Living in the post-inflation era turns out to be no fun

It’s Christmas shopping time, when the bills mount up and your money never goes far enough. So how come people are saying the inflation rate should be higher? I thought inflation was meant to be a bad thing?

It’s a good question when one of those people is Reserve Bank governor Dr Philip Lowe. He keeps saying we need to get unemployment lower and inflation back up into the 2 to 3 per cent target range. (At last count the annual rate of increase in consumer prices was "only" 1.7 per cent. I can remember when, for a brief period in the 1970s, it was 17 per cent.)

The short answer is that Lowe doesn’t see higher prices as a good thing in themselves. Rather, he sees them as a means to an end. Or better, as a symptom or by-product of something that is a good thing.

Why do prices rise? Because the demand for goods and services – the desire to purchase them – is growing faster than the supply of them – our businesses’ ability to produce them. So the rate of price inflation is a symptom or sign of strong demand.

And strong demand for goods and services is a good thing because it means the economy is growing and so is employers’ need for workers to help produce more goods and services. Employment increases and unemployment falls.

So Lowe wants to see higher prices simply because they’re a means to the end of lower unemployment. What’s more, increased employer demand for labour relative to its supply makes labour – particularly skilled labour – scarcer and so puts upward pressure on its price, otherwise known as wages.

And, as he’s often said, Lowe would like to see employers paying higher wages than they are, because consumer spending – consumer demand – is so weak at present mainly because wages are hardly growing faster than consumer prices, and real wages are the main thing that drives consumer spending.

All that make sense? Good – because now I’ll give you the more complicated answer. Surely, although strong demand is good for the economy, it would be better if supply was just as strong, meaning we could have growth in jobs and living standards without any inflation?

That makes sense in principle, but not in practice. The managers of the macro economy believe we need some inflation, though not too much. For two reasons. First, though you’ll find this hard to credit, economists are sure our consumer price index (like other countries’ CPIs) overstates inflation.

That’s because the official statisticians are unable to pick up all the cases where prices rise not simply because the firm’s costs have risen, but because the quality of the product has been improved. If so, aiming for a measured inflation rate of zero would require you to crunch the economy hard enough to make actual inflation less than zero – that is, prices would be falling.

The second reason is that sometimes, when the economy is growing too strongly, wages rise too much, prompting firms to lay off workers. Trouble is, workers hate having their wages cut. But if you’ve got a bit of inflation in the system, you can cut wages in real terms simply by skipping an annual pay rise, which workers find less unpalatable.

When the Reserve Bank set its target for inflation in the early 1990s, it settled on 2 to 3 per cent a year ("on average over the medium term"). It thought such a range would overcome both problems and insisted such a target range constituted "practical price stability".

But things in our economy and all the advanced economies have changed a lot since the 1990s. Demand has been chronically weak relative to supply since the global financial crisis and, in consequence, inflation rates have been below-target everywhere.

Some people have suggested we move to a lower, more realistic target range, but Lowe has resisted, arguing that to do so would lower firms’ and workers’ expectations about inflation, making our weak-demand problem even worse. He may be right.

But now try this thought. Inflation is 1.7 per a year, while wages are growing by 2.2 per cent and workers aren’t at all happy. I’ve had several top economists agree with my contention that, if we could wave a magic wand and raise both inflation and wages by, say, 2 percentage points, so that wages were growing by 4.2 per cent, workers would be a lot less discontented.

Why? Because of a phenomenon that economists used to talk about a lot in in the 1960s, but rarely mention today, called "money illusion". People who aren’t economists keep forgetting to allow for inflation. If so, the era of very low inflation isn’t proving to be much fun.

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Don’t bank on budget surpluses this year or in future

This week’s mid-year budget update has changed the fiscal outlook markedly. It’s now a lot clearer that neither in this financial year nor those following is a budget surplus assured.

Whether he knows it or not, by staking so much of his political and economic credibility on getting back to surpluses, Scott Morrison has taken an enormous gamble. When the reality of this “courageous decision, minister” finally gets through to him, I won’t be surprised to see him perform a backflip to go down in history.

Since the election of the Coalition in 2013, there’s been a great debate about the causes of our economy’s continuing sub-par performance. While some economists have argued its roots lie mainly in changes to the structure of the economy (and thus lasting), the econocrats have insisted the causes are cyclical and thus temporary.

So Treasury and the Reserve Bank have gone on, budget update after budget after budget update, predicting that, although the latest indicators show the economy remaining sub-par, it will soon return to the trend growth we were used to before the global financial crisis.

Until now. The mid-year update represents the first stage in the econocrats’ quiet shift from cyclical to structural as the predominant cause of the economy’s weakness. And the first hint it was on its way came in late November, when Reserve Bank deputy governor Dr Guy Debelle pronounced that annual wage rises of between 2 and 3 per cent were “the new normal”.

By far the most significant revisions to the budget forecasts were made to annual growth in the wage price index. With the actual for last financial year coming in at 2.3 per cent rather than 2.5 per cent, the prediction for this year was cut by 0.25 percentage points to 2.5 per cent. The following three years were cut by 0.75 points to 2.5 per cent, by 0.75 points to 2.75, and by 0.5 points to 3 per cent.

This would be the main factor explaining why, after consumer spending grew by just 1.2 per cent over the year to September, the forecasts for consumer spending were cut by 1 percentage point to 1.75 per cent for this financial year, and by 0.5 points to 2.5 per cent for next year.

Despite offsetting changes to other components of gross domestic product, these major downward revisions to wages and consumer spending do most to explain why the forecast for real GDP growth for this financial year was cut by 0.5 percentage points to 2.25 per cent – but nothing to explain why growth the following year was kept unchanged at 2.75 per cent (but see below).

The major cuts to wages and consumer spending forecasts do most to explain why, after just eight months, the government’s been obliged to slash the budget’s estimate of tax collections and other revenue over the budget year and the three “forward estimates” years by a total of – amazingly — $33 billion.

Partly offsetting this, however, are its net cuts in estimated government spending over the four years of $11.5 billion. How is this possible when, in the time since the budget, the government has announced additional spending of $8.2 billion over the period on drought support, aged care and accelerated spending on infrastructure?

It’s possible because the lower predicted growth in wages and inflation will save the budget money on indexed welfare payments and, more particularly, because the fall in long-term interest rates will save it big money on interest payments on the net public debt. An expected gross saving on the spending side of $19.7 billion.

See what a difference less optimistic forecasts for the economy make to the budget?

Slashing revenue estimates by $33 billion, less the net saving on spending of $11.5 billion, means the expected budget surpluses over the four years have been slashed by $21.5 billion, from $45 billion to $23.5 billion. The expected budget surpluses have almost halved in the space of eight months.

This means the expected surplus for this financial year has been cut to $5 billion, or just 0.3 per cent of annual nominal GDP. Do you see how, in a budget worth $500 billion, such a small sum could disappear with just the smallest overestimate of revenue or underestimate of spending?

It’s the same for the revised predictions for surpluses in the following years: $6 billion (0.3 per cent of GDP), $8 billion (0.4 per cent) and $4 billion (0.2 per cent).

As former top econocrat Dr Mike Keating has argued, with no fall in unemployment expected until a modest improvement in 2021-22, the revised forecasts offer no convincing reason why annual wage growth will recover from its present rate of 2.2 per cent to a projected 2.75 per cent in 2021-22 and 3 per cent the year after.

Amazingly, the budget update papers imply this will happen because the budget’s projection methodology requires it to. Same with the return to (pre-crisis) trend GDP growth of 2.75 per cent next financial year. (This is a sign the econocrats have some way to go in fully accepting that structural changes will stop us ever returning to the “old normal”.)

But just as hard to believe as the out-year growth projections is the budget’s assumption that, having so far succeeded in limiting average real growth in government spending to 1.8 per cent a year, the government will now limit it to 1.3 per cent a year over the next four years.

As Keating has noted (and peak welfare group ACOSS’s Dr Peter Davidson before him), this implies real government spending per person will actually be falling.

Unsurprisingly, the Parliamentary Budget Office has warned it’s hard to believe such a degree of restraint could be maintained over such a long time.

Even Morrison’s secret weapon, aka hollow log – the budget’s highly conservative assumption on future world iron ore prices – rests on a gamble that iron ore prices will remain abnormally high. It would be so much less risky just to have some fiscal stimulus.

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Orana to Christmas, summer and the chance to go bush

Out on the plains the brolgas are dancing
Lifting their feet like war horses prancing
Up to the sun the woodlarks go winging
Faint in the dawn light echoes their singing
Orana! Orana! Orana to Christmas Day

To me one of the nicest bits of Christmas is a chance to sing the Australian carols of the old ABC’s William G. James, including Carol of the Birds. Orana, by the way, means welcome.

