'Planetary boundaries' set the limits of economic freedom

One of the most important developments in economics is something in which economists had no hand: the identification of the environmental limits which humans, busily producing and consuming, cross at their peril.

Earth has existed for about 4 billion years and humans have lived on Earth for about 200,000 years. For almost all of that time we were hunters and gatherers, but 10,000 to 12,000 years ago we settled down, to farm and create civilisation.

It’s probably no coincidence that, for about that time, Earth has enjoyed a stable climate, with no more ice ages nor period of great heat, in which palms grew in Antarctica. This is the geological epoch called the Holocene, in which we live – although it may be ruled that we’ve moved to the Anthropocene, a new epoch in which the human species has made major alterations to the planet.

In its modern form, economics can be dated to 1776, when Adam Smith published The Wealth of Nations. Beliefs about how the economy works were well-defined by the time Alfred Marshall published Principles of Economics in 1890.

The point is that all economic activity – all the efforts of humans to earn a living – both depends on the natural environment and adversely affects it. By 1900, there were only about 1.6 billion humans on the planet, not enough to do much damage.

If we wrecked some area, we could just move to somewhere that hadn’t been wrecked, while the first bit gradually recovered.

So, at the time conventional economics was established, it was perfectly sensible to assume that the environment’s role in economic activity could be taken for granted. It was just there and it always would be. It was, as economists say, a “free good”.

When, from the 1700s, we started burning fossil fuel – coal, oil and gas – for heat, light and energy, we had no reason to worry that one day it might run out. It certainly never occurred to us that this might end up having an effect on the climate.

It took many decades before scientists began telling us that all the things we were doing to improve our lives – cutting down forests, damming rivers, drilling for water, ploughing, fertilising crops, fishing with nets – were damaging the soil, causing erosion, killing species, lowering the water table, and damaging the environment in other ways.

However, in just the past century or so, the world’s population has gone from 1.6 billion to 8 billion. Every extra human does a bit more damage to the environment. But that’s not the main thing. The main thing that’s changed is our use of advances in technology to hugely increase our standard of living and, in the process, massively increase the damage we’re doing to the environment.

Which brings us to “planetary boundaries”. In 2009, the Swedish scientist Johan Rockstrom and a scientist from the Australian National University, the late Will Steffen, with many helpers, established a framework listing the key categories of environmental damage, and estimating the amount of damage that could be done to each before the risk increased that “the Earth system” could no longer recover.

A second update of these estimates, led by an American oceanographer based in Copenhagen, Katherine Richardson, was released last month. With the ANU’s Professor Xuemei Bai, Richardson has written an article explaining the planetary boundaries.

There are nine boundaries. Three of them cover what we take from the ecological system: loss of biodiversity (extinction of species), loss of fresh water (pumping too much water from rivers and aquifers) and land use (deforestation).

Something economists didn’t know – or didn’t realise affected them – is that the laws of physics say we can never truly get rid of anything that exists on Earth.

All we – or the ecosystem – can do is change the form of the thing. Water can evaporate, but it’s still up in the clouds, for instance. We can cut down a tree, but as it slowly sinks into the dirt, it releases the carbon dioxide it had previously taken up.

This means that all our economic activity leaves in its wake a lot of waste. Not just landfill, but in many other forms.

So, the remaining six boundaries concern the waste our activity greatly adds to what would have occurred naturally. They are: greenhouse gases which cause climate change, ocean acidification (carbon absorbed by the sea), emission of chemicals that deplete the Earth’s ozone layer, “novel entities” (synthetic chemicals such as plastics, DDT and concrete), aerosols, and nutrient overload (nitrogen and phosphorus from fertilisers that wash into rivers and the sea, causing algae blooms, killing fish and coral).

Crossing any of these boundaries doesn’t trigger immediate disaster. But it does mean we’ve moved from the safe zone into dangerous territory. And the nine boundaries are interrelated and interacting, in ways we don’t yet fully understand.

In 2009, the scientists found we’d already crossed three boundaries: biodiversity, climate change and nutrient overload. By the 2015 update, a fourth boundary had been crossed: land use.

And by this year’s update, only three boundaries hadn’t been crossed: ocean acidification (but only just), aerosol pollution, and stratospheric ozone depletion – where an international agreement banning CFCs is slowly reducing the ozone hole we created.

Richardson and Bai say we’re now well into the danger zone, “where we – as well as every other species – are now at risk”. “We are eating away at our own life support systems,” they say.

One thing to be said for economists is that, unlike some, they don’t try to tell scientists how to do their job. Very few economists dispute the scientists’ evidence that climate change has been caused by human activities.

It was economists who developed the best means to reduce carbon emissions – emission trading schemes – which other countries have adopted, but Australia rejected.

When our governments decide to act on the other planetary boundaries, it will be economists who work out the best way to do it.

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We need economic growth to make us better off, right? Well, actually

For all our lives, worthies – our politicians, business people and economists – have assured us we need economic growth to make us better off. Almost everything I write assumes this to be true. But is it?

These days, there are more doubters than there used to be. Some people don’t believe that spending your life striving to own more stuff will make you happy. (Spoiler: they’re right.)

But a growing number of scientists tell us unending growth in the economy simply isn’t physically possible, and the more we keep growing the more we’ll damage the natural environment, to our great cost. Climate change is just the most glaring example of the damage we’re doing.

Historians remind us that our obsession with The Economy is relatively recent. It didn’t take hold until the middle of last century.

