Next election will offer voters more genuine, wider choice

Even if we don't end up having a federal election this year, rest assured, it will feel like a year-long campaign. But whenever it occurs, it's likely to determine the fate of neo-liberalism, aka "bizonomics".

Though the two sides like to paint every election as a clear choice between good (us) and evil (them), many voters have concluded all politicians are the same – liars and cheats.

But that's truer of the way they behave than of the policies they espouse on some key issues.

The plain fact that neither side has enough committed supporters to guarantee it election means victory goes to the party that attracts more of the uncommitted voters in the middle.

This has long been a factor encouraging both sides away from extremes of left or right and towards the more moderate, "sensible centre". They've retained only enough pro-business or pro-worker positions to keep their voting, donating and polling-booth-staffing "base" motivated, as well as to provide some product differentiation.

The standard approach of recent decades has been for each side to seek to neutralise those issues where the other side is perceived by voters to have the advantage, by saying "me too", while trying to highlight those issues where it has the perceived advantage over its opponents.

Polling released last week by Essential, shows the Liberals' great perceived strengths are national security and terrorism, and management of the economy, whereas Labor's strengths are (in ascending order) education, health, housing affordability, the environment, industrial relations and climate change.

Note that almost all the contentious issues are economic, broadly defined. Voters see little to distinguish the two sides on population growth and asylum seekers. The government's already pushing hard on national security and terrorism, but Labor will run from any argument over these issues, where it starts well behind in voters' estimations.

Of late, however, the parties have departed from the standard script. Realising he lacked the charisma to get away with mimicking Tony Abbott's virtuoso performance of total negativity against the death-wish Rudd-Gillard-Rudd Labor, Bill Shorten thought he had little to lose by abandoning the small-target strategy of most oppositions, and went to the 2016 election with some relatively daring proposals on tax increases, particularly on restricting negative gearing and the capital gains tax discount.

Despite the conventional wisdom that touching negative gearing would be political suicide, Shorten's bravery was rewarded. Now look at the speeches Shorten and Malcolm Turnbull gave last week, and you see both sides planning to widen, rather than narrow, the policy distance between them.

Abbott was someone with conservative social values and hard-right economic views that fitted well with a party base that's be drifting to the right for many years. But he knew better than to highlight such views when seeking enough middle-ground votes to win the 2013 election.

Which leaves Turnbull with a big problem. His oft-stated position as a small-l liberal means much of his parliamentary party neither likes nor trusts him. To keep them behind him, he's had to loudly espouse policy positions – on big business tax cuts, weekend penalty rates and saving coal mines, for instance – that are far to the right of majority, middle-ground opinion.

The further Turnbull's party base has forced him away from the centre, the more Shorten has been emboldened to move his own policies further leftward from the centre than his predecessors would ever have dared.

It's clear Turnbull will go to the election offering no real plan to achieve Australia's Paris climate change commitments and making no more than sympathetic noises about the supposedly soaring cost of living, while claiming that big business tax cuts would trickle down and allow big pay rises.

In the meantime, the ever-continuing budget deficit won't stop the government also promising a tax cut for ordinary workers.

In echoes of Labor's winning policies at the 2007 election, Shorten will promise concrete action on climate change and on winding back the parts of Work Choices' attack on collective bargaining that Kevin Rudd and Julia Gillard weren't game to.

A rhetorical challenge for Shorten will be to shift the punters from their misconceived concern with the soaring cost of living, to the real problem: weak wage growth.

Despite that weak growth, I doubt many voters will be greatly tempted by the promise of modest tax cuts. A test of Shorten's leadership credentials will whether he has the courage to avoid matching Turnbull's promise.

But with Turnbull sticking to his plan for big-business tax cuts, and his resistance to reform of negative gearing and wage-fixing, this election may well determine the fate of the era of bizonomics.

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CPI a more accurate measure of living costs than we imagine

Ask any pollie, pollster or punter in the pub and they'll all tell you there are no political issues hotter than the soaring cost of living. But this week the Australian Bureau of Statistics issued its consumer price index for the December quarter.

Oh no. It showed prices rising by 0.6 per cent in the quarter and a mere 1.9 per cent over the year to December.

That's a soaring cost of living? What are these guys smoking? Has the government got to the statisticians? Or do the bureaucrats sit in some office in Canberra making up the numbers?

