Our leaders would do better if their followers were thinking harder

Much has been said about the failures of Scott Morrison, Daniel Andrews and Gladys Berejiklian in our never-ending struggle to keep on top of the coronavirus. But just this once, let’s shift the spotlight from our fallible leaders to the performance of those they lead. I think we ourselves could be doing a better job of it.

There is, after all, much truth in the saying that we get the politicians we deserve. When we think we’re entitled to have good government served up to us on a plate, we’ve lost sight of the truth that well-functioning democracies require diligent citizens, not just honest and smart politicians.

Perhaps our biggest complaint has been that our leaders and experts keep changing their tune. Why can’t we be told simply and clearly what’s required of us? Why can’t the pollies decide what they want and stick to it?

It’s as though they’re making it up as they go along, chopping and changing when they realise they’ve taken another wrong turn. Hopeless.

Let me tell you the shocking truth: they are making it up. But if you were thinking harder you’d realise that’s all they can do. As Morrison rightly says, a new virus doesn’t come with an instruction manual.

Our political leaders are relying heavily on epidemiologists and other medical experts because pollies have so little knowledge and experience of pandemics. The medicos know a lot about viruses, epidemics, vaccination and immunology, but at the start they knew little about the characteristics of this particular virus.

They were forced to make assumptions about those characteristics but, as they’ve realised those assumptions were wrong, they’ve changed them.

At the start they thought the virus was spread in big droplets landing on surfaces within one or two metres, whereas now they think it’s more like smoke. Without strong ventilation, it builds up in the air. This explains much of the early uncertainty about whether masks were a good idea.

The medicos have relied on the findings of the limited studies available, but when bigger and better studies have come along with different findings, they’ve updated their views.

As I don’t think Keynes actually said, “When the facts change, I change my mind. What do you do, sir?” Or, as he did say, “It is better to be roughly right than precisely wrong.”

Those people carrying on about how confusing it all is and how incompetent our leaders are reveal their own intellectual laziness: their reluctance to think through complex, nuanced, ever-changing problems when they’d prefer to be back watching carefully choreographed “reality” television. And their ignorance of how science works, slowly groping towards an ever-changing best guess at the truth.

The media’s new-found interest in public health means formerly obscure academics have become TV stars and any boffin who disagrees with what the government’s doing about X gets an op-ed article to air their dissent.

You could say this is adding to the confusion, but it’s science proceeding the way science does. It’s academics doing what academics do – eternally arguing among themselves.

It’s tempting to tell them “not in front of the children”, but when you remember how lacking our leaders are in competence, openness and accountability, the last thing our democracy needs is for experts to keep their critique of government policies to themselves.

You might have thought that a bunch of media-innocent scientists and a news media devoted to highlighting the exceptional over the typical, seeking out controversy and not always untempted by the sensational, would make an explosive combination.

But for the most part, the media have been on their best behaviour, favouring their audience’s need for accurate, trustworthy information. That brings us to the Australian Technical Advisory Group on Immunisation, and its ever-changing recommendation on who should be receiving the AstraZeneca vaccine now it’s been found to carry a very rare risk of blood clotting.

The advice has changed partly because circumstances have changed, but mainly because the original advice led to considerable vaccine hesitancy at a time when the vaccine rollout is way behind, we have Greater Sydney in lockdown and loads of AstraZeneca is going begging while little of the alternative Pfizer vaccine is available.

The advisory group has been criticised, but I think it was a narrowly constituted group, which gave narrow advice when what the government needed – and should have sought from elsewhere – was advice taking account of a broader range of factors.

The public’s huge reaction against the vaccine is unwarranted and unfortunate at such a time. AstraZeneca is less risky than taking aspirin. But when the media gave such attention to the clotting risk, the overreaction wasn’t surprising.

Responsible reporters can say “very rare” as many times as they like but, as our science reporter Liam Mannix has explained, humans are notoriously bad at giving minuscule probabilities the weight they deserve.

The saver may be that, as highly social animals, when people see so many of their friends lining up to “bare their arms”, their hesitancy may evaporate. It’s a strange, messy world we live in.

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Privatisation has done too much to perpetuate monopolies

It always disturbs me to see how few of our econocrats and economic rationalists – “neo-liberals” to their lefty critics – are willing to acknowledge the many cases where, what looked like perfectly sensible micro-economic reform on the drawing board, turned into a disastrous rort in the hands of the politicians.

But that’s not true of one of the great survivors from the reform era. Rod Sims, now chair of the Australian Competition and Consumer Commission, who’s an experienced econocrat and formerly a key advisor on the 1993 Hilmer report on national competition policy, which urged increased competition at state as well as federal level.

At the commission’s annual regulatory conference last week, Sims criticised the many privatisations of government-owned businesses that have simply bundled up a public monopoly and sold it to the highest bidder, without doing anything to get some competition into the industry, or even to adequately regulate the prices charged by a now-privately owned monopoly.

“Privatising assets without allowing for competition or regulation creates private monopolies that raise prices, reduce efficiency and harm the economy,” Sims said.

Why would governments do such a terrible thing? Because they put short-term budgetary pressures ahead of the best interests of their voters, as consumers and business-users of essential services. It’s actually part of a trick that buys the appearance of good management at the price of paying more than necessary for essential services from now on.