What we call “the economy” is all economic activity. It’s people getting up every morning, going out to earn a living, and then spending what they’ve earned. So it’s “getting and spending”, production and consumption. This is measured by gross domestic product – the value of all the goods and services produced during a period.

It was only when we started regularly measuring GDP in the mid-1950s that we began our obsession with whether it was growing and by how much. Or whether – God forfend – it was going backwards.

But these are just modern words and concepts. In truth, Australians have been preoccupied by what today we call economic growth since the day white people arrived. Their magic words were “settlement”, “progress” and “nation building”.

The recent arrivals saw a “new” nation where nothing had been done, but with huge potential for endless bush to be made to resemble the old country. They set about clearing the land, damming rivers, building houses, establishing farms and digging up minerals.

Why? To become more prosperous. They spurred themselves on with the belief they must “populate or perish” – be taken over by invading Asians.

So how do you achieve what we call economic growth? The easiest way is to grow the population. Have lots of kids and encourage (in those days, white-only) immigration. That gives you more people to work, but also more people needing to be fed, clothed, housed and entertained.

Bingo. A bigger economy. But while increasing the population makes the economy, GDP, bigger, it’s really only if the growth increases GDP per person that it can be claimed to make us better off, to have raised our material standard of living. And this doesn’t follow automatically.

The harder way to grow the economy is to increase the proportion of the population in paid employment, or to increase our investment in plant and equipment, and (well-chosen) public infrastructure. This does increase GDP per person.

But there’s another, more magical way to increase GDP per person. It’s to take the same quantity of resources – raw materials, labour and capital equipment – and use them to produce more output of goods and services than you did.

This is what people mean when they talk about increasing our “productivity”. It’s achieved, as economists keep repeating, by “working smarter, not working harder”.

How? By building a better educated and more skilled workforce, and by finding ways to make the organisation of factories and offices more efficient, but mainly by advances in technology that create better machines (and these days, computer programs) doing better tricks.

This is the bit scientists don’t get. When they hear the word “growth” they think of one thing: growth in humans’ exploitation of natural resources and all the damage we do to the environment in the process.

But that’s not what GDP measures. Economists know that most of the growth in GDP over the long term comes from increased productivity, not increased inputs of raw materials, labour and physical capital.

This means that, unless you believe there’s a limit to human ingenuity, it’s not true that continuing growth in GDP is impossible.

But when scientists say more clearly the kind of “growth” they’re referring to – growth in the use of natural resources and “ecosystem services” – it’s not possible to argue with the laws of physics.

While economists used to argue that the “limits to growth” weren’t as close at hand as some scientists had calculated, the possibility of the developing world enjoying the same profligate use of natural resources as the rich world is not credible. We expect the bottom 80 per cent to resign themselves to lives of relative poverty, while we in the top 20 per cent continue partying as though there’s no tomorrow.

So I accept that we and other rich countries will have to greatly constrain our use and abuse of the natural environment if the planet is to remain functional. A “circular economy” in which resources are so expensive that almost everything has to be repaired, reused and recycled? Sure.

But here’s the joke. It wouldn’t be the scientists who worked out how we could move to such an economy, it would be the economists.

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How full employment can coexist with low inflation

Who could be opposed to full employment? No one. Not openly, anyway. But Treasurer Jim Chalmers’ white paper on employment has been badly received by the Business Council and other business lobby groups. And, of course, business’s media cheer squad.

At least since Karl Marx, the left has charged that business likes unemployment to stay high so there’s less upward pressure on wages and workers are more biddable. We know that when, during recessions or lockdowns, bosses announce they’re skipping the annual pay rise, the unions never dare to disagree. Forget the pay rise and keep my job secure.

So you don’t have to swallow all the Marxist claptrap to suspect there may be some truth to the idea that, though businesses hate recessions, they don’t mind a bit of healthy unemployment.

If so, don’t expect them to be greatly enamoured of Labor’s latest resolve to pay more than lip service to the goal of full employment. But, by the same token, don’t be surprised if business happens to find in the full-employment package something they can profess to be terribly worried about.

Talk about speed reading. As is the practice in lobbyist-ridden Canberra, within minutes of the release of the white paper last Monday, the Business Council – like a lot of other business lobby groups – issued a full-page press release singing its agreement with the government’s move. It was all wonderful, and, in fact, just what the council had been calling for in its own recent voluminous report.

Until, suddenly, in the third-last paragraph, we discover the government had got it a bit wrong. Unfortunately, “we believe the federal government’s workplace relations reforms will undermine the objectives set out in the white paper.

“They will return the workplace relations system to an outdated model, unable to meet the expectations of both employees and businesses in the ways they seek to work today. It will risk fossilising industry structures and work practices when we know technology is going to change and people and workplaces need to adapt quickly,” the council says.

“If the government is to achieve the task it has set itself in this white paper, we encourage it to halt the current workplace relations changes and work constructively with business to identify challenges and find solutions that will deliver sustainable real wage increases for Australians.”

Ah, yes. Now we have it. And I’m sure all that would make perfect sense to every chief executive.

No, part of the opposition to the employment white paper comes from paper’s qualification to the definition of full employment as no one being jobless for long: “These should be decent jobs that are secure and fairly paid.”

But another part of the opposition has involved flying to the defence of the NAIRU – the “non-accelerating-inflation rate of unemployment” – which Chalmers now calls the “technical assumption” used by the Reserve Bank and Treasury in their forecasting, as opposed to the broader definition of full employment set out in the white paper.

