Education is leading the two sides of politics to change sides

A strange thing is happening in politics. People who in earlier times could have been expected to vote for the right-wing party are now more likely to be supporting the party on the left, while those who would have voted for the left in times past are now more inclined vote for the right.

This is something the insiders – the political scientists, pollsters and party professionals – know all about, but the politicians prefer not to admit. So it’s news to the rest of us.

You could see it alluded to in all the learned explanations of why Donald Trump romped home in the presidential election that was too close to call. But you can also see it in our own elections. Indeed, it’s a “secular” (long-term) trend occurring in the politics of most rich countries.

Did you see some commentator saying the Republicans were now the party of the working class? What! It’s truer than it sounds. Our own Farrah Tomazin wrote that the election saw “the realignment of the Republicans as a party that appeals to the working class while the Democrats have increasingly become the party of college-educated, upper-income suburban voters, especially women”.

A distinguished American professor of anthropology added that “Trump voters trend older, white, rural, religious and less educated”. It seems most “voters of colour” still voted Democrat, but enough Latinos and others defected to Trump to give him an easy win.

And, as I say, you see a similar role reversal going on here in Oz. Professor Ian McAllister of the Australian National University, who oversees its Australian Election Study, a large sample survey of voters following every federal election, says we’ve been gradually moving the same way since the 1990s.

His study, following the federal election in May 2022, found it showed a continuation of “major sociodemographic shifts in voting patterns based on gender, generation and social class, with significant implications for the future of the major parties”.

Historically, the two big parties represented the rival interests of voters playing different roles in the economy. Labor looked after the workers supplying their labour, while the Liberals looked after those small and big businesspeople supplying their capital.

The standard division between the working, middle and upper classes was based on people’s occupational status: blue-collar, white-collar, owners and managers.

But that economy-based division is being replaced by more people voting according to their social values and identity. McAllister says this shift is being driven by rising levels of education. Whether someone has a university education is now the best single predictor of how they vote.

As a general rule, those people with a university degree end up with values and preferences that are quite different from those of people who don’t have a degree, or left school early.

So, just as college-educated Americans are more likely to vote Democrat, Australians with a degree are more likely to vote Labor. People without tertiary education are more likely to vote Republican, Liberal or National Party.

It follows – again as a broad generalisation – that the more highly educated are more likely to live nearer the centre of big cities, where the better-paid jobs tend to be, while the less highly educated are more likely to be found in the outer suburbs and the regions.

Over the 34 years to 2023, the proportion of adults with a university degree has risen from 8 per cent to almost one-third. Each year, more than half of students completing high school go on to uni.

So, as each year passes, people in the oldest generation, who are less likely to be graduates, die, while the youngsters taking their place in the electorate are more likely to be graduates.

In his report on the 2022 federal election, McAllister found that Labor still attracted more working-class votes, although its share of them had fallen to just 38 per cent. The Coalition lost votes from university-educated voters, high-income voters and home owners – groups that, in the previous election, were more likely to have supported it.

A much higher proportion of girls are going on to uni these days, which helps explain why more women vote Labor than for the Coalition. And higher education does much to explain why Labor’s support is much stronger among younger voters.

McAllister has found that, as the Millennials get older – some are now in their early 40s – they’re less likely to drift to the right the way earlier generations did as they aged.

You might see the Liberals’ loss of six heartland seats to the teals as a clear example of the secular trend we’re discussing: Liberal voters who cared about climate change, a federal anti-corruption commission and more women in parliament, switching their vote to the teals.

But McAllister found it was more complicated than that. Only about one-fifth of former Liberal voters changed their vote. What got the teals across the line was strategic voting by those seats’ minority Labor and Greens voters. Knowing their party was never going to win, they threw their weight behind the teals, who did have a chance of winning.

As voters around the rich world become less likely to vote according to their economic class and more likely to vote according to their social and cultural values, political scientists have developed a fancy new theory that characterises parties on the left as GAL and parties on the right as TAN.

GAL stands for green, alternative (relaxed about gender fluidity, for instance) and libertarian (“my body, my choice”). TAN stands for traditional (“I liked it the way it was” and “the world should be run by men”), authoritarian (“we need strong leadership”) and nationalist (“why are they letting in all those strange immigrants?”).

So when, in coming months, you see Peter Dutton banging on about inflation, all those terrible immigrants and all the crime on the streets, and campaigning hard in the outer suburbs and regions, the media will tell you he’s borrowing from the Trump playbook. But now you’ll know there’s a lot more to it.

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Will Trump be disastrous for our economy? I doubt it

When, in its wisdom, the American electorate does something really stupid, it’s tempting to predict death and disaster for the whole world, including us.

But though the Yanks are embarking on a bout of serious self-harm – and this will have costs for the rest of the world economy – let’s not kid ourselves that we’ll be prominent in the firing line.

Leaving aside Donald Trump’s climate change denial – a topic I’ll get to another day – his most damaging stated economic policy is to make America great again by imposing a tariff (import duty) of 10 to 20 per cent on all America’s imports except imports from China, which will cop 60 per cent.