I don’t like to boast, but one of my achievements this year was to see a brolga. Several, in fact. Flying rather than dancing but, even so, one to cross off my bucket list. I’ve also seen jabirus, magpie geese, comb-crested jacana, osprey, white-bellied sea eagles, red-tailed black cockatoos and crocodiles, fresh and salty.

I’ve also seen Timorese ponies, Asian buffalo and – more surprising – Indonesian banteng cattle. By now the banteng are endangered in Indonesia, but going strong in northern Australia.

All during a 12-day tour of Arnhem Land, bouncing along unsealed roads in a truck converted to a bus, to visit remote Aboriginal communities (complete with permits) and cave paintings. An unforgettable experience, one moneyed Baby Boomers should consider before they jet off on yet another exploration of other people’s homelands.

Actually, I sometimes wonder whether the day is coming when – because of the damage it does to the atmosphere – we will look back with amazement and envy on the relatively brief golden age when flying for tourism was not only permitted but dirt cheap, so we roamed the globe whenever we could get away.

It’s a terrible thought. Let’s hope it never happens, thanks to some technological advance in aircraft fuel. But while it lasts, let’s not forget what a privileged generation we are.

But what of ecotourism? Is it as virtuous as we wilderness wanderers like to imagine, or will the new age puritans put the kybosh on that, too?

Well, I’ve been checking what the academic experts are saying – courtesy of my second-favourite website, The Conversation – and, though you can find the killjoys if you look, I think ecotourism gets a qualified tick.

It’s true that, in an ideal world, we’d all stay at home admiring nature from afar and insisting the politicians keep the outback – and other continents’ backblocks – locked up and in pristine condition. Where damage had already been done, we’d happily pay high taxes to compensate farmers, miners and tour operators for closing their businesses, and to restore the land to its former state.

No, not going to happen. Those who live in far-flung parts aren’t going to renounce the material ambitions that drive the rest of us. They’ll continue finding ways to make a buck. If so, ecotourism – whatever its downsides – will do a lot less harm than many other ways for bushies to earn a living.

Dr Guy Castley and two other researchers at Griffith University find ecotourism can contribute to conservation or adversely affect wildlife, or both. Attitudes of local communities towards wildlife influence whether they support or oppose poaching. Income from ecotourism may be used for conservation and local community development, but not always.

But for seven of the nine threatened species they studied – the great green macaw in Costa Rica, Egyptian vultures in Spain, hoolock gibbons in India, penguins, wild dogs and cheetahs in Africa, and golden lion tamarins in Brazil – ecotourism provided net conservation gains.

This was achieved through establishing private conservation reserves, restoring habitat or by reducing habitat damage. Removing feral predators, increasing anti-poaching patrols, captive breeding and supplementary feeding also helped.

For orang-utans in Sumatra, however, small-scale ecotourism couldn’t overcome the negative effects of logging. And for New Zealand’s sea lions, ecotourism only compounded the effects of intensive fishing because it increased the number of pups dying as a result of direct disturbance at sites where the sea lions came ashore.

Michele Barnes and Sarah Sutcliffe, of James Cook University, studied the effect of a shark education and conservation tour off the coast of Oahu, Hawaii. Sharks are crucial to our marine ecosystems, yet many shark populations are in decline because of fishing (particularly for shark-fin soup), fisheries bycatch, habitat destruction, and climate change.

Sharks have a PR problem. They are feared by many, demonised by the evil media, treated as human-hunting monsters, and cast as the villains in blockbuster movies. In many places, governments cull sharks in the name of beachgoers’ safety.

The researchers found that the program gave participants significantly more knowledge of the ecological role of sharks and a more favourable attitude towards them. It also had a significantly positive effect on people’s intentions to engage in shark conservation behaviour. This remained true even after allowing for the participants’ greater initial positive attitudes towards sharks than the public generally.

Even when not off somewhere exotic, my family almost always ends up holidaying in or near some national park. But what about all the damage done to parks to accommodate the needs of tourists?

Dr Susan Moore, of Murdoch University, and others from Southern Cross University, argue sensibly that parks need visitors to get vital community and political support.

“We need people in parks because people vote and parks don’t,” they say. “Strong advocacy from park visitors for environmentally friendly experiences, like wildlife viewing, photography, hiking, swimming, canoeing and camping, can counterbalance pressures for environmentally destructive activities such as hunting and grazing.” Amen to that.

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Letting things get worse so we're well placed to fix them later

If you've been feeling the pinch of a massive mortgage and minuscule pay rises and resolving to keep your spending tight this Christmas, Scott Morrison has good news. You will be relieved to hear the federal budget is still on track to reach a surplus this financial year and stay in surplus as far as the accountants' eyes can see.

Although many economists have been panicking over the economy's weak state – and the panickers were joined this week by the International Monetary Fund – Morrison is sticking to his resolve to keep his foot on the budget brake rather than move it to the accelerator.

This, his Treasurer Josh Frydenberg assured us in the mid-year budget review, will bring great
economic benefits, providing "the stability and certainty that households and businesses need to
plan for the future, giving them confidence to spend and invest knowing that the government can
keep taxes low and guarantee funding for essential services".

Hasn't worked so far, but it's bound to kick in soon.

Admittedly the economy's growth is weaker than he predicted it would be before the election in
May, so Frydenberg has had to cut the expected surplus this financial year by $2 billion to $5 billion (not all that much in a $500 billion budget) and by $5 billion next year.

This is mainly because the government has been obliged to abandon the confident prediction it has been making throughout its time in office that wage growth would soon return to something much healthier.

The bad news from the update is that Frydenberg is not expecting pay rises to average as much as 3 per cent a year until the second half of 2022 at the earliest.

But if that makes you fear the budget may not stay in surplus for long, Morrison has more good news. Much of the budget's recent strength despite a slowing economy is explained by the huge taxes our mining companies will be paying because a mining disaster in Brazil has pushed the world price of iron ore way up.

The trick is they've built themselves a hollow log. The budget's figuring is based on the assumption that the iron ore price collapses to $US55 a tonne. Should that not happen, Morrison can use the difference to prop up his budget if the panickers are right and the economy stays weak rather than speeding up, as he's sure it will.

On a separate matter, remember the Future Fund, set up in the early years of the resources boom when the Howard government was running budget surpluses so big they were embarrassing? According to Frydenberg's latest figuring, the income from all the shares the fund's money was invested in will account for most of the budget surpluses the government is expecting to run.

Now that's the "responsible fiscal management" we have come to expect of the Coalition. And it must surely comfort you to know that, should the worst come to the worst, the government will be well placed to launch a few life boats. On a user-pays basis, of course.

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Your antidote to Frydenberg’s budget-update talking points

At a time when the Prime Minister is refusing to accept that our weak economy needs a boost rather than a drag from the budget, stand by for loads of look-over-there spin from his unfortunate Treasurer Josh Frydenberg when he unveils the mid-year budget update today.

That was Frydenberg’s way of bluffing his way round the news earlier this month that the economy had grown by a disappointing 1.7 per cent over the year to September. So it wouldn’t be surprising to see some of those talking points get another run today.

He started with the line that, despite a result that laughed at his forecasts made only eight months earlier, the economy remains “remarkably resilient in the face of significant global and domestic economic headwinds”.

That’s a spin doctor’s way of saying “it could have been even worse”. Arithmetically true, but cold comfort. Since Frydenberg is boasting about our strong growth in exports, it’s hard to see much evidence of the global headwinds he claims are holding us back. And the domestic headwinds we’re suffering are home-grown and all too evidently a sign of poor economic management.

But Josh has more: “While other major developed economies like Germany, the United Kingdom, South Korea and Singapore have experienced negative economic growth, the Australian economy is in its 29th consecutive year of economic growth.”

Yes, but at present almost all our growth is coming from high immigration-fed population growth, not rising prosperity. As AMP Capital’s Dr Shane Oliver has noted, our annual growth in gross domestic product per person is just 0.2 per cent, compared with America’s 1.4 per cent, Japan’s 1.6 per cent and even the Eurozone’s 1 per cent.

In the first of his look-over-there arguments, Frydenberg boasts that we’ve maintained our AAA credit rating from three leading US rating agencies. Since these agencies’ lapse in ethical standards contributed significantly to the global financial crisis, this isn’t a recommendation I’d be skiting about. Any government that lets those disreputable characters dictate its budget policy lacks the courage of its convictions.

Next, we’ve seen our current account on the balance of payments “return to surplus for the first time in more than 40 years”. Not sure whether this boast is a sign of our Treasurer’s economic illiteracy, or his assessment of ours. Only the same people who think now’s a good time for the budget to take more out of the economy than it puts back – that is, return to surplus – would be foolish enough to think a current account surplus was a sign of economic strength.