The Australian Chamber of Commerce and Industry, the biggest employer group, said in its response to the white paper that the government “needs to make it clear that, contrary to trade union understandings, there will be zero impact on the Reserve Bank’s interest rate setting framework, and zero expectation that [it] will be more doveish on inflation”.

Well, not sure about that. Those who take the government’s recommitment to the goal of full employment to be a return to the post-World War II days when full employment was the only goal in the management of the macroeconomy are doomed to disappointment.

But those who happily imagine it will make zero difference are also kidding themselves. As the white paper makes clear, achieving sustained full employment involves “minimising volatility in economic cycles and keeping employment as close as possible to the current maximum level consistent with low and stable inflation”.

It doesn’t mean that, having fallen to about 3.5 per cent, the rate of unemployment must never be allowed to go any higher. No one has abolished the business cycle, nor the need for macro management to smooth the ups and downs in demand as the economy moves through that cycle.

So, the likelihood that, having greatly increased interest rates despite the fall in real wages, we’ll see some rise in unemployment in coming months, won’t prove the white paper was all hot air.

It’s also true, as more sensible business economists have realised, that the improvements in education and training that the white paper envisages could reduce “structural” unemployment, and thus the level of estimates of the NAIRU.

The truth is, economists make lots of calculations and the NAIRU is just one of them. While their calculations can tell them the NAIRU is now higher or lower than it was a few years ago, economists have never been able to tell you just why it’s changed.

The best they’ve ever been able to do is “ex-post” (after the fact) rationalisation. If the NAIRU has fallen, think of something that’s improved. If it’s risen, think of something that’s got worse.

The way the critics have rushed to the defence of the NAIRU, you’d think its magic number was written by God on tablets of stone. It’s just an estimate. And, like all estimates, it can be more reliable or less reliable.

No, what the government’s recommitment to full employment does is put full employment back up there as an economic objective equal in importance to low inflation. There’s always been scope for tension between the two objectives, and this increases that tension.

It says: if you’ve been erring on the side of low inflation, don’t. Try harder to find a better trade-off between the two.

It means the Reserve Bank and Treasury will now be less mindless and more mindful in the way they use the NAIRU to influence forecasts and judgements. But, unlike the critics, I think the Reserve and Treasury have already got that message.

As generator of magic numbers, the NAIRU has two glaring weaknesses. It was designed in an era when most jobs were full-time, so entirely ignores the spare capacity hidden in underemployment.

And, as the Reserve itself has acknowledged, it assumes all price rises are caused by excess demand, when we know that, in recent times, many price rises have come from disruptions to supply. And we know there’ll be more supply-driven pressure on prices from the transition to renewables and other things.

Have you noticed that whenever the Reserve and Treasury tell us their latest estimates of the magic number, they never tell us how much “judgment” they applied to the number that popped out of the model before they announced it?

But if that doesn’t convince you, try this one: the judgements the Reserve Bank makes will be better in future because, for the first time in a quarter of a century, Chalmers has appointed to its board someone who really knows how wages are set in the real world.

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Albanese wants to put full employment back on its throne

Something really important to the management of the economy happened this week: the Albanese government released its white paper on employment. If the government achieves the vision it has laid out, it could be a turning point in how our economy works, one that begins a lasting reduction in the rates of unemployment and underemployment.

This is Labor’s decision to put “full employment” back on its throne as a central objective of macroeconomic policy. Or, as the paper puts it, “placing full employment at the heart of our institutions and policy frameworks”.

For the first 30 years after World War II, the achievement of full employment was the overriding objective for the managers of the economy. This era began in 1945, with the Curtin Labor government issuing a white paper on full employment in Australia. Notice a pattern?

It worked well for 30 years, but fell apart with the arrival of high inflation in the mid-1970s. Since then, the primary concern of macroeconomic management has been to keep inflation low, with the goal of achieving full employment usually given not much more than lip service.

What’s changed has been the way the ups and downs of the pandemic have suddenly returned us to the lowest rate of unemployment in almost 50 years, about 3.5 per cent. But also the lowest rate of underemployment – part-timers who can’t get as many hours of work as they want – in several decades.

At present, we have about the highest proportion of the working-age population participating in the labour market – by having a job or actively seeking one.

This unexpected return to something close to full employment has prompted many people to think we should be trying at lot harder than we have been to keep employment high and unemployment low.

And that’s why the Albanese government has decided to put the goal of full employment back on its throne in the halls of macroeconomic management.

“Macro” means focusing on the economy as a whole. “Micro” means looking at particular bits of the economy, or at particular mechanisms within the economy.

Since World War II, governments have sought to use “fiscal policy” (the budget) and “monetary policy” (interest rates) to “manage” the macroeconomy by smoothing out the ups and downs in demand for (spending on) goods and services – and thus employers’ demand for workers.

If the goal of full employment is now back on centre stage, what does full employment actually mean?

The white paper defines it as where “everyone who wants a job is able to find one without having to search for too long”. But it adds a qualification: the jobs we create should be “decent jobs that are secure and fairly paid”, a requirement many employers won’t like the sound of.

The paper says it wants “sustained” full employment, which means “minimising volatility in economic cycles and keeping employment as close as possible to current maximum level consistent with low and stable inflation”.

So restoring the priority of full employment doesn’t mean ceasing to care about inflation, but does mean that getting serious about full employment will affect the day-to-day management of the macroeconomy.

The paper also says full employment must be “inclusive”: broadening the opportunities for people to take up paid work and lowering the barriers to work created by various forms of discrimination.

But how will the government go about achieving this more inclusive view full employment? Well, one way to answer this is to take the economists’ standard list of the types or causes of unemployment.