None of the above. In truth, the bureau puts an enormous amount of expertise, care and effort into making the CPI as accurate as possible. Which is not to say the indicator is without its limitations – nothing in the real world is.

The care is shown in an explanatory paper the bureau issued this week to accompany its latest six-yearly updating of the index.

The CPI is purpose-built to measure changes in the price of a fixed quantity of goods and services bought by people living in metropolitan households.

"Metropolitan" means the eight capital cities, and the households include wage-earners, the self-employed, self-funded retirees, age pensioners and social welfare beneficiaries. That covers almost two-thirds of all Australian households, leaving out only those in regional areas.

The index measures the change in the price of a metaphorical basket containing fixed quantities of goods and services bought in each of the capital cities. It looks at thousands of prices of individual items, divided into 87 expenditure classes, 33 sub-groups and 11 major groups.

These are: food and beverages (accounting for 16 per cent of the total basket), alcohol and tobacco (7 per cent), clothing and footwear (4 per cent), housing (23 per cent), furnishings, household equipment and services (9 per cent), health (5 per cent), transport (10 per cent), communication (3 per cent), recreation and culture (13 per cent), education (4 per cent), and insurance and financial services (6 per cent).

How does the bureau know which particular goods and services to include in the basket and, more especially, what "weight" (relative importance) to give each class of expenditure?

Every six years it conducts a survey of more than 10,000 households, asking them to keep diaries of the spending they do. As spending patterns change over time, it updates the contents and the weights given to the items in the basket.

This week it applied new weights derived from the household expenditure survey it conducted in 2015-16.  From now on, however, the weights will be updated yearly.

The bureau checks the prices consumers are being charged by regularly visiting shops and offices, by phoning businesses, and, increasingly, by checking online supermarket sites and records of scanner transactions in stores.

It checks the prices of items at least once a quarter, but more frequently if prices – petrol, for example – keep changing. It aims to show the average price charged during the quarter.

It measures the retail prices we actually pay, so prices include the goods and services tax, and excise taxes, embedded in them, but also any government price subsidies for items such as private health insurance or childcare.

It takes account of widespread "specials", provided the items are of normal quality. It seeks to measure "pure" price changes, meaning it tries to exclude price changes attributable to a change in the quality or quantity of the latest version.

If some producer tries to disguise a price increase by leaving the price of a can of baked beans unchanged, but reducing the amount of beans, the bureau uses the actual price increase per gram.

When the latest laptop or mobile phone is more powerful than the previous model, or does more tricks, the bureau tries to take account of this quality improvement by calculating the underlying or "pure" price change – often a price fall.

But if the bureau takes so much care to measure price changes accurately, why do its figures invariably seem much lower than our impression of the price rises we've experienced?

Short answer: because we don't take nearly as much care as it does. We don't keep meticulous records, but form impressions. And, as behavioural economists tell us, our memories of prices changes are subject to predictable biases.

Price changes we don't like stick in our minds, while those we don't mind are soon forgotten. We remember clearly a few big price increases – the shock we got when we saw our quarterly electricity bill – but don't remember price falls (of which there are far more in these days of digital disruption). And it never occurs to us to take account of all the many items whose prices hardly change.

As a statistician would say, we don't attach the right weights to the price changes (including zero changes) that come our way.

So, for instance, we carry on (justifiably) about ever-rising power prices, but forget that electricity accounts for just 2.2 per cent of the average household's total consumer spending.

Of course, no particular household's experience is likely to be perfectly represented by such a broad average. The index lumps together people in different cities, smokers and non-smokers, drinkers and non-drinkers, renters, mortgagees and outright home owners.

The bureau tries to reduce this problem by also publishing special living cost indexes for certain types of households. Over the year to September, in which the CPI rose by 1.8 per cent, living costs rose by 1.5 per cent for employee households, 1.6 per cent for self-funded retirees, 1.7 per cent for age pensioners, and by 2.1 per cent for unemployed households.

Sorry, but the notion that the prices I pay rose way more than other people's did is just another of our happy self-delusions.

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Wage growth the key to lasting economic strength in 2018

So, no train strike in Sydney because unionists were ordered to keep working by the Fair Work Commission. Is that good news or bad? Depends on the point from which you view it – but don't assume you have only one of 'em.

