Memo generals: China is our inescapable economic destiny

There must be times in Australia’s history when people look at the nation’s economic experts and wonder if they have any idea what they’re doing. Today, the boot’s on the other foot: people who care about our economic future are wondering what game the nation’s defence and foreign affairs experts think they’re playing.

The concern of many business people and others has been most eloquently expressed by Dr John Edwards, former Reserve Bank board member, in a paper for the Lowy Institute. He’s in complete agreement with Scott Morrison’s assertion last year that “even during an era of great-power competition, Australia does not have to choose between the United States and China”.

Edwards says Australia made its choices long ago, and is now locked into them. “It chose its region, including its largest member, China, as the economic community to which it inescapably belongs. It also long ago chose the US as a defence ally to support Australia’s territorial independence and freedom of action.”

There is a good deal of tension between these two choices, but no possibility that either will change, he says. “Like many other enduring foreign policy problems, it cannot be resolved. It must instead be managed.

“However, it can only be managed if the Australian government has a clear and united understanding of Australia’s interests, and competent people to execute policies consistent with that understanding.”

Australia’s trade with East Asia has been growing faster than its gross domestic product and its trade overall for many decades. Our exports to East Asia now account for more than a sixth of our total GDP. Half of these exports go to China, and now amount to 10 times those going to the US.

Australia is meshed with China’s economy not only because China is such a big market for our exports, but also because China is the major trading partner of our other major markets in East Asia: Japan, South Korea, Taiwan and the ASEAN countries.

Today, East Asia and the Pacific form a regional economic community that, in terms of trade and investment between its members, is only a little less integrated than the European Union, and very much more integrated than the North American region.

“Already selling all it can to Japan and Korea, Australia would not find new markets for iron ore and coal to replace even a part of what it now sells to China. Nor could it easily replace exports of wine, meat, dairy products and manufactures to China. The largest share of foreign tourists is from China, as is the largest share of foreign students,” Edwards says.

“Without trade with China, Australia’s living standards would be lower, its economy smaller and its capacity to pay for military defence reduced.” (Generals – armchair and otherwise – please note.)

“It is difficult to imagine plausible circumstances in which an Australian government would voluntarily cut exports to China. Australia cannot and will not decouple from China’s economy any more than Japan, Korea, Taiwan or Southeast Asia can, wish to, or will,” he says.

Australia’s stance towards the US-China competition must therefore be informed by a recognition that what injures China’s prosperity also injures Australia’s prosperity. Economic "decoupling" of China from North America or Europe is not in Australia’s interests.

But “nor will Australia decouple from its security arrangements with America. The US will remain the primary source of advanced military technology for Australia. It will also remain the primary source of security intelligence.

“And no hostile power can entirely discount that possibility that the US would come to Australia’s military assistance if required. The security arrangements Australia has with America are therefore sufficiently valuable that no Australian government would voluntarily depreciate them, let alone relinquish them.”

The tension between these two pillars of Australia’s engagement with the world will continue for decades to come. The centrality of these relationships makes it all the more important for Australia to conduct them carefully and cleverly, always guided by a notion of Australia’s long-term interests, we’re told.

“China’s growing role on the world stage, its authoritarian government, its suppression of internal dissent, its territorial claims and defence build-up in the South China Sea, together with the deterioration of the relationship between the US and China, make this tension increasingly difficult to manage.

“Thus far, the cleverness Australia increasingly needs is not evident in its handling of relations with China . . . Refusing to take sides in the trade and technology competition between China and the US is Australia’s declared policy. It was wisely adopted – but not deftly implemented,” Edwards concludes, with admirable restraint.

Read more >>

It'll be a long haul to get the economy going properly

If you’ve been away on Mars for the past five months, it will have been a huge surprise to learn this week that the economy is now "officially" in recession. For the rest of us, the news is the size of the recession, how it compares, what contributed most to the contraction, and the cloudy outlook for recovery.

The Australian Bureau of Statistics’ "national accounts" show real gross domestic product fell by 7 per cent in the June quarter, on top of the 0.3 per cent fall in the previous quarter. This is by far the largest fall in any quarter since we began measuring quarterly GDP in 1959.

The next biggest was a fall of 2 per cent in the June quarter of 1974. As Callam Pickering, of the Indeed global job website, reminds us, our total fall since December compares with peak-to-trough falls of 1.4 per cent in our previous recession in the early 1990s, and 3.7 per cent in the recession of the early 1980s.

So, no doubt this is indeed the worst recession since the Great Depression of the 1930s. Why so bad? Because, as David Bassanese of BetaShares tells us, "this is a recession like no other," being caused by the almost instantaneous spread around the world of a deadly virus and the consequences of our efforts to suppress the virus by ceasing much economic activity.

This coronacession is distinguished by its very front-loaded and cruelly uneven nature. “Unlike past recessions, which usually evolve over a year or so, most of the contraction in the economy took place within two short months,” Bassanese says.

The sudden need to lock down much of the economy and get people to leave their homes as little as possible raises the hope that, as the economy is re-opened, much of that activity will be resumed. And if we switch the focus from what’s happening to GDP – the economy’s production of goods and services – to the more important issue of what’s happening to jobs, we see this is already happening.

Treasurer Josh Frydenberg reminds us that, of the 1.3 million people who either lost their job or were stood down on zero hours following the outbreak, more than half were back at work by July.

This suggests we should be able to expect a significant bounce-back in production in the present September quarter, which has less than a month to run. Sorry, Victoria’s second wave and return to lockdown have put paid to that fond hope.

With the rest of the nation re-opening, but Victoria accounting for about a quarter of GDP, the optimists in Treasury are hoping for a line-ball result, but most business economists seem to be expecting a further (though much smaller) fall.

With any luck, however, Victoria should have started re-re-opening by the end of this month. So, a big recovery in production in the run up to Christmas? Sorry. Unless the government changes its tune by then, the economy will be struggling to cope with the withdrawal of much of Scott Morrison’s budgetary support.

Time for some good news. Remember that, no matter how tough things are looking in Oz, they’re looking better than in the rest of the developed world, with the United States losing 9 per cent during the June quarter, the Europeans down 12 per cent, and Britain down 20 per cent.

Why have we been hit less hard? Because we closed our borders earlier and had more success at containing the virus. We didn’t have to lock down as hard and were able to re-open earlier.

Now back to the details of how our 7 per cent contraction came about. The great bulk of it came from consumer spending - accounting for well over half of GDP – which fell by a remarkable 12.1 per cent during the quarter.

Consumption of goods fell a bit, while consumption of services fell hugely. Why? Because staying at home and social distancing slashed our spending on services such as hospitality, recreation and transport (public, car and air).

To the fall in consumer spending we must add falls of 6.8 per cent in new home building and 6.2 per cent in business investment in new equipment and structures. Note that this continued the declines in these two areas that began well before the virus arrived, showing the economy was weak even before the crisis.

This collapse in private sector spending was partly offset by growth in two parts of the economy. First, public sector spending grew by 2.5 per cent, mainly reflecting greater health care costs. (Note that, being "transfer payments", the huge spending on the JobKeeper wage subsidy scheme shows up as an addition to wage income, while the greater spending on JobSeeker unemployment benefits also shows up as an addition to household disposable income.)

This increased government assistance, at a time when job losses meant wage income was falling, actually caused household disposable income to rise by 2.2 per cent. Combined with the remarkable fall in consumer spending, however, this helps explain why the rate of household saving leapt from 6 per cent of household income to almost 20 per cent.

Second, our international trade made a 1 percentage point positive contribution to growth because, although the volume of our exports of goods and services fell, the volume of our imports of goods and services (which subtract from growth) fell by more.

(Just so you know, partly because of this we recorded our largest quarterly current account surplus on record of $18 billion, or 3.8 per cent of GDP. This is our fifth consecutive surplus, the longest run of surpluses since the 1970s. For a financial capital-importing economy like ours, this is actually a sign of economic weakness.)

Remembering that the outlook for coming quarters isn’t bright, I leave the last, sobering word to the ANZ Bank’s economics team: “Significant further stimulus over the next few years is likely to be required to generate growth and jobs and drive the unemployment rate down.”

Read more >>

Pandemic: inconvenient for the privileged, rough on the poor

The popular coronavirus refrain that "we're all in this together" is a call for everyone to pull together and be more conscious of the interests of others, not just our own. What it's not is a statement of fact.

Far from it. When you take a closer look, what you see is inequality and injustice – on many dimensions. Some of these have been created by the way our governments have decided who gets help to cope with the pandemic and who doesn't.

But others are the consequence of our politicians going for years pushing problems under the carpet because fixing them would just be too expensive for taxpayers.

You and I have generally been content for these problems to be kept out of our sight. But the virus has drawn these injustices to light. In some cases, the victims have continued to suffer in silence. In others, they've continued going about their business in ways that have undermined our efforts to limit the virus's spread.

Like many of us, no doubt, I've been aware of much of this. But the recent writings of Dr Stephen Duckett, of the Grattan Institute, have brought it together in a way that's shocked me. Duckett is the nation's leading health economist. Most of what follows comes from him.

His account begins at the beginning. We congratulate ourselves that we were quick to block the arrival of foreigners who could be bringing the virus with them. We closed our borders to China early, and soon added Iran and South Korea to the list. A planeload of repatriated Chinese Australians from Wuhan was quarantined well away from us at the Christmas Island detention centre.

"However, we baulked when countries like us – white and wealthy – began to show higher levels of infection," he says. "Italy had higher levels of infection than the Asian countries, but our borders remained open to Italians."

The United States was the next source of infections. "Some Aspen skiers, returning home, brought the infection with them. They were asked, probably politely, to self-isolate in their Portsea beach houses. They did not, and the virus spread. The first wave of infections was mostly these international transmissions, returning travellers, probably wealthier than the average Australian."

At that time we didn't know much about the virus, except that it seemed to have started in China. With people of Chinese appearance being vilified in the streets, Australians were not shown at their best (or brightest).

Look at Victoria's second wave, however, and you see people at the other end of the income scale helping to spread the virus and being its greatest victims. Low-paid and poorly trained hotel-quarantine guards, with precarious job security, were the human channels from supposedly quarantined travellers to the guards' families and friends.

It was not by chance that the first areas in the renewed lockdown were social housing towers where immigrant families lived cheek by jowl. "Communication problems with residents were exacerbated by the authorities' failure to adequately recognise the need for cross-cultural communication. And the authorities in turn seemed not to trust the residents, with whom they had little contact," Duckett says.

Generations of neglect of public housing have caused overcrowding in the estates and created the conditions for rapid transmission of disease. The same could be said of jails, where our enthusiasm for locking up offenders has not been matched by our enthusiasm for building new prisons. Then, of course, there's our neglect of residential aged care.

When you think about it, the device of limiting the spread of the virus by locking down large parts of the economy and encouraging people to stay in their homes inevitably hurts the poor more than the well-off.

As a general rule (to which there will always be exceptions, without that stopping the rule from holding much truth), the more skilled, better paid and permanent jobs can be done safely from home, whereas jobs that involve the face-to-face delivery of services are more likely to be less skilled, less well-paid and less secure.

Many of these jobs – particularly in hospitality and tourism – just disappeared, while others kept going, but with greater risk of becoming infected. Health workers were particularly exposed, often with inadequate access to personal protective equipment. Disgracefully, this sometimes led to them being shunned in public.

The "flexibility" afforded by the growth in part-time and casual work has been of great benefit to employers and some benefit to young parents and full-time students. But when casuals work multiple jobs to make ends meet, any infection spreads further. And when they lack paid sick leave, their temptation to keep working despite symptoms is great.

Then there's our treatment of overseas students and others on temporary visas. The moment their costs exceed their benefits to us, we cut them adrift without a shilling.

"The privileged among us have been inconvenienced by the pandemic; the vulnerable have suffered and in some cases died because of its unequal health and economic effects," Duckett concludes.

Read more >>

We're edging towards a change in economic management

We must be in a recession because I’m getting a lot more letters from readers telling me they’ve figured out how to fix the economy in a way the economists haven’t been smart enough to discover.

Their solutions can be weird and wonderful, but a lot of them boil down to a simple proposition: if the economy’s in recession and unemployment’s high because people aren’t spending enough money, why doesn’t the government just print a lot of money and spend it itself?

But here’s the scoop: the idea that, rather than borrowing to fund their budget deficits – thus incurring big debts and interest bills – governments should just create the money they need has been anathema to economists for the past 40 years, but this may be changing.

There is a growing debate among economists, between the proponents of what they call “modern monetary theory” and more conventional economists and econocrats over whether governments should just create the money they need.

The defenders of the conventional wisdom have had to concede a lot of ground. Whereas a decade ago MMT was lightly dismissed as a crackpot idea, as this radical idea has gained more attention its opponents have had to admit it would be perfectly possible to do. They just think it would be a really bad thing to do.

Trick is, the “unconventional policy” of “quantitative easing” – where the central bank buys second-hand government bonds and other securities and pays for them merely by crediting the seller’s bank account – is quite similar to what the radicals are seeking.

All the major advanced economies – the US, the Eurozone, Britain and Japan - began doing this in big licks in the aftermath of the global financial crisis in 2008, once their official interest rates were so close to zero that they could be pushed no lower.

And now, once this coronacession had prompted our Reserve Bank to drop our official rate to its “effective lower bound” of 0.25 per cent in March, it too has resorted to quantitative easing, promising to buy as many second-hand bonds as necessary to keep the interest rate on three-year government bonds no higher than 0.25 per cent.

So, how exactly would what the Reserve is already doing be very different to what the MMT advocates say it should be doing?

The greatest proponent of MMT is an Australian, Professor Bill Mitchell, from my alma mater, the University of Newcastle. Internationally, its highest profile salesperson is Professor Stephanie Kelton, of Stony Brook University in New York, author of the big-selling The Deficit Myth.

Our leading commentator on the debate is Dr Stephen Grenville, a former deputy governor of the Reserve. And our most vocal opponent of MMT is present Reserve governor Dr Philip Lowe.

Those opponents are right to say there’s nothing new about “modern” monetary policy. In the days before the loss of faith in simple Keynesianism, it was common for governments to fund their budgets partly by selling bonds to the Reserve Bank, rather than to the public.

So the fatwah on governments “printing money” dates back only as far as Milton Friedman and his monetarists’ semi-successful attack on Keynesian orthodoxy in the late 1970s, when all the developed economies had a big problem with high inflation.

Friedman argued that inflation was “always and everywhere a monetary phenomenon” which governments could control by limiting the supply of money. Governments eventually realised that the quantity of money was “demand-determined” and that setting targets for growth in the money supply didn’t work. They switched to using the manipulation of interest rates to target the inflation rate.

As sensible economists always knew, it was never true that creating money always leads to greater inflation. It does so only when the demand for “real resources” – land, labour and physical capital – exceeds the supply of real resources. Only then do you have “too much money chasing too few goods”.

This has been confirmed by the failure of all the money created by quantitative easing since the global financial crisis to cause much, if any inflation, contrary to the predictions of the world’s few remaining monetarists.

The opponents are also right to say, quoting Friedman’s most famous aphorism, that “there’s no such thing as a free lunch” and it’s a delusion to imagine MMT offers one.

As Lowe argued vigorously at his appearance before the Parliament’s economics committee earlier this month, in reply to questions from Greens leader Adam Bandt, it may seem that by creating money rather than borrowing it you’re avoiding a lot of debt and interest payments but, in reality, all you’re doing is delaying and hiding the bill to the government and its taxpayers.

It’s also a delusion (as the leading proponents of MMT acknowledge) that governments would be free to create (or “print”, to use a misleading metaphor) as much money as they needed, without restraint. The restraint is the same one it always was: the limited supply of real resources.

While ever the demand for real resources – the things we use to produce goods and services – is falling short of the supply of those resources, creating money should lead to increased demand for them (provided you do it more effectively than the big central banks did it after the financial crisis).

But once demand was growing faster than the supply of real resources, any further money you created would simply cause inflation. This is what’s really worrying the opponents of MMT (and me). If you let the politicians off the leash to spend as much as they liked up to a point, how would you ever get them to stop once that point was reached?

While ever all we’re doing is quantitative easing, the independent central banks do the deciding, not the politicians. Which brings us to Lowe’s “advanced negotiating position”: why risk letting the pollies start creating money when the government can borrow from the public at interest rates that are pathetically low. And Lowe’s promising to keep them low for as long as necessary.

Read more >>

The young will carry the worst scars from this recession

When Scott Morrison spoke to the first day of the National Youth Commission's virtual "youth futures summit" on Monday, he sought to assure the young people that, difficult as the pandemic and the economy are at the moment, there is another side to it, "where Australia emerges once again, where we actually do go back to the life that we loved".

I'm sure that's true. But if past recessions are any guide, most of us will have recovered from the coronacession and be back enjoying the life we love long before most of the present crop of youngsters leaving education have found themselves a decent job.

If the past is any guide, the government won't do nearly as much as it should to help those youngsters who, "through no fault of their own", as Morrison would say, had the immense misfortune to be born in the wrong year or three.

And, quite apart from the pain so many young people will suffer, the money the taxpayer saves from that neglect is likely to be exceeded by all the subsequent cost to the budget in healthcare, unemployment benefits and workers whose reduced incomes mean they don't pay as much tax as they might have.

The greatest burden of recessions always falls on the young for the simple reason that employers' automatic response to a recession is to cancel their annual intake of school and university leavers. The deeper the recession, and the slower the recovery from it, the more years that entry-level hiring is postponed.

This was the case for many years after the global financial crisis of 2008 even though, for the rest of us, a recession was avoided.

You've heard that, unusually in this recession, the greatest burden has fallen on women rather than men. But this can be true while it remains true that the young are the greatest losers. That's because a disproportionate share of the women is young.

As summarised for the summit by the independent economist Saul Eslake, recent research by Treasury has found that people who enter the jobs market for the first time during a recession are less likely to change jobs – which means they're more likely to miss out on one of the main ways by which people get pay rises during their first 10 years in the workforce (that is, by changing jobs).

This matters because almost 80 per cent of lifetime wage rises occur during the first 10 years of someone's working life. So the "scarring" effect of leaving education in a bad year lasts for 10 years.

Treasury finds that the scarring effect has been bigger since 2000 than it was in earlier recessions, so that the most recent generations of young people have been affected more than previous generations. And it's worse for women than for men.

All this is consistent with the interim findings of a nationwide inquiry into youths' transition from education to employment, which the National Youth Commission published on Monday. It finds that unemployment for 15- to 24-year-olds is consistently higher than for 25- to 64-year-olds. And that traditional pathways to employment for young people have eroded over the past couple of decades.

One thing that's changed over the years is the growth of underemployment. To the present unemployment rate of 7.5 per cent and rising must be added the underemployment rate of 11.2 per cent, representing those who have some paid work but want more.

Just remember it's the young who dominate the underemployed. Many of them have multiple jobs, but still can't make ends meet. Many are in the "gig economy", whom governments have allowed to be defined as "independent contractors", thus permitting those wonderful innovative outfits that run app-based fast-food delivery and all the rest to sidestep the legal obligations of an employer.

Remember, too, that the seeming epidemic of "wage theft" – which, by their neglect, governments have done too much to allow and too little stamp out – would be perpetrated particularly on the young.

Unsurprisingly, the inquiry found the (pre-pandemic) levels of the youth allowance and unemployment benefits – which successive governments have frozen in real terms for 25 years – are inadequate. It's the young who suffer most from this parsimony.

Morrison and his ministers have repeatedly defended the $40 a day by saying people are on the dole only temporarily before they find a job. That was certainly the reasonable expectation in the past. Now, however, it's one of the respects in which the inquiry found the system no longer fit for purpose.

Another respect is, it's no longer true that most jobs for young people are full-time. Only in the past month has the government temporarily changed the means test to encourage the unemployed to look for part-time jobs. Pity so few of them are on offer at the minute.

The youth commission has proposed a detailed "youth futures guarantee" laying out reforms and measures that would better support our young people in meeting the challenges they face. Challenged to respond to the proposal, Morrison was masterfully noncommittal.

Read more >>

Pandemic could kill off governments' credit rating bogeyman

I guess we shouldn’t be surprised that an economic shock as big as the pandemic is breaking down longstanding rules – written and unwritten - about how the national economy should be managed.

One rule is the rigid demarcation between fiscal (budgetary) policy and monetary (interest-rate) policy. Another is that the states leave management of the macro economy to the feds, and stick to a Good Housekeeping approach to their own budgets. A third is that there should be free trade and movement between the states.

A corollary of the strict separation of fiscal policy and monetary policy is that the federal government and its Treasury should leave all public comment about the appropriate levels of interest rates and the dollar to the independent Reserve Bank, while the Reserve makes no public comment on the appropriate levels of government spending, taxation and budget deficits.

On that convention, Reserve governor Dr Philip Lowe has been stretching the friendship almost since the day he took the job in 2016. His problem is that macro management works best when both arms of policy are pushing in the same direction: either moving the economy along or holding it back.

But whereas his goal has been to use low interest rates to stimulate a weak economy and get unemployment down, the Abbott-Turnbull-Morrison government’s goal has been to tighten fiscal policy and turn the budget deficit into a surplus.

Lowe hasn’t been able to resist the temptation to note - repeatedly - that he could do with more help from fiscal policy. And as the level of interest rates has fallen further and further towards zero, he’s been more and more outspoken. Now the official interest rate has reached the “effective lower bound” of 0.25 per cent, he’s been even more importuning.

But in his evidence to the House of Reps economics committee a fortnight ago, he moved to putting the hard word on the premiers. Replying to a question about fiscal stimulus, he said: “I think we need both the federal government and the state governments carrying their fair share.

“The federal government, I understand, has announced measures so far equivalent to roughly 7 per cent of gross domestic product ... The measures to date from the state governments add up to close to 2 per cent of GDP ...

“The challenge we face is to create jobs, and the state governments do control many of the levers here. They control many of the infrastructure programs. They do much of the health and education spending. They’re responsible for much of the [regular] maintenance of much of Australia’s infrastructure.

“So I would hope, over time, we would see more efforts to increase public investment in Australia to create jobs, and the state governments have a really critical role to play there.”

At the national cabinet meeting on Friday, we’re told, Lowe told the premiers they should collectively spend $40 billion over the next two years – equivalent to 1 per cent of GDP per year – on job creation measures, including infrastructure, social housing and training.

Trouble is, the states have already done about as much as they can without exceeding the borrowing limits set by the credit-rating agencies, and so endangering their triple-A ratings. So what’s Lowe’s solution to that problem? Dooon worry about ’em.

At the parliamentary hearing, he said: “From my perspective, creating jobs for people is much more important than preserving the credit ratings. I have no concerns at all about the state governments being able to borrow more money at low interest rates. The Reserve Bank is making sure that’s the case.”

At one level, this is a sign of the momentous times we live in. Governments around the world are borrowing massively as the only way they can think of to overcome the coronacession. With interest rates on long-term government borrowing at unprecedented lows, what have they got to fear?

In effect, they’re daring the three big American for-profit rating agencies to downgrade them. And so far, those supposedly righteous judges haven’t accepted the dare. Perhaps they’re remembering the time after the global financial crisis when one of them had the temerity to downgrade US government bonds. No one took any notice.

The presumed penalty for being downgraded is that the bond market increases the interest rate it requires to lend to you. But what if the market has stopped listening? In any case, with interest rates ultra-low, why should anyone fear having to pay a tiny fraction more?

At another level, however, this is Lowe telling Treasuries, federal and state, that the jig is up. Ever since the mid-1980s, they’ve used the threat of a rating downgrade as a stick to wave over the heads of the spending ministers, to limit their spending. They’ve used the rating agencies as the ultimate policemen enforcing Smaller Government.

Not any more, it seems. Right now, apart from the appalling prospects for unemployment, Lowe has bigger worries: the push from the proponents of “modern monetary theory” urging governments to stop funding their budget deficits by borrowing from the public and just print the money they need.

In Lowe’s mind, this would be the ultimate breach of the separation of fiscal policy and monetary policy. The elected government would be telling the independent central bank how much money to create.

Lowe would be willing to bend the rules a lot to avoid this ultimate breach. He certainly wouldn’t want the rating agencies adding to the pollies’ temptation to print rather than borrow. But he would be willing to resort to “unconventional measures” and buy big quantities of second-hand Commonwealth and state government bonds and so ensure their interest-rates stay ultra-low.

Read more >>

It may be a terrible recession, but it could have been worse

In economics, everything is relative. Relative to you, the coronacession is likely to be the worst economic disaster you’ll experience in your lifetime. Relative to Australia, it is – as the media (including yours truly) keep telling us – the worst recession since the Great Depression of the 1930s.

But, as a report published this week by the Lowy Institute reminds us, there’s another side of the story. Relative to what we were expecting initially, the recession isn’t as bad as feared. And relative to many other developed economies, we’ve got off lightly.

The report is by Dr John Edwards, a former member of the Reserve Bank board. Perhaps in reaction to his former career as a journalist, Edwards has a penchant for highlighting the aspects of an economic story his former colleagues have tended to gloss over. Which means he finds the not-so-bad bits – and so is always worth hearing from.

How badly a country is suffering economically is largely a function of how well it responded to the pandemic. Those that followed the medicos' injunction to "go early, go hard" have done better than those that procrastinated. Fortunately, and thanks in large part to Scott Morrison’s leadership, we’re in the former group.

Edwards says that, because of our early success in controlling the virus, the "pandemic in Australia is fading sooner and with less economic damage than expected. While the secondary wave of infection in Victoria is a big setback and there may yet be other regional or local outbreaks, the economic recovery already evident is set to continue."

The pandemic "from which Australia is now emerging was the most abrupt, savage and frightening economic shock in the lifetime of most Australians. But the jolt was also short and unexpectedly shallow."

If you judge it by the progress of the economy’s output (real gross domestic product), you may not be convinced the recovery has begun. But judging it by the state of the jobs market, which is what matters most, leaves little doubt.

The best measure of the immediate employment response is the total number of hours worked in the economy. Between March and April we experienced an astonishingly swift fall of 9 per cent. The following month it fell by less than 1 per cent. In June, however, it rose by 4 per cent. The 1.3 per cent rise in July signals a slowdown in the rate of the jobs recovery.

So in July we were still down 5 per cent on July 2019. But here's Edwards’ other way of looking at it: "Through the four months of what was widely portrayed as a general economic cessation, a large proportion of Australian employees kept working.

"New networking technologies permitted most office work to be performed at home. Mining and farming continued. So did much of manufacturing and construction. Electricity, gas and water utilities employees kept their jobs.

"Throughout Australia, public servants continued working, often at home. Tradespeople, cleaners and gardeners more often than not were working. Most health employees remained on the job, busier than ever. Childcare facilities remained open in most places and, where necessary, classroom teaching continued remotely. Media workers struggled to keep up with the demand for news and entertainment.

"The economic cessation, such as it was, centred on restaurants, clubs, pubs and accommodation, discretionary retail such as clothing and furniture, local and international travel, sports, entertainment, and the arts.

"Take-up of the JobKeeper program, which helped businesses retain employees, was far lower than expected because the economic damage was less than expected. All up, most of the Australian workforce remained on the job, either from their usual place of work or from home."

Surprisingly, most of the economic downturn took the unusual form of a sudden cessation in household consumption.

While it’s true that colleges and universities have been hurt by the suspension of foreign student arrivals, Edwards says the majority of international students living in Australia before the pandemic stayed. Indeed, many of them had little choice. Quarantines will remain necessary, but plans are now being made to permit the resumption of student arrivals.

More than nine million foreigners, mostly tourists, visited Australia last year. The number arriving since March this year is “scarcely worth counting," he admits. The resumption of mass foreign travel, unimpeded by quarantine, awaits not only the discovery and approval of a vaccine, but also its worldwide distribution in millions of doses.

But get this: in the short term, however, the suspension of normal international travel actually adds to Australia’s gross domestic product. That’s because Australians’ spending abroad exceeds foreigners’ spending in Australia.

Now, compare how we’ve fared with how the other rich countries have. Taking total coronavirus deaths as a proportion of the population, Edwards calculates that our rate is less than a thirtieth of the rates for the United States and Britain.

So it’s little wonder our economy hasn’t been as badly hit. Using the forecasts of the International Monetary Fund, the economic contraction in the United States, the whole of the Euro area, Britain and Canada will be twice the size of our contraction.

Global economic growth will be lower than it would otherwise have been for years to come. And, "while unemployment will be the principal domestic problem, the changing global context will also shape the Australian economy for years to come", Edwards predicts.

Doesn’t sound good. But he has found a silver lining: “The impact for Australia of lower global demand and production is mitigated because three-quarters of its goods exports are to East Asia, a region that is growing faster than Europe or the United States and which, in most cases, has handled the pandemic well.

"While world output [gross world product] will contract nearly 5 per cent in 2020 on IMF forecasts, developing Asian countries will contract by less than 1 per cent."

For us, it all could have been much worse.

Read more >>

We've been electing governments that damage our kids' future

One of the most dismal ideas for our youth to entertain is that their lives won't be as comfortable as their parents'. Everyone in the older generation knows how much their lives have improved over the decades, and how much better off we are than our parents were.

We've come to regard continuous improvement in living standards and quality of life over the generations as part of the natural order. Our pay-off for living in a capitalist economy.

So how can our kids have become so pessimistic about the future? How can they imagine their parents would allow such an appalling prospect to befall their offspring? Isn't improving their kids' chances in life a big part of the reason parents work so hard?

Isn't it why so many parents pay so much to send their kids to private schools? Isn't preserving their kids' inheritance the reason the well-off retired fought so hard against Labor's plan to take away their dividend franking credits?

How could any government that presided over a significant deterioration in our children's prospects hope to survive?

Trouble is, the kids are right to be so pessimistic. We can't know what the future holds, but we do know that various trends in that direction are well-established.

And the plain truth is that one way governments have got themselves elected and re-elected in recent decades has been to pursue policies that favour the old and don't worry about the young.

Politicians have been tempting us to put our immediate interests ahead of our offspring's future – and it's worked a treat.

This week the Actuaries Institute of Australia published a new index of intergenerational equity, which compares the "wealth and wellbeing" of people aged 65 to 74 with that of people aged 25 to 34 between 2000 and 2018.

Note that this is before any effect of the coronacession. And remember that the faces in these two aged groups keep changing as people age. No one who was between 65 and 74 in 2000 is still in that group now.

Since the Baby Boomers were born between 1946 and 1964, probably more than half of them were in the 65 to 74 age range by 2018. And the Millennials were joining the 25 to 34-year-olds.

The actuaries have divided "wealth and wellbeing" into six "domains": economic and fiscal (allocated a subjective weighting of 30 per cent in the index), health and disability (20 per cent), social (including rates of homelessness, incarceration and being a victim of robbery; 15 per cent), environment (15 per cent), education (10 per cent) and housing (10 per cent).

The scores for people aged 65 to 74 in 2000 were given an index value of 100. In the same year, the scores of people aged 25 to 34 amounted to 70. It's hardly surprising that people 40 years younger have significantly lower scores. They've had much less time to gain promotion, earn, save and pay off a home (or even receive an inheritance).

No, what matters more is how the two groups' scores have changed over time. Over the 18 years, the older group's score has risen to 115, whereas the younger group's score has fallen to 69.

Turning to the size of the young's deficit relative to the old, it improved from minus 30 to minus 11 between 2000 and 2006 – presumably mainly because the young did well in the resources-boom-driven labour market – but then deteriorated to minus 20 by 2012.


That year, 2012, was when the resources boom started winding down. And it was when the Baby Boomers started reaching 65. Over just the six years to 2018, the young's deficit relative to the old worsened dramatically to minus 46.

But why has the position of the young relative to the old deteriorated so badly since 2006? Well, they've benefited from improving health, as life expectancy has increased and rates of disability have decreased.

They've benefited also from increasing levels of educational attainment and, socially, from modest reductions in the gender pay gap and falling rates of robbery (which affect the young more than the old).

But these gains have been more than countered by losses in other domains. In ascending order of loss, young people have suffered economically as, since the global financial crisis, education-leavers have taken much longer to find full-time jobs; government spending has been skewed towards older generations (higher spending on health, pensions and aged care, but less on the rate of unemployment benefits) and public debt has risen.

The young have suffered in housing, as the rate of home ownership for their age group has dropped from 51 per cent to 37 per cent over the past two decades. But their greatest loss (sure to grow in coming years) is from the deterioration in the natural environment: rising carbon emissions and temperatures, the drying Murray-Darling Basin and declining biodiversity.

And all these trends before the likely weak and prolonged recovery from the coronacession scars the careers and lives of another generation of education-leavers, without governments or voters being too worried about it.

Read more >>

Tribal prejudices about wages guarantee a weak recovery

Neither side of politics wants to admit it, but it’s a safe bet that the economy’s recovery from the coronacession will be weak and slow until we get back to strong growth in wages.

Scott Morrison and the Liberals can’t admit it because it flies in the face of their tribe’s view that the unions have too much power, that wage rises are always economically damaging and that public servants are underworked and overpaid.

Meanwhile, Anthony Albanese and Labor can’t admit it because they live in fear of being portrayed as anti-business and because tribal loyalties mean they’ve taken on the union movement’s vested interest in ever-increasing compulsory super contributions.

Last week we learnt that, as measured by the wage price index, after growing by a weak 0.5 per cent or so per quarter for the past six years, wages grew by just 0.2 per cent in the June quarter, the first virus-affected quarter. This took annual growth down to 1.8 per cent.

Worse, wages in the private sector grew by just 0.1 per cent in the quarter. This included actual falls in some wage rates, those negotiated by individual arrangement with people in senior executive and highly paid jobs.

The Reserve Bank sees annual wage growth falling to 1.25 per cent by the end of this year, and staying there until the end of next year. By the end of 2022, it will have recovered only to its present well-below-par rate.

Wage growth is the key to recovery because wages are the greatest single driver of economic activity and employment. But rather than thinking of ways to get wages up, both sides are working on ways to slow them further.

Not that private sector employers will need any help. They always skip pay rises during recessions because, afraid of losing their jobs, workers know they’re in no position to argue.

But, while as individuals, firms benefit from cutting the real value of the wages they pay, when all of them do it at the same time, they all suffer because the nation’s households have less money to spend on the products of the nation’s businesses.

So what can governments do? Well, they can at least avoid doing anything that makes real wage growth any weaker. Federal and state governments can resist the temptation to cut the