The pollies say: “Look at how much I got for that business, look at how I’ve got the budget back to surplus and reduced government debt, look at how I’ve kept our triple-A credit rating”. (Just don’t look at how much more you’re paying for electricity, for using the airport and for imported goods.)

Adding to these short-term budgetary temptations is the way politics and public policy have become more tribal, more public bad/private good. More “binary” as Prime Minister Scott Morrison would say. By definition, the public sector is inefficient and the private sector is efficient, people think.

It follows that merely by changing the ownership of a business from government to private you’ve made it more efficient. But that’s not economics, it’s just prejudice. Economists believe that whether a business should be privatised should be judged case-by-case, and by the way it’s proposed to be done.

Sims says “privatisation can generate important benefits to the economy, such as improved incentives for cost control, investment and innovation to meet the needs of consumers”.

“There have been many examples of privatisations that have been done well and that have benefited Australia. The privatisation of Qantas was done appropriately, for example, and the privatisation of Telstra was accompanied with measures to promote rather than constrain competition.”

Governments can be bad owners of businesses because – thanks to budgetary pressures – they’re usually hungry for big dividends, but reluctant to provide the extra capital needed to keep up with innovation and changing consumer needs.

But I’ve never understood people who lament the privatisation of the Commonwealth Bank. Its treatment of customers was never very different to that of its three big privately-owned competitors. On aviation, we’ve long had trouble keeping enough competition in our domestic market, but Qantas had plenty of international competitors.

“The problem is that, in more recent years, many of Australia’s key economic assets have been privatised without regulation, and often with rules designed to prevent them ever facing competition. This makes us all poorer,” Sims says.

“You regularly hear people calling for micro-economic reform these days. The best way to do that is to expose more of our economy to competition, and by dealing with excessive market power. Australia has on a number of occasions been doing the opposite.

“Many monopolies are subject to regulation, such as gas pipelines, electricity networks, railways and the NBN. In contrast, many ports and airports, which are essential gateways for our economy, are largely unregulated, mostly due to decisions made when they were privatised.”

In its search for a top-dollar selling price, the Keating government stuffed up the privatisation of capital-city airports, particularly Sydney’s. But nothing Victorian governments have done compares in infamy with the behaviour of the Baird and Berejiklian governments in NSW.

They took the state’s three vertically integrated electricity companies – each owning power stations and electricity retailers – and sold them to the people offering to buy them at the highest price. They became the three oligopolists dominating the national electricity market, Origin Energy, AGL and EnergyAustralia.

Then, when they privatised NSW ports, they promised the new owner of the Botany and Port Kembla ports it would be compensated should the Port of Newcastle start handling containers, not just coal.

Then they made the new owners of the Newcastle port agree to pay this compensation should they set up a container facility. They were so proud of this deal they tried to keep it a deep dark secret.

When its existence became known, the ACCC tied to get it struck down by the court as anti-competitive. But it failed to persuade the judge that trying to maximise the sale price by including monopoly rights in the deal was anti-competitive.

Which shows that it’s not just the ulterior motives of politicians that can turn good reform into a travesty. It’s also that many privatisation deals end up before the courts, where economic questions are decided by judges “learned in the law” but, in too many cases, not as well-versed in economics.

I understand that, in a recent case where one of the state’s public-sector unions sought to object to the NSW government’s wage freeze before the NSW Industrial Relations Commission, an economist brought as an expert witness by the union mentioned that wage increases were supposed to reflect productivity improvement.

He was chastised by the bench for introducing such a novel and controversial notion so late in the proceedings. Really?

My point is that would-be reformers need to be a lot warier of doing more harm than good.

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Don’t be surprised if the economy surprises on the downside

The economy has been on a roller-coaster since the virus arrived early last year, dipping one minute, soaring the next. Now, with the Delta variant putting Sydney and Melbourne back in lockdown, we’re in the middle of another dip. But as you hang on, remember this: what goes down must come up.

When governments order many businesses to close their doors, and us to leave our homes as little as possible, it’s hardly surprising that economic activity takes a dive. What did surprise us was the way the economy bounced back up the moment the lockdown was eased.

We rushed out of our houses and started spending like mad. Not that we weren’t spending whatever we could while locked down. Another surprise was the way the presence of the internet changed what would otherwise have happened.

Apart from allowing most people with desk jobs to work from home, and talk face to face to people in other cities without getting on a plane, it allowed us to keep spending: ordering groceries and takeaways online, consulting doctors over the phone – I thought receptionists were there to stop you getting through to the great personage – buying exercise equipment and stuff to get on with fixing up the back bedroom.

As I keep having to remind myself, only God knows what the future holds – and He’s not letting on. But it’s part of the human condition to be insatiably desperate to know what happens next. We keep searching the world for the one person who might be able to tell us.

Since even the experts can’t be sure what will happen, they base their predictions on the hope that what happens this time will be much the same as what usually happens. Experts are people who remember last time better than we do.

But that way of predicting the future hasn’t worked this time. The epidemiologists – and all the related -ologists we hardly knew existed – know a lot about viruses but, at the start, little about the particular characteristics of this one. Their predictions have kept changing as they’ve had more to go on.

Last year’s recession was the fifth of my career (counting the global financial crisis, which I do). I thought that knowledge put me so far ahead of the game I was an expert expert. Wrong.

Ordinary recessions happen because the people managing the economy stuff up. The economy takes well over a year to unravel, then three or four years to wind back up. But this recession was completely different, having been knowingly brought about by governments, for health reasons. When at last they let us go back to business, however, that’s just what we did.