And if your viewpoint's from somewhere in Victoria, don't assume it's a matter of little relevance to your own pay packet.

A 24-hour train strike would have caused great inconvenience to commuters and disruption to many businesses – which is precisely why the unionists were ordered to abandon their strike. Thank goodness. Damage averted.

Or maybe not. The union wanted to strike for better wages and conditions during the very brief period following the end of an enterprise agreement when industrial action is legally protected.

I don't want to shock you, but all strikes are designed to impose financial costs on an employer – that's what gives bosses an incentive to agree to pay rises they don't fancy. Inconvenience to the employer's customers is usually unavoidable.

It's no bad thing that such disruption has become rare – always provided employers and their workers are able to reach agreement on reasonable wages and conditions without the need for disruption.

That's what gives the averted rail strike its wider significance. If the rail workers can't strike even during their brief "bargaining period", when can they? Maybe never. In which case, what's to stop employers driving ever more one-sided bargains?

The union movement's response is to claim that the right to strike is "very nearly dead". I'm not convinced. But, equally, I'm not certain it contains no element of truth.

And get this: if it is true that the past few decades of industrial relations "reform" have robbed the nation's workers of much of their power to bargain collectively, that's not just bad news for more than 12 million employees, and their dependents, it's bad news for the entire economy – including most of the nation's grossly overpaid chief executives.

This is an issue we'll keep hearing about this year. Much – even the fate of the Turnbull government – will turn on an issue it doesn't want to talk about: what happens to wages.

There's great optimism among economists and business people about a return to strong growth in the economy this year.

Everyone's convinced the world economy will grow faster than it has in years and, at home, the amazingly strong growth in employment last year – most of it in full-time jobs – is expected to continue.

What could be better calculated to lift the survival prospects of Malcolm Turnbull and his band of not-so-happy siblings, who must face an election by the middle of next year at the latest?

While economists and business people sing eternal praises to the great god of Growth in the size of the economy, voters care most about increased Jobs. The two usually go together, but they're not the same.

There's just one problem with the rosy prospects for Jobson Grothe this year: wages have grown no faster than consumer prices for the past four years. Employees have gained nothing from the improvement in productivity during that time, with all the lolly going to profits.

Does that sound like heaven on a stick for our business people? Many are yet to realise it's a fool's paradise. But, rest assured, if it keeps up for another year, light will dawn.

There are rival explanations for the weakness in wage growth. Some say it's temporary, others that it's lasting.

The econocrats – whose forecasts for wage growth have been way too high for years – say it's just a result of the economy's slow recovery from the resources boom, plus maybe a little digital disruption, and will go away if we're patient a bit longer.

They say it's simple supply-and-demand: as employment keeps growing, suitable labour becomes harder to find, obliging employers to pay higher wages to attract the staff they want.

Others fear the problem is deeper and long-lasting: it has been only the collective bargaining strength conferred on employees by industrial relations law that has allowed them to extract from employers the wage growth (above inflation) that has been their rightful share of improved productivity.

By now, however, years of "reform" have swung the industrial relations pendulum too far in favour of employers, thus allowing them to avoid sharing any of the productivity gains with their workers.

What do I think? My guess is it's a bit of both. It's too soon to be sure how much of the problem is temporary and how much is permanent, requiring governments to do more to roll back the Howard government's measures to discourage collective bargaining.

But time's running out for the not-to-worry brigade. If we don't see some quickening in wage growth as the year progresses, suspicions will increase that the economy's stopped working the way it's supposed to.

It's weak growth in wages that's really driving voters' complaints about the rising cost of living.

Worse, consumer spending is by far the biggest contributor to growth in the economy. Consumer spending is driven by the growth in household incomes, which in turn is driven partly by rising employment, but mainly by real wage rises.

Take away the real growth in wages and neither the economy nor jobs will stay growing strongly for long. If so, neither voters nor business people are likely to be happy.

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Who’s doing best in the rent-seeking business

Economists joke that, whereas they are taught that any barriers to new firms entering a market are bad, allowing profits to be too high, MBA students are taught that "barriers to entry" are good, and shown ways to raise them.