It’s actually a sign that business investment is so unusually weak that our households, companies and governments are saving more than is needed to fund our national investment in new productive assets. Our usual current account deficit would be a much better sign of strong investment in future expansion.

Then we’re told that “welfare dependency is at its lowest level in 30 years”. With the unemployment rate at 5.3 per cent and the under-employment rate at 8.5 per cent, that’s not because they’ve all got jobs, it’s because of the government’s greater use of excuses to cut people off the dole and make them reliant on charity for their survival. Talk about reversion to the mean.

In a breathtaking case of Orwell’s Newspeak, Frydenberg claimed “growth has been broad-based with household consumption, public final demand and net exports all contributing to GDP growth”.

This is the very opposite of the truth. Since growth in consumer spending was a negligible 0.1 per cent during the quarter, the vast private sector of the economy actually went backwards, with what little growth we got coming from the much smaller (and despised) public sector and from net exports.

Growth in the September quarter was weaker than expected because Frydenberg’s repeated assurances that his middle-income tax offset would boost consumer spending failed to happen. Talk about chutzpah. He changed his line to “whether spent or saved, the tax cuts are putting households in a stronger economic position, making them more financially secure with more money in their pockets” without a blush.

Finally, it’s the drought’s fault – and you surely can’t blame the government for that. “Farm GDP is 5.9 per cent lower through the year to the September quarter and falling in four of the past five quarters. Rural exports fell by 2.8 per cent in the quarter,” Frydenberg said.

Arithmetically correct, but calculated to mislead. What he hopes you won’t remember is that, these days, agriculture accounts for only about 2 per cent of GDP, meaning the drought shaved only 0.1 percentage points off growth in the quarter, and 0.2 points over the year.

All this is the balderdash we get when pollies give politics priority over policy.

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Why the government's forecasts are always way off

Just to warm you up for the mid-year budget update on Monday, let me ask you: why do you think Treasury and the Reserve Bank have gone for a least the past eight years forecasting more growth in the economy than ever transpired?

Kieran Davies, a respected economist from National Australia Bank, has been checking. He says their mistake has been failing to allow for the decline in our “potential” growth rate since the global financial crisis in 2008.

Actually, Davies has checked only the Reserve’s forecasting record, not Treasury’s. But the two outfits use similar forecasting methods and use a Joint Economic Forecasting Group to ensure their forecasts are never very different.

An economy’s “potential” growth rate is the average rate at which its capacity to produce goods and services is growing each year. This is determined by the average rate at which the Three Ps are growing – population, participation (in the labour force) and productivity (output per unit of input).

Sometimes (as now) the economy’s annual demand for goods and services doesn’t grow as fast as its potential to supply those goods and services is growing. This creates an “output gap” of idle production capacity, including unemployed and under-employed workers.

When demand picks up, the economy can grow faster than its potential growth rate for a few years until the idle capacity is fully taken up and the output gap has disappeared. Once that’s happened, the potential growth rate sets the speed limit for how fast the economy can grow. If demand’s allowed to grow faster than supply, all you get is inflation.

We know from the fine print in the budget papers that Treasury’s estimate of our present potential growth rate is 2.75 per cent a year. You can be sure the Reserve’s estimate is the same. This is often referred to as the economy’s forward-looking “trend” (medium-term average) rate of growth.

Treasury’s projections of growth over the rest of the next 10 years are based on the assumption that, once the economy has returned to its trend rate of 2.75 per cent, it will then grow by 3 per cent a year for several years until the idle capacity is used up, when it will revert to 2.75 per cent. (This projection of perfection is what allows the budget papers to include an incredible graph showing the budget surplus going on forever and the government’s net public debt plunging to zero by June 2030.)

Now, here’s the trick. Because the Treasury and Reserve forecasters have no more knowledge of what the future holds than you or I do, they rely heavily on a long-established statistical regularity called “reversion to the mean”. That is, if at present the variable you’re forecasting is above its average performance, the greatest likelihood is that it will move down towards the average. If it’s below average, it’s likely to move up towards the average.

So now you know why, for at least the past eight years, Treasury has forecast that, though growth in the economy is weak at present, within a year or two it will return to trend, and then go higher. When it turns out that didn’t come to pass this time, it’s still the best bet for next year. Fail and repeat. Although the Reserve revises its forecasts every quarter, it follows the same method.

Davies’ examination of the Reserve’s forecasting record found that, since the financial crisis, it had persistently overestimated growth in real gross domestic product in the year ahead, and had nearly always overestimated growth over the next two years.

Why? Because it failed to take account of the decline in the potential growth rate since the crisis. It’s a safe bet the Reserve has stuck with 2.75 per cent. But Davies says the Reserve’s own econometric model of the economy, MARTIN, finds that potential growth has declined from 3.1 per cent in 2000 to 2.7 per cent in 2010 and 2.4 per cent in 2019.

In other words, when your forecasting method relies so heavily on reversion to the mean, if your estimate of potential growth is too high, it’s hardly surprising you’ll forecast more growth than you ever get.

But what’s wrong with the econocrats’ estimate of the potential growth? It could be in one or more of their estimates of growth in its three P components, but Davies’ checking shows it’s not population or participation, but productivity.

Davies says the MARTIN model shows that trend growth in productivity has slowed from 2 per cent a year in 2000, to 1.3 per cent in 2010 and to 1.1 per cent in 2019. This slowdown is not peculiar to Australia, but has occurred across the advanced economies.

Taking the median rate for those other economies, he estimates that the annual improvement in their productivity of labour per hour worked has slowed from 1.9 per cent in the 10 years before the crisis, to 0.8 per cent in the years since the crisis.

Davies’ equivalent estimates for us are similar: from 2.1 per cent to 1.2 per cent.

Okay, so why has productivity improvement slowed? Labour productivity has two components: “capital deepening”, where investment in more capital equipment per worker makes workers more productive, and “multi-factor productivity”, which is the improvement that can’t be explained by anything but technological progress (not more equipment so much as better equipment, plus improvements in the way factories and offices are organised) and reforms to the structure of the economy (“micro-economic reform”).

Davies finds the overall decline is mainly explained by the weakest rate of improvement in multi-factor productivity in decades – that is, little technological progress, here or overseas – but also by investment in the stock of non-mining physical capital that’s only just keeping up with the growth in the supply of labour (which, I imagine, hasn’t been helped by our need for “capital widening” to provide equipment to all the extra migrant workers).

What Davies’ digging has really exposed, of course, is the econocrats’ refusal to accept that our economy’s caught in former Bank of England governor Mervyn King’s “low-growth trap”.

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How Morrison is putting politics ahead of policy

If you think Scott Morrison’s been busy doing not very much since the election in May, you are much mistaken. In truth he’s been very busy doing stuff of not much interest to you. But sometimes it pays to take an interest in things that don’t seem of interest.

For instance, I wouldn’t expect you to have taken much interest in the reshuffle of government departments he announced on Friday. But I’ve been reading up on it and been amazed – or appalled – by what I’ve learnt.

It’s said to be the most dramatic overhaul of the federal public service since 1987, cutting the number of departments from 18 to 14 while creating four new mega-departments and removing five department secretaries, three of them women.

Morrison said it was not a cost-saving measure, but had been done to “better align and bring together functions within the public service so they can all do their jobs more effectively and help more Australians”.

So be very clear on that: it’s been done to ensure you and I get better service from the public service. Specifically, the number of departments was shrunk so as to “ensure the services that Australians rely on are delivered more efficiently and effectively”.

I just have one problem: that’s what they all say. If Morrison had increased rather than decreased the number of departments, he would still have assured us it would make the public service more efficient and effective.

This is hardly the first time departmental arrangements have been changed. They’re changed after every election and often several times more. Changes are so common bureaucrats have a name for them: MoG – changes in the “machinery of government”.

According to calculations by Bob McMullan, former Labor minister turned academic, more than 200 changes have been made since 1993-94. “In 2015-16, machinery of government changes involved the movement of 8000 staff in 21 separate changes. Changes following the 2013 election, which involved the movement of 12,000 staff, cost an average of $14 million per agency.”

Governments everywhere do it, but research by academics at UNSW’s Canberra campus suggests Australian governments do it far more than others. “Even governments with an emphasis on ‘cutting red tape’ [such as this one] have undertaken extreme and costly MoG changes,” they say.

So why are the latest changes said to be the biggest since 1987? Because that’s when the Hawke government introduced the idea of merging departments into mega-departments. Paul Keating reversed some of those changes and John Howard undid much of the rest. Get it? It’s time to mega up again.

When the changes cause the name of some function to drop out of the ever-longer titles of departments, the interest group invariably sees red. A few years ago it was the scientists, this time it’s the arts. Actually, the arts have never had their own department, but have been shunted from one department to another.