This is rampant populism – it sounds like a great idea to those who understand nothing about how economies work but it will make the US economy worse rather than better. Trump claimed this new tax would be paid by the foreign suppliers but, in reality, it will be paid by those American consumers and businesses that continue to buy imported items.

So the man who got elected because the punters hate inflation will be acting to worsen inflation. This isn’t likely to do much to increase the demand for locally made manufactures but, to the extent that it does, automation and digitisation will mean it does little to create more jobs in manufacturing.

Another reason protectionism doesn’t work is that America’s major trading partners – particularly China and Europe – are likely to retaliate by imposing tariffs on their imports from America. We know from history that trade wars end up leaving both sides worse off.

So the United States will suffer most, although all countries that trade with it will suffer to some extent. But get this: the US is not one of our major trading partners. It takes only about 5 per cent of our exports. Our big partners are China, Japan and South Korea.

Like many ignorant Americans, Trump believes any country that runs a bilateral trade surplus with the US must be doing so because they’re cheating in some way. Not a problem for us: we import more from the Yanks than we export to them. It’s China and the Europeans Trump will be going after, not us.

To the extent that Trump hurts the Chinese economy – as part of the Americans’ bipartisan obsession with trying to prevent China usurping their place as the world’s top dog – that will have an adverse flow-on to us.

But the Chinese have their own ways of fighting back. In any case, the greatest risk to our economy is not from what the Yanks do to the Chinese but from what the Chinese stuff up on their own account.

While it’s clear Trump is well placed politically to press on with implementing the crazy policies he has promised, that doesn’t mean he’ll do everything he’s said he’ll do to the full extent that he’s said. For instance, why would he tax all imports of goods and services when it’s manufactures he’s really on about? Also, not everything he tries to do will be done in next to no time.

We know the man. He’s nothing if not capricious. Dead keen one minute, moved on the next. And as someone who sees himself as the great dealmaker, he’s highly transactional. A 20 per cent tariff may be just the list price before the bargaining starts. ANZ Bank economists say the average tariff on Chinese goods will go from 13 per cent to 22 per cent, not 60 per cent.

The truth is that we’re too small to figure largely in Trump’s thinking. And why kick the US lapdog we’ve made ourselves?

Trump has made much of his promise to deport the many millions of undocumented immigrants. Most of these people are doing jobs Americans don’t want to do. Getting rid of them would reduce the size of the economy while increasing inflation as employers offer higher wages to attract other people to unattractive jobs.

But not to worry. It’s hard to see just how he’d round up all these people without calling out the military. It’s much easier to see him limiting himself to trying harder to stop more people crossing the Mexican border. In this case, the reduction in the economy and the rise in costs would be smaller.

So far, his policies on tariffs and immigration seem likely to increase America’s rate of inflation while reducing its economic activity. Great idea. But then we come to his promises for big tax cuts.

He says he wants to cut the rate of company tax and “extend” his 2017 personal income tax cuts, which greatly favoured the high-income earners more likely to have been too smart to have voted for him.

In principle, you’d expect tax cuts to be expansionary and thus possibly inflationary. But note this: according to a strange American custom, the personal tax cuts enacted in 2017 are due to expire at the end of next year.

So extending them means not that everyone gets a tax cut, but everyone avoids a tax increase. The troops’ after-tax income is unchanged. But, of course, the budget deficit is now worse than previously projected.

One thing we can be sure of is that Trump’s not a man to worry about deficits and debt. Republican congresspeople do have a history of worrying about such matters – but only when those irresponsible Democrats are in charge.

The Yanks do have many of the smartest academic economists in the world and, as the US government’s annual interest payments get to be bigger than its spending on defence, they’re starting to wonder how long America’s fiscal insouciance can continue before something goes wrong. But the reckoning is unlikely to come in the next four years.

All told, it does seem that Trump’s policies will cause America’s inflation and interest rates to be higher than they would have been had Kamala Harris won the presidency. But what doesn’t follow is that this will have much effect on our inflation and interest rates, and on our Reserve Bank’s decision about when to start cutting rates to prevent us having an accidental recession.

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How we measure recessions is wrong. There's a better way to do it

By MILLIE MUROI, Economics Writer

Of all the scary words in economics, recession is probably among the worst. Not just because of the bad times we link it with, but because of the way it’s measured.

What if I told you the way we measure recession is wrong? Or at least that we need to give it a rethink?

The widely used rule for a recession is “two consecutive quarters of negative economic growth”. That means two sets of back-to-back periods (of three months each) where gross domestic product – or GDP: the amount of goods and services that we’re producing and selling – shrinks.

Under that definition, Australia has been in a recession only once since 1991, and that was shortly after the pandemic and its lockdowns hit.

The idea is this: if we’re making and buying less, that must mean we’re having a hard time. And if it happens for six months, that must mean we’re becoming really worse off!

Here’s the thing, though. GDP is already a flawed measure at the best of times. Sure, it can give us an indication of how much we’re pumping out on the assembly line or purchasing at the checkout. But that doesn’t tell us anything about other measures of our wellbeing: environmental damage, our health or education outcomes.

