Breaking news: unions play a central role, for good and ill

Welcome back to a tripartite world, where Labor has returned to power and its union mates are back inside the tent – and at last week’s jobs summit could be seen moving in their furniture. For those who don’t remember the 1983 glory days of Bob Hawke, Paul Keating, consensus, the Accord, and former ACTU secretary Bill Kelty as an honorary member of the cabinet, it will take some getting used to.

For those who’ve been watching only since the John Howard era, it may even seem unnatural. One of Howard’s first acts upon succeeding Hawke and Keating in 1996 was to delegitimise the unions.

He allowed the tripartite committees to lapse, and didn’t reappoint the ACTU secretary to the board of the Reserve Bank. I doubt if many even informal links between ministers and union leaders continued.

The Libs didn’t know the union bosses, and didn’t want to know ’em. They were the enemy – always had been, always would be. Big business bosses, on the other hand, would be privately consulted and were always welcome to phone up for a quiet word with the minister.

This, by the way, helps explain the Reserve Bank’s pro-business bias. Its board is loaded with business worthies - who are there to help keep the central bankers’ feet on the ground – and its extensive program of regular and formal “liaison” with key firms and industries, doesn’t include asking union leaders what they think’s happening.

If you wonder why Reserve governor Dr Philip Lowe’s remarks about wages can sometimes seem naive – even out of “boomer fantasy land” – it’s because he only ever hears the bosses’ side of the story. And I doubt if they ever shock his neoclassical socks by talking about how they exercise their market power.

It’s easy to justify the Liberals’ delegitimation of the unions by noting that, these days, only about 14 per cent of employees belong to a union. But if you find that argument persuasive, you’re revealing your ignorance of our wage-fixing institutions.

Most workers are subject to an industrial award, and there’s a union (and an employer or employer group) on one end of every award, and almost every enterprise agreement. In the Fair Work Commission’s annual wage review – which sets the wages of about a quarter of all employees – it’s the ACTU that stands against the employer groups arguing that times are tough, and they couldn’t possibly afford a rise of anything much.

So, to say the unions have what economists would call a giant “free-rider” problem – a lot of people happy to receive benefits without paying for them – is not to say they shouldn’t be given a seat at the table.

Liberals, business and their media cheer squad may be appalled by sanctification of the unions, but at least Labor’s making it clear it wants business to keep its seat at the table. It will be consulted. This too is Labor’s inheritance from the Hawke-Keating experience: to the extent possible, keep business on side.

The ACT’s second-biggest industry – lobbying – will be busier than ever. It’s third-biggest – consulting – not so much.

What all agreed at the summit is that Labor has taken over an economy with many structural problems that need fixing. Not the least of these is that the wage-bargaining system is broken.

What we learnt last week, from everything ministers said and from the 14-page “outcomes document” is that, in marked contrast to its predecessor, Labor does intend to fix things.

The whole summit, tripartite business is about giving all the key players a say in how things are fixed, giving them a heads-up on the government’s intentions, and an introduction to the minister. About winning support – or, at least, acquiescence – from as many of the powerful players as possible, to minimise the political risks of making changes.

Under Labor’s tripartism, the three parties aren’t equal. The government will, in the end, do what it decides to do. The unions start well ahead of business, because of their special relationship with a Labor government.

They have a further advantage over business: solidarity. The many unions are used to speaking with one, unified voice through the ACTU, whereas business fractures into big versus small, and rival employer groups. The unions know all about playing one business group off against another.

What business has to decide is whether it wants to stay in the government’s tent or walk out. Because, in business, pragmatism usually trumps idealism, my guess is that business will play ball for as long as Labor looks like staying in office.

After the summit ended, the ACTU’s statement said it had always “been clear that we need to get wages moving and increase skills and training for local workers in order for unions to support lifting skilled migration levels. We welcome that this summit has delivered those commitments.”

It was all a talk fest? No, a deal was done and that quote reveals just what the deal was. However, a big part of the business side didn’t support fixing the wage-bargaining system by returning to “multi-employer” bargaining.

What’s clear is that the government will be pressing on with some form of multi-employer bargaining. What isn’t yet clear is what that form will be. Until it’s finalised, business will be busy inside the tent pushing for whatever modifications it can get.

With Labor back in power and the unions back walking the halls of power, it’s important to understand the relationship between the two arms of the “labour movement”. Whereas the relationship between the Libs and business is quite informal, the relationship between Labor and the unions is highly formal. They’re not mates, they’re close rellos.

Historically, the unions set up the Labor Party to be their political arm. To this day, those unions that pay dues to the Labor Party still wield considerable influence over it and the members of the federal parliamentary caucus.

Labor parliamentarians are affiliated with particular unions, which gives some of the bigger unions considerable influence over preselections, on who gets to stay leader of the party, and on certain policy matters.

When Labor is in government, businesses in certain industries use their unions to get to the government. This explains why Labor governments haven’t done as much as they should to tighten up our competition law.

And whereas Howard left the Libs with a visceral hatred of industry super funds, Labor’s links with the unions – and the unions’ links with the ticket-clippers of the super industry – mean it can’t always be trusted to favour the interests of super members over super managers.

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Look up, we're on the verge of employment greatness

“Visionary” and “inspirational” aren’t words normally used about economists, but they certainly apply to Professor Ross Garnaut, of the University of Melbourne, and to his Thursday dinner speech to the jobs and skills summit. His message to Anthony Albanese is that he’s taken the helm at the worst of times. But, if he can rise to the challenge, he can lead us to the best of times.