“Frictional” unemployment occurs because, at any time, there’ll always be some people moving between jobs or seeking their first job. So frictional employment is inevitable and nothing to worry about.

It occurs because it takes time for someone wanting a job to find someone wanting to give them one. You’d think that with so much advertising of job vacancies, and so much looking for jobs, occurring online, frictional unemployment ought to be lower than it used to be.

“Cyclical” unemployment is caused by downturns in the economy, which reduce employers’ demand for workers with little reduction in the people seeking work. As the paper says, it can be lessened through “effective macroeconomic policy settings”.

That is, to get the economy moving quickly out of a recession and, better, managing to stop it getting into recession in the first place. It’s when people lose their jobs during a prolonged recession – and education-leavers take months to find their first job – that you get a build-up in “long-term” unemployment.

These are the people who needed special, personalised help from the government because the longer they go unemployed, the less an employer wants to take them on. This role used to be played (not particularly well) by the Commonwealth Employment Service, which was replaced by what’s now called Workforce Australia, using often for-profit providers of “employment services” to people with problems.

If you’ve heard anything about robo-debt, it won’t surprise you that it’s become a travesty of what it was supposed to be, with providers gaming the system and gaining the impression the government wants them to punish people rather than help them.

The Albanese government has instituted an inquiry into the present system of government-funded employment services. How seriously it reforms this shemozzle will be a key test of how committed the government is to achieving sustained full employment.

The final type of unemployment is “structural”, caused by a mismatch between the skills a worker possesses and the skills employers are seeking. Sometimes the mismatch is geographic; often it’s caused by the ever-changing structure of industry, as some industries decline and others expand.

This is the hardest cause of unemployment to reduce. But it involves reforming every level of education and committing to retraining and lifelong learning. Again, this will be a key test of whether the government is committed to achieving sustained full employment, not just dreaming about it.

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Labor sets out its alternative to neoliberalism

If, rather than wading through all the things the Albanese government has decided to do, you read what its white paper on employment actually says, you realise a remarkable thing: it reveals a vision of an alternative economy the government wants to take us to.

In recent weeks we’ve seen before our eyes the worst of the economy that several decades of “neoliberalism” – the doctrine that what’s good for big business is best for the rest of us – has brought to us. The rise of the nation’s chief executives as commercial Brahman castes, taking short-cuts to higher profits by chiselling customers and mistreating employees, and seeing themselves as above the law, has left a sour taste.

Treasurer Jim Chalmers and his colleagues want to move from an economy centred on what the bosses want, to one centred on what’s best for the workers. It’s a shift from managing the economy for the few, rather than the many. The great majority of Australia’s households depend on income from wages.

The white paper spells it out from the beginning. “The government’s vision is for a dynamic and inclusive labour market in which everyone has the opportunity for secure, fairly paid work and people, businesses and communities can be beneficiaries of change and thrive. We are working to create more opportunities for more people in more places,” it says.

Our surprise return to our lowest rate of unemployment in almost 50 years – about 3.5 per cent, which we’ve maintained for more than a year – has revived the government’s ambition to pursue a goal we lost sight of in the 1970s, full employment.

The white paper says what the government takes that term to mean in our very different world, and how it will be pursued. Full employment has never meant an unemployment rate of zero. At the very least, there will always be a small proportion of workers moving between jobs or looking for their first job.

The paper announces the government’s definition of the term: it is working to create an economy where “everyone who wants a job is able to find one without having to search for too long”.

That’s a demanding specification. Sometimes unemployment will be high because the economy’s in recession. In normal times, unemployment is high precisely because too many people have gone for months without finding a job.

Some part of unemployment comes from the economy’s ever-changing industry structure, as some industries decline while others expand. This can leave some workers high and dry. They may have skills that some business wants, but that business may be many miles from where they live.

So for the government to commit to people not having to search too long to find a job imposes on it a great responsibility to help those people having problems.

But the government adds an important qualification to the requirement that no one be jobless for long: “These should be decent jobs that are secure and fairly paid.”

All this, it tells us, “is central to a strong economy and a prosperous and inclusive society”.

Just so. The only reason to want a strong economy is for prosperity that’s widely shared among the people who constitute the economy. And a simple truth that was lost in the era of neoliberalism is the value people place on having a job that’s secure.

It’s the peace of mind that comes from knowing that, if you turn up every day, do what you’re told and work hard, you can stop worrying about where your next meal’s coming from.

This can be just as important as how well the job pays, if not more so. But in recent decades we’ve seen the growth of businesses increasing their profits by using casualisation to make jobs less secure and devices such as labour hire and outsourcing to side-step existing wages and conditions.

The white paper says the government’s objective is “sustained and inclusive full employment”.

“Sustained full employment is about minimising volatility in economic cycles and keeping employment as close as possible to the current maximum level consistent with low and stable inflation.

“Inclusive full employment is about broadening opportunities, lowering barriers to work including discrimination, and reducing structural under-utilisation [part-time workers who can’t get as many hours of work as they want] over time to increase the level of employment in our economy.”

The paper says building a strong and skilled workforce “will be fundamental to achieving full employment and productivity growth”. This will require substantial growth in the high-skilled workforce.

“Australia needs an increasingly highly skilled labour force, equipped with the right tools and technology” to maximise gains from the transition to renewable energy, the increased use of artificial intelligence and the growing care economy.

Now, I know what you’re thinking. It would be a much better world to live in. But they’re just words ... just aspirations. True. But by setting it all down so formally, the Albanese government is raising our expectations.

