We could be among the world's climate change winners

In the dim distant past, politicians got themselves elected by showing us a Vision of Australia’s future that was brighter and more alluring than their opponent’s.

These days the pollies prefer a more negative approach, pointing to the daunting problems we face and warning that, in such uncertain times, switching to the other guy would be far too risky.

We’ve gone from “I’m much better than him” to “if you think I’m bad, he’d be worse”. Maybe they simply lack any vision of the future beyond advancing their own careers.

Management-types tell us we should conduct “SWOT analysis” – considering our strengths and weaknesses, opportunities and threats. But we’ve become mesmerised by the threats and incapable of seeing the opportunities. Such a pessimistic mindset is crippling us when we could be going from strength to strength.

Take climate change. It, of course, is a threat – to our climate, and hence to our comfort and our economy – but think a bit more about it and you realise that, for a country like ours, it’s also a new gravy train we could be climbing aboard.

The stumbling block is that responding to climate change requires change – and no one likes change, especially those who earn their living from the present way of doing things.

So, what more natural reaction than to resist change? Economists are always warning politicians not to try “picking winners”. In reality, they’re far more likely to resist change by spending lots of money trying to prop up losers.

Start by denying that change is necessary. Global warming isn’t happening, it’s just a conspiracy by scientists angling for more research funds.

Nothing new about heatwaves, bushfires, droughts, floods and cyclones – they’ve always existed. They’re becoming bigger and more frequent? Just your imagination.

What you’re not imagining is the ever-higher cost of electricity. But that’s just because those ideologues imposed a carbon tax and are making us subsidise renewable energy. Get rid of the taxes and subsidies and the cost falls back to what it was.

And those terrible wind turbines. They’re unnatural and unsightly, they kill rare birds and their noise endangers farmers’ health.

Renewable energy is unreliable because it depends on the wind blowing or the sun shining. You need coal for steady supply. With the greater reliance on renewables, where do you think the blackouts are coming from?

And renewable energy is so expensive. Coal-fired electricity is much cheaper. Plus, we’ve got all our chips stacked on coal. We’re world experts at open-cut coal mining. Our coal is much higher quality than most other countries'.

Coal provides jobs for 30,000 workers. There are towns desperate for jobs who’d just love another coal mine. And, of course, we’ve still got huge reserves of the stuff that’s of no value if it stays in the ground.

Some of these claims have always been untrue, some are no longer true and some are less true than they were.

Just this week, for instance, a report from the independent Grattan Institute has debunked the claim that “outages” are being caused by renewables, saying more than 97 per cent of outage hours can be traced to problems with the local poles and wires that transport power to businesses and homes.

While it’s true that power from existing coal-fired generators is dirt cheap, many of these are old and close to the end of their useful lives. They’re not being replaced by new coal generators because there’s too much risk that the demand for coal-fired power will dry up before the generators have returned the money invested in them.

The latest report from the CSIRO says the lowest-cost power from a newly built facility is now produced by solar and wind.

The cost of solar, battery storage and, to a lesser extent, wind power, has fallen dramatically over this decade, partly because of advances in technology but mainly because of economies of scale as China and many other countries jump on the bandwagon. These falls are likely to continue.

This has gone so far that the old arguments about the need for a price on carbon and subsidies for renewables are being overtaken by events.

Installation of renewable generation is proceeding apace, with all renewables’ share of generation in the national electricity market jumping from 16 per cent to 21 per cent, just over the year to December, according to Green Energy Markets.

So, as the economist Professor Frank Jotzo, of the Australian National University, has said, coal is on the way out. The only question is how soon it happens.

According to our present way of looking at it, this is disastrous news. But not if we see it as more an opportunity than a threat.

Professor Ross Garnaut, of the University of Melbourne, has said that “nowhere in the developed world are solar and wind resources together so abundant as in the west-facing coasts and peninsulas of southern Australia.

“Play our cards right, and Australia’s exceptionally rich endowment per person in renewable energy resources makes us a low-cost location for energy supply in a low-carbon world economy.

