Politicians addicted to the appearance of economic success

I realised Australian government was fast approaching peak fake when I read Laura Tingle of the Financial Review's revelation that Malcolm Turnbull's Snowy 2.0 announcement was timed to favourably influence the imminent fortnightly Newspoll result.

When our leaders progress from being mesmerised by opinion polls to trying to game them, that's when we know the country's in deep, deep trouble.

It's long been clear that, acting on their belief that "the perception is the reality", the political class – Labor and Coalition – has focused less on attempting to fix problems and more on being seen to be fixing them.

But trying to game the political polls takes faking it to a new level: being seen to be seen to be trying to fix things.

It hardly needs saying that Snowy 2.0 was just a stunt, designed to excite the media and portray Turnbull as the great Nation Builder, while being no more than a feasibility study of a scheme that's probably not feasible, would end up costing at least double what we were told it would and, if it did eventuate, would come years too late to help with the energy crisis.

Since faking progress – conning the media into conning their voting customers – is a lot less time-consuming than pondering real solutions, you fill the vacuum by attacking your opponents' policies and record – even though such attacks rate sky-high on the hypocrisy Richter scale.

The pollies must know from their focus groups how this slagging off of opponents serves only to alienate the voters – and discourage most young people from taking any interest in politics.

But since they have little in the way of genuine policies to outline and explain, and have to keep burbling on about something, they don't seem able to stop themselves saying things that make the public change the channel.

Veteran Australian National University political scientist Professor Ian McAllister says trust in politicians is at its lowest than at any time since he started surveying it all the way back to 1969.

The other group whose perceived trustworthiness has declined badly are the media. Purely coincidental, I'm sure.

Sometimes I wonder if the pollies haven't turned the hostility between them up so high that it's no longer possible for any flesh-and-blood prime minister to survive for more than a year or two. When every day is a minefield, the sharpest leader will often put a foot wrong.

Certainly, the leadership instability we've seen since the ejection of John Howard shows no sign of abating. Whoever's leading the Coalition by the time of the next election – likely to be late next year because of last year's double dissolution – it's hard to see the Coalition surviving.

But who could convince themselves Bill Shorten's the man to restore stable government and the steady pursuit of good policy?

The superficiality of the way we're governed these days has made our politicians even more prone to short-term thinking, to the quick fix.

This explains the difficulty we're having getting both sides to accept a more disciplined, objective approach to the selection of infrastructure projects.

Infrastructure isn't something you use to improve the nation's productivity – its ability to move people and goods around efficiently; its accumulation of human capital – it's something you use to buy votes in particular electorates for particular reasons.

Speaking of getting a fix, pollies on both sides and levels of government have become addicted to announcing new mining projects, notwithstanding that the resources boom turned to bust long ago.

No one in their right mind would think now is a good time to build a mega coal mine in the Galilee Basin, but that hasn't stopped either the Turnbull government or the Palaszczuk government from offering huge subsidies to get one going.

And when politicians are waving their cheque books, you can usually find some enterprising miner – usually foreign and often tax-haven-based – confident of their ability to extract more from the government than the government extracts from them, even if history tells us most go out backwards.

There's a large element of con trick in mining projects. Their supposed attraction is the many jobs they're said to create. But these numbers are invariably hugely exaggerated and, in any case, relate only to the construction phase.

The one thing new mines don't do is create many jobs, barring the first few years.

What they do is create short booms and long busts for nearby towns. They're the bringer of all the joys of going cold turkey.

Viewed from the front, however, they look like Christmas. No wonder our vision-bereft politicians are addicted.

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Economists' changing view of the labour market

The newly invigorated Australian Council of Trade Unions is demanding a $45 a week increase in the federal minimum wage, a rise of 6.7 per cent, which has shocked and appalled the employer groups and the Turnbull government.

If I was on the minimum wage, however, I wouldn't start spending the increase yet. It's all a bit ritualistic, with the unions demanding far more than they expect to get, while the employers cry poor and predict huge job losses should anything more than the tiniest increase be imposed on them by the Fair Work Commission.