Since Bob Hawke’s day they’ve gone from Environment to Communications, back to Environment, then Regional Development, Prime Minister and Cabinet, back to Regional Development, then Attorney-General’s, back to Communications and now to the new mega Department of Infrastructure, Transport, Regional Development and Communications.

So many MoG changes involve moving functions from one department to another that McMullan has christened them “merry-go-round decisions”. “Responsibility for childcare, aged care and Indigenous affairs (to name a few) have all been the subject of multiple shifts in the past decade. In some cases, the functions have moved out of one department only to return to their original home a few years later,” he says.

He adds that “disentangling financial structures, IT support structures, property responsibilities and HR systems from old organisations and reintegrating them into new ones takes considerable time and effort”.

Former boss of Prime Minister’s Terry Moran’s comment on the latest changes is blunter: “There’ll be turmoil in many departments for a significant period."

So why do the changes keep happening? Partly to create the appearance of progress – “reform”. Sometimes I think the pollies are trying to convince themselves as much as us. But mainly to indulge the preferences, prejudices and professed priorities of the prime minister and his or her ministers.

It’s notable that these extensive changes to the bureaucracy – including the sacking of five department heads – involve no changes to the ministry. The new mega Department of Agriculture, Water and the Environment will now contain three Cabinet ministers, co-equal in power and glory.

What particular preferences and prejudices of Morrison do the latest changes reveal? I think it reveals this government’s disdain for public servants. It’s the revenge of the ministerial staffers (which many ministers started their political careers as). Who needs public servants giving ministers advice when it’s the staffers who understand the politics of the matter?

This is Morrison surrounding himself with the top public servants he knows and likes, replacing the ones who want to keep talking about policy with can-do men and women who don’t argue.

Morrison has repeatedly expressed his belief that he doesn’t need policy advice from public servants. They should just be getting on with implementing the policies the government gives them.

I think this is Morrison perfecting the hermetic seal of his personal Canberra bubble. He already knows what’s on his to-do list and he doesn’t want news from the outside world delaying or deterring him from his purpose.

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Please, no more Pollyanna impressions in the budget update

The mid-year budget update we’ll see next Monday presents the government and its econocrats with a threshold question: can their battered credibility withstand one more set of economic forecasts based on little more than naive optimism?

Or won’t it matter if first the industry experts, and then the Quiet Australians in voterland, get the message that budgets are largely works of fiction - based on political spin, with forecasts crafted to fit - and so are not to be believed?

Last week’s national accounts confirmed five successive quarters of weak growth in the economy and left Reserve Bank governor Dr Philip Lowe’s lovely thought of the economy reaching a “gentle turning-point” looking pretty ragged.

Maybe if you squint you could see a pattern of improvement, with the economy’s weakness concentrated in the last two quarters of 2018 (growth in real GDP of 0.3 per cent and 0.2 per cent), and strength returning in the first three quarters of this year: 0.5 per cent, 0.6 per cent and now 0.4 per cent.

Trouble is, that ain’t economics, it’s numerology: looking at a pattern of numbers without troubling your head with the varying factors that are driving them. Look at what’s driving those numbers and the illusion is dispelled.

Every part of the private sector is weak: consumer spending, home building and business investment, so much so that, as a whole, it’s actually contracting. That consumer spending is weak and getting weaker – despite the tax cut and three cuts in interest rates – is hardly surprising when you remember how weak the growth in wages has been.

It’s a great thing that public sector spending is providing most of what little growth we’re getting while the private sector goes backwards, but it doesn’t count as a sign the economy’s getting back on its feet.

As for the contribution from net exports, it would be more encouraging if it weren’t for the knowledge that a fair bit of it comes from the fall in imports you’d expect to see when domestic demand is “flat to down”.

But for a disillusioning summary statistic, try this: real household disposable income per person – a good measure of average material living standards - has essentially been flat since the end of 2011. So the Quiet Australians have nothing to show for eight years of toil. The rest is a conjuring trick where high population growth is passed off as growing prosperity.

Three quarters into our run of five weak quarters, Scott Morrison fought the election on a claim to have delivered a Strong Economy. The two subsequent sets of national accounts have destroyed that masterpiece of the marketer’s art.

But Morrison’s misrepresentations came bolstered by Treasury forecasts and projections showing the economy would quickly recover from weakness to strength, whereupon it would enter a five-year period of above-trend (3 per cent) annual growth before reverting to trend for the rest of a decade.

This flight of back-of-an-envelope fancy not only appeared to be Treasury’s endorsement of Morrison’s unfounded claims about strong growth, they supported the government’s claim that the budget could easily afford to double the tax cuts announced in the previous year’s budget – taking the cumulative cost to revenue to $300 billion over a decade – and still achieve healthy annual surpluses, eliminating the government’s net public debt by June 2030.

Just eight months later, these fearless forecasts aren’t looking too flash. They had the economy returning to trend growth of 2.75 per cent this financial year and inflation returning to 2.5 per cent by June 2021.

Most wonderful of all, they had annual wage growth accelerating to 2.5 per cent by June (actual: 2.3 per cent, falling to 2.2 per cent following quarter), to 2.75 per cent by June next year, then to 3.25 per cent by June 2021 and 3.5 per cent by June 2022 and in all subsequent years.

Wages are such a central driver of the economy, this triumph of hope over experience was essential to any forecast recovery in consumer spending and economic growth, not to mention any return to (bracket-creep-fuelled) budget surpluses despite tax cuts.

See the problem Treasurer Josh Frydenberg and his troops face in preparing next Monday’s mid-year budget update? Do they keep playing the budgetary version of the with-one-bound-our-hero-broke-free game and leave themselves open to growing derision, or do they stop pretending, offer plausible forecasts and adopt a more defensible projection methodology, and start on the long road back to being respected and authoritative?

But if the days of Treasury being game to give the boss (Morrison) forecasts he won’t like are long gone, that raises a courage question for the Reserve heavies: when will they stop ensuring their forecasts tick-tack with Treasury’s and start telling us what they really think?

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Sorry, the economy can't grow much without higher wages

I usually pooh-pooh all alleged recessions that have to be qualified with an adjective. With recessions, it’s the whole economy or nothing. But I’ll make an exception for the "household recession" – which tells you why this week’s news of continuing weakness in the economy provides no support for Scott Morrison’s refusal to stimulate it.

Households are only part of the economy, of course, but they’re the part that matters above all others. Why? Because they contain all the people. And because all the other parts – the corporate sector, the public sector and the "external" sector of exports and imports – exist solely to serve we the people.

The economy’s "national accounts", issued this week by the Australian Bureau of Statistics, showed weak growth for the fifth quarter in a row, with real gross domestic product growing by just 0.3 per cent in the September quarter of last year, 0.2 per cent in the December quarter, 0.5 per in March quarter this year, 0.6 per cent in the June quarter and now a disappointing 0.4 per cent for this September quarter.

That took the annual growth in real GDP up from a (revised) 1.6 per cent over the year to June, to 1.7 per cent over the year to September. Morrison needed a lot better than that to convince anyone bar his my-party-right-or-wrong supporters that a response to the Reserve Bank’s repeated pleas for budgetary stimulus could be delayed until the budget in May.

To see how weak that is, remember our economy’s estimated "trend" or average rate of growth over the medium term is 2.75 per cent a year – about 0.7 per cent a quarter.

But let’s get back to households and their finances. Their spending on consumption grew by an almost infinitesimal 0.1 per cent in real terms during the latest quarter, or by 0.5 per cent before taking account of inflation.

Sticking to before-inflation figures (even though all the other national-account figures I quote are always inflation-adjusted), the quarter saw households’ main source of income – wages – grow by 1.1 per cent, which other, lesser income sources shaved to growth of 0.8 per cent in total household income.

However, the amount households had to pay in income tax fell by 6.8 per cent, thanks mainly to the arrival of the government’s new middle-income tax offset. This meant that households’ disposable income grew by a much healthier 2.5 per cent.

But something led most households to save rather than spend the tax break, causing their total saving during the quarter to jump by 80 per cent and their ratio of saving to household disposable income to leap from 2.5 per cent to 4.8 per cent. That’s why their consumer spending grew by only 0.5 per cent, as we’ve seen.

It’s possible people will get around to spending more of their tax cut but, with household debt at record levels after years of rising house prices, and continuing weak wage growth, it’s not hard to believe they’re too worried to spend up at a time when the economy's hardly onward-and-upward.

They may be intending to pay down some debt, just as it’s likely many people with mortgages have allowed the fall in the interest rates they’re being charged just to speed up their repayment of the loan.

Whatever, the faster consumer spending Morrison and his loyal lieutenant assured us their tax cut would bring about hasn’t materialised. And it’s noteworthy that what little consumer spending we’ve seen has been on essentials rather than discretionary items.