The initial, nationwide lockdown caused the economy’s production of goods and services (gross domestic product) to dive by an unprecedented 7 per cent in just the three months to the end of June last year. But then the economy bounced back by 3.5 per cent in the September quarter and a further 3.2 per cent in the December quarter after Victoria’s delayed release from lockdown.

In the period before the Delta strain sent Sydney back into humbling lockdown, GDP was ahead of what it was at the end of 2019. Total employment was also ahead, while the rate of unemployment was actually a little lower.

Since the present September quarter has two months left to run, and Sydney’s lockdown rolls on even though Melbourne’s has ended, it’s too early to be confident by how much GDP will fall but, depending on how long Sydney’s drags on, it’s likely to be a fall of less than 1 per cent or somewhat more than 1 per cent. However bad, a lot less than last time.

As for the December quarter – and barring some new outbreak, say a new letter in the Greek alphabet – it’s likely to show expansion rather than contraction. Victoria will be growing, NSW will be in bounce-back mode as soon as the lockdown ends, and the rest of Australia will be doing its normal thing.

So all those silly people desperate for a chance to repeat the R-word aren’t likely to get the excuse they imagine they need.

Another major respect in which coronacessions differ from normal recessions is that politicians can’t consciously decide to stop the economy without at the same time providing generous assistance to all the workers and businesses this will harm. Normally, the assistance comes much later and is less generous.

Despite cries for the return of JobKeeper, the arrangements Scott Morrison has hammered out with Gladys Berejiklian and Dan Andrews are, by and large, a good substitute for the measures used the first time around.

The other thing to remember is that the economy is in much better shape now than at the end of 2019. Households have more money in the bank, the housing market is booming, profits are up and businesses are complaining about staff shortages.

Not such a bad time to cope with a setback. It won’t be the end of the world.

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The real reason we’ve hit policy gridlock: fear of public opinion

You don’t have to agree we owe big business a living to know that our public policies are far from perfect and that every government’s job is to beaver away at improving them. Nor to know recent governments have tired of doing that. We each have our theories on why this has happened, but now someone sensible has analysed the reasons policy reform has ground to a halt.

John Daley, the man who spent the past decade building our leading non-aligned think tank, the Grattan Institute, having handed its leadership over to Danielle Wood, has just released his last report, Gridlock: Removing barriers to policy reform. It’s his magnum opus, worthy of study by everyone who thinks they know a bit about how modern Australia ticks.

Daley defines “reform” as “changes to policy that would improve the lives of Australians” (as opposed to improving the careers of our top business people).

He starts by demonstrating that the pace of reform really has slowed, and isn’t just old-timers remembering the glory days of Hawke, Keating and Howard and complaining about “the young people of today”. He dismisses the excuse that “you can’t float the dollar twice”, noting “there are plenty of other good policy ideas that governments have failed to adopt”.

Daley examines the fate of the many policy recommendations in the regular reports of the Organisation for Economic Co-operation and Development, but focuses on the success or failure of the 73 proposals made in Grattan’s reports over the decade to 2019, covering budgets, tax and welfare, retirement incomes, housing, transport and cities, health, energy (aka climate change) and education.

He finds that, of the 73 reforms, about a third were substantially implemented and two-thirds weren’t adopted. He identifies seven main potential blockages to good ideas going ahead: popular opinion, partisan shibboleths, vested interests, a weak evidence base, budgetary costs, upper house obstruction and federal-state disagreement.

By “partisan shibboleths” he means policy views that are contrary to the weight of policy evidence, but are almost universally held within a political party or party faction, while much less widely accepted in other circles.

“One of the functions of shibboleths is that they mark membership of a group – a ‘tribe’. A belief is likely to be more effective as a marker of membership when it is not rational – otherwise the belief would be shared by many people who are not part of the tribe,” he says.

It will surprise many that, by Daley’s reckoning, the biggest blocker by far is popular opinion, not opposition from vested interests or party shibboleths.

Of the 23 Grattan reforms that were substantially implemented, none was unpopular, and none was opposed by powerful vested interests without that opposition being countered by substantial independent evidence from government reports and the like.

Only one of the successful proposals ran counter to a party shibboleth, and only one involved a big budget outlay.

By contrast, the most common blockage among the 50 proposals that weren’t adopted was that they were unpopular with the electorate. That accounted for 15 of them.

After that came 10 blocked by party shibboleths (although three of these were also unpopular). Six of the remainder were actively opposed by powerful vested interests not countered by strong independent evidence. Three more were blocked because the evidence for them was poor or contradictory, and five were blocked because they involved large budgetary costs exceeding $2 billion a year.

As for the other potential causes of blockage, in only two cases could their rejection be attributed mainly to a failure to pass the Senate. Federal-state disagreement was a significant issue in only six of the proposed reforms that weren’t adopted, and all of them were probably blocked for other reasons.

It’s hardly surprising that popular opinion is a powerful force in a democracy. But this is worth remembering when we’re tempted to think that the power of vested interests and politicians’ corruptibility are the reasons governments don’t make the changes we think they should. Maybe they don’t because not enough people agree with us.

Daley finds that whereas, over the past decade – but not necessarily during the preceding “golden age of reform” – public opposition invariably doomed a reform proposal, popular support is no guarantee a policy will be adopted. However, it certainly improves the chances.