It also doesn’t tell us how growth is shared: an expanding economy doesn’t mean everyone is getting better off. All or most of it could just be flowing to the already well-off.

Right now, as much as a lot of us feel worse off, we’re technically not in a recession. Looking purely at GDP, the Australian economy has managed to tread water.

In the September quarter (and the one before that, and the one before that), GDP grew by a tiny 0.2 per cent – but it was still above zero: close to a recession, but no cigar.

It helps if we split that figure up by population. When we consider the boom in our population over the past couple of years, we have, indeed, gone backwards. For the past year and a half, GDP growth per person has consistently fallen every quarter.

But to better measure and identify recessions, which we tend to see as a signal for economic pain, we should look to the labour market.

Why? Because that’s where most of the impact of a recession is felt: think about job losses and how hard it is to find a job when the economy is tanking, as well as the impact our jobs have on our lives.

Over the past year, our biggest banks have said our strong labour market has helped people muddle through the cost-of-living crisis. We can change our spending habits to keep up with mortgage repayments or work extra hours to keep up with our rent. It’s not fun, but it’s possible.

Lose your job, though, and life is much harder. It can put people under serious financial stress and damage their mental health.

Enter American economist Dr Claudia Sahm. The tool she developed – called the “Sahm rule” – helps to warn when an economy is entering a recession. It has missed the mark only twice in the past 11 US recessions.

The Sahm formula looks at monthly unemployment data to track how quickly the national unemployment rate has risen compared to the past year. Specifically, it compares the current three-month moving average of the national unemployment rate with the lowest value it has hit in the previous 12 months.

If the current rate is at least 0.5 percentage points higher than the lowest point in the previous year, it means we’re in the early stages of a recession. Measures such as the Sahm rule help us identify weaknesses in our economy and the risk of a recession early. That’s because jobs data is more frequently reported than GDP.

Sahm says changes in the labour market are crucial in understanding the state of the economy.

“If you were put on a desert island and could only have one variable to say what’s going on in the US economy, unemployment is the one you want,” she says. “It really says a lot about whether we’re in good times or bad.”

Sahm’s formula came about in 2019 while she was searching for a better way to fight the next recession. “I had just watched for a decade how hard the Great Recession was on families,” she says. “The goal was to have something people could understand that was very simple, easy to track and really accurate. Your best shot at fighting a recession is to move quickly.”

According to Sahm’s rule, Australia has been in the early stages of a recession for at least one month this year (although the Reserve Bank has argued the Sahm rule should be triggered at 0.75 per cent rather than 0.5 per cent).

When developing the rule, Sahm says she knew from the beginning that examining unemployment would be key. “I already knew, just from my work experience, even small increases in the unemployment rate are a bad sign,” she says.

Australia’s labour market has been remarkably resilient, with the most recent unemployment rate in September coming in at a historically low 4.1 per cent. But we’ve been in – or close to – the danger zone for the past few months.

Why does this matter? Getting on the front foot is important, especially for policymakers such as the government and central banks, to limit the fallout from an economic slowdown.

Independent economist Saul Eslake has long believed the common definition of a recession is flawed. He points to the two consecutive quarters of negative GDP growth in Australia in 1977: “Nobody thinks that was a recession,” he says.

On the other hand, Australia didn’t see two consecutive quarters of negative GDP growth during either the global financial crisis or the tech wreck in the early 2000s. But Eslake says Australia arguably faced minor recessions during both those periods.

His own metric for a recession, like Sahm’s, focuses on the labour market. He says a recession should be when unemployment rises by more than 1.5 percentage points in 12 months.

“The biggest impact of a recession is on those who lose their jobs or take a long time to find them,” he says.

“There’s evidence that people who lose their jobs during a recession, or enter the workforce as school-leavers or university graduates during a recession, take longer than normal to find a job.”

This then has a “scarring” effect. Those who lose their jobs or have difficulty finding one tend to end up earning less over the rest of their working lives.

The better we are at identifying a recession, the better we can be at protecting jobs and longer-term livelihoods.

Of course, it may not be as simple as just monitoring the jobs market. In the US, for example, the National Bureau of Economic Research (NBER) considers a range of measures beyond GDP – including personal income, employment, wholesale and retail sales – when deciding whether to declare a US recession.

And even Sahm says her rule has limitations, especially as we’ve seen big changes in the supply of labour across many countries.

“This particular economic cycle has challenged simplicity in a way that means these simple rules need some kind of extra check,” she says.

But whether we go with a measure that is simpler than the NBER gauge, more complex than the Sahm rule, or timelier than GDP, it’s clear the focus needs to be more on jobs.

If there’s one job our economic leaders have, it’s to keep us, as much as possible, in ours.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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We owe more than we realise to our best econocrats

If you believe, as all of us do, that governments need to be accountable to the voters who elect them, then someone has to care about the way those governments account for all the money they raise in taxes and charges, plus all the money they borrow. Governments spend this money on myriad services they provide and the huge array of infrastructure they build for us, ranging from police stations to grand spaghetti junctions.