One discretionary spending decision is whether to buy a new car. Separate figures show new car sales in November were down 9.8 per cent on November last year.

So if the biggest part of the economy has done next to nothing to generate what little growth we’ve seen, where’s it coming from?

Well, not from the business end of the private sector. Spending on the building of new homes was down 1.7 per cent in the September quarter and by 9.6 per cent over the year to September. Business investment spending was down 2 per cent during the quarter and by 1.7 per cent over the year.

All told, the private sector – consumer spending, home building plus business investment – fell for the second quarter in a row and is 0.3 per cent lower than a year ago.

By contrast, public sector spending – the thing Morrison & Co profess to disapprove of – is going strong, with government consumption spending up by 0.9 per cent in the quarter, and 6 per cent over the year, mainly because of the continuing rollout of the National Disability Insurance Scheme.

Public investment in infrastructure – mainly by the state governments – grew 5.4 per cent in the quarter, to be 2.1 per cent up on a year earlier. All told, growth in the public sector accounted for most of the growth in the economy overall in the September quarter.

That leaves the external sector – aka "net exports" – making a positive contribution to overall growth during the quarter, with the volume of exports up 0.7 per cent while the volume of imports was down 0.2 per cent. (Falling imports, however, are a sign of a weak domestic economy.)

Another seeming bad sign – worsening productivity, with GDP per hour worked down 0.2 per cent in the quarter and 0.2 per cent over the year – wasn’t as bad as it seems, however.

When you’ve had the good news that employment has grown faster than you’d expect given the weak growth in output of goods and services, productivity – output per unit of input – falls as a matter of arithmetic. Does that make the employment growth a bad thing?

I’ll leave the last word to Callam Pickering, of the Indeed job site: "As long as wage growth remains so low, it will be difficult for the economy to return to annual growth of 3 per cent or higher. Quite simply, it is almost impossible to have a strong economy without a healthy household sector."

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Women are making themselves at home in the workforce

In the world of paid work, women still have a lot to complain about: unequal pay and promotion, still-inadequate childcare, and a tax and benefit system that discourages “secondary earners” from working more.

All true. But don’t let this conceal from your notice the success women are having at flooding into the long male-dominated workforce and slowly reshaping it to their needs.

In my never-humble opinion, for as long as girls continue making themselves better educated than boys, it’s only a matter of time before women are calling the shots.

Reserve Bank deputy governor Dr Guy Debelle highlighted women’s growing role in the labour market in a speech he gave last week.

You’ve no doubt heard the government boasting about how strongly the number of jobs has grown on its watch. It’s true. The rest of the economy hasn’t been doing well – wages, the standard of living, for instance – but employment has been growing at the disproportionately strong annual rate of about 2.5 per cent over much of the past three years. As a consequence, a near-record 62.6 per cent of all Australians aged 15 and over have a paid job.

But here’s what the pollies never mention, but Debelle noted: women accounted for two-thirds of the additional jobs in the past year.

This means the rate at which working-age females are participating in the labour force is now at its highest. So with female participation continuing to grow strongly over the decades, while male participation has fallen back, the gap between male and female participation is the narrowest it’s been.

Similarly, if you look just at the gender of those with jobs, women’s share is now above 47 per cent. Similar trends are occurring in all the advanced economies, of course.

Debelle says “changing societal norms and rising educational attainment have contributed to more women moving into ... employment outside the home. Female participation has also been influenced by the increasing flexibility of working-time arrangements, the availability and cost of childcare and policies such as parental leave.”

True. There was a time when most employers thought in terms of full-time workers and not much else – an attitude reinforced by the male-dominated unions. The increasing use of part-time employment has greatly added to the “flexibility” with which employers can deploy labour within their businesses, and no doubt helped to make them more profitable.

But the fact remains that the advent of part-time employment has been a boon, first, to women seeking a career as well as motherhood, then to full-time university students seeking income while they study, and now to many older workers seeking a mid-point between the extremes of full-time work and retirement. So the dread “flexibility” can benefit workers as well as bosses.

Debelle says that the participation rate of mothers with dependent children has kept increasing, rising by 10 percentage points since the early 2000s to 73 per cent. Over the past decade, the rise has been most pronounced for mothers with children aged up to 4.

Of those returning to work within two years after the birth of a child, an increasing majority are citing “financial reasons” as their main reason for doing so. Others returning to work cite “social interaction” or to “maintain career and skills” as their main reason.

Financial reasons could be capturing a number of considerations, according to Debelle, including low growth in wages, the rise in household debt or childcare costs.

Research suggests the cost and quality of childcare does have a significant effect on the willingness of women to do paid work, he says. According to the HILDA survey – of household income and labour dynamics in Australia – the share of households using (more expensive) formal childcare for young children has increased notably over the past decade.

Even so, access to childcare places and financial assistance with childcare costs remain “very important” issues for mothers not back at work.

Debelle says the rise in the level of mortgage debt owed by households in recent decades has “broadly coincided” with the increase in women’s rate of participation in the labour force. But which one’s causing what?

Are debt levels higher because more households have two incomes and so can afford to borrow more? (If so, that would suggest the increase in second incomes is helping to push up house prices.)

Or does the need to borrow more to afford the higher prices drive women’s decisions to go back to work? Maybe the low growth in wages in recent years has caused couples to have more debt than they anticipated and thus needing to work more to pay it down.

What little research evidence there is has usually found it’s the higher debt levels that lead to more women going back to work, but the evidence isn’t strong.

Looking beyond the continuing increase in participation by the mothers of young children and the ever-growing workplace role of prime-aged women – 25 to 54 years – of which it is part, women also account for a big part of the swing from early to later retirement.

Do you realise that 60 per cent of women aged 55 to 64 are taking part in the labour force? That compares with 20 per cent or so before the turn of the century. And the rising participation by women 65 and over isn’t all that much less than for men. Times change.

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Lowe should rescue a PM lost in the Canberra bubble

Dr Philip Lowe, governor of the Reserve Bank, is one of the smartest economists in the land. You don’t get a PhD from the Massachusetts Institute of Technology unless you’re super-sharp. But the question now is whether he has the courage to stand up to a wilful Prime Minister whose confidence far exceeds his comprehension.

Scott Morrison, as we know, is refusing to do what Lowe – with the support of the international agencies and most of our economists – has been begging him to do: use his budget to come to the rescue of monetary policy and its ever-feebler efforts to stop the economy slowing almost to stalling-speed.

Morrison is desperate to deliver a budget surplus. So desperate he’s convinced himself that failing to do so would cost him more political support than would allowing the economy to continue failing to lift voters’ living standards, and be so weak that a shock from abroad could push us into recession.

How any politician could come to such a self-harming conclusion is hard to fathom. Perhaps it’s that the 28 years since our last severe recession have robbed the latest generation of Liberal pollies of their economic nous.

Morrison’s so green he hasn’t learnt the first rule of politics: if you stuff up the economy, they throw you out. If that’s news to you, remember the 1961 credit squeeze, which brought Bob Menzies within a whisker of having his career cut short.

Remember how the 1975 recession dispatched with Gough Whitlam, the recession of the early 1980s finished Malcolm Fraser and the 1990 recession caught up with Paul Keating despite a one-term reprieve granted by Liberal fumbling of the 1993 election.

The question for Lowe is how he responds to the Prime Minister’s misreading of his own best interests (not to mention ours). Does Lowe stand back and watch an overconfident leader dice with political death by pretending that monetary policy hasn’t reached the end of its useful life and that blood can still be squeezed from the stone? Or does he announce he’s done all he sensibly can and turn the economy’s problem back to the one (elected) person who could fix it if he came to his senses?

Conventional monetary policy (interest-rate manipulation) has lost most of its power because household debt is at record levels, because the official interest rate is almost at zero, and because rates are already so low that another few cuts won’t make much difference.

Further, as Lowe explained in his speech last week, there’s little to be gained from deciding to progress to QE – "quantitative easing". It’s not capable of lowering rates much further and, in any case, comes at a cost.

As Lowe himself has acknowledged, it creates a moral hazard. For as long as Lowe pretends monetary policy is still effective, he’s running cover for the person who could do something effective, but chooses not to.

And it’s not just the absence of a positive, it’s also the continuation of a negative. Everything that causes the budget to take more out of the economy than it puts back in government spending causes private demand to be weaker.

Consider the way continuing bracket creep (only partly countered by the new middle income-earners’ tax offset) takes a bigger bite out of households’ wage income before they can spend it. Fiscal policy is actually counteracting monetary policy.

In his speech outlining the "limitations of monetary policy" and his lack of enthusiasm for unconventional measures, Lowe noted that their modest benefits needed to be balanced against their possible adverse side-effects.

