dubious assumptions, in the hope this will make its predictions more reliable.

With the cost-of-living crisis coming to an end as the inflation rate returns to the 2 to 3 per cent target range, and interest rates falling back to more normal levels, the government can turn its attention to a problem we – and all the rich economies – have had for a decade or so: only slow improvement in the productivity of businesses and government providers of services.

Right, so what can economists tell us about productivity? Short answer: not all that much. What they do know is that improving productivity – increasing output faster than you increase inputs of raw materials, labour and physical capital – is the main way capitalist economies have been able to improve their material standard of living over the decades.

They’ve also figured out that most productivity improvement comes from the application of advances in technology, particularly labour-saving equipment. So spending on research and development should help. A better educated and trained workforce probably helps ,too.

So, what else can our learned economists tell us about productivity – how it works and how we can get more of it?

Not much. If productivity’s so important to our standard of living, you’d think economists would have put an enormous research effort into learning more and more about where productivity comes from and how we get more of it.

Sorry, we’ve been too busy with our maths and our modelling. Economists are great believers in innovation. They’d like to see a lot more of it. But they don’t practise what they preach. In academia, all the pressure is to stick to the orthodoxy. New ideas are usually wrong.

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

By MILLIE MUROI, Economics Writer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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