Our politicians are meant to care about how – and how well – money is raised and spent, but the control of all that money and the recording of where it comes from and goes to is the responsibility of bureaucrats in federal and state treasuries and finance departments, not forgetting the central bank.

The budgets and financial statements they produce are intended to account publicly for all the money that passes through the governments’ hands, but the econocrats know that the system of accounting must also help ensure that governments and their departments and agencies are well managed. That the money they spend actually achieves its intended objectives, with little waste.

Whereas political journalists spend much of their time talking to the politicians we read about, as an economic journalist, I spend most time talking to the technocrats standing in the shadows behind them.

The pollies are never keen for the econocrats to take much of the media limelight, and that usually suits the bureaucrats fine. But while they all work hard in the voters’ interests, some of them do an outstanding job in protecting and advancing those interests.

One such person was Percy Allan, who died at 78 last month. He was secretary of the NSW Treasury for about 12 years under three premiers – Labor’s Neville Wran, the Liberals’ Nick Greiner and Labor’s Bob Carr. Allan was a contact of mine who later became a friend.

You may think of economists and accountants as being as boring as the work they do. But that’s not the way they think of themselves, and no one who knew Allan ever thought of him as dull.

As we were reminded during the pandemic, whereas the federal government raises most of the taxation, it’s the state governments that are responsible for delivering most of the government services we rely on.

The six states and two territories have much autonomy. They compete against and copy each other. But usually, it’s the biggest states, NSW and Victoria, that initiate change.

If you want boring, try this: Allan led the way in getting federal and state governments to adopt the accounting profession’s general accounting principles and also the public sector’s budget reporting and financial statistics standards.

It helps make governments’ budgets and financial statements more accountable and transparent if all governments follow the same set of rules, rather than them each doing things their own way. And for the rules to make sense.

Governments provide many figures for publication by the Australian Bureau of Statistics. It helps if those figures are calculated on the same, consistent basis, and if government figures fit with all the statistics provided to the bureau by the private sector.

Similarly, it helps if all the world’s governments use the same internationally agreed standards laid down by the International Monetary Fund and the United Nations Statistical Commission.

Private businesses have long been required to report their annual profit or loss, and their balance sheet of assets and liabilities on the last day of the year, on an “accrual” basis. That is, to make a great effort to ensure that the income reported for a particular period was earned during that period.

Likewise, to ensure the expenses reported for the period didn’t relate to other periods. Accountants call this making sure the income and expenses reported for a period actually “match”.

If that sounds obvious, it wasn’t the way federal and state government budgets and financial statements were prepared until Allan and others led the way in conforming to private sector and international accounting and statistical standards.

Until then, federal and state budgets and financial statements were calculated on a “cash” rather than accrual basis. Revenue was any money that hit the government’s bank account during the period, even if some of the money was people paying last year’s tax late or others paying next year’s early. Similarly, all money that left the government’s bank account during the year was counted regardless of the year to which it applied.

Has the penny dropped yet? Compared to the cash basis, the accrual basis makes it much harder for the company or the government to fudge their annual figures by switching incomings and outgoings between years.

Now get this. The federal government has used accrual accounting since the start of this century. But to this day, federal budget documents are written in a confusing mixture of the two accounting languages – cash and accrual. The budget deficit or surplus the treasurer tells us about is always the “underlying cash” balance.

Treasury will tell you cash is the more appropriate basis from a macroeconomic perspective. That is, when you want to judge the budget’s effect on the economy, or the economy’s effect on the budget.

Maybe. But what’s undeniably true is that, unlike the states, the feds’ retention of the cash basis makes it a lot easier for the government of the day to engage in creative accounting – which it often does.

Another reform Allan was proud of was the “corporatisation” of various businesses the state government owns: the railways, the buses, water and sewerage, electricity generation and distribution, the ports and so forth.

Allan wanted all government-owned businesses to run, and be accounted for, as though they were commercial undertakings. When so many of them are natural monopolies, this has its dangers.

But when state-owned businesses aren’t run like businesses, they’ll tend to be run for the convenience of employees rather than customers, with overstaffing and other wastefulness.

So, better to have transparent accounting, leading to greater efficiency and higher profits going back to the government, to be spent on additional services without the need for higher taxes.

Linked to this was Allan’s role, during the term of the reforming Greiner government, in setting up the NSW Independent Pricing and Regulatory Tribunal to ensure the prices charged by government-owned businesses rose by no more than could be justified.

But one of Allan’s greatest achievements was achieved long after he’d left NSW Treasury. He founded and ran the Evidence Based Policy Research Project, in which a right-leaning and a left-leaning think tank have been commissioned to examine more than 100 federal or state bills to assess whether they stack up.

Most have been found not to. Allan had a big win when the NSW upper house passed a standing order that all government bills answer a public interest questionnaire. The project has been taken over by the Susan McKinnon Foundation.

My mate Percy Allan devoted his life to trying to make the world work better. We all owe him thanks.