Such as? First, they may change incentives in an unhelpful way. Providing the banks with ready liquidity during emergencies may encourage them not to bother holding their own adequate buffers, thus making further crises more likely.

Similarly, "the willingness of a central bank to use its full range of policy instruments might create an inaction bias by other policymakers [and] this could lead to an over-reliance on monetary policy," he said. But which policymakers could he possibly have in mind?

A second possible side effect is reducing the efficiency with which resources are allocated throughout the economy. Low interest rates and flattening the yield curve (pushing long-term interest rates down to the level of short-term rates) can damage banks’ profitability, leaving them with less capacity to lend.

There are also risks to the stability of the financial system when low interest rates cause the prices of property or shares (and borrowing) to boom at a time when the economy’s actually weak.

Finally, a third side-effect is a blurring of the lines between monetary policy and fiscal policy. "If the central bank is buying large amounts of government debt at zero interest rates, this could be seen as money-financed government spending," and so damage a country’s credibility internationally.

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QE: not certain, not soon, no great help, no let-out for govt

The big economic development this week was Reserve Bank governor Dr Philip Lowe giving the financial markets’ expectations about QE – “quantitative easing” - and other unconventional monetary policy an almighty hosing down.

In his speech on Tuesday he disabused the financial markets of the notion that, as soon as the Reserve had cut the official interest rate to zero, it would be on with QE and business as unusual.

Equally, he disabused our surplus-fixated government of any notion that his resort to unconventional monetary policy (manipulation of interest rates) would relieve it of the need to use conventional fiscal policy (budget measures) to get the economy moving again.

Lowe’s first act was to pooh-pooh most of the unconventional policies the letters QE conjure up in the minds of excitable market players. He identified four possible tools and rejected two and a half of them.

Let’s start with “forward guidance” – the notion of the central bank seeking to improve the confidence of consumers and firms by making its intentions on interest rates unmistakably clear. Great idea, he said, which is why he’d be doing it for ages and would keep doing it. Interest rates, he said, “will remain low for an extended period”.

Second is “extended liquidity operations”. During the global financial crisis in 2008, many central banks made significant changes to their usual ways of dealing with banks.

This was when financial markets were so disrupted that banks were too worried about their own finances to want to keep lending to ordinary businesses, threatening to crunch the economy.

Central banks dramatically increased their lending to banks, lent against the security of assets other than government bonds, lent for longer periods and lent at discounted rates of interest.

That is, they did what anyone with any sense would do to calm a crisis. Most of these extraordinary arrangements were soon unwound after calm had been restored. The Reserve itself had done some of them.

Would it do the same again should another crisis occur? Of course. At present, however, everything was working normally and our banks were able borrow as much as they needed – here or from abroad - at reasonable interest rates. So forget that one.

The third unconventional measure Lowe listed was “negative interest rates”. We used to assume that interest rates couldn’t go below zero, but things have become so desperate in Japan and then Europe – but nowhere else – that central banks have started paying banks negative interest rates. Governments have issued bonds at negative yields. That is, the borrower doesn’t pay the lender, the lender pays the borrower.

“Unconventional” doesn’t do justice to such a topsy-turvy world. It was long assumed that if banks started charging people to deposit their money, most of them would keep their money in cash under the bed. Lowe says there’s been a bit of that, but not much.

Why not? Partly because the negative rates are tiny – minus 0.5 per cent in the euro area, minus 0.1 per cent in Japan. But mainly because the negative rates have been restricted to charging banks and bond holders. No one’s been mad enough to try it on ordinary businesses or households.

So what are the chances we’d see negative rates here? It’s “extraordinary unlikely”, according to Lowe.

Which brings us finally to “asset purchases”. This is the only one of the four unconventional tools that can be called QE – quantitative easing. The central bank buys financial assets – securities – from the banks, paying for them merely by crediting the banks’ deposit accounts with the central bank.

This adds to the central bank’s liabilities, and to its holdings of financial assets, thus expanding its balance sheet and increasing the supply of money. Many central banks have purchased huge amounts of securities since the financial crisis, the vast majority of them being government bonds.

So, what’s Lowe’s attitude to QE? Well, for openers, he has “no appetite” for buying private sector securities (that’s the half I mentioned). But “if – and it is important to emphasise the word if – the Reserve Bank were to undertake a program of quantitative easing, we would purchase government bonds, and we would do so in the secondary [second-hand] market”. That is, it wouldn’t buy bonds newly issued by the government.

It would do QE because government bonds are assumed to be risk-free, and adding to the demand for bonds would lower the risk-free interest rate – not just for bonds but for all borrowing, from short-term to long-term. This should encourage borrowing and spending, as well as making our industries more price-competitive internationally by further lowering our dollar.

Whoopee-do. The financial markets ride again and monetary policy rolls on, allowing the government to continue putting the state of the budget ahead of the state of the economy.

Not so fast. Lowe said he wouldn’t even start to wonder about QE until we reached the point where the official interest rate had been lowered to 0.25 per cent (which would be as low as it’s possible to go).

And get this: “the threshold for undertaking QE in Australia has not been reached, and I don’t expect it to be reached in the near future.”

But his “threshold” isn’t the official rate down to 0.25 per cent. It’s trickier. “There is not a smooth continuum running from interest rate reductions to quantitative easing. It is a bigger step to engage in money-financed asset purchases by the central bank than it is to cut interest rates.

“In considering the case for QE, we would need to balance [the] positive effects with possible [adverse] side-effects.” Oh, didn’t think of those. He implied that he wouldn’t move to QE unless he was convinced we’d begun moving away from the inflation target and full employment.

Finally, having said the official interest rate couldn’t be cut below 0.25 per cent, he then estimated the scope for using QE to lower interest rates was no more than 0.2 percentage points. Sound like a magic wand to you?

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High immigration is changing the Aussie way of life

The nation’s economic elite – politicians of all colours, businesspeople and economists – long ago decided we need to grow our population as fast as we can. To them, their reasons for believing this are so blindingly obvious they don’t need to be discussed.

Unfortunately, however, it’s doubtful most ordinary Australians agree. A survey last year by researchers at the Australian National University found that more than 69 per cent of respondents felt we didn’t need more people, well up on a similar poll in 2010.

This may explain why Scott Morrison announced before this year’s election a big cut in our permanent migrant intake – while failing to mention that our booming temporary migrant intake wouldn’t be constrained.

He also foreshadowed measures to encourage more migrants to settle in regional cities. What he didn’t say is what he’d be doing differently this time, given the many times such efforts had failed in the past.

In between scandalising over the invading hordes of boat people, John Howard greatly increased the immigration intake after the turn of the century, and this has been continued by the later Labor and Coalition governments. “Net overseas migration” accounts for about 60 per cent of our population growth.

In 2000, the Australian Bureau of Statistics projected that our population wouldn’t reach 25.4 million until 2051. We got there this year. Our population is growing much faster than other developed countries’ are.

The growth in our economy has been so weak over the past year that they’ve had to stop saying it, but for years our politicians boasted about how much faster our economy was growing than the other economies.

What they invariably failed to mention was that most of our faster growth was explained by our faster-growing population, not our increasing prosperity. Over the year to June, for instance, real gross domestic product grew by (a pathetic) 1.4 per cent, whereas GDP per person actually fell by 0.2 per cent.

That’s telling us that, despite the growth in the economy, on average our material standard of living is stagnant. All that immigration isn’t making the rest of us any better off in monetary terms.

Of course, that’s just a crude average. You can be sure some people are better off as a result of all the migration. Our business people have always demanded high migration because of their confidence that a bigger market allows them to make bigger profits.

Economists, on the other hand, are supposed to believe in economic growth because it makes all of us better off. They’re not supposed to believe in growth for its own sake.

This week one of the few interest groups devoted to opposing high migration, Sustainable Population Australia, issued a discussion paper that’s worth discussing. It reminds us that many of the problems we complain about are symptoms of migration.

The biggest issue is infrastructure. We need additional public infrastructure – and private business equipment and structures, and housing – to accommodate the needs of every extra person (locally born as well as immigrant) if average living standards aren’t to fall.

Taking just public infrastructure – covering roads, public transport, hospitals, schools, electricity, water and sewage, policing, law and justice, parks and open space and much more – the discussion paper estimates that every extra person requires well over $100,000 of infrastructure spending.

When governments fail to keep up with this need – as they have been, despite a surge in spending lately – congestion on roads and public transport is just the most obvious disruption we suffer.

The International Monetary Fund’s latest report on our economy says we have “a notable infrastructure gap compared to other advanced economies”. Spending is “not keeping up with population and economic growth”. We have a forecast annual gap averaging about 0.35 per cent of GDP for basic infrastructure (roads, rail, water, ports) plus a smaller gap for social infrastructure (schools, hospitals, prisons).