Not that many years ago, most economists would have shared the employers' doubts about the wisdom of even a modest increase in the minimum wage.

Indeed, conventional economic analysis – using the "neo-classical" model of markets – told them that government intervention in the labour market to set a "binding" minimum wage – that is, one higher than would be set by the unfettered interaction of supply and demand – might benefit those workers who managed to retain their jobs, but must inevitably mean many unskilled workers would be prevented from getting jobs.

Just how many people were unemployed as a consequence of holding the minimum wage above its "market-clearing" level would be determined by the "elasticity" – the degree of sensitivity to price changes – of employers' demand for unskilled labour.

There are probably plenty of economists who still believe all that, particularly those who don't make a study of the economics of the labour market and rely on elementary analysis of any and every market.

After all, such analysis is completely logical, given the assumptions on which the simple model rests.

Trouble is, it's long been obvious to those who cared to look that the conventional model isn't much good at predicting what will happen to employment and unemployment.

For instance, those economists who use the neo-classical model – as opposed to a Keynesian approach – to explain the behaviour of the macro-economy are obliged to argue that the jump in unemployment during recessions is voluntary rather than involuntary.

It's just a lot of workers choosing that moment to take an unpaid holiday.

But the big challenge to economists' conventional wisdom that minimum wages cause unemployment came in 1995, when two American economists, David Card and Alan Krueger, published empirical evidence showing that a 19 per cent rise in New Jersey's minimum wage actually saw a small rise in employment.

Many studies since then have come up with similar findings.

This suggests the conventional model of markets doesn't offer a useful description of how the labour market works. Either the model's many assumptions don't hold, or there are key factors affecting labour markets that the model doesn't capture.

This is no radical idea. A father of neo-classical economics, Alfred Marshall, argued as long ago as 1920 that the market for labour differed from two other "factor markets" – markets for the factors of production - land and capital.

Why? Because, according to Marshall, workers retain ownership of their human capital (skills) – they're free agents – and because workers must be present in the workplace for the delivery of their skills.

The first characteristic means that anything workers learn on the job, or are trained to do, remains their property, not their employer's, thus giving them some control over the use of those skills.

The second characteristic – that every unit of labour an employer purchases comes with a human being attached – means workers can't live very far from the workplace.

Since moving homes involves cost and inconvenience – especially if the worker has a family – this may give employers some ability to exploit their workers.

Remember this and the notion that a model for the buying and selling of land, or machines, or for the borrowing and lending of dollars, would work just as well in explaining the buying and selling of labour, is fanciful.

So what other, better models of the labour market are there? Labour economists are working on many. A favourite of Professor Alison Booth, of the Research School of Economics at the Australian National University, is the "oligopsony" model.

Huh? Monopoly means there's just one seller of a product. Monopsony means one buyer of a product or, in this case, input. Oligopsony means just a few buyers – by no means uncommon in a modern economy where a few big companies dominate many product markets.

The oligopsony model assumes that even if workers have identical skills and abilities, they have differing preferences on which employer they want to work for, influenced by such things as how far the firm is from where they live, the hours they want to work, or whether they like the boss and their fellow workers.

It takes time and effort (that is, cost) for workers to find alternative employers they like at least as much as their present one and, similarly, it's expensive for employers to find a worker they like as much as the one they could lose.

This makes many workers reluctant to change jobs and many bosses reluctant to change workers. And because these preferences are private information – the other side can't be sure how strong they are – there's scope for "economic rents": for workers to be paid less, or more, than the value of their work. Less is more likely (except for me).

Booth says the attraction of the oligopsony model is its ability to show how a minimum wage can actually increase employment, as well as why employers provide general training to workers who could leave and take the training with them.

Trouble is, these alternative models of the labour market may be more realistic, but they're also more complicated and harder to reduce to a set of equations.

Keynes once said it was better to be roughly right than precisely wrong. A lot of economists disagree.

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