Where the immediate effect of a reform is to reduce taxes or prices for consumers, it’s likely to be popular. And public opinion has a tendency to focus on immediate effects rather than on promised longer-term benefits.

But liberal democracies have always been a delicate balance between popularly elected rulers and a whole series of institutions – ranging from the courts and central banks to expert administrators of everything from water allocation to child protection – designed to temper popular views.

People tend to trust these experts much more than politicians. And it’s long been accepted that the primary duty of elected representatives is to govern according to their judgment of what's in the interests of their electors, rather than simply following the opinion of their electors, Daley says.

Our not too distant past holds plenty of examples of governments pressing on with controversial policies, confident in the belief that public opinion can change once people experience the reality of a policy change they didn’t like the sound of.

When they do so, they end up winning a lot of respect – something they so obviously lack at present. “So it is surprising that unpopularity has become an automatic strike-out for policy reforms,” Daley says.

He concludes that, “in general, Australian governments today seem less willing to take on public opinion.” How have Australia’s institutions changed to make public opinion so much more decisive?

And what can we do to improve things? Good questions – for another day.

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Reduced competition between businesses is harming productivity

In the search for explanations of the slowdown in productivity improvement, the world’s economists are closing in on one of the significant causes: reduced competition between the businesses in an industry, giving them increased “market power” – ability to raise the prices they charge.

Research by various Treasury economists has found evidence of this happening in Australia. And this month US President Joe Biden acted to increase competition in various markets where it had been lacking.

A new study by Jonathan Hambur has added to earlier research by Treasury people finding that Australia’s private sector has shown less “dynamism” – ability to become more economically efficient over time – during the past decade or so.

Hambur has used a database of tax returns covering almost all Australian businesses to find that their “mark-ups” have increased by about 5 per cent since the mid-noughties.

To economists, a firm’s mark-up is the ratio of the prices it charges compared to its “marginal” cost of production – that is, the cost of the last unit it produced.

Hambur says that, while part of this increase seems to have been caused by technological change, it also shows an increase in firms’ market power and a decline in competition.

If so, this would explain about a fifth of the slowdown in the rate of productivity improvement we’ve seen over the past decade, since we already know the same period has seen slower reallocation of resources from low-productivity to high-productivity firms.

We measure productivity by comparing the quantity of the output of goods or services with the quantity of inputs of raw materials, labour and physical capital used to produce the output. Increasing output per unit of input is the main way we’ve been able to keep improving our material standard of living over the past two centuries.

And one of the ways an economy increases its productivity is by more of the production being done by the firms that are best at turning inputs into outputs at the expense of the less-efficient firms. Resources (inputs) are thereby “reallocated” to their most efficient use. What causes this reallocation to occur? Price competition between the firms in an industry.

Many people assume big companies can set whatever price they like. But this can’t be true. Even in the case of a single firm selling an important product, if the monopolist uses its considerable market power to set a price that’s simply too high for many people to afford, it will get to a point where it loses more from the sales it no longer makes than it gains from the extra profit it makes from those people still willing and able to pay the extra.

This is why economists say a firm wanting to maximise its profits is able to charge no more than “what the market will bear”. How much the market will bear depends mainly on the strength of the competition it faces from other firms selling the same product.

The textbook, neo-classical model of a “perfectly competitive” market – which is hugely oversimplified and has never existed in the real world – tells us the many firms in a market are able to charge a price no higher than their marginal cost of production (remembering that the “cost” includes a rate of profit just sufficient to discourage the owners of the firm from taking their financial capital to another market).

In this case, each firm that survives in the market will be able to charge only the identical market price set by the marginal cost. A firm that tries to charge more than the market price will sell nothing, whereas a firm that charges less will sell out immediately, but then go out backwards because it hasn’t covered its costs.

In the real world, there are a host of possible reasons why firms are able to charge a price higher than their marginal cost, and so make excess profit: because customers don’t know where to find the products that are cheaper but just as good, because customers are bamboozled by advertising and phoney “product differentiation”, because economies of scale and improved technology allow firms to get bigger and reduce their average cost of production.

Firms pursue scale economies and other innovations in the hope of making excess profits, but theory tells us that competition from other firms will end up forcing them to pass their cost savings on to their customers in the form of lower prices. The consumers always beat the capitalists.

When competition isn’t strong enough to make this happen, however, firms can and do earn mark-ups well above their marginal costs. Now Hambur has confirmed this happens in Australia. Worse, our mark-ups have increased over the past decade, telling us competition has weakened further and given our businesses greater market power.

With US economists finding similar evidence of reduced competition contributing to America’s own productivity slowdown, it’s not surprising to see President Biden acting to increase competition. Earlier this month he signed an executive order urging federal government agencies to crack down on anti-competitive practices ranging from agriculture to pharmaceuticals.

He denounced the present era of business monopolies. “Rather than competing for consumers [businesses] are consuming their competitors; rather than competing for workers they are finding ways to gain the upper hand on labour,” he said.

“Let me be very clear, capitalism without competition isn’t capitalism, it’s exploitation.”

Biden directed the Department of Justice and Federal Trade Commission to carefully review mergers and even challenge deals already put through.

He directed the trade commission to deal with competition concerns about the behaviour of Facebook, Apple, Alphabet’s Google, and Amazon, and to limit “killer acquisitions” where large internet platforms buy out potential competitors.

The justice department will launch a review of merger guidelines to determine whether they are “overly permissive”.