Economists have no quarrel with businesses making profits. The shareholder-owners who provide the financial capital needed to sustain those firms are entitled to a return on their investment, one that reflects not only the (opportunity) cost of their capital, but also the riskiness of the particular business they're in.

Economists call such a return on equity "normal profit". But sometimes the various barriers to new firms entering a market limit competition, allowing the incumbents to make profits in excess of those needed to induce them to stay in the industry.

These are called "super-normal" profits (super as in "above"). Now get this: the other name for super-normal profits is "rents" – economic rents, to be precise.

We're used to thinking of rent-seekers as businesses or industries that ask governments for special treatment. But it's common for rents to be sought in situations that have nothing to do with government favours.

One of the most informative pieces of economic research undertaken last year was conducted by Jim Minifie, of the Grattan Institute, who made detailed estimates of the economic rents being earned in particular industries – something no government agency would be game to do.

He focused on the two-thirds of the economy made up by the "non-tradable private sector", excluding export and import-competing industries and the public sector.

He found that the annual return on equity in the most competitive part of this sector averaged 10 per cent. That compares with returns exceeding 30 per cent in internet publishing, which includes online classified advertising of homes, jobs and cars.

Then came internet service providers on 25 per cent and wired telecom on a fraction less. Supermarkets were on about 23 per cent, sports betting on 22 per cent, liquor retailing on 19 per cent, and wireless telecom and (get this) private health insurance on about 18 per cent.

Delivery services and fuel retailing are on 15 per cent, with banking not far behind on 14 per cent, level pegging with electricity distribution and airport operations.

But the rate of an industry's super-normal profit or economic rent isn't the same as its absolute amount. Most industries with very high rates of profit are quite small.

Measured in dollar terms, the most rents are in banking, followed by supermarkets, electricity distribution (just the local poles and wires), wired and wireless telecom.

Minifie estimates that rents account for 20 per cent of the non-tradable private sector's total annual after-tax profits of $200 billion. This is equivalent to more than 2 per cent of gross domestic product.

Another way to judge the significance of super-normal profits is to express them as "mark-ups" – as proportions of total sales.

The average mark-up across the whole non-traded private sector is 2 per cent. So, if rents were eliminated, but costs didn't change, average prices would fall by 2 per cent.

Within that average, however, the mark-up in internet publishing is 26 per cent. Then come airport operations on 20 per cent, wired telecom on 19 per cent and electricity distribution on 12 per cent.

Further down the league table, electricity transmission – the high-voltage power lines, not the local poles and wires – has an estimated mark-up of 7 per cent.

But get this: the banks' mark-up is just 4 per cent and the supermarkets' is a bit over 3 per cent.

How come, when super-profits account for more than half the supermarkets' total profit? Because supermarkets are a high-volume, low-margin business (as are banks).

Minifie notes that Coles and Woolworths are so big they achieve huge economies of scale. And, as dairy farmers well know, they achieve further cost savings by using their market power to force down the prices they pay their suppliers.

Trick is, they pass much of these cost savings on to their customers, but keep enough of them to remain highly profitable.

Coles and Woolies have substantially higher profit margins than their smaller rival IGA, even though their average prices are lower than IGA's prices. So the big two's costs must be a lot lower than IGA's.

The list of industries with the highest super-profits reminds us how badly governments have stuffed-up the national electricity market, how much better they could be doing in controlling the prices of monopoly businesses such as Telstra, airports and port terminals, and in charging for liquor and gambling licences, not forgetting the indulgent treatment of private health funds.

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How Keynesianism came to Australia

Whenever you meet someone who uses the words Keynes or Keynesian as a swear word – or as synonyms for socialist – know that their adherence to neoliberal dogma far exceeds their understanding of mainstream economics.

Though John Maynard Keynes' (rhymes with gains) magnum opus, The General Theory of Employment, Interest and Money, was published in 1936, and he died 10 years later at 62, most economists – including many who wouldn't want to be called Keynesians – acknowledge him as the greatest economist of the 20th century.

It's true that the "monetarist" counter-attack on Keynesian orthodoxy led by Milton Friedman in the 1970s and early 1980s led to lasting changes in prevailing views about how the macro economy should be managed – mainly, that the primary instrument used to stabilise demand should be monetary policy (interest rates) rather than fiscal policy (the budget).