“That would make us the economically rational location within the developed world of a high proportion of energy-intensive processing and manufacturing activity.”

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Politicians, economists will decide if bank misbehaviour stops

In the wake of the Hayne report on financial misconduct, many are asking whether the banks have really learned their lesson, whether their culture will change and how long it will take. Sorry, that’s just the smaller half of the problem.

You can’t answer those questions until you know whether the politicians and their economic advisers have learned their lesson and whether their culture will change.

Why? Because the game won’t change unless the banks believe it has changed, and that will depend on whether governments (of both colours) and their regulators keep saying and doing things that remind the banks and others on the financial-sector gravy train that the behaviour of the past will no longer go undetected and unpunished.

One of Commissioner Hayne’s most significant findings was that almost all the misbehaviour he uncovered was already illegal. Which raises an obvious query: in that case, why did so much of it happen?

Hayne’s answer was “greed”. That’s true enough, but doesn’t tell us much. Greed has been part of the human condition since before we descended from the trees. But greed has been channelled and held in check by other factors – particularly by social norms that disapprove of it and find ways to censure people who aggrandise themselves are the expense of others. In old times, social ostracism was enough.

So, since banks and other financial outfits haven’t always been willing to exploit their customers the way they have recent decades, the question is: what changed?

One explanation is that the economy’s become a bigger, more complex, more impersonal place, where the exploiter and the exploited don’t know each other. Where the exploitation is carried out by four of the biggest, most sprawling and intricate computer systems in the country.

Where I can spend my obscenely large pay cheque without seeing the faces of the people I’ve ripped off flashing before my eyes. Indeed, in my suburb, all of us get huge pay cheques. And I don’t feel guilty; some of them get much bigger cheques than me.

But another part of the explanation must surely be that things started changing after the triumph of “economic rationalism”, the introduction of microeconomic reform, and the deregulation of the financial sector in the second half of the 1980s.

In the highly regulated world, there was less scope and less incentive to mistreat customers. Competition was limited and there was little innovation. Deregulation was intended to spur competition between the banks and give customers a better deal.

I’m not saying bank deregulation was a bad idea. It did bring innovation (we forget that banking and bill-paying are infinitely more convenient than they were) and you no longer have to live in a good suburb to get a loan from a bank.

And the banks do compete far more fiercely than they used to. It's just that they compete not on price (as the reformers assumed they would) but on market share and which of the big four achieves the biggest profit increase.

In this they’ve behaved just as you’d expect oligopolists to behave.

In the meantime, economic rationalism sanctified greed (the “invisible hand” tells us the market leaves us better off because of the greed of the butcher and the baker) and economists invented euphemisms such as “self-interest” and “the profit motive”.

Then, after economists got the bright idea of using bonuses and share options to align management’s interests with shareholders’, big business elevated “shareholder value” to being companies' sole statutory obligation.

Now, however, when Hayne says the banks gave priority to sales and profits over their customers’ interests, everyone’s rolling around in horror.

And politicians and econocrats are feigning surprise that financial regulators, long given a nod and wink to dispense only “light” regulation of the players (and denied the funding to give them any hope of successful prosecutions), did just as they were told.

Unless the econocrats and their political masters are willing to accept the naivety that marred bank deregulation, the harm ultimately done to bank customers – ranging from petty theft to life-changing loss – and the system’s susceptibility to political corruption, the banks’ culture won’t change because the will to change it won't last.

The existing prohibitions on mistreatment of customers need to be made more effective, as proposed by Hayne but, above all, the law needs to be policed with vigour – including adequately resourced court proceedings – so the banks realise they have no choice but to change.

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The economy isn’t in trouble, but let’s cut interest rates anyway

Rather than merely acknowledging that the next move in interest rates is as likely to be down as up, I think the Reserve Bank should get on with cutting them. But not for the reason you may imagine.

There are plenty of people – many of them in the media – silly enough to believe a fall in interest rates is always good, and a rise always bad. They have a mortgage-centred view of the universe.