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How weak competition forces up food prices along the supply chain

By Millie Muroi, Economics Writer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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How supermarkets get away with raising their prices

 By Millie Muroi, Economics Writer, October 4,2024 

If Coles and Woolies wanted to get away with higher prices, they just had to tell us.

Alright, it’s not that simple. But there is a getaway car for any business wanting to keep customers coming – even after pumping up their prices. False discounting? No. Read on.

The high-inflation environment has sucked for a lot of us: growing grocery bills, surging insurance premiums and higher housing costs, to name a few. But the way we’ve perceived price increases – and the way we’ve responded to them – tell us (and businesses) a lot about how and when they can push prices up without getting customers cross.

Behavioural science consultancy Dectech took a look at the most recent spurt of inflation in the UK and how consumers saw – and changed their behaviour in response to – large price rises. They did their own testing, too, to see whether different justifications given for those pesky price hikes could change the way customers responded.

Now, you might expect customers to behave consistently to a price rise, regardless of the justification given for it. After all, an $8 packet of chips is still sucking more money out of your bank account than a $5 packet, regardless of the reason given for it.

But the thing about behavioural economics is that it often pokes holes in the neat economic models and theories we have in place to explain how we act. The law of demand, for example, states that as prices rise, customers buy less. Most economic models wouldn’t account for the fact that this depends on how companies explain those price hikes.

But the effect of the reasoning given for inflation can be more influential than the inflation itself, according to Dectech. An unexplained price rise, or a price rise for a “bad reason” can have a similar effect on customer behaviour as a 16 percentage point higher price rise for a “good reason”.

So, what’s the difference between “good” and “bad” reasons? Basically, it comes down to whether the price increase seems fair. Of course, this all comes down to perception. But one thing which helps to increase customers’ perceived “price fairness” is understanding how the price for a product was determined.

Despite the law of demand, pointing to increased demand for a price rise is a “bad” reason: it has the biggest negative effect on customer satisfaction and eagerness to buy a product. This is especially the case for a sector like telecommunications where the retailer doesn’t really have significant supply constraints.

By contrast, the best way to fend off angry customers is to either blame it on cost increases which “have to” be passed on, or to say the price increase covers extra costs needed for product development. Essentially, it has to be either something out of a business’s control, or aimed at improving the customer’s experience.

The worst thing a business can do is give no reason at all and hope no one notices (or, as Coles and Woolies have allegedly done, hide those price rises beneath false discounts, eroding customers’ trust). A 20 per cent price rise with the explanation that you’re investing in the product has the same effect on sales as a 4 per cent price rise with no explanation.

Even something as vague as “due to recent circumstances” is better than nothing. Did the dog eat your conveyor belt? Or is it because of a global supply shock? Who knows – but it works because at least the business is showing the decency to own the price increase. Openness and honesty count for something.

Time-poor and lazy

It also depends on the sector. Dectech’s study found raising prices “to invest in the product” worked especially well for the grocery and airline sectors – at least in the UK. Why? “People want to see better ready-made meals and new aeroplanes,” the authors said.

We also know humans aren’t big fans of change. We’re creatures of habit, often preferring to stick to routine or with what we know. Independent Australian economic research institute e61’s economist Matt Elias took a peek into consumer bank transactions linked to store locations and found there was a “persistent degree of inertia” when it comes to our supermarket choices.

Chances are, even if you have multiple options, you stick with one of the big two: Coles or Woolworths. It’s hard to pinpoint why, but Elias says it could reflect the fact that comparing prices between supermarkets can be tricky: there are so many items which are changing in price from week to week.

Consumers are also time-poor and – let’s face it – lazy. How often do you pull up the websites or catalogues of the major supermarkets to optimise your shopping? Probably not as much as you should or could.

Fluffy handcuffs

Brand loyalty can trap consumers, and unfortunately, it can reduce competition, handing more market power to big companies such as Coles and Woolworths. Why? Because when customers refuse to shop around, there’s less pressure on businesses to offer the best prices.

One way to combat this, Elias says, is to set up a government-supported digital price comparison platform, similar to the websites and apps we have to compare fuel prices. When these systems have been set up overseas, they’ve resulted in lower prices.

Loyalty cards or reward apps can worsen customers’ inertia, acting like fluffy handcuffs. They lock in consumers who would otherwise be more inclined to shop around for the best deal by offering enticing rewards for being faithful. Why cut prices when your customers are busy spending at your store to rack up points?

While economists like to assume people are perfect bargain-hunters, helping to keep companies on their toes and prices in check, the reality is blurrier. From inertia to justifications and loyalty cards, our behaviour is shaped by more than price. Being aware of some of what makes us tick (or sit back) can help businesses make money – but it can also help us save it.

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Get this into your head: we are now short of workers, not jobs

Last week, something strange happened without anyone noticing. We got the best monthly report on the jobs market we’ve ever had, and it was greeted with dismay. The message we’ve yet to get is that, when it comes to the need for jobs, our world has been turned on its head.