It’s setting a standard for us to judge its performance by – a standard much higher than its predecessors ever set. We must hold Albo to it.

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What's kept us from full employment is a bad idea that won't die

Lurking behind the employment white paper that Treasurer Jim Chalmers will release today is the ugly and ominous figure of NAIRU – the non-accelerating-inflation rate of unemployment. If the Albanese government can’t free itself and its econocrats from the grip of NAIRU, all its fine words about the joys of full employment won’t count for much.

The NAIRU is an idea whose time has passed. It made sense once, but not anymore. The story of how this conventional wisdom came to dominate the thinking of the rich world’s macroeconomists has been told by Queensland University’s Professor John Quiggin.

In the period after World War II, economists decided that the managers of the economy faced a simple choice between inflation and unemployment. Low unemployment came at the cost of high inflation, and vice versa.

This relationship was plotted on something called the Phillips curve, and the economic managers could choose which combination of inflation and unemployment they wanted.

It seemed to work well enough until the mid-1970s, when the developed economies found themselves with high unemployment and high inflation at the same time – “stagflation” – something the Phillips curve said couldn’t happen.

The economists turned to economist Milton Friedman, who’d been arguing that, if inflation persisted long enough, the expectations of workers and businesses would adjust. The inflation rate would become “baked in” as workers and suppliers increased their wages and prices by enough to compensate for inflation, whatever the unemployment rate.

So, after much debate, the economists moved to doing regular calculations of the NAIRU – the lowest rate to which unemployment could fall before shortages of labour pushed up wages and so caused price inflation to take off.

Since the early 1980s, the economic managers have tried to ensure the rate of unemployment stayed above the estimated NAIRU, so inflation would stay low. Should inflation start worsening, central bankers would jump on it quickly by whacking up interest rates.

Why? So that expectations about inflation would stay "anchored". Should they rise, the spiral of rising wages leading to rising prices would push up actual inflation. Then it would be the devil’s own job to get it back down.

If this sound familiar, it should. It’s what the Reserve Bank has been warning about for months.

Trouble is, the theory no longer fits the facts. Inflation has shot up, but because of supply disruptions, plus the pandemic-related budgetary stimulus, not excessive wage growth. And there’s been no sign of a worsening in inflation expectations.

Wages have risen in response to the higher cost of living, but have failed to rise by anything like the rise in prices. Why? Because, seemingly unnoticed by the econocrats, workers’ bargaining power against employers has declined hugely since the 1970s.

Meanwhile, the stimulus took us down to the lowest rate of unemployment in almost 50 years, where it’s stayed for more than a year. It’s well below estimates of the NAIRU, meaning wages should have taken off, but shortage-driven pay rises have been modest.

All of which suggest that the NAIRU is an artifact of a bygone age. As Quiggin says, the absence of a significant increase in wage growth is inconsistent with the NAIRU, which was built around the idea that inflation was driven by growth in wages, passed on as higher prices.

“As a general model of inflation and unemployment, it is woefully deficient,” Quiggin concludes.

Economists have fallen into the habit of using their calculations of an ever-changing NAIRU as their definition of full employment. But it’s now clear that, particularly in recent years, this has led us to accept a rate of unemployment higher than was needed to keep inflation low, thus tolerating a lot of misery for a lot of people.

So if today’s employment white paper is to be our road map back to continuing full employment – if our 3.5 per cent unemployment rate is to be more than a case of ships passing in the night – we must move on from the NAIRU.

A policy brief from the Australian Council of Social Service makes the case for new measures of full employment and for giving full employment equal status with the inflation target in the Reserve Bank’s policy objectives – as recommended by the Reserve Bank review.

The council quotes with approval new Reserve governor Michele Bullock’s definition that “full employment means that people who want a job can find one without having to search for too long”.

But it says another goal could be added, that “people who seek employment but have been excluded (including those unemployed long-term) have a fair chance of securing a job with the right help”.

And it argues that “since an unemployment rate of 3.5 per cent (and an underemployment rate of 6 per cent) has not triggered strong wages growth, this could be used as a full employment benchmark”.

One of the things wrong with the NAIRU was that it was a calculated measure, and it kept changing. As Quiggin notes, it tends to move in line with the actual rate of unemployment.

“When unemployment was high, estimates of NAIRU were high. As it fell, estimates of NAIRU fell, suggesting that how far unemployment could fall was determined by how far unemployment had fallen,” he says.

Which is why, to the extent that econocrats persist with their NAIRU estimates – or the government sets a more fixed target – the council is smart to suggest a test-and-see approach.

Rather than continuing to treat a fallible estimate as though it’s an electrified fence – to be avoided at all cost – you allow actual unemployment to go below the magic number, and see if wages take off. Only when they do, do you gently apply the brakes.

The council reminds us that it’s not enough to merely aspire to full employment, or even specify a number for it. It’s clear that, apart from the ups and downs of the business cycle, what keeps unemployment higher than it should be is long-term unemployment.

Committing to full employment should involve committing to give people who have “had to search too long” special help just as soon as their difficulties become apparent.

This would be a change from paying for-profit providers of government-funded “employment services” to punish them for their moral failings.

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AI will make or break us - probably a bit of both

Depending on who you talk to, AI – artificial intelligence – is the answer to the rich world’s productivity slowdown and will make us all much more prosperous. Or it will lead to a few foreign mega tech companies controlling far more of our lives than they already do.

So, which is it to be? Well, one thing we can say with confidence is that, like all technological advances, it can be used for good or ill. It’s up to us and our governments to do what’s needed to ensure we get a lot more of the former than the latter.