So, what could our government do about our own decline in competition? Well, we could start by tightening our own merger laws so the Australian Competition and Consumer Commission can be more successful in its efforts to protect us from anti-competitive takeovers.

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Getting to net-zero emissions an easier ride than some want to think

I have a mate who – in normal times, anyway – gives me a lift to the gym in his new all-electric Mercedes. He loves its lack of engine noise and amazingly fast acceleration when the lights change (not that I’m implying he’s a rev-head hoon the police should be watching). I’m no car lover, but it’s certainly a smooth, quiet ride.

Most of us accept that, as part of the world’s move to net-zero emissions by 2050, we’ll all be moving to electric cars. Other countries are already further down this road than us.

We’ve made big strides in shifting electricity generation to renewables, and our emissions are falling. But electricity production accounts for only a third of our total emissions. Transport, in all its forms, accounts for about 20 per cent of total emissions, so its move away from fossil fuels is another part of the transition we should get on with.

In all the years we’ve been arguing about climate change, people have tried to convince us how costly it will be. How disruptive to industry and our way of life. All the higher prices, the tax we’ll pay, the jobs we’ll lose.

So far, however, there’s been little extra cost or disruption. The rise of wind and solar power has happened without much pain. And a report this week from Tony Wood and colleagues at the Grattan Institute think tank suggests the move to electric vehicles can be achieved without angst.

More than 60 per cent of the transport sector’s 20 per cent of total greenhouse gas emissions comes from the tailpipes of cars and light commercial vehicles, including our two biggest selling cars, Toyota HiLux and Ford Ranger utes. That leaves trucks accounting for 20 per cent of the sector’s emissions and domestic aviation for about 10 per cent.

Australia has about 18 million light vehicles, up from fewer than 15 million in 2010. And we’re driving bigger, heavier cars than we were a decade ago. (All those appalling SUVs. One day they’ll run over my little Toyota Yaris.)

At present, electric vehicles make up just 0.7 per cent of new sales in Australia. This doesn’t count hybrid electric/petrol cars which, because of their continued use of fossil fuel, can’t be a lasting part of the shift, Wood says.

Our tiny all-electric share of new sales compares with 2 per cent in the US, 3 per cent in New Zealand, 11 per cent in Britain and 75 per cent in Norway.

Because it takes more than 20 years to replace our light vehicle fleet, for our transport sector to make a sufficient contribution to the target of net-zero total emissions by 2050 we’ll need to get to the point where all new light vehicles are electric by about 2035, he estimates.

Government projections suggest that, if the market is left to itself, the move to electric vehicles will cause light vehicle emissions in 2030 to be 7 per cent lower than they were in 2019. This isn’t good enough.

So what can be done to speed the shift? Wood says governments should reduce the main barriers to buying an electric car. First, the high cost of switching and limited choice and, second, the lack of charging points.

We pay an average of about $40,000 for a new car. But we have fewer than 30 electric models to choose from – much lower than overseas – and of these, just three models retail for less than $50,000.

As with all innovative products, the price of electric cars is coming down as the novelty wears off and sales increase. They’ll fall further as batteries become cheaper to make. But the point where the price of an electric car falls below an equivalent conventional car is still some years away.

So Wood proposes removing several taxes on the purchase of new electric cars. Scrapping state stamp duty would cut the price by up to 6.5 per cent, he estimates. Remembering that, these days, all vehicles are imported, removing federal import duty would cut the cost by up to a further 5 per cent.

Exempting electric cars from the federal luxury car tax – a tax of 33 per cent of the price exceeding the first $80,000 – until 2030 would also help.

Australia is alone among the rich countries in not having mandatory fuel efficiency and emissions standards. And there’s a suspicion some foreign makers send us only the high-emissions conventional models they have trouble flogging in other markets.

So to these carrots, Wood adds a stick: to phase out petrol and diesel cars, the feds should impose an emissions limit on light vehicles and reduce it to zero by 2035.

Many people hesitate to buy an electric vehicle because they worry about finding places to recharge. Wood says governments should require all new buildings with off-street parking to make provision for vehicle charging.

Getting everyone into electric vehicles wouldn’t solve our emissions problem, but it would help. And it’s another indication that the fears of huge costs and disruption are greatly exaggerated.

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Reality is catching up with our freeloading, populist climate deniers

Don’t be taken in by the Morrison government’s outraged cries of “protectionism” against the EU plan to impose a carbon tariff on our exports to Europe. It’s we who are in the wrong, failing to do what we should have to reduce emissions, in favour of politicking and populism.

What we’re seeing is just the reality of the world’s need to act to limit climate change catching up with a government and federal party which, since Tony Abbott used denialism to seize the party’s leadership from Malcolm Turnbull in 2009, decided to make global warming a party-political football: a way to beat your opponents, not a need to tackle the nation’s biggest problem.

It’s a condemnation of our business people that, when their own side of politics offered them a way to postpone the inevitable costs of adjusting to a low-carbon world, they happily embraced it.

It’s a condemnation of Australian voters that they were willing to allow their preferred party to tell them whether they cared or didn’t care about their children’s future. It should have been the other way round. “It’s all too hard; you do my thinking for me.”

But the game has moved on since those bad days, and now it’s not just the rest of the world that’s realised there’s no future in denying the reality of climate change and the need to act. As each day passes, we see more evidence that our own financial regulators, banks, investors and businesses are accepting the inevitable and modifying their behaviour.