Every month, the Australian Bureau of Statistics gives us the latest figures for what’s happening to employment and unemployment, based on a huge sample survey of Australia’s 10.5 million households. The figures we got last week, for September, showed that the number of Australians with jobs increased by more than 64,000 during the month, to 14.5 million. The number of people unemployed – wanting a job, but unable to find one – fell by 9000 to a bit under 620,000.

Why was this the best jobs report we’ve had? Because the proportion of the working-age population with a job reached an all-time high of 64.4 per cent. During September, the number of full-time jobs grew by 51,000, to reach 10 million for the first time. So, more than 80 per cent of the extra jobs were full-time.

If the economy was booming, this strong growth in employment wouldn’t be so surprising. But the Reserve Bank has been applying the interest-rate brakes since May 2022, and the economy’s growth has been very weak for the past year or more.

The only thing that’s been growing strongly is the population – which makes the limited worsening in unemployment all the more surprising.

The new Minister for Employment, Murray Watt, boasted that more than a million extra jobs had been created since the Albanese government came to office in May 2022. “This is the most jobs ever created in a single parliamentary term by any Australian government,” he said immodestly.

So why was last week’s good news greeted with dismay? Because it was taken to mean the Reserve Bank will be in no hurry to start cutting interest rates. You know the media: always look on the dark side of life.

Rates will come down in due course, of course. And with the jobs market holding up as well as it has, it gets ever harder to fear the economy will drop into recession. Silly people judge recession by whether the economy’s production of goods and services – gross domestic product – starts going backwards.

But what makes recessions something to be feared is not what happens to production, but what happens to employers’ demand for workers. To the rate of unemployment, in other words. It’s when people can’t find work that they feel pain even greater than the pain people with big mortgages are feeling at present.

When the pandemic lockdowns ended and people were finally able to get out and spend the money they’d earned, businesses started hiring more workers and unemployment fell sharply. By the end of 2022, the rate of unemployment got down to 3.5 per cent – the lowest it had been in about 50 years.

But here’s the surprise: despite the big rise in interest rates designed to slow the economy and stop prices rising so fast – despite consumer spending becoming so weak – 28 months after the brakes were first applied the rate of unemployment has risen only to 4.1 per cent.

That’s still much lower than we’ve seen during most of the past five decades. After the recessions of the early 1980s and early 1990s, unemployment got up to about 10 per cent. In the 2000s, we got used to a rate that started with a 5.

For about the first 30 years after World War II, our problem was finding enough workers to do all the work needing to be done. Since the mid-1970s, however, we’ve learnt to live with the opposite: not enough jobs for all the people – including married women – wanting to work.

By now it’s become deeply ingrained in our thinking that there can never been enough jobs. Every politician and businessperson knows that, if you want to get your way, you promise to create more jobs.

But here’s the surprising news: the unusually low rates of unemployment we’ve experienced this decade aren’t the temporary product of the ups and downs of the pandemic and its inflationary aftermath. They’re here to stay. That’s why the jobs figures are holding up so well.

The half century in which jobs were always scarce has ended, and we’re back to the opposite problem: not enough workers to do all the work that needs doing.

Why? In five words: the ageing of the population. Because the proportion of people too old to work is growing, while families are having fewer children. Old people don’t stop consuming. They need more spending on services such as healthcare and aged care, which requires more workers.

For years we’ve made up for our low fertility rate by allowing high rates of immigration. And we’ll keep seeking from abroad the many doctors and nurses and aged-care workers we need.

Trouble is, all the rich countries have the same population-ageing problem we do. For different reasons, even China has a big ageing problem. So, the world competition for young skilled workers is likely to get a lot more intense.

But isn’t that a problem off into the future sometime, like climate change? Don’t be so sure – like climate change.

With the high cost of home ownership and a shortage of rental housing, right now we ought to be building a lot more additional housing than we are. What’s the problem? A shortage of skilled workers, with many people who could be building homes off working on the state governments’ big infrastructure projects.

And now that the Albanese government has approved the expansion of many coal mines, this will further reduce the number of skilled workers available to build homes.

A shortage of jobs is no longer our problem. It’s a shortage of workers.

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Let's all be more positive towards nature. But how?

Have you heard about Nature Positive? It’s a global movement to stop all the damage we’re doing to the natural environment – to forests, rivers, plants and animals – and start reversing that damage. It’s an idea whose time has come. And it’s coming to Australia next week.

Tuesday week will see the world’s first global Nature Positive Summit in Sydney, hosted by federal Minister for the Environment and Water Tanya Plibersek and NSW Minister for the Environment Penny Sharpe.

The summit will be “the next step towards turbocharging private sector investment in nature repair”. It will bring together ministers, experts, environmental groups, businesses, First Nations people, community leaders and scientists.

It will “bring together global leaders to discuss next steps for a nature-positive future, so that our kids and grandkids will be able to enjoy the wild places we love today”, Plibersek says.

Sharpe says that “getting nature on the path to recovery is as important as tackling climate change. Nature positive, and investing in nature, are newish concepts, and they are key to turning around destruction and pollution of land, waterways and air, and stopping biodiversity loss”.