They forget that lower rates are bad news for people living off their savings – or saving for a home deposit.

More particularly, they forget that central banks use interest rates to keep the economy on an even keel. Judged the conventional way, central banks cut interest rates when they judge the economy to be weak or weakening.

So, even for those with mortgages, a cut in rates is no reason to celebrate. They’ll be paying less interest, sure, but only because, in the econocrats’ judgement, there’s now a greater risk they’ll lose their job, be put on a short working week, or go for year or two without a pay rise.

Is that what you’re hoping for? I’m not. Nor do I think it’s our certain fate. The biggest risk we face is talking ourselves into a downturn – for no better reason than it would be something new to talk about.

Telling ourselves that a fall in house prices – something we’ve experienced many times before and lived to tell the tale – is the start of an avalanche.

Or, when Reserve Bank governor Dr Philip Lowe moves from saying the next move in rates is up, to saying the chances are evenly balanced between up and down, leaping to the conclusion he’s really saying a cut is imminent.

It isn’t. It isn’t because, as he made plain in a speech on Wednesday – and reiterated in the statement on monetary policy on Friday – he remains confident the economy has slowed a bit, but no worse. His revised forecast is for the economy to grow by an above-trend 3 per cent this year.

And a rate cut isn’t imminent because he said it wasn’t. “[The board] does not see a strong case for a near-term change in the cash rate. We are in the position of being able to maintain the current policy setting while we assess the shifts in the global economy and the strength of household spending.”

He also said that “what we are seeing looks to be a manageable adjustment in the housing market”.

So a rate cut isn’t imminent. According to Lowe, a cut would require “a sustained increase in the unemployment rate”. Which, judged by conventional standards, is good news. It means he believes the economy will continue plugging on.

But my point is different. Lowe is pursuing a conventional, business-as-usual approach to managing the economy because he assumes nothing fundamental has changed.

His conventional thinking is that it’s weak wage growth that’s driving the economy’s relative stagnation. It hasn’t occurred to him it’s the other way round: the economy’s stagnation is the cause of weak wage growth.

I think it’s clear the phenomenon of “secular (that is, long-lasting) stagnation” – exceptionally low inflation, low wage growth, low real interest rates, low business investment, low productivity improvement and low economic growth – applies to our economy as well as to the United States and the other advanced economies.

Every symptom on that list applies to us (bar the long-past mining investment boom). And stagnation isn’t a bad way to describe our position, where growth over the 10 financial years since the global financial crisis has averaged less than 2.6 per cent a year and only one year (2011-12) has been above trend.

One thing that’s become clear in America and other advanced economies is that secular stagnation – the causes of which economists are still debating – has caused conventional estimates of the NAIRU (“non-accelerating-inflation rate of unemployment” – the lowest rate to which unemployment can fall before wage and price inflation begin to worsen) to be far too high.

In those countries, unemployment has fallen well below where the NAIRU (sounds a bit like the island) was thought to be, without any sign of price inflation or excessive wage growth.

The same can be said of us. The Reserve estimates our NAIRU to be “about 5 per cent”. Our actual unemployment rate has been at 5 per cent or so for some months, while the latest reading for underlying inflation is 1.75 per cent and for the wage price index is 2.2 per cent.

So, we’re at the supposed NAIRU without the slightest sign of inflation pressure. Indeed, underlying inflation has been below the 2 to 3 per cent target range since the end of 2015, and Lowe is forecasting it won’t get up into the target range until the end of next year.

This suggests that, in our newly stagnant world, the true NAIRU is a lot lower: 4.5 per cent, maybe 4 per cent. And since, as Lowe reminds us, the RBA’s objectives include “delivering on full employment”, he should be trying harder to get unemployment down to the true NAIRU.

How? By using the one instrument available to him: cutting interest rates to loosen a monetary policy that’s tighter than it needs to be.

Until recently, Lowe’s best reason for not lowering rates was a desire to avoid adding fuel to the boom in house prices (“asset-price inflation”). But now that constraint has lifted, there’s no reason to hesitate.