Garnaut’s message is in two parts. First, we must stop kidding ourselves about the state of the economy and the budget. Second, we can make the seemingly impossible changes needed to gain all the material and social advantages of economic success.

First, we are kidding ourselves about how well our economy has been performing. It’s true our economy bounced back more quickly from the COVID-19 pandemic recession than did most developed economies - because our stimulus from the budget was bigger and faster.

Since then, however, Garnaut says, “we have looked ordinary in a troubled developed world”.

“We can’t turn the economy back to before the pandemic,” he says. “Even if we could, pre-pandemic conditions aren’t good enough. That’s high unemployment and underemployment and stagnant living standards.”

Recently, our problems have been compounded by the invasion of Ukraine and its disruption of global energy markets. But, unlike the Europeans and most other rich countries, Australian energy companies benefit when gas and coal prices rise.

“We are kidding ourselves if we think no deep wounds will be left in our polity from high coal and gas – and therefore electricity - prices bringing record profits for companies, and substantially lower living standards to most Australians,” he warns.

And “we have to stop kidding ourselves about the budget”. We need unquestionably strong public finances to have low cost of capital, private and public, for our transformation from fossil-fuel loser to Superpower exporter of clean energy and minerals, and to shield us from a disturbed international economy and geo-polity.

We’ve emerged from the pandemic with eye-watering public debt and large budget deficits, when high commodity prices should be driving budget surpluses.

“We talk about [the need for] much higher defence expenditure, but not about higher taxes to pay for it.

“We say we are underproviding for care and underpaying nurses, and underproviding for education and failing to adequately reward our teachers.”

The latest Intergenerational Report tells us that the ratio of over-65s to people of working age will rise by half over the next four decades, bringing higher costs and fewer workers to carry them, he says.

But, “in the face of these immense budget challenges, total federal and state taxation revenue as a share of gross domestic product is 5.7 percentage points lower than the developed-country average”.

Get it? Yet another economics professor telling us taxes must go up – not down.

The budget update issued at the start of this year’s election campaign predicted real wages would decline by 3 per cent over the two years to next June. Treasurer Jim Chalmers’ update three months later increased the decline to 7 per cent.

So, says Garnaut, “the facts have changed, and we should be ready to change our minds”. When we stop kidding ourselves, we’ll recognise the need for policies we now think impossible. That’s Garnaut’s second, more inspiring point.

“Australians accepted change that had been impossible on two earlier occasions when we faced deep problems, and responded with policy reforms that set us up for long periods of prosperity, national confidence and achievement.”

The most recent was the reform era starting in 1983. The first was postwar reconstruction of the economy in the 1940s, which was followed by a quarter of a century of full employment and rising incomes.

Back then, the Curtin and Chifley governments were determined Australians would not return to the high unemployment and economic insecurity of the interwar years.

“The 1945 white paper on full employment was premised on the radical idea that governments should accept responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment ...

“This would achieve the highest possible standards of living for ordinary Australians.”

The Menzies Liberal government’s political success – it stayed in power for 23 years – “was built on full employment, helped by Menzies insulating policy from the influence of political donations to an extent that is shocking today”.

Garnaut says he grew up in a Menzies world of full employment. (So did I, as it happens.)

The authors of the white paper wondered how low the rate of unemployment could fall before it caused high or accelerating inflation. They were surprised to find it fell to below 2 per cent, and stayed there for two decades without a problem.

It’s tempting to think that, with all the problems of controlling inflation and decarbonising the economy, this brush with our glorious past will soon disappear, and we’ll be back to the 5 to 6 per cent unemployment we’ve learnt to think is the best we can do.

But Garnaut’s inspiring vision is that, with the right, seemingly impossible policy changes, we can complete the return to a fully employed economy and stay there, reaping its many material and social benefits.

In the world he and I grew up in, “workers could leave jobs that didn’t suit them and quickly find others – often moving from lower- to higher-productivity firms. Employers put large efforts into training and retraining workers.

“Labour income was secure and could support a loan to buy a house. Businesses that could not afford rising wages closed and released their workers into more productive employment.”

Steadily rising real wages encouraged firms to economise in their use of labour, which lifted productivity.

Sounds worth striving for, to me.

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Summit consensus: everyone wins some, loses some

In the consensus spirit of dear departed Bob Hawke, Anthony Albanese is hoping it will be all sweetness and light at this week’s jobs and skills summit. And, to give them their due, the industrial parties have been doing their best, looking to realise John Howard’s maxim: “the things that unite us are greater than the things that divide us”.

The ACTU has issued a joint statement with the peak small business organisation expressing their agreement to “come together to explore ways to simplify and reduce complexity within the industrial relations system”.

The ACTU has also issued a joint statement with the Business Council – representing the nation’s biggest companies – and the two biggest employer groups. They all agree that federal and state governments should try harder and spend a lot more money fixing the almighty mess they’ve made of what they call “vocational education and training” but is actually what’s left of TAFE.

And the ACTU and the Business Council have issued a joint statement with the peak community welfare organisation, the Australian Council of Social Service, agreeing that the guiding framework of the summit should be “achieving and sustaining full employment”.

The Hawke government’s consensus summit succeeded because it sought a comprehensive, grand bargain in which each side gained something it wanted, while giving up things the others wanted.

Of course, no one knew more about hammering out a deal between warring parties than Hawke. I hope Albanese can rise to the occasion because, underneath all the smiling goodwill, the parties’ objectives in attending the summit seem diametrically opposed.

The main thing the unions want is a return to industry-wide, or at least multi-employer, wage bargaining because, under enterprise-level bargaining, they’ve lacked the industrial muscle to achieve decent pay rises. In contrast, the Business Council is desperate for a surge in migration to fill the present record number of job vacancies. Why? So big business doesn’t have to pay higher wages to attract the workers they need.