One factor increasing the cost of infrastructure is that about two-thirds of migrants settle in the already crowded cities of Sydney and Melbourne – each of whose populations is projected to reach 10 million in the next 50 years, with Melbourne overtaking Sydney.

According to a Productivity Commission report, “growing populations will place pressure on already strained transport systems. Yet available choices for new investments are constrained by the increasingly limited availability of unutilised land”.

New developments such as Sydney’s WestConnex have required land reclamation, costly compensation arrangements, or otherwise more expensive alternatives such as tunnels. It’s reported to cost $515 million a kilometre, with Melbourne’s West Gate Tunnel costing $1.34 billion a kilometre.

Who pays for all this? We do – one way or another. “Funding will inevitably be borne by the Australian community either through user-pays fees or general taxation,” the commission says.

Combine our growing population with lower rainfall and increased evaporation from climate change and water will become a perennial problem and an ever-rising expense to householders and farmers alike.

The housing industry’s frequent failure to keep up with the demand for new homes adds to the price of housing. And the only way we’ll double the populations of Melbourne and Sydney is by moving to a lot more high-rise living.

High immigration is changing the Aussie way of life. Before long, only the rich will be able to afford a detached house with a backyard.

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Confessions of a pet shop galah: much reform was stuffed up

As someone who, back in the day, did his share of being one of Paul Keating’s pet shop galahs – screeching "more micro reform!" every time they saw a pollie – I don’t cease to be embarrassed by the many supposed reforms that turned into stuff-ups.

My defence is that at least I’ve learnt from those mistakes. One thing I’ve learnt is that too many economists are heavily into confirmation bias – they memorise all the happenings that affirm the wisdom of their theory, but quickly cast from their minds the events that cast doubt on that wisdom.

Well, let me remind them of a few things they’d prefer to forget.

Of course, it’s not the case that everything done in the name of "micro-economic reform" was wrong-headed. The floating of the dollar was an unavoidable recognition that the era of fixed exchange rates was over. And the dollar’s ups and downs have almost always helped to stabilise the economy.

The old regulated banking system wasn’t working well and had to be junked. With the rise of China in a globalising world, persisting with a highly protected manufacturing sector would have been a recipe for getting poorer. Nor could we have persisted with a centralised wage-fixing system or a tax system that failed to tax capital gains, fringe benefits and services – to name just a few worthwhile reforms.

Many privatisations were justified – the government-owned banks, insurance companies and airlines – but the sale of geographic monopolies (ports and airports) and natural monopolies (electricity and telephone networks) was a step backwards, mainly because governments couldn’t resist the temptation to maximise the sale price by preserving the businesses’ pricing power at the expense of consumers.

The conversion of five state monopolies into the national electricity market proved a monumental stuff-up at all three levels: generation, transmission and retail. It quickly devolved into an oligopoly with three big vertically integrated firms happily overcharging consumers at every level, with collateral damage to the use of carbon pricing in reducing greenhouse gas emissions.

We’ve learnt that “markets” artificially created by governments and managed by bureaucrats are – you wouldn’t guess – hugely bureaucratic, with the managers susceptible to “capture” by market players. The gas market has also been an enormous stuff-up, threatening the survival of what remains of Australian manufacturing.

The ill-considered attempt to treat schools and TAFEs and universities as being in some kind of market, where fostering competition between them and paying teachers performance bonuses would spur them to lift their performance, proved an utter dud.

Had the harebrained plan to deregulate uni fees not been stopped, it would have made even worse the chronic disorientation of the nation’s vice chancellors on what universities are meant to do and why they’re doing it. Lesson: trying to turn non-market parts of society into markets, while blithely ignoring all the obvious reasons such "markets" would fail, is a fool’s errand.

Which brings us to the half-baked idea of trying improve the provision of taxpayer-funded services by making their delivery “contestable” by for-profit providers. It's been an expensive failure pretty much everywhere it’s been tried: childcare, employment services, vocational education and training, and aged care (see present royal commission), not to mention privately run prisons and offshore detention centres. How long will it be before we’re having a royal commission into the abuses of the largely outsourced national disability insurance scheme?

Why have so many reform programs ended so badly? Partly because of the naivety of econocrats and other proponents of "economic rationalism". They had no notion of how far the grossly oversimplified neo-classical model of markets they carry in their heads misrepresented the big bad real world.

And many of them, having spent their working lives solely in the public sector, had no idea of how wasteful or bureaucratic the supposedly rational private sector could be. Actually break the law if they thought they wouldn’t get caught because corporate law-breaking wasn’t being policed? Sure. Rip off the government because the bureaucrats wouldn’t notice? Love to.

But there’s another reason so many reforms blew up. Because naive econocrats failed to foresee the way reforms intended to leave consumers or taxpayers better off could be hijacked by Finance Department accountants looking to cut government spending and produce "smaller government" by whatever expediency possible (see uni fee deregulation) and politicians looking to win the approval of big business or to move money and influence from the public sector column (them) to the private sector column (us).

Lesson: if a venal politician can find a way to sabotage micro-economic reform to their own advantage, they will.

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Weak wages the symptom of our stagnant economy, but why?

If you don’t like the term "secular stagnation" you can follow former Bank of England governor Mervyn King and say that, since the Great Recession of 2008-09, we’ve entered the Great Stagnation and are "stuck in a low-growth trap".

On Friday we saw the latest instalment of our politicians’ and econocrats’ reluctant admission that we’re in the same boat as the other becalmed advanced economies, with publication of the Reserve Bank’s latest downward revisions of its forecasts for economic growth.

This time last year, the Reserve was expecting real growth in gross domestic product of a ripping 3.25 per cent over the present financial year. Now it’s expecting 2.25 per cent. Even that may prove on the high side.

What their eternal optimism implies is our authorities’ belief that the economy’s weakness is largely "cyclical" – temporary. What the past eight years of downward revisions imply, however, is that the problem is mainly "structural" or, as they used to say a century ago, "secular" – long-lasting.

If the weakness is structural, waiting a bit longer won’t see the problem go away. The world’s economists will need to do a lot more researching and thinking to determine the main causes of the change in the structure of the economy and the way it works, and what we should be doing about it.

Apart from dividing problems between cyclical and structural, economists analyse them by viewing them from the perspective of demand and then the perspective of supply.

Obviously, what you’d like is demand and supply pretty much in balance, meaning low inflation and unemployment, with economies growing at a good pace and lifting our material standard of living. In practice, however, it’s not that simple and demand and supply don’t always align the way we’d like.

For about the first 30 years after World War II, the dominant view among economists was that the big problem was keeping demand strong enough to take up the economy’s ever-growing potential supply – its capacity to produce goods and services – and keep workers and factories in "full employment". Keynesian economics was developed to use the budget ("fiscal policy") to ensure demand was always up to the mark.

From about the mid-1970s, however, the advanced economies developed a big problem with inflation. After years of uncertainty and debate, the dominant view emerged that the main problem wasn’t "deficient" demand, it was excessive demand, always threatening to run ahead of the economy’s capacity to produce and thus cause inflation.

The answer was to get supply – potential production – growing faster. Most economists abandoned Keynesian economics and reverted to the former, "neo-classical" macro-economics, in which the central contention was that, over the medium-term, the rate at which an economy grew was determined on the supply side, by the three key determinants of production capacity, "the three Ps" – population, participation (by people in the labour force), and productivity – the rate at which investment in more and better machines and structures allowed workers to produce more per hour than they did before.

If so, the managers of the macro economy could do nothing to change the rate at which the economy grew over the medium term. Their role was simply to ensure that, in the short term, demand neither grew faster than the growth in the economy’s production potential (thus casing inflation) nor slower than potential (thus causing unemployment).

And the best instrument to use to achieve this balancing act was, as Treasury secretary Dr Steven Kennedy explained recently, monetary policy (moving interest rates up and down).

Everyone agrees that the problem with the advanced economies at present – including ours – is weak demand. The question is whether that weakness is mainly cyclical or mainly structural. If it's cyclical, all we have to do is be patient, and the old conventional wisdom - that, fundamentally, growth is supply-determined - doesn’t need changing.

But the conclusion that fits our circumstances better is that the demand problem has structural causes. Consider this: we’ve had plenty of episodes of weak demand in the past, but never has demand been so weak that inflation is negligible. Nominal interest rates are way down in consequence, but even real global interest rates have been falling since even before the financial crisis.

That’s why monetary policy has almost done its dash. It doesn’t do well at a time of negligible inflation, and fiscal policy is back to being the more effective instrument. But if the demand problem is mainly structural, then a burst of stimulus from the budget may help a bit, but won’t get to the heart of the problem.