If all the talk of AI makes your eyes glaze (or you’re so old you think AI stands for artificial insemination), let’s just say that AI is about making it possible for computers to learn from experience, adjust to new information and perform human-like tasks, such as recognising patterns, and making forecasts and decisions.

Scientists have been talking about AI since the 1950s, but in recent years they’ve really started getting somewhere. It took the telephone 75 years to reach 100 million users, whereas the mobile phone took 16 years and the web took seven.

You’ve no doubt seen the fuss about an AI language “bot”, ChatGPT, which can understand questions and generate answers. It was released last year and took just two months to reach 100 million users.

This week the competition minister, Dr Andrew Leigh, gave a speech about AI’s rapidly growing role in the economy. What that’s got to do with competition we’ll soon see.

He says the rise of AI engines has been remarkable and offers the potential for “immense economic and social benefits”.

It “has the potential to turbocharge productivity”. Most Australians work in the services sector, where tasks requiring the processing and evaluation of information and the preparation of written reports are ubiquitous.

“From customer support to computer programming, education to law, there is massive potential for AI to make people more effective at their jobs,” Leigh says.

“And the benefits go beyond what shows up in gross domestic product. AI can make the ideal Spotify playlist for your birthday, detect cancer earlier, devise a training program for your new sport, or play devil’s advocate when you’re developing an argument.”

That’s the optimists’ case. And there’s no doubt a lot of truth to it. But, Leigh warns, “it’s not all upside”.

“Many digital markets have started as fiercely competitive ecosystems, only to consolidate [become dominated by a few big companies] over time.”

We should beware of established businesses asserting their right to train AI models on their own data (which is how the models learn), while denying access to that data to competitors or new businesses seeking to enter the industry.

Leigh says there are five challenges likely to limit the scope for vigorous competition in the development of AI systems.

First, costly chips. A present, only a handful of companies has the cloud and computing resources needed to build and train AI systems. So, any rival start-ups must pay to get access to these resources.

As well, the chipmaker Nvidia has about 70 per cent of the world AI chips market, and has relationships with the big chip users, to the advantage of incumbents.

Second, private data. The best AI models are those trained on the highest quality and greatest volume of data. The latest AI models from Google and Meta (Facebook) are trained on about one trillion words.

And these “generative” AI systems need to be right up-to-date. But the latest ChatGPT version uses data up to only 2021, so thinks Boris Johnson and Scott Morrison are still in power, and doesn’t know the lockdowns are over.

Which brings us, third, to “network effects”. If the top ride-hailing service has twice as many cars as its rival, more users will choose to use it, to reduce their waiting times. So, those platforms coming first tend to get bigger at the expense of their rivals.

What’s more, the more customers the winners attract, the more data they can mine to find out what customers want and don’t want, giving them a further advantage.

This means network effects may fuel pricing power, entrenching the strongest platforms. If AI engines turn out to be “natural monopolies”, regulators will have a lot to worry about.

Fourth, immobile talent. Not many people have the skills to design and further develop AI engines, and training people to do these jobs takes time.

It’s likely that many of these workers are bound by “non-compete” clauses in their job contracts. If so, that can be another factor allowing the dominant platforms to charge their customers higher prices (and pay their workers less than they should).

Finally, AI systems can be set up on an “open first, closed later” business plan. I call it the drug-pusher model: you give it away free until you get enough people hooked, then you start charging.

Clearly, the spread of AI may well come with weak competitive pressure to ensure customers get a good deal and rates of profit aren’t excessive.

Just as competition laws needed to be updated to deal with the misbehaviour of the oil titans and rail barons of 19th century America, so too we may need to make changes to Australian laws to address the challenges that AI poses, Leigh says.

The big question is how amenable to competition the development of AI is. In other, earlier new industries, competition arose because key staff left to start a competing company, or because it made sense for another firm to operate in a different geographic area, or because customers desired a variant on the initial product.

“But if AI is learning from itself, if it is global, and if it is general, then these features may not arise.” If so, concentration maybe more likely than competition.

Get it? If we’re not careful, a few foreign mega tech companies may do better out of AI than we do.

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NSW budget: no horror, but Labor still had three dirty jobs to do

This is no horror budget, although it’s unlikely to be popular – except perhaps with the state’s public sector workers. For the rest of us, there are various minor cuts to be annoyed by.

Actually, it’s unrealistic to expect the first budget of a new government to be anything but sombre and penny-pinching. That’s the way the political cycle turns.

Indeed, had this budget been full of goodies, it would have been a worrying sign – that the Minns government didn’t know its business and was off to a start likely to help shorten its life.

It will be easy for critics to attack the big pay rises already delivered and planned for public sector workers.

Labor looking after its union mates. If they’re just public servants, why feed them? And how can such big pay rises possibly be afforded?

But the notion that we could go for year after year holding down the wages of nurses, teachers, ambos, firies and all the rest, simply because they weren’t working for the private sector, was always delusional.

When you look at it, almost everyone working for the state government is providing an essential service bar a few pen-pushers in offices near Macquarie Street.

And the inevitable has happened: the state can’t attract and keep workers when they can find better-paid jobs somewhere in business.

Where will the money come from? How about asking the people who benefit from those essential services – which is all of us – to pay slightly higher taxes?

But the states have little scope for raising taxes, so the $2.7 billion over four years to be raised from the (probably too small) increase in coal royalties is a good start.