The council agrees that enterprise bargaining is broken, but what it means is that its members are finding it too hard to use the bargaining system to get their workers to agree to changes in the work they do in return for a pay rise.

Almost to a person, the nation’s economists are strong supporters of high levels of immigration. But the Economic Society of Australia’s recent survey of 50 top economists suggests their support has become more qualified.

Asked which of the policies likely to be discussed at the summit they considered to be of most benefit to Australians, only about a third picked “migration”, whereas almost two-thirds picked “education and skills”.

Independent economist Saul Eslake said he was “absolutely not an advocate of reducing our immigration intake” but he “didn’t think we should revert to being as reliant on it as a substitute for doing a better job of equipping those who are already here with the skills which will be required to obtain secure employment and decent wages in the years ahead”.

“Australia’s education system – at all levels – is increasingly failing to equip Australians with the skills required for the jobs of both today and the future,” he said. “As a result of the shortcomings in our education and training systems, we have become increasingly reliant on immigration to deliver skilled workers.”

Well, that’s one way to look at it. I think businesses have tolerated governments’ dismantling of higher education because, as part of their mania for lowering labour costs, they’ve found it easier and cheaper to import the already-trained labour they need.

Professor Sue Richardson, of Flinders University, said she thought that “judicious migration is very beneficial to the economic and social life of Australia”.

But we’ve “relied much too heavily on migration as a solution to any labour supply problem”. This “enables employers and our skills-development system to avoid a close examination of why we do not generate the skills that we need, and what needs to be done to ensure that we do”.

It seems the government is working towards increasing our immigration targets to please business and ease labour shortages, but in return for greater business support for technical training. And for higher wage rates for skilled workers on temporary visas, to limit the scope for undercutting the wages of local workers.

But Eslake suspects immigration may not return to pre-pandemic levels, at least not as quickly as widely assumed. I do too.

As for the wage-fixing arrangements, I think that’s what the ACTU will take away from the summit. Something has to be done to reduce the power imbalance between employers and employees, if the economy is to thrive.

It turns out enterprise bargaining suits big business, but not small business. The unions and the small business peak body have already agreed to explore a move to multi-employer bargaining.

With industry bargaining, firms don’t have to worry about agreeing to higher wages than their competitors are paying. You’d think that, in time, the nation’s big businesses would also see this advantage.

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Jobs summit: shut up those playing the productivity three-card trick

Anthony Albanese and his ministers are keen to ensure this week’s jobs and skills summit doesn’t degenerate into the talk fest the opposition is predicting it will be. Well, one way to avoid much hot air is to shut up people playing the usual three-card trick on productivity.

The truth is there’s a lot of muddled and dishonest talk about the relationship between wages and productivity. Much of this comes from the employer lobby groups, which will spout any pseudo-economic nonsense that suits their goal of keeping wage growth as low as possible.

But they get too much comfort from econocrats who think that if you know what economics 101 teaches about how demand and supply interact, you know all you need to know about how all markets work, including the labour market.

As former top econocrat Dr Michael Keating, an economist specialising in the labour market, has explained, “the authorities’ model, which assumes perfect competition, constant returns to scale and neutral technological progress, implies that real wages can be expected to grow at the same rate as [labour] productivity, neither more nor less, making it look as if the collapse in productivity growth explains the collapse in wages growth”.

So when workers complain about the lack of growth in real wages, the employers’ professional apologists reply that real wages haven’t grown because the productivity of labour hasn’t improved. If only the unions would co-operate in efforts to improve productivity, wages would grow, as sure as night follows day.

But the supposed magical mechanism by which productivity improvement flows inexorably to real wages is refuted by the summary statistics quoted in Treasury’s issues paper for the summit. We’re told that, though productivity improvement has slowed, we’ve still achieved growth averaging 1 per cent a year since 2004.

But we’re also told that “real wages have grown by only 0.1 per cent a year over the past decade, and have declined substantially over the past year”. Not much automatic flow-through there.

Which brings us to another thing that’s being fudged in the present debate. You sometimes hear spruikers for the employers implying you need productivity improvement to justify even a rise in nominal wages.

But productivity is a “real” – after-inflation – concept. For the benefit from national productivity improvement to be shared fairly between capital and labour – employers and employees – it has to increase wages over and above inflation.

Here, however, is where we strike another difficulty. There used to be tripartite consensus – business, workers and government – that wages should always keep up with prices. Cuts in real wages were needed only to correct a period where real wage growth had been excessive – that is, exceeding productivity improvement.

Right now, however, the opposite is the case. Real wages were long falling short of what productivity improvement we were achieving before the present surge in prices left wage rates far behind. Even with the labour market so tight, workers simply haven’t had the industrial muscle to achieve wage rises commensurate with the leap in prices.

And now, while businesses show little restraint in passing their higher imported input costs through to higher retail prices, while adding a bit for luck, the great and good – read business and the econocrats – have agreed that the quickest and easiest way to get inflation down is for the nation’s households to pay the price.

A big fall in real wages squares the circle. Business has passed on its costs – and then some – and the economic managers have redeemed their reputations and got the inflation rate falling back. What’s not to like?

Well, we’ve solved the problem by allowing a big cut in real household income. It’s likely businesses will feel adverse effects as households see no choice but to tighten their belts. And I imagine some workers, consumers and voters will be pretty upset, concluding that the economy certainly isn’t being run for their benefit.