All our state governments – most notably the Berejiklian Coalition government of NSW – have embraced the target that all other rich nations have embraced, net-zero emissions by 2050. Everyone can see that our refusal to take climate change seriously is wrong-headed and unsustainable.

So, apart from being a national embarrassment – we’re the person stopped for not wearing a mask, so to speak – it’s no bad thing that even other countries have stepped in to oblige our national government to shoulder its responsibilities.

As part of their plan to reduce their emissions by 55 per cent by 2030, the Europeans are toughening up the emissions trading scheme they introduced in 2005, which imposes a price on the carbon emissions of European industries.

To prevent this putting their industries at a disadvantage against imports from countries that don’t impose a similar carbon price on their own industries, the Europeans plan to use a “carbon border adjustment mechanism”, a tax on imported cement, fertilisers, aluminium and iron and steel to bring their carbon costs up to those faced by local producers.

This not only levels the playing field for local industry, it eliminates the incentive for producers to move their production to countries without carbon pricing.

These problems are ones we ourselves worried about when designing Kevin Rudd’s original carbon pollution reduction scheme (which the Coalition and the Greens voted down in 2010) and Julia Gillard’s carbon pricing scheme of 2012 (which was repealed by Abbott in 2014).

So what the Europeans want to do can’t honestly be called protectionism. It bears no similarity with the new import duties China’s imposing on some of our exports.

What’s true is that it’s a messy but necessary way of solving the “wicked” problem of climate change which, being global, can only be fixed by all of the world’s big emitting countries doing their bit. This is why we can expect many other big countries – starting with America, and maybe extending to Japan − to impose similar carbon border taxes on those countries that try to freeload on those doing the right thing, while helping to sabotage the good guys’ efforts in the process.

So there’s no reason for any of us who believe climate change is real and must be countered to have any sympathy for the Abbott-Turnbull-Morrison government. All its sins of expedience and populist politicking are finding it out. It took a bet that the rest of the world wouldn’t get serious, and we lost.

The point is, had we stuck with either the first or the second version of our own emissions trading scheme – which were actually designed to fit with the Europeans’ scheme – we wouldn’t have this problem.

By now our exporters would be paying our carbon tax to our government (or, if they weren’t yet, we could easily fix it) rather than paying the same tax to foreign governments. Why’s that a good idea?

From the beginning, this government has used climate change as nothing more than an opportunity to attack the other side of politics by pushing populist delusions that taxes are always and everywhere a bad thing. Bad for the economy. Yeah, sure.

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Reform not a dirty word when it benefits the many, not the few

The idea that the economy needs to be “reformed” has been hijacked by the business lobby groups. Their notion of reform involves making life better for their clients at the expense of someone else. But that doesn’t mean there aren’t things that could be changed to make the economy work better for most of us, not just the rich and powerful.

Trouble is, Scott Morrison shows little interest in any kind of reform, whether to advance business interests or anyone else’s. Reform involves persuading people to accept changes they don’t like the sound of, and increases the risk they’ll vote against you at the next election.

Morrison’s government is making heavy weather of our most urgent problem – getting all of us vaccinated against the virus ASAP – so maybe it’s not such a bad time for him to Keep it Simple, Stupid.

But we do have an election coming up, in which it’s customary to think about what improvements could be made over the next three years. And it’s not illegal for us to dream about what could be improved if sometime, somewhere we ever found leaders interested in doing a better job as well as staying in office.

Next to the pandemic, the most important problem we need to be working on is climate change. That’s stating the obvious, I know, but not to Morrison and his Treasurer, Josh Frydenberg, whose recent intergenerational report paid lip service to the issue but then proceeded to project what might happen to the economy and the federal budget over the next 40 years without taking climate change into account.

What’s surprising is that another Coalition government, Gladys Berejiklian’s in NSW, did take account of global warming in its state intergenerational report. It found that more severe natural disasters, sea level rises, heatwaves and declining agricultural production would reduce incomes in NSW by $8 billion a year in 2061 under a high-warming scenario compared to a lower warming one.

Clearly, climate change will be bad for everyone in the economy – some people more than others – while acting to reduce our emissions of greenhouse gases will be a cost to our fossil fuel industries.

But the world’s demand for our coal and gas exports is likely to decline whatever we do. Our government doesn’t believe climate change needs to be taken seriously but, fortunately for more sensible Australians, the rest of the world does, and is in the process of forcing “reform” on our obdurate federal government.

In the meantime, however, our electricity industry is finding it hard to know what to do because the Morrison government won’t commit itself to a clear plan on how we’ll make the transition to all-renewable power.

Worse, our abundance of sun and wind relative to most other countries makes us well placed to become a world renewables superpower – exporting “clean” energy-intensive manufactures, maybe even energy itself - if we act quickly.

Right now, however, our need to choose between being a loser from the old world or a winner in the new world is sitting in the too-hard basket.

Moving to less strategic issues, Danielle Wood, chief executive of the Grattan Institute, gives a high priority to lowering barriers to workforce participation by women, by making childcare more affordable and improving paid parental leave.

We’ve long seen the benefits of free education in public schools. Making “early childhood education and care” free would not merely make life easier for young families, it would get more of our kids off to a better start in the education system and allow women to more fully exploit the material benefits of their extensive education, not just to their benefit but the benefit of all of us.