As former top econocrat Dr Mike Keating has argued consistently, weak growth in real wages seems the main cause of weak growth in consumer spending and, hence, business investment, productivity improvement and overall growth – both in Australia and the other advanced economies.

Reserve Bank governor Dr Philip Lowe would agree. But he tends to see the wage problem as mainly cyclical: wait until we get more growth in employment, then the labour market will tighten, skill shortages will emerge and real wages will be pushed up.

Other economists stick to the supply-side, neo-classical approach: if real wages aren’t growing fast enough it can only be because the productivity of labour isn’t improving fast enough, so the answer is more micro-economic reform. Not a big help, guys.

The unions say the root cause is that deregulation has robbed organised labour of its bargaining power – and there may be something in that. But Keating’s argument has been that skill-biased technological change has hollowed out the semi-skilled middle of the workforce, with wage increases going disproportionately to the high-skilled, who save more of their income than lower-paid workers.

So Keating wants any budget stimulus to be directed towards the lower-paid, and a lot more spending on all levels of education and training, to help workers adopt and adapt to the digital workplace.

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Mental health: the smart way to increase happiness

You have to hand it to Scott Morrison. He is, without doubt, the most skillful politician we’ve seen since John Howard. He runs rings around his opponents. It’s just a pity he puts so much time into strengthening his own position by making his opponents look bad and so little into strengthening our position by working on some of our many problems.

Speaking of problems, on the very day the Royal Commission into Aged Care was revealing how appallingly we treat so many of our parents and grandparents, the Productivity Commission released a draft report on how much our treatment of the mentally ill leaves to be desired.

Sometimes I think that if hastening the economy’s growth is intended to increase our happiness, why don’t we do more to increase it directly by reducing the unhappiness of, for instance, those in old people’s homes and those suffering mental illness, not to mention their families?

Why do you and I somehow imagine it won’t be us being mistreated in some institution in a few years’ time? Why could mental ill-health never reach us or our family and friends?

The commission’s report found that almost half of Australian adults will meet the diagnosis for a mental illness at some point in their lives. In any given year, however, one person in five will meet the criteria. And, although it can affect people of any age, three-quarters of those who develop mental illness first experience problems before they’re 25.

And yet we’ve gone for years providing quite inadequate help to the mentally troubled. Why? Because physical problems are more visible and less debatable. But also because the stigma that continues to attach to mental problems makes sufferers reluctant to admit to them, and the rest of us reluctant to dwell on it.

Mental illness includes more common conditions such as anxiety, substance use and depression, plus less common conditions such as eating disorders, attention-deficit/hyperactivity disorder, bipolar disorder and schizophrenia. And suicide, of course.

The report says that many who seek treatment for mental problems aren’t receiving the level of care necessary. As a result, too many people suffer additional and preventable physical and mental distress, relationship breakdown, stigma, and loss of life satisfaction (the $10 words for happiness) and opportunities.

A big part of the problem is that the treatment of mental illness has been tacked on to a health system designed around the characteristics of physical illness, especially acute rather than chronic illnesses.

Five long-standing and much-reported-on problems causing the mental health system to deliver poor results are, the report says, first, the underinvestment in prevention and early intervention. This is what makes the fact that mental problems tend to start early and get worse good news, in a sense. It means that, if you get in early, you can stop people experiencing years of unhappiness (not to mention cost to the taxpayer).

Second, the focus on clinical services – things done by doctors and nurses – often means overlooking other things and other people contributing to mental health, including the important role played by carers and family, as well as the providers of social support services.

Third, the frequent difficulties finding suitable social supports, sometimes because they just don’t exist in regional areas. This is despite suicide rates, for example, being much higher outside the capital cities.

Fourth, the social support people do receive is often well below best-practice, isn’t sustained as their condition evolves or their circumstances change, and is often unconnected with the clinical services they get.

Fifth, the “lack of clarity” about roles, responsibility and funding between the federal and state governments. This means persistent wasteful overlaps existing side by side with yawning gaps in the services provided. And it means no level of government accepts responsibility for “the system’s” poor performance.

It’s clear we’re not spending enough on mental healthcare. But this is where we get into an old argument. Ask the people running the system and their answer is always “just give us a shedload more money and we’ll decide how best to spend it”. But ask the Smaller Government brigade and they’ll say “we’re already spending far more than we did and spending even more would improve nothing”.

As usual, the truth’s in the middle. It’s true we’re spending a lot more without much evidence of improved results, but equally true we need to spend more – particularly on social support, such as suitable housing. Fix people, throw them onto the street, and see how well they do.

Sorry, but the days of “trust me, I’m a doctor/teacher/public servant/whatever” are gone. Too many occupations have abused our trust. We need to spend what we’re already spending a lot more effectively – particularly on prevention and early detection, on the non-clinical aspects of the problem, and on better coordination of federal and state roles – as a condition of spending more.

And that will mean paying a bit more tax. After all, if we’re so willing to spend on a big-screen TV or overseas holiday or new car to make us happier, what’s the hang-up with spending via taxes to improve our treatment in old age or should we or a rello strike mental problems?

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Aged Care: the crappy end of the Smaller Government mentality

What do you get when politicians and econocrats go for decades trying to foist Smaller Government  on an unwilling public? Bad government. And the delivery of crappy services – often literally in the case of aged care.

The interim report of the royal commission into aged care is absolutely scathing about the appalling state the system has been allowed to fall into. Its summary is headed: 'A Shocking Tale of Neglect'.

Aged care services are “fragmented, unsupported and underfunded. With some admirable exceptions, they are poorly managed. All too often, they are unsafe and seemingly uncaring.”

“We have uncovered an aged care system that is characterised by an absence of innovation and by rigid conformity. The system lacks transparency in communication, reporting and accountability. It is not built around the people it is supposed to help and support, but around funding mechanisms, processes and procedures,” the report says.

“Many of the cases of deficiencies or outright failings in aged care were known to both the providers concerned and the regulators before coming to public attention. Why has so little been done to address these deficiencies?”

“We have heard evidence which suggests that the regulatory regime that is intended to ensure safety and quality of services . . . does not adequately deter poor practices. Indeed, it often fails to detect them. When it does so, remedial action is frequently ineffective. The regulatory regime appears to do little to encourage better practice beyond a minimum standard.”

Here’s where you see the fingerprints of the econocrats and accountants: “the aged care sector prides itself in being an ‘industry’ and it behaves like one. This masks the fact that 80 per cent of its funding comes directly from government coffers. Australian taxpayers have every right to expect that a sector so heavily funded by them should be open and fully accountable to the public and seen as a ‘service’ to them.”

Get it? Don’t ask us to publish performance indicators. They’re “commercial-in-confidence” – especially because many providers are for-profit providers. Why don’t the regulators insist? Because, like so many regulators, they’ve been “captured” by the providers, which have Canberra-based lobbyists, are generous wine-and-diners and employers of retired ministers and senior bureaucrats, and could make a lot more trouble for the government than a thousand mistreated mums aka silent Australians (whose vote for the Coalition is rusted-on).

The obvious reason the Smaller Government brigade has to shoulder the blame for the appalling treatment of so many (but not all) people in aged care – and many of the overworked and underpaid nurses working in it – is that, as part of the eternal crusade to keep government smaller, aged care is, as the commission finds, seriously underfunded.

But it’s worse than that. Part of the Smaller Government mentality is having aged care provided by someone other than the government – including for-profit providers which, as every Smaller Government crusader knows, are far more efficient than the public service.

Except that, as the commission’s report demonstrates yet again, they’re not. And when they can’t use greater efficiency to cover their profit margin, they extract it by cutting quality. The report doesn’t say so, but it’s a safe bet the for-profits are at the forefront of the “poor continence management,” “dreadful food, nutrition and hydration,” and “common use of physical restraint” and “overprescribing of drugs which sedate residents” to make them easier to manage, it uncovered.

Trouble is, so long as so much of the “industry” is profit-maximising, no amount of increased funding will be sufficient to stop residents being mistreated.

The more fundamental problem is that the Smaller Government zealots have never persuaded voters that less is more. Almost all of us think more is more. That’s what we want and what even conservative politicians promise us at every election.

So they have no mandate for Smaller Government and, since the disastrous 2014 budget, lack the political courage of their convictions. But they persist with their efforts to keep the lid on government spending, continually cutting away at the people they consider to be political weak and enemies of the Coalition: the ABC, people on welfare, and the deeply despised public service - particularly those bureaucrats offering policy advice (who needs it?) and those regulating and policing the public funding received by the party’s generous business donors.

In practice, Smaller Government means underspending on essentials such as aged care until the neglect is no longer tolerable politically, feigning shock and promising to spend big and crackdown on miscreants when voters react with horror to the revelations of the inevitable royal commission then, once the media circus has moved on, quietly welching on much of what you promised to do.

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