In effect, Treasury’s issues paper says forget the present disaster and look to the future. We can get real wages growing again – an election promise - as soon as we get productivity up.

Well, no we can’t. The paper’s claiming that, contrary to the experience of the past decade, improved productivity automatically flows through to real wages. And even if that were true, it assumes workers are innumerate, and won’t know that future real gains in wages must first make up for previous real losses. It’s the productivity three-card trick.

Meanwhile, business and the econocrats’ self-serving expedience, in deciding that the punters should pay for a problem they did nothing to cause, has created the climate for radical reform of the wage-fixing system: a return to industry bargaining.

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Don't expect great productivity if we give business an easy ride

An unwritten rule in the economic debate is that you can say whatever you like about the failures of governments – Labor or Liberal; federal or state – but you must never, ever criticise the performance of business. Maybe that’s one reason we’re getting so little productivity improvement these days.

One reason it’s unwise to criticise big business is that it’s got a lot of power and money. It can well defend itself but, in any case, but there’s never any shortage of experts happy to fly to its defence, in hope of a reward.

But the other reason is the pro-business bias built into the standard demand-and-supply, “neoclassical” model burnt into the brains of economists. It rests on the assumption that market economies are self-correcting – “equilibrating” - and so work best when you follow the maxim “laissez-faire” – leave things alone.

So if markets don’t seem to be going well, the likeliest explanation is that intervention by governments has stuffed them up. Business people always respond rationally to the incentives that governments create, so if what business is doing isn’t helpful, it must be the government’s fault.

In theory, economists know about the possibility of “market failure”, but many believe that, in practice, such failures are rare, or of little consequence.

All this explains why almost all discussion of our poor productivity performance assumes it must be something the government’s doing wrong, which needs “reforming”. You’ll see this mentality on display at next week’s jobs and skills summit.

Which is surprising when you remember that, for the most part, productivity improvement – producing more outputs of goods and services from the same or fewer inputs of raw materials, labour and physical capital – occurs inside the premises of businesses, big or small.

Fortunately, one person who understands this is the new assistant treasurer, Dr Andrew Leigh, a former economics professor, who this week used the Fred Gruen lecture at the Australian National University to outline recent Treasury research on the “dynamism” of Australian businesses – how good they are at improving their performance over time.

The news is not encouraging. One indicator of dynamism is job mobility. When workers switch from low-productivity to high-productivity firms, they earn a higher wage and make the economy more efficient.

The proportion of workers who started a new job in the past quarter fell from 8.7 per cent in the early 2000s to 7.3 per cent in the decade to the end of 2019.

Another indicator of dynamism is the “start-up rate” – the number of new companies being set up each year. It’s gone from 13 per cent in 2006 to 11 per cent in 2019.

Over the same period, the number of old companies closing fell from 10 per cent to 8 per cent. So our firms are living longer and getting older.

The neoclassical model assumes a high degree of competition between firms. It’s the pressure from competition that encourages firms to improve the quality of their products and offer an attractive price. It spurs firms to develop new products.

Competition encourages firms to think of new ways to produce their products, run their businesses and use their staff more effectively, Leigh says.

“In competitive industries, companies are forced to ask themselves what they need to do to win market share from their rivals. That might lead to more research and development, the importation of good ideas from overseas, or adopting clever approaches from other industries.

“Customers benefit from this, but so too does the whole economy. Competition creates the incentive for companies to boost productivity,” he says.

As Leigh notes, the opposite to competition, monopoly, is far less attractive. “Monopolists tend to charge higher prices and offer worse products and services. They might opt to cut back on research, preferring to invest in ‘moats’ to keep the competition out.

“If they have plenty of cash on hand, they might figure that, if a rival does emerge, they can simply buy them out and maintain their market dominance. Monopoly [economic] rents lead to higher profits – and higher prices.”

Taken literally, “monopoly” means just one seller, but economists use the word more broadly to refer to just a few big firms - “duopoly” or, more commonly, “oligopoly”.

One indicator of the degree of “market power” – aka pricing power – is how much of a market is controlled by a few big firms. At the start of this century, the market share of the largest four firms in an industry averaged 41 per cent. By 2018-19, it had risen to 43 per cent. So across the economy, from baby food to beer, the top four firms hold a high and growing share of the market.

And the problem’s even greater when you remember that the rival firms often have large shareholders in common. For instance, the largest shareholders of the Commonwealth Bank are Vanguard and Blackrock, which are also the largest shareholders of the three other big banks.

But the strongest sign of lack of competition is the size of a company’s “mark-up” – the price it charges for its product, relative to its marginal cost of production. In the textbook, these mark-ups are wafer thin.

Treasury estimates that the average mark-up increased by about 6 per cent over the 13 years to 2016-17. This fits with the trend in other rich economies. And the increase in mark-ups has occurred across entire industries, not just the market leaders.

It seems that rising market power has reduced the rate at which labour flows to its most productive use, which in turn has lowered the rate of growth in the productivity of labour by 0.1 percentage points a year, according to Leigh’s rough calculations.

If so, this would explain about a fifth of the slowdown in productivity improvement since 2012. Lax regulation of mergers and takeovers has allowed too many of our big businesses to get fat and lazy, even while raising their prices and profits. But don’t tell anyone I said so.

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Welcome to the job, Treasurer. Rather you than me

Very occasionally, some poor misguided letter-writer suggests to my boss that I’d make a better treasurer than the incumbent. I’m flattered, of course, but it’s never been a job I’ve lusted after. Nor do I delude myself I’d be much good at it. And that goes double for the present incumbent, Jim Chalmers.

I wouldn’t want to be in his shoes (especially not with people like that grumpy old bugger Gittins offering a critique of my every move).