The summit’s sessions and site visits will cover driving sustainable ocean economies and “blue finance”, developing nature reporting frameworks, business leadership on sustainability, boosting First Nations leadership in nature repair, and showcasing nature repair in practice, across landscapes, seascapes and borders.

Well, that’s great. At this late stage, you’d have to be pretty boneheaded not to agree with all that. The question is, what should we do to stop the continued destruction and start repairing the damage we’ve already done?

Well, the answer’s obvious – obvious to economists anyway. Surely, what we should do is create the incentives necessary to discourage destructive behaviour and encourage helpful behaviour.

We need to set up something similar to the present “safeguard mechanism”, which requires businesses in industries with major carbon emissions to limit and then reduce their emissions.

Where this is impractical, they must “offset” any excess emissions with “carbon credits” purchased from farmers and others who do things that reduce an equivalent amount of carbon emissions. These “Australian carbon credit units” are certified by a government agency to ensure they’re genuine.

Get it? Rather than just ordering companies to stop emitting greenhouse gases, the government uses an “economic instrument” that offers incentives to businesses to do the right thing. The government creates a new market where businesses unable to reduce their emissions can pay other businesses to reduce emissions for them.

The emissions are reduced by those businesses that can do so cheaply, rather than the firms for which doing so would be much more costly. The market thus allows the community to reduce climate damage at the lowest available cost.

Neat idea, eh? One small problem. We have to be sure the businesses being paid to reduce their emissions really do so to the extent they claim. But these carbon-credit schemes are notorious around the world for being dodgy or downright fraudulent.

One problem is ensuring the carbon isn’t locked up (“sequestrated”) for a few years and then let go. Another is being sure people aren’t getting paid to do something they fully intended to do anyway for other reasons.

Officialdom insists that our federal carbon-credit system is kosher. But various whistleblowers beg to differ – and that’s not hard to believe.

With nature first, the schemes you use to reduce carbon emissions can be adapted to preserving and repairing bushland and plant and animal habitat. With bushland, there’s a fair bit of overlap between the two problems.

The NSW government has been running a biodiversity offsets scheme since 2017. But in its own politely ponderous way, a performance audit by the NSW Auditor-General in 2022 tore it limb from limb.

It found that the government department responsible for the scheme had “not effectively designed core elements” of it. There were “key concerns around the scheme’s integrity, transparency and sustainability” creating “a risk that biodiversity gains made through the scheme will not be sufficient to offset losses resulting from the impacts of [economic] development, and that the department will not be able to assess the scheme’s overall effectiveness”.

The point is, by now we’ve had enough experience of attempts by governments to create “markets” out of thin air, just by passing laws and setting up regulatory bodies, to know this doesn’t leave us with markets that work the way real markets work – let alone the markets that exist in economics textbooks.

When it comes to the environment, the trouble with government-created “markets” is that governments are creating the demand for something – a carbon credit, or a biodiversity credit – and also determining the supply of that something, by deciding who’s done something that entitles them to sell a credit.

So the buyer has been ordered to buy things called credits, while the seller has been allowed to sell things called credits. See what real markets have that this market doesn’t? Customers.

A customer is someone who wants value for their money and, if they aren’t getting it, will either go somewhere else or decide to go without.

But in this so-called market without customers, buyers have to buy credits just to please the government, while sellers who’ve been granted a piece of paper called a credit have a guaranteed buyer.

So sellers can sell anything they’ve persuaded the government to class as a credit, while the buyers forced by the government to acquire officially designated credits, have no reason to care whether the credits they buy are good, bad or indifferent.

It’s hard to imagine a “market” where the risk of buying something that’s no good could be higher.

Now get this. As originally intended, the purpose of the Albanese government’s Nature Repair Act, passed late last year, was to establish a nature-repair market. But the Greens would pass the bill in the Senate only if it didn’t permit miners and other developers to harm nature. And if they did, the polluters would have to offset any damage by buying biodiversity credits.

So, in the end, the Act created only half a market. It gives the government power only to award farmers and others who do nature-enhancing things with “biodiversity certificates”, which they can sell.

Who’d want to buy such certificates? Only philanthropists, environmental groups, companies trying to enhance their environmental credentials, or governments coughing up taxpayers’ money.

You get the feeling the Greens don’t have much faith in creating artificial markets to fix the environment. They don’t seem to share most economists’ conviction that governments shouldn’t order people about – particularly businesspeople.

So how else can we pursue nature positive? Well, here’s a radical thought: governments could stop logging native forests, stop further land clearing, stop subsidising fossil fuels, stop permitting new mines and gas fields, and start spending a lot of money restoring land and habitat.

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What goes on in the Reserve Bank's mind

By MILLIE MUROI, Economics Writer

So far, the Reserve Bank is winning. Every time we’ve had a new inflation read or jobs data, the country has held its breath … and exhaled a sigh of relief. Things are a little tougher for a lot of people, and a lot harder for some. But inflation, our public enemy number one, is gradually slinking away, and a historically high bunch of us have jobs.