But the monetarists' advocacy of using control of the money supply to limit inflation was soon abandoned as unworkable, and these days few economists would want to be called monetarist.

What remains is a host of fundamentally Keynesian ideas. First is the distinction between micro-economics (study of particular markets) and macro-economics, study of the economy as a whole.

Then there's the idea that governments should seek to stabilise the fluctuations in aggregate (total) demand as the economy moves through the business cycle, a notion rejected by some "new classical" academic economists, but daily practised by the world's central banks and treasuries.

Macro-economists' obsession with fluctuations in gross domestic product is a product of Keynesian thinking, made possible by the development of "national income accounting" by Keynes' followers.

The General Theory was Keynes' attempt to explain how the Great Depression of the 1930s occurred – when the prevailing "neo-classical" orthodoxy said it couldn't occur – and how the world could return to healthy economic growth.

Eventually, it led to a revolution in the way economists thought about the macro economy. Neo-classical theory was out, Keynesian theory was in. Usually, radically different ideas can take years to be accepted – but this time, not so much in Australia.

In his book published earlier this year, A History of Australasian Economic Thought, Alex Millmow, an associate professor at Federation University in Ballarat, explains how Keynesianism​ came to Oz.

Although The General Theory laid out Keynes' new approach in all its exciting but confusing glory, the thinking of Keynes and his associates at Cambridge University in England had been developing since the start of the Depression in late 1929, and expressed in several of his earlier books and papers.

Australian academic economists had also been puzzling over the causes and cure of the international slump. They'd been closely involved in our initial policy response, to devalue the Australian pound, cut wages by 10 per cent and try to balance the budget.

Only slowly did the evolving thinking of Keynes and his circle in Cambridge cause them to doubt the wisdom of this deflationary approach, which made things worse, and shift to the opposite tack of using government spending on capital works to stimulate economic activity and create jobs at a time of mass unemployment.

Cambridge was then the Mecca of economics – especially for Australians – meaning our academics had plenty of contact. Our leading economist of the era was Lyndhurst Falkiner Giblin, a Tasmanian based at the University of Melbourne.

Anther leader was Douglas Copland, a Kiwi also at Melbourne Uni. They were early and influential, if cautious and qualified, supporters of the Keynesian approach.

Among the Australians who studied at Cambridge and brought back Keynesian thinking was E. Ronald Walker (later Sir Edward Walker; several of these people ended up as knights), based at the University of Sydney.

Over the years, Walker did most to inculcate Keynesian macro-economics among Australian academics and students. Another Aussie who returned from Cambridge as a convert was Syd Butlin, also at Sydney, who became our greatest economic historian.

Keynes was interested in how Australia had been hit by the Depression. Among his colleagues and students who made extended visits to Australia in the 1930s was Colin Clark, who stayed on after accepting an invitation to become a top bureaucrat in the Queensland government.

Clark was a brilliant economic statistician, who played a leading part in the development of what these days are known in every country as the national accounts.

When a Labor federal treasurer, Edward "Red Ted" Theodore, proposed a program of reflation in 1931, to counter the effects of the earlier deflationary measures, he quoted Keynes in his support. His plan was blocked by the Senate.

All this explains why Keynesian ideas were widely accepted by Australian economists even before the publication of The General Theory in 1936.

Publication came just as our first royal commission into "the monetary and banking systems" was getting under way. Many economists gave evidence, making a more influential contribution than the bankers, who defended the status quo.

The leading member of the commission, who wrote most of its report, was Richard Mills, an economics professor from Sydney University. Its other member of note was Ben Chifley, future Labor treasurer and prime minister, whose part in the commission caused his biographer to call him "a Keynesian of the first hour".

It's key finding was that "the Commonwealth Bank [then Australia's central bank, as well as a government-owned trading bank] should make its chief consideration the reduction of fluctuations in general economic activity in Australia".

The commission's recommendations shaped the regulation of Australian banking – including establishment of the Reserve Bank of Australia in 1959 – until the advent of financial deregulation in the mid-1980s.

As Millmow has observed elsewhere, the latest banking royal commission is unlikely to be nearly as influential as the first.

The federal government's national mobilisation following the outbreak of war in 1939, then the preparations for "postwar reconstruction and development", saw the full acceptance of Keynesian economics.

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