When, within days of taking up the job, Chalmers declared the budget situation was “dire”, people thought he was just softening us up. But I suspect it had finally dawned on him (with a little help from his new treasury advisers) just what an unhygienic sandwich he’d promised to eat: the more so because he’d played his own part in making such a meal of it.

Chalmers’ problem comes in two parts. First, he inherited an almighty mess from Scott Morrison and Josh Frydenberg. They hadn’t exactly tidied the place up before leaving.

Justifiably, they’d racked up huge additional government debt to tide us through the worst of the pandemic, and now the economy was growing strongly. But they were still looking at a decade or more of budget deficits continuing to increase the debt.

It was a problem they’d think about when and if they were re-elected. Meanwhile, nothing mattered more that avoiding doing anything that could cost them votes.

All this we knew before the election. What was less obvious were the many stopgap measures they’d used to hold back the growth in government spending, building up a dam that would inevitably burst.

The stopgaps included making oldies wait many months for a homecare package, making people wait months for a visa, keeping the unemployed below the poverty line and thinking of excuses to suspend their payments.

And that’s before you get to the various, hugely expensive problems with the National Disability Insurance Scheme – problems that can’t be solved by telling the disabled to like it or lump it.

The Morrison government’s projections of continuing budget deficits assume those dams will never overflow. Much of the deficit is explained by the continuing cost of the Morrison government’s already legislated stage-three tax cut in July 2024, which the Parliamentary Budget Office now estimates will have added almost a quarter of a trillion dollars to our deficit and debt by 2032-33.

The second element of Chalmers’ budget problem is that, as part of its small-target strategy for finally winning an election, Labor promised never to do anything anyone anywhere would ever dislike.

When it came to the budget, while banging on about our trillion-dollar debt, they painted themselves into a corner by promising not to do what they’d need to do to stop adding to it. Not to rescind the stage-three tax cut, nor do anything else to increase taxes apart from a tax on multinational companies. (Talk about pie in the sky: make the wicked foreigners pay their fair whack and all our problems are solved without any pain.)

In theory, eliminating the budget deficit is easy. Just slash government spending to fit. All you’d have to do is, say, suspend indexation of the age pension, or cut grants to the states’ public hospitals and schools (while taking care not to touch private hospitals and schools).

In practice, making cuts sufficient to fill the gap is politically impossible. It’s true the government is busy reviewing all their predecessor’s spending, looking for waste and extravagance. But all that’s likely to achieve is to make room for their own new spending promises.

As several former top econocrats have told me, what’s needed to eliminate the deficit is to increase tax collections by about 4 per cent of gross domestic product – about $90 billion a year. See what I mean about Labor boxing itself in?

One thing that wasn’t clear before the election was the full extent of our problem with inflation, even though the Reserve Bank did increase interest rates a fraction during the campaign.

It’s made the need to reduce the budget deficit more pressing because the more the government reduces its own stimulus of the economy, the less the Reserve has to increase interest rates to get inflation down.

And the less rates rise, the less the risk that – as has happened so often in the past – the Reserve’s efforts to reduce inflation send us into recession. One of the side-effects of recession would be to increase deficit and debt greatly.

After his “dire” remark, I expected to see Chalmers edging quietly towards a door marked Sorry About That, and preparing a Keynes-like speech about how “when the facts change, I change my promises”.

But so far, he seems still to be painting himself into the corner. Apparently, keeping promises, no matter how ill-judged and overtaken by events, is more important to Labor than managing the economy well or even avoiding becoming a one-term government.

I’d never seen Chalmers and his boss as martyrs to the cause of Unbroken Promises.

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Housing own goal worsens our inflation problem

A key part of the economic response to the pandemic was to rev up the housing industry. It’s boomed and now it’s busting. What’s been achieved? Mainly, a big, self-inflicted addition to our inflation problem.

That, and a lot of recent first-home buyers now getting their fingers burnt. Well done, guys.

It’s not a crime to be wise after the event. Indeed, it’s a crime not to be. As we all know, you learn more from your mistakes than your successes.

We have much to learn from our mishandling of the economic aspects of the pandemic. Because we had no experience of pandemics, our mistake was to treat the lockdowns as though they were just another recession. Turned out they’re very different.

Because downturns in home building and house prices often lead the economy into recession, then a recovery in home building leads it out, the managers of the macroeconomy assumed it would be the same this time.

The federal government offered HomeBuilder grants to people ordering new homes or major alterations. The state governments offered stamp duty concessions to first-home buyers, provided they were buying new homes.

But the doozy was the Reserve Bank’s decisions to cut the official interest rate from 0.75 per cent to 0.1 per cent, and then cut the base rate for 3- and 5-year fixed-rate mortgages.

By the end of last year, according to the Bureau of Statistics, the median house price in Sydney and Melbourne had jumped by more than 40 per cent. In the following quarter, it fell by 7 per cent in Sydney and 10 per cent in Melbourne. By all accounts, it has a lot further to fall.

Turning to building activity, we’ve seen a surge in the number of new private houses commenced per quarter, which jumped by two-thirds over the nine months to June 2021. Then it crashed over the following nine months, to be up only 14 per cent on where it was before the pandemic.

It’s no surprise commencements peaked in June 2021. Applications for the HomeBuilder grant closed 14 days into the quarter.

But to commence building a house is not necessarily to complete it a few months later. The real value of work done on new private houses per quarter rose by just 15 per cent over the nine months to June 2021. Nine months later, it was up 12 per cent on where it was before the pandemic.