The Reserve Bank might not be high-fiving itself yet, but it’ll be cautiously relieved that things are going (mostly) the way it planned. As the bank gets closer to the finish line, though, the balancing act will get harder. The reserve has been laser-focused on shrinking inflation, which it has. But the labour market is weakening, and there’s a risk we won’t feel or see the full impact on jobs of keeping interest rates on hold until after we’ve gone too far.

What is “too far”? Well, it’s tricky to say, because there’s no exact number to guide us on how many job losses we’d be OK with. And because – until we’ve locked inflation well within the 2 to 3 per cent target range – a strong jobs market is also a sign the economy might be pushing too hard to keep up with demand, and therefore that inflation might be here for a bit longer.

As one of the country’s leading labour economists, Jeff Borland, has pointed out, while recent data points to the Reserve Bank’s success so far, there probably needs to be a turning point in the bank’s thinking soon if we’re to avoid a big round of lay-offs.

Underlying inflation, the measure the bank cares about – and which doesn’t count items with especially large price changes – fell to 3.4 per cent over the year to August. Gross domestic product (a measure of how many goods and services the economy is producing), while crawling along, is still growing. And at 4.1 per cent in August, the unemployment rate shows we’ve managed to hold on to a lot of the gains in our labour market.

Compared with the US, UK and Canada, Australia seems to be the Goldilocks country. Partly because of Australia’s responsiveness to interest rate changes (we have one of the highest shares of mortgage-holders on variable rate loans, which means interest rate changes are felt pretty much immediately), the central bank has been less aggressive in ramping up interest rates to curb inflation.

While the US Federal Reserve jacked up rates by 5.3 percentage points from 2022 to its peak, Australian interest rates rose only 4.3 per cent (that’s also lower than in Canada and the UK). Despite this, the increase in Australia’s inflation rate since the first interest rate rise hasn’t strayed far from its peers. In fact, the 2.7 percentage point increase in inflation since the first rate rise is a lot lower than in the UK, where inflation surged 4.8 percentage points from its first rise.

The downward journey in inflation has also been fairly even across the countries. From its peak, Australia’s inflation rate has fallen about 0.7 percentage points every quarter, the same as in Canada and only a touch slower than the 0.8 percentage points in the US. The UK, with a high inflation peak, has had the fastest decline at 1 percentage point every quarter.

Australia’s approach has also limited damage to the jobs market. While unemployment increased 1.6 percentage points in Canada since the first rate rise and 0.8 percentage points in the US, the UK and Australia have managed to keep the lift in unemployment to just 0.6 percentage points.

At the same time, Australia’s participation rate has climbed 0.7 percentage points – the highest of its peers – since unemployment started rising. The participation rate is the proportion of working-age people (those aged over 16) who either have a job – full-time or part-time – or are actively seeking one (we call all these people “the labour force”) in the wider working-age population.

All this, together with high inflation, signals to the Reserve Bank that the Australian economy is still “running hot” as the Reserve’s chief economist Sarah Hunter has put it.

We tend to focus on the rate at which the economy is growing rather than the level it is sitting at. That’s why, when we see weak figures such as 0.2 per cent GDP growth for the most recent quarter (and for the quarter before that, and the one before that), we hear warning bells ringing about recession: commonly defined as two back-to-back quarters of falling growth.

So, why isn’t the bank in a rush to ease up on interest rates?

For as long as employment is growing and unemployment has risen only a bit, the bank won’t be living in fear, as many of its critics are, that the economy could drop into recession at any moment.

While the movement in GDP and household consumption has been very weak, the levels they’re at are still high – especially when compared with how much production capacity we have in the economy.

A strong labour market (one where most people who want a job can find one), means there’s still a lot of demand from businesses for workers. Why? Because there’s strong demand for their goods or services, and they need people to help produce or provide them. In August, for example, the Australian economy added more than 47,000 jobs.

But there are some signs the labour market is weaker than the headlines might tell us.

Some of the additional jobs and additional hours worked are a result of a big boost in immigration and therefore our population. In August, our population grew by 50,000 – but this growth won’t last forever, especially with the government’s cap on international students.

A lot of the growth in hours has also been in industries such as education, healthcare and social assistance. As Borland points out, about 40 per cent of the extra hours worked in recent months were in these largely government-funded industries – which, once again, cannot last forever.

We also know businesses are likely to be hoarding workers (firms tend to cling onto their workers when the economy starts to slow, until the very last minute, because it can be a pain to rehire them), and that interest rates take up to 12 to 18 months to impact the economy, meaning we may be yet to see the full impact of our rate rises.

Until underlying inflation sits comfortably within the target zone, GDP turns negative, or the jobs market deteriorates more noticeably, the Reserve Bank won’t be in a rush to dust off its bias towards reining in inflation.

But we know job loss has life-altering and long-lasting consequences for those affected. For the bank to keep Australia on the “narrow path” and continue to kill it (its job, that is, not the economy), it might need to start shifting its focus towards keeping us all in our jobs.

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