Treasurer Daniel Mookhey had three dirty jobs to do in this budget. First, continue the slow return to the usual small operating surplus – used to help fund part of the state’s massive spending on infrastructure and other capital works – after the huge spending and borrowing necessitated by the pandemic.

Second, “repurpose” some of the government’s spending from his predecessors’ priorities to the Labor government’s priorities.

Third, reverse or correct some of the wrong-headed and damaging policies pursued by the previous government.

Mookhey is dismantling the designed-to-mislead Transport Asset Holding Entity (even the name tells you it’s some kind of fiddle), as well as the gimmicky NSW Generations Fund, as well as easing the costs of outer-suburb motorists hit hard by the ever-increasing tolls used to pay for the motorways now ringing Sydney.

You license Transurban and other developers to overcharge motorists then, when it starts really hurting, you transfer part of the cost back to state taxpayers more generally.

This makes sense? Fortunately, Mookhey says this arrangement is just until they get time to fix the problem properly.

Meanwhile, as the budget papers admit, the tricksy acronyms – TAHE and NGF – are “masking an ongoing underlying budget result deficit”.

Huh? Officially, this financial year’s expected operating deficit of $7.8 billion (well down on last year’s deficit of $10.1 billion) should turn into a surplus of more than $800 million next financial year.

Allow for the previous government’s fiddles, however, and this year’s expected deficit is actually $8.6 billion, and next year’s surplus becomes just a balanced budget.

It’s wonderful how honest pollies can be about their opponents’ misdemeanours.

On housing, the budget trumpets its help for first-home buyers and renters (renters have problems? Who knew?) with the “faster planning program” and the “essential housing package”.

Sounds good. But experience suggests we save the applause until we see results actually delivered.

On early childhood education and care, the budget continues the big improvements initiated by the Perrottet government, moving to universal preschool access and increasing the number of childcare places.

The budget does a little to remember what is so often forgotten when savings are needed: the state’s duty to look after kids without parental care.

With budgets, there’s always books to balance and money to worry about. But behind all those dollars are people, whose needs are real.

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How to make big business deliver for us, not just the fat cats

When we’ve got big business behaving badly, what can we do about it? Most of the answer’s obvious: strengthen the laws against misbehaviour, greatly increase the penalties and then, most obvious of all, police them vigorously until the fat cats get the message.

As the banking royal commission showed, much of the misbehaviour uncovered involved breaking the existing law. And the casinos in Sydney and Melbourne seem to have been breaking the law.

If PwC’s decision to pass on to other clients the information it had been given by the Tax Office after promising to keep it confidential wasn’t illegal, it should have been. And obviously, the many big businesses found to have been paying their workers less than they were legally entitled to were breaking the law.

The High Court has just confirmed that Qantas’ dismissal of 1700 workers was illegal, just as the Federal Court had originally found it to be many months ago. Qantas had appealed against the Federal Court decision but failed, so it took its appeal to the High Court and was again rebuffed.

Think how much shareholders’ money was spent trying to escape what most people would have thought was the company’s legal duty to its employees. And how much the shareholders will now have to pay to compensate the unlawfully dismissed employees.

Now the Australian Competition and Consumer Commission is taking legal action against Qantas, alleging it continued selling fares on flights it had already cancelled. Should the airline lose the case, it will be up for hefty fines.

It’s hard to believe that in all these cases big businesses, with their own legal departments, didn’t know that what they were doing could be found to be against the law. Much easier to believe they thought the chances of being prosecuted were low.

It’s possible some thought that, should they be prosecuted, they could afford the legal firepower to find a way to get them off the hook. But I think the main reason so many big companies have been acting as they have is their confidence that they wouldn’t be prosecuted.

Of course, in competitive markets – even markets like ours, where competition on price isn’t nearly as strong as it’s supposed to be – when one big business is seen to be gaining an advantage by finding neat legal arguments, the temptation for other businesses to do the same is intense. And it’s all too human to assume that the test of what’s ethical behaviour is what you imagine everyone else is doing.

Remember, too, that although many personal crimes are committed in the heat of the moment, big-business lawbreaking is likely to be the result of carefully considered advice.

That’s why penalties for business lawbreaking need to be very high. I think going to jail – even for just a few months – would be a highly effective deterrent. Think what your spouse would say if you got caught.

But why have chief executives been so confident their misdeeds would go undiscovered and unpunished? Because for a long time, it was pretty true.

During the now-ended era of “neoliberalism” – the doctrine that what’s good for business is good for the economy – successive governments used nods and winks to let corporate watchdogs, competition and consumer watchdogs, and wages watchdogs know their job was to look impressive without ever biting anyone.

And, if that wasn’t enough, governments would deny them the funds needed to police adequately the laws they were responsible for. Even the Tax Office wasn’t funded to do as many audits of taxpayers as it should have done – despite those audits bringing in far more revenue than they cost.

But, as I say, the neoliberal era is over, a victim of the manifest failure of much privatisation and outsourcing, and the exposure of big business misconduct by investigative journalists – most of them working for this august organ and the ABC.

And, of course, the crossbenchers are using Senate committees to draw attention to failures the two major parties would prefer to go unnoticed.

Once the public’s attention is aroused, governments have to act, calling royal commissions and being seen enforcing the law.

Now the watchdogs are better funded, and the ACCC is calling for stronger powers. Last week its chair, Gina Cass-Gottlieb, told a parliamentary committee that many unfair trading practices currently fall outside the scope of Australian consumer law, “despite causing considerable harm for consumers, small business [note that; big businesses often mistreat small businesses] and competition”.