For the most part, the home building industry kept working through the two big lockdowns. It seems that, between them, the nation’s macro managers took an industry that was plugging along well enough, revved it up enormously, but didn’t get it building all that many more houses, nor employing many more workers.

Perhaps it soon hit supply constraints – shortages of building materials and suitable labour. I don’t know if the industry was lobbying governments privately for special assistance, or whether it didn’t have to. Maybe pollies, federal and state, just instinctively rushed to its aid.

But I wonder if the builders didn’t particularly want to get much bigger. There are few industries more cyclical than home building. Builders are used to building activity going up and down and prices doing the same.

When demand is weak, they try to keep their team of workers and subbies together by cutting their prices, maybe even to below cost. Then, when demand is strong, they make up for it by charging all the market will bear.

It’s the height of neoclassical naivety to think it never crosses the mind of a “firm” existing outside the pages of a textbook that manipulating supply might be a profitable idea.

So maybe the builders found the thought of increasing their prices more attractive than the thought of building a bigger business to accommodate a temporary, policy-caused surge in demand.

They may have taken a lesson from those property developers with large holdings of undeveloped land on the fringes of big cities. Dr Cameron Murray, a research fellow in the Henry Halloran Trust at Sydney University, has demonstrated that the private land-bankers limit the regular release of land for development in a way that ensures the market’s never flooded and prices just keep rising.

So, back to our inflation problem. Whenever people say the recent huge surge in prices is caused largely by overseas disruptions to supply, which can’t be influenced by anything we do, and will eventually go away, the econocrats always reply that some price rises are the consequence of strong domestic demand.

That’s true. As I wrote last week, it seems clear many of our businesses – big and small – have used the cover of the big rises in the cost of their imported inputs to add a bit for luck as they pass them on to consumers.

But I saved for today the great sore thumb of excess demand adding to the price surge: the price of building a new home (excluding the cost of the land) or major renovations. This accounted for almost a third of the rise in the consumer price index in the June quarter, and jumped by more than 20 per cent over the year to June.

The price of newly built homes has a huge weight of almost 9 per cent in the CPI’s basket of goods and services, making it the highest-weighted single item in the basket. This implies that new house costs have added almost 2 percentage points of the total rise of 6.1 per cent.

When the econocrats worry about the domestic contribution to the price surge, they never admit how much of that problem has been caused by their own mishandling of the pandemic.

Indeed, when people argued that the main thing further cutting interest rates would achieve would be to increase house prices, the Reserve was unrepentant, arguing that raising house prices and demand for housing was one of the main “channels” through which lower rates lead to increased demand.

But the crazy thing is, this strange way of using the cost of a new dwelling to measure the cost of housing for home-buyers – which, I seem to recall, was introduced in 1998 after pressure from the Reserve – exaggerates the true cost for people with mortgages, especially at times like these.

Few people ever buy a new dwelling and, even if they do, rarely pay for it in cash rather borrowing the cost. This is one reason the bureau doesn’t regard the CPI as a good measure of the cost of living, but does publish separate living-cost indexes for certain types of households.

Ben Phillips, of the Centre for Economic Policy Research at the Australian National University, has used the bureau’s living-cost indexes to calculate that about 80 per cent of households had a living cost increase below the CPI’s rise of 6.1 per cent. The median (typical) increase over the past year was 4.7 per cent.

What trouble the econocrats get us into when they use housing as a macro managers’ plaything.

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Good news: why our low unemployment rate will last

Nobody’s noticed, but something really good has come out of the upheaval of the pandemic: more than 100,000 people who’d spent ages searching for a job without success, finally found one. The benefit to them – and the economy – will last a long time.

When I say nobody noticed, I mean no economist or econocrat. The person first to notice was a former economics writer for this august organ, now economics editor for The Conversation website, Peter Martin.

Because no one had experienced a pandemic, and because it was feared initially that the disruption to the economy would be much greater than it proved, both the Reserve Bank, with its cuts to interest rates, and the government, with its spending and tax cuts, responded to the need for lockdowns by giving a huge boost to demand.

The authorities responded as though the lockdowns were an ordinary recession, not something much more short-term and limited to particular parts of the economy. The economy bounced back strongly after each of the two lockdowns.

So, the surge in demand for goods and services led to a surge in demand for workers to produce them. Adding to the demand for workers were the high levels of absenteeism caused by the virus.

Normally, much of this increased demand for workers would have been satisfied by bringing in workers from abroad. This time, however, our borders were closed. Worse, we’d sent home many overseas students and backpackers.

So what happened? If they wanted more staff, employers were obliged to be less choosy about the workers they hired.

Some people in the pool of unemployment get to find a job and escape the pool after only a few weeks. Others take a lot longer. And the harsh truth is that the longer it takes you to find a job, the less likely an employer is to want you.

Employers think, “if no other employers have wanted you, why should I risk it?” It’s as though the longer you stay in the pool, the further down you sink until eventually, you get stuck in the mud at the bottom.

The Bureau of Statistics defines “long-term” unemployment as having been jobless for a year or more. The number of long-term unemployed always rises greatly in the years following a normal recession.

That’s because the normal pattern is for unemployment to shoot up at the start of the recession, but then take six or seven years to come back down.

Among the greatest victims of recessions are students who have the misfortune to be leaving education at the time. Economists say such unfortunates get “scarred” by the long delay in finding an appropriate job. Research shows it can take them up to 10 years to get their careers going properly.

But though Treasury economists feared the pandemic would leave many young people scarred, it didn’t happen because the “coronacession” proved so short and sharp.

Martin is the first person to shout that, over the year to June, the number of long-term unemployed fell from 218,200 to 130,100. And then to join the dots.