The benefits of getting an education greatly exceed getting a better-paid job – education broadens the mind, don’t you know – but it makes no sense for girls, their families and the taxpayer to put so much effort and money into gaining a better education, then make it so hard for them to do well in the workforce when they have kids.

One factor that’s widening the gap between rich and poor in the advanced economies is years of “skill-biased” technological change, which is increasing the wages of highly skilled workers while doing little to increase the wages of unskilled workers. Indeed, many routine jobs are being replaced by machines.

This says one way to ensure Australian workers prosper in the digital future of work is to ensure our workforce is well educated and highly trained. We must be willing to spend – to invest – however much it takes to have a workforce capable of providing the more analytical, caring and creative skills employers will be demanding.

We need to do more to help our teachers teach better so that fewer kids leave school early without having acquired sufficient education to survive in the world of work. Some teachers are better at it than others; they need to be used to train younger teachers on the job and rewarded accordingly.

Universities need to be better funded by the federal government, so they can afford to give students a higher quality education, vice-chancellors aren’t so eternally money hungry, unis stop exploiting younger staff with insecure employment and aren’t so dependent on making money out of overseas students and thus obsessed by finding ways to game the international university league tables.

How’s all this to be afforded? By all of us paying somewhat higher taxes, how else? By politicians giving up their election-time pretense that taxes can come down without that leading to worse quality government services rather than better.

Throwing money at problems doesn’t magically fix them, you must use the money effectively. But when mindless cost-cutting is the source of much of the problem, nor is it possible to fix problems without spending more.

If our politicians would speak to us more honestly along the lines of “you get what you pay for”, that itself would be a welcome reform.

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The economy’s job is to serve our good health

What a tough, tricky world we live in. There we were, starting to think the pandemic – for us, at least – was pretty much over bar the jabbing, when along came a new and more contagious variant and knocked our confident complacency for six. It’s now clearer that getting free of the virus will be messier, more expensive and take longer than we’d hoped.

It’s natural to be impatient to see the end of this terrible episode in the nation’s life, but no one’s been more impatient to see the end of restrictions than Scott Morrison and the business lobby groups.

We should worry less about any continuing small risks and more about getting the economy working normally again, we were told. Why do those appalling premiers keep closing state borders? Don’t they understand how it disrupts businesses?

One theory that’s been blown away is the tribal notion that continuing problems keeping a lid on the virus were limited to dictatorial Labor states, not “gold standard” Liberal states. We’ve been reminded of what pride so often causes us to forget: success is invariably a combination of competence and luck.

Luck was running against Victoria, now it’s NSW’s turn. NSW did do better on contact tracing, but along came a variant that could spread faster than the best contact-tracing system could keep up with.

The nation’s macro-economists learnt some years ago that the best response to a recession is to “go early, go hard”. That’s something the exponential spread of viruses means epidemiologists have long understood.

The sad truth is, no matter how long NSW’s present lockdown needs to last before the virus is back under control, Premier Gladys Berejiklian’s critics are certain to say she waited too long and didn’t go hard enough.

And they’ll be right. If there’s ever a possibility of starting even a day earlier, it’s always right.

Is it a bad thing to want to limit the economic disruption caused by our fight against the virus? Of course not. But it’s a tricky choice. You don’t want to act unnecessarily, but the longer you take to realise you must act, the more disruption you end up causing.

Berejiklian’s problem is that she was being held up as the national pin-up girl of governments’ ability to cope with the crisis while minimising economic disruption.

The economy is merely a means – a vital means – to the end of human wellbeing. Health is also a means to achieving human wellbeing. But good health is so big a part of wellbeing it’s almost an end in itself. And prosperity isn’t much good to you if you’re dead.

So, as surveys show, most economists get what it seems many business people (and certainly, their lobby groups and media cheer squad) don’t get: in any seeming conflict, health trumps economics.

It’s also a matter of solving problems in the best order. Just as a war takes priority over material living standards, so does a major threat to our health. Fix the health problem, then get back to worrying about the economy.

To put it yet another way, “the economy” exists to serve the interests of the people who make it up; we don’t exist to serve the economy.

The people who want to exalt “the economy” tend to be those using “the economy” to disguise their pursuit of their own immediate interests, not the interests of everyone. “Keep my business going; if that means a few people die, well, I’m pretty sure I won’t be among ’em.”

Some economists estimate that the NSW lockdown will cost the economy (gross domestic product) about $1 billion a week. But don’t take that back-of-an-envelope figure too seriously. For a start, it’s not huge in a national economy producing goods and services worth about $2000 billion a year.

In any case, it’s misleading for two reasons. First, can you imagine what would be happening in the economy had St Gladys (or, before her, Dictator Dan) done nothing while the virus raged about us, getting ever worse?

Most of us would be in what Professor Richard Holden of the University of NSW calls “self-lockdown”. Which would itself be a great cost to the economy – not to mention the angst over the lack of leadership.

So don’t confuse the cost of the virus with the cost of the government’s efforts to limit its spread by doing the lockdown properly.

Second, remember that the economy rebounded remarkably quickly and strongly after the earlier lockdowns, making up much of the lost ground. Of course, the exceptional degree of income support for workers and businesses provided by the federal government does much to account for the strength of the rebound.

Which is why it’s good to see the federal-state assistance package announced on Tuesday, even though its cut-price version of JobKeeper, while being better than was provided to Victoria recently, isn’t as generous as it should have been.