You could argue that, with households already so loaded with debt, a rate cut may not do much to boost consumer spending. But it probably would lower the dollar, which would improve our industries’ price competitiveness internationally, encouraging them to hire more workers. We’ve got little to lose.

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Bank royal commission the start of re-regulation

If you think the banking royal commission’s damning report means you’ll never again be overcharged or otherwise mistreated by a bank, you’re being a bit naive. If you’re hoping to witness leading bankers being dragged off to chokey, you’ll be waiting a while.

But if you think that, once the dust has settled, we’ll find little has changed, you haven’t been paying attention.

I think we’ll look back on this week and see it as the start of the era of re-regulation of the economy. The time it became clear our politicians were no longer willing to give big business an easy ride, to assume it would only ever act in the best interests of its customers and that nothing should ever be done to displease the big end of town, for fear this would damage the economy.

And I’m talking about a lot more than banking, superannuation and insurance. Many other industries have been treating their customers or employees badly, and they too will find governments getting tough with wrongdoers.

Why the change of heart? Because, in so many cases, the 30-year experiment with deregulation, privatisation and outsourcing is now seen to have ended badly.

Recent years have revealed many businesses breaking the law while government regulatory bodies fail to bring them to justice: firms paying their employees less than their legal entitlements, firms taking advantage of foreign students and others on temporary work visas, private providers of vocational education inducing youngsters to sign up for inappropriate courses, irrigators illegally extracting water from the Murray-Darling river system, private inspectors certifying high-rise apartment blocks later found to be seriously defective, and many more.

Big business may have power and money, but customers and employees have votes. And when voters experience mistreatment at the hand of business – or just read about the mistreatment of others – they tend to blame the politicians, who were supposed to ensure such things happened only rarely.

Commissioner Kenneth Hayne has found that almost all the misbehaviour by banks and other institutions he uncovered was already illegal.

He makes the point that “the primary responsibility for misconduct in the financial services industry lies with the entities concerned and those who managed and controlled those entities”.

But, he adds, “too often, financial services entities that broke the law were not properly held to account.

“The Australian community expects, and is entitled to expect, that if an entity breaks the law and causes damage to customers, it will compensate those affected customers. But the community also expects that financial services entities that break the law will be held to account.”

And when the Australian community realises this hasn’t happened, who does it blame? Who does it seek most to punish? The government of the day. Even though the genesis of the policy problem lies in decisions made by governments long gone.

Do you see now why the worm has turned on deregulation?

Former Labor and Coalition governments’ naive faith that “market forces” would oblige businesses to do the right thing has proved badly misplaced. In their scramble for higher profits and pay, seemingly respectable businesses have taken advantage of their greater freedom, knowingly breaking the law whenever they thought they wouldn’t be caught.

And now the chickens have come home, who’s most at risk of losing their jobs? Not the bosses of offending businesses, not the regulators asleep at the wheel, but the government of the day. That’s the rough justice of democracies. Voters hit out at those they have the power to hit – those they elect.

It was business that had the fun, but it’s politicians in most immediate danger of paying the price. Do you really think they’ll be going easy on their former business mates who’ve been dudding them behind their backs?

But what’s a threat to the government is an opportunity for the opposition. Competition between the two parties will ensure the Hayne commission’s recommendations are acted on.

And, whichever side wins the election, the next term will see a tightening of the regulation of many industries beside financial services.

Commissioner Hayne was highly critical of the two main financial regulators, the Australian Securities and Investment Commission and the Australian Prudential Regulation Authority. Why did they allow so much wrongdoing to get past them?

Partly because they succumbed to the ailment threatening all regulators: “capture” by the industry they were supposed to be regulating. They allowed themselves to become too matey with the industry, seeing its point of view more clearly than the interests of its customers.

But there’s more to it. During the decades in which politicians and some economists convinced themselves that the more lightly businesses were regulated the better they’d serve the rest of us, the regulatory authorities were left intact more for appearances than function.