Over the 14 months to June, the fall’s even bigger: 125,000 – almost 1 per cent of the labour force.

This week, we learnt that the unemployment rate has fallen to 3.4 per cent, its lowest in almost 50 years. For the sceptics who think this a fudge, at 6 per cent the rate of underemployment is its lowest in more than 30 years.

This isn’t surprising since 98 per cent of all the extra jobs created since March 2020 have been full-time – suggesting the labour shortage has prompted employers to turn many part-time jobs into full-time.

Since March 2020, the rate of youth unemployment (people aged 15 to 24) has fallen from 11.6 per cent to 7 per cent. And you’d expect the labour shortage to have increased the labour-force participation of older workers, as employers encouraged them keep working or switch to part-time rather than retire.

All this is more than just good news for the people who’ve finally been able to find jobs, move from part-time to full-time, or keep working despite getting older.

It has important implications for the economy’s prospects, and for its ability to achieve lower rates of unemployment before this causes wage inflation to take off. By changing so many people’s category from unemployable to actually employed, it’s increased the effective supply of homegrown labour.

By getting 125,000 long-term unemployed back into the working world, it’s lowered the floor under the unemployment rate by about 1 percentage point. So even if the economy turns down in coming months or years, the unemployment peak, however high, is likely to be about 1 percentage point lower than it otherwise would have been.

It gets us closer to a level of full employment that makes more sense to an ordinary person who thinks full employment surely must mean unemployment close to zero.

It means a rare conjunction of circumstances – strong demand while the economy was closed to imported labour - has brought about a structural change in our labour market that makes nonsense of economists’ conventional estimates of our NAIRU - the “non-accelerating-inflation” rate of unemployment.

When the Morrison government decided to spend big in the 2021 budget to improve its political chances, the econocrats decided to make a virtue of necessity by moving to what I call Plan B: keep stimulating demand to get unemployment so low that employers would have to bid wages up to get all the workers they needed.

This week’s news that wage growth over the year to June has soared to the frightening rate of 2.6 per cent suggests that Plan B hasn’t been a roaring success, and certainly isn’t a reason to worry that labour shortages will lead to wage growth that threatens our return to low inflation.

But the econocrats could claim credit for an unintended consequence of Plan B: it’s helped bring about a long-term reduction in the rate of unemployment.

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I foresee a world where workers gain the upper hand

Former NSW premier Neville Wran was the first politician – but far from the last – to say the election would be about “jobs, jobs, jobs”. That line captured perfectly one of the great economic certainties of our age: you can never, ever have enough jobs to go around.

That’s what most of us think, and the reason we think it is that it’s been true for the past 50 years. That’s how long it’s been since we had a rate of unemployment so low no one worried much about it.

But, as my colleague Jessica Irvine reminded us only yesterday, at 3.5 per cent, unemployment is at its lowest in almost 50 years.

To put it more positively, at more than 64 per cent, the proportion of the working-age population with a job is higher than it’s ever been. If you don’t find that gratifying news, there’s something wrong with you.

At present, we have a record number of unfilled job vacancies, about as many as we have unemployed workers. (Of course, not all the jobless have the right training – or live in the right part of the country – to fill those vacancies.)

Now, you can argue this happy outcome is just a temporary consequence of the pandemic. For two years, the official interest rate was almost zero, and governments – federal and state – were spending like wounded bulls.

So we had a huge increase in the demand for labour, but at a time when there was a two-year ban on imported workers. Little wonder employment grew strongly, vacancies shot up and employers complain incessantly about skill shortages.

You can also argue that, now our borders have reopened, our normal high inflow of foreign students, backpackers and skilled workers on temporary visas will resume, and the jobs market won’t stay nearly so tight.

Then you can argue that it only needs Reserve Bank governor Dr Philip Lowe to step too hard on the interest-rate brakes and we – as with many other developed economies – will be plunged into recession and rising unemployment.

You can argue all that. But I think these short-term factors are hiding deeper, longer-term trends that have brought us to a turning point. We’re going from never having enough jobs available for people to fill, to never having enough people available to fill all the jobs.

And here’s the bonus: if I’m right, we’ll be going from insecure jobs and stagnant wages to much higher wages and bosses falling over themselves to attract and retain the workers they need.

Business people are nothing if not opportunistic. When workers are plentiful, they pick and choose and make demands. But when workers are hard to find, they become wonderful people whose only concern is their workers’ welfare.

The first factor that’s working to turn the tables is the ageing of the population: more oldies leaving the workforce than youngsters joining it. Fertility has fallen below the replacement rate of 2.1 kids per woman.

For many years we’ve sought to slow population ageing by maintaining one of the advanced economies’ highest rates of immigration, with an emphasis on young, skilled workers.

Skilled immigration is also used to keep downward pressure on wage rates. With the pandemic receding, big business is desperate for high immigration to resume ASAP. And the Albanese government is likely to oblige.

But setting high immigration targets is one thing; attaining them is another. These days, migrants come mainly from developing countries. But all the other rich countries have an ageing problem, so we’ll be competing against them for takers.

China’s population is also ageing rapidly. Our intake of foreign students – some of whom are allowed to stay on – has been reduced by our falling out with China, but has always been a temporary play while Asia’s emerging economies get their universities going.

The final factor that will keep the demand for workers growing faster than the supply is the way the rich economies are becoming service economies, much of which represents the growth of the “care economy”.

Australia has already reached the point where 80 per cent of our production and 90 per cent of our employment is from the services sector. The thing about services is that they’re mainly delivered by people. As the Productivity Commission has noted, it’s much easier to use machines to replace people in farming, mining and manufacturing than it is in the services sector.