Like Berejiklian, Morrison is still adjusting to his newly reduced circumstances.

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Don't believe the boys who cry 'interest rates to rise'

Heard the talk that a rise in interest rates is getting closer? So’s Christmas. Here’s my advice: the greatest likelihood is that a rise is still years away. But between now and then you’ll keep hearing stories that it’s on the way. Ignore them.

Why? Because though nature abhors a vacuum, it doesn’t do so as much as the financial markets and the financial media do. They form an unholy alliance because both make their living speculating about changes in interest rates.

They cannot abide a situation where rates don’t change for years on end. So they keep trying to convince themselves something’s about to happen. The financial markets jump at shadows and, whenever they do, the media breathlessly report this worrying development.

The plain truth is, no one knows what the future holds – not even me. But all of us crave to know what’s coming, and keep searching for the person who may be able to tell us. The traders in the financial markets – who do infinitely more buying and selling of securities and currencies than is required to meet the needs of their business customers – earn a well-buttered crust by betting with each other on what’s coming down the pipe.

The media make their living partly by catering to their customers’ unquenchable curiosity about the future. Any interesting opinion will do, though they know that bad news sells better than good. A rise in rates would be bad news for people with mortgages, but good news for people living on their savings in retirement. But the people who choose what news we’re told about can’t imagine they’ll be old themselves one day.

Although no one but God knows for certain what will happen to interest rates, you’d think the person likely to be best informed on the subject is the person with most influence over interest rates in Australia, the boss of our central bank, Reserve Bank governor Dr Philip Lowe.

For more than a year, Lowe has kept telling us – and the markets – that the Reserve is “unlikely” to raise the official interest rate “until 2024 at the earliest”. But there was much excitement last week when he changed this to saying the Reserve’s “central scenario” is that a rise won’t be needed “before 2024″ – that is, not for another two and a half to three years.

What this means is that, whereas it couldn’t see any likelihood a rise would be needed until 2025, it can now see a “range of plausible scenarios” where “further positive surprises” could make a rise appropriate some time during 2024.

The further surprises would mean that annual growth in wages exceed 3 per cent earlier that in the Reserve’s “central scenario”. Although its target is annual inflation of 2 to 3 per cent, and its statutory duty is to achieve full employment (something it now sees as necessary to get inflation back up into the target zone), wage growth of 3 per cent-plus is a key indicator because “history teaches that sustained [my emphasis] changes to the inflation rate are accompanied by sustained [ditto] changes in growth in labour costs”.

Our annual rate of wage growth hasn’t exceeded 3 per cent since March 2013 – more than eight years ago, long before the pandemic – so you see why the Reserve’s “central scenario” is that getting back to it is likely to take several years yet.

For much of this year, however, the financial markets have thought they knew better that the Reserve governor. And nothing he said last week persuaded them he might know more about his likely decisions than they did.

There was little change in futures market prices showing they expect a rate rise in a year’s time – July 2022 – and another in the first half of 2023.

Why do the markets think they know better? Well, because the world’s national financial markets are now so highly integrated, traders probably spend more time thinking about the global market leader, the US economy and Wall Street, than they do about our economy. And they’re always tempted to follow a simple decision rule: whatever the US Federal Reserve is doing, we’ll be doing soon enough.

They may be right in believing rising inflation pressures in the US will lead the Fed to start raising interest rates sooner than sometime in 2024 at the earliest. But what they miss is the big differences between our circumstances and the Yanks’ when it comes to prices and wages.

None of the advanced economies were roaring ahead before the arrival of the pandemic, but the US was travelling a lot faster than we were. So we have a lot more ground to make up than they do. Although most advanced economies have long had inflation rates below their central banks’ target range, ours has been a lot further below than the Americans’.

That’s probably because, over recent years, their market for labour has been a lot “tighter” than ours. Their rate of wage growth has been much less weak than ours has.

A big reason for this is that, in our labour market, the increased demand for workers has been more closely matched by an increase in the supply of workers, whereas theirs hasn’t been. Our rate of working-age people already participating in the labour force has risen to near-record highs, whereas theirs has been much lower.

A lot of the increase in our supply of labour has come from our relatively higher levels of immigration. This has ceased to be true since we closed our borders – which does a lot to explain why employment and unemployment have bounced back to their pre-pandemic levels much earlier than we were expecting – so one of Lowe’s uncertainties is how long this strange form of stimulus will last.

The American financial markets began worrying about the risk of rising inflation earlier this year. This is partly because President Biden has been applying huge amounts of budgetary stimulus, and because of rising commodity prices and reports of shortages of the supply of semiconductors and other things, caused by the pandemic’s disruption.

By contrast, our government is busy ending its big stimulus programs. And supply shortages are temporary. Increases in prices don’t become a lasting increase in the rate of inflation unless they lead to higher wages. That’s what Lowe means when he stresses that he won’t be putting up interest rates until enough time has passed to convince him the increases in inflation and wages are “sustained”.

The final thing to remember is that one reason the financial markets are so quick to jump to conclusions about what lies ahead is that, because they lay new bets every day, they know they can jump to a different conclusion in a few weeks’ time. To them, it’s all part of the fun of being a professional gambler.

If you actually enjoy worrying that interest rates may rise – all the thrills and spills along the way – then be the media’s guest. But if you have better things to do and just want a credible view about the future that doesn’t change any more often than it has to, feel free to ignore the markets’ fun and games.

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