She was referring to practices such as making it hard for people to cancel digital subscriptions, online sites with opaque and confusing trading terms for small businesses, manipulative sales practices such as misleading scarcity claims (“Hurry, stocks limited”), or deceptive design patterns such as sites that confuse you into buying things you didn’t actually want.

In the post-neoliberal world, there’s much cleaning up to be done.

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Productivity debate descends into damned lies and statistics mode

Last week we got a big hint that the economics profession is in the early stages of its own little civil war, as some decide their conventional wisdom about how the economy works no longer fits the facts, while others fly to the defence of orthodoxy. Warning: if so, they could be at it for a decade before it’s resolved.

Economists want outsiders to believe they’re involved in an objective, scientific search for the truth and are, in fact, very close to possessing it. In reality, they’ve long been divided by ideology – views about how the world works, and should work – which is usually aligned with partisan interests: capital versus labour.

You see this more clearly in America, where big-name “saltwater” (coastal) academic economists only ever work for Democrat administrations, while “freshwater” (inland) academics only work for the Republicans.

In the 1970s, the world’s economists argued over the causes and cures for “stagflation” – high inflation and high unemployment at the same time. Then, in the 1980s, we had a smaller, Australian debate over how worried we should be about huge current account deficits and mounting foreign debt, won convincingly by the academics, who told the econocrats to forget it – which they did.

Now, the debate is over the causes of the latest global surge in inflation. At a time when organised labour has lost its bargaining power, while growing industry “concentration” (more industries dominated by an ever-smaller number of big companies) has reduced the pressure from competition and increased the pricing power of big firms, is a lot of the recent rise in prices explained by businesses using the chance to increase their profit margins?

A related question is whether it remains true that – as business leaders, politicians and econocrats assure us almost every day – all improvement in the productivity of labour (output per hour worked) is automatically reflected in higher real wages.

And that’s the clue we got last week. The Productivity Commission issued a study, Productivity growth and wages – a forensic look, that concluded that “over the long term, for most workers, productivity growth and real wages have grown together in Australia”.

So, all the worrying that silly people (such as me) have been doing – that the workers are no longer getting their cut of what little productivity improvement we’ve seen in recent years – has been proved to be a “myth”.

For the national masthead that prides itself on being read by the nation’s chief executives, this was a page one screamer. Apparently, even though real wages are 4 per cent lower than they were 11 years ago, workers are getting “their fair share of pie”.

When workers’ real wages rise by less than the improvement in labour productivity, the study calls this “wage decoupling”. It says “it is important to get the facts right on wage decoupling. Unfortunately, debates about the extent of wage decoupling, its sources and its implications are often dogged by differences in the methods and data”.

“This is because analysts can pick and choose among a wide range of measures of real wage growth, and their choices can lead to different, sometimes misleading conclusions.”

This is very, very true. Trouble is, sauce for the goose is sauce for the gander. The clear inference is that “the commission’s preferred measure” is the single correct way of measuring it, whereas all those who get different results to us are just picking the methodology that gives them the results they were hoping for.

Get it? I speak the objective truth; you are just fudging up figures to defend your preconceived beliefs about how the world works. Yeah, sure.

I hate to disillusion you, gentle reader, but this is what always happens in economics whenever some group says, “I think we’re getting it wrong.” They produce calculations to support their case, but some don’t like the idea, so they produce different calculations intended to refute it.

Because economics is factionalised, most debates degenerate into arguments about why my methodology is better than yours. That’s why a change in the profession’s conventional wisdom can take up to a decade to resolve. But intellectual fashions do change.

The study finds that the mining and agriculture industries – which account for only 5 per cent of workers – have experienced major wage decoupling over the past 27 years, but for the remaining 95 per cent of workers, in 17 other industries, the difference between productivity growth and real wage growth has been “relatively low”.

Sorry, but that’s my first objection. It’s not relevant to compare productivity growth by industry with real wage growth by industry. Some industries have high productivity, some have low productivity and, in much of the public sector, productivity can’t be measured.

Despite the things it suits the employer groups to claim, the reward held out to workers for at least the past 50 years has never been that their real wages should rise in line with their own industry’s productivity.

For reasons that ought to be obvious to anyone who understands how markets work, it’s never been promised that, say, carpenters who work in mining or farming should have rates of pay hugely higher than those who work in the building industry, while the real wages of carpenters working in general government should never have changed over the decades because their (measured) productivity has never changed.

It’s an absurd notion that could work only if we could enforce a rule that no one could ever change jobs in search of a pay rise.

No, as someone somewhere in the Productivity Commission should know, the promise held out to the nation’s employees has always been that economy-wide average real wages should and will rise in line with the trend economy-wide average improvement in the productivity of labour.

When you exclude the two industries that contribute most to the nation’s productivity improvement, it’s hardly surprising that what’s left is so small you can claim it wasn’t much bigger than the growth in most workers’ real wages.

Then you tell the punters that, over 27 years, they are less than 1 percentage point behind – a mere $3000 – where they were assured they would be.

The report finds – but plays down – that the national average real wage fell behind the national average rate of productivity improvement by an average of 0.6 percentage points a year – for 27 years.

That’s if you measure wages from the boss’s point of view (which is economic orthodoxy) rather than the wage-earner’s point of view. But I can’t remember hearing that fine print explained in the thousands of times I’ve heard heavies telling people that productivity improvement automatically flows through to real wages.

View wages from the consumer’s perspective, however, and the national average shortfall increases to 0.8 percentage points a year. And nor did anyone ever tell the punters that it may take up to 27 years for their money to arrive.

You guys have got to be kidding.

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