As people become old, they need more services – from doctors, nurses, paramedics and age care workers. All these people require education and training – by more services-sector workers.

Have you noticed all the stories lately about shortages of teachers, GPs, hospital workers and, before that, aged care and childcare workers? We’re going to get them all from overseas? I doubt it.

I noticed a tweet from an economics professor: “‘skill shortage’ = wages too low to attract workers”.

Get it? If we want all these people, we’ll have to pay them a lot more than we do now – and treat them a lot better.

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Inflation psychology: firms charge what they can get away with

Economists think inflation is all about economics. What they don’t know is that it’s also about psychology. But Reserve Bank governor Dr Philip Lowe shows a glimmer of understanding when he refers not to “inflation expectations” but to “inflation psychology”.

Notorious for their “physics envy” – where the world works according to known and unchanging laws, so everything can be reduced to mathematical calculation – economists think changes in prices are determined by the interaction of the “laws” of supply and demand.

This is true, but far from the whole truth. Especially for the prices set in the jobs market – aka wages – where this simple “neoclassical” analysis almost always gives wrong answers.

Economists’ first attempt at a less mechanical approach to the relatively modern problem of inflation – a continuing rise in the general level of prices – came from Milton Friedman and another Nobel laureate’s realisation of the important role played by people’s expectations about what will happen to the inflation rate.

If it worsens significantly and this leads enough people to expect it to stay high or go higher, their expectations may lead to the higher rate becoming entrenched via a “wage-price spiral”.

That is, expectations of higher inflation tend to be self-fulfilling because people act on their expectations. If businesses expect higher price rises generally, they adjust their own prices accordingly. And workers and their unions adjust their own wage demands accordingly.

When last the rich world had a big inflation problem, in the second half of the 1970s and much of the ’80s, this theory seemed to work well, though it took years for expectations to worsen. Then it took years of keeping interest rates high and demand weak, and getting actual inflation down below 3 per cent, before expected inflation came back down.

The inflation target, of 2 to 3 per cent on average, was set in the mid-90s to help “anchor” expectations at an acceptable level.

All this is why the latest leap in inflation has led some economists to worry that, if expectations become “unanchored”, inflation may become entrenched at a much higher level.

This fear explains why many are anxious to use higher interest rates to get actual inflation back down ASAP. If falling real wages help to speed the process, so much the better.

Two small problems with this. For a start, there’s little evidence – either here or in the other rich economies – that expectations have moved up. Sensibly, everyone expects that, before too long, the inflation rate will go back to being a lot lower.

In the real world of price-setting by firms and workers, it takes a lot longer for expectations to shift prices than it does for prices in share and other financial markets to bounce around.

But the deeper reason worries about worsening expectations are misplaced is that, since this theory became so influential in the ’70s, the mechanism by which the expected inflation rate becomes the actual rate has broken down.

Businesses retain the ability to raise their prices when they decide to – and to discount those prices should they discover they’ve pushed it too far and are losing sales - but organised workers have largely lost their ability to force employers to grant higher pay rises.

If you doubt that, ask yourself why the number of days lost to strikes is now the tiniest fraction of what it was in the ’70s. We’ve seen a little strike action lately, but it’s coming almost wholly from workers in the public sector – the main part of the workforce that’s still heavily unionised.

But the breakdown of the inflation-expectations theory and the “wage-price spiral” as explanations of the relatively modern phenomenon of inflation – a continuing rise in the general level of prices – leaves us looking elsewhere for explanations.

A big part of it is the message those economists who specialise in studying competition have to give financial economists such as Lowe: you don’t seem to realise that our modern oligopolised economy gives many big businesses a lot of power over the prices they’re able to charge.

Oligopoly is about the few huge firms dominating a particular market reaching a tacit agreement to keep prices high and stable, and limit their competition for market-share to non-price areas such as product differentiation and marketing.

As former competition czar Rod Sims has pointed out, this greatly reduces the ability of higher interest rates to influence prices in many big slabs of the economy.

But if many big businesses can improve their profitability by deciding to raise their prices, why did they wait until only a year ago to decide to start whacking up them up? Because it ain’t that simple.

All firms would like to raise their prices all the time. What stops them is the knowledge that they can’t charge more than “what the market will bear”. They worry about two things: what will my competitors do? And what will my customers do?

When there’s a big rise in input costs, the knowledge that all my competitors are facing the same cost increase gives me confidence we’ll all be passing it through to the customer at the same time.

That’s why it was the sudden, large and widespread increase in the cost of imported inputs caused by the pandemic and the Ukraine war that started the latest bout of prices rises at the retail level.

But, as Lowe keeps saying, the supply chain cost increases don’t explain all the rise in retail prices. He makes the obvious point that firms find it easier to raise their prices at a time when demand is strong and people are spending. His interest-rate rises are intended to stop demand being so strong and conducive to price rises.

But the less obvious point – especially to people mesmerised by the neoclassical way of thinking – is the role of psychology. I’ve got a great justification for increasing my prices, but no one’s counting. If my costs have risen by 5 per cent, but I increase my prices by 6 per cent, who’s to know?

Sims reminds us that this is just the way firms with pricing power behave. They raise their prices and profits in ways that aren’t easy for their customers to notice.

That covers big business. In the main, small businesses don’t have much pricing power. But “what the market will bear” is greater when the media has spent months softening up their customers with incessant talk about inflation and how high prices will go.

Lowe can’t say it, but it’s not uncooperative workers that are his problem, it’s businesses using the chance to slip in a little extra for themselves.

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