They soon got the message that their political masters – from either side of politics – wanted them to go easy on business. Both sides went for years reinforcing the message by repeatedly cutting the regulators’ funding.

But all that’s changed. The politicians, claiming to be shocked by the regulators’ dereliction, are now pumping in taxpayers’ money as fast as they can go. Life won’t be the same for big business.

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Hey pollies: weak wage growth won't fix itself

The economy’s prospects are threatened by various risks from overseas – about which we can do little – and by continuing weakness in wage growth – about which the two sides contesting the May federal election have little desire to talk.

In his major economic speech last week, Scott Morrison gave wages only a passing mention: “by focusing on delivering a strong economy we create the right environment for wages growth, which we are now beginning to see, and more will follow”.

Actually, you need a microscope to see any improvement. The microscope shows that most of it is explained by the Fair Work Commission’s hefty 3.5 per cent increase in minimum wage rates last June.

(And why was it so generous? To offset the effect on pay packets of its earlier decision to phase down Sunday penalty rates.)

Not, however, that Bill Shorten has had a lot more than Morrison to say about the causes and cure of weak wage growth. Presumably, Shorten fears that anything he says about changes to wage fixing will be used to feed yet another scare campaign about him being a patsy for a union takeover.

Two or three years ago, I was happy to entertain the view still publicly espoused by the Reserve Bank (and still happily hidden behind by Morrison) that the wage problem was simply cyclical: wages are taking longer than expected to recover from the ups and downs of the resources boom but, be patient, they’ll come good soon enough.

Sorry, that possible explanation gets harder to believe as each quarter passes without any sign of nominal wage growth moving ahead of weak inflation, so as to give employees their rightful share of the improvement we’ve achieved in the productivity of their labour.

(And thus – ScoMo please note - giving the boost to real household disposable income, then consumer spending and then business investment spending, that has always been the greatest single contributor to “delivering a strong economy”.)

No, as years pass without the cycle restoring real wage growth, it becomes easier to believe the problem arises from some deeper issue with the structure of the economy.

The most popular structural explanation – best espoused by Professor Joe Isaac, an eminent labour economist – is that the “reform” of wage fixing went too far in shifting the balance of industrial bargaining power in favour of employers.

Isaac’s various proposals for reforming the reform – including restoring unions’ right of entry to the workplace, reducing the rigmarole before workers can strike, and restoring permission for industry-wide bargaining – would no doubt have crossed Labor’s mind for serious consideration should it win the election.

But another noted labour economist, former top econocrat Dr Mike Keating, has his doubts. He says he has no great objection to Isaac’s wage-fixing reforms, but doubts they’ll get wages moving because the structural problem is much deeper.

As argued in detail in his book with Professor Stephen Bell, Fair Share, and many articles and blogs, Keating sees our wages problem in the much broader context of the malaise of “secular stagnation” that’s been gripping the US and other advanced economies for at least a decade.

Keating reminds us that wage growth has been weak in most of the advanced economies for several decades, accompanied by rising inequality.

The distribution of earnings (that is, wages, rather than income from all sources) has become more unequal, Keating argues, mainly because of technological change and, to a lesser extent, globalisation.

Technological change has been “skill-biased”, with strong growth in high-skilled employment, and reasonable growth in unskilled jobs, but a decline in middle-level jobs, where routine jobs are being done by computers.

The result is a change in the structure of employment, one which increases earnings inequality. If so, it’s not a problem that could be fixed by higher wage-rates.

Keating says we’ve been slow in Australia to see what’s increasingly been realised overseas and by the international economic agencies: income inequality is bad for economic growth (mainly because the high-paid save rather than spend a higher proportion of their incomes).

But Keating’s more fundamental policy response to the problem of technology-driven weak wage growth and increased inequality is enhanced education and training, to help workers adjust to the challenges posed by new technologies, as well as spur the adoption of those technologies.

He’d give priority to early childhood learning and life-long learning through the TAFE system. He's happy to note this would require us to pay more tax rather than less – another thought the pollies don’t want us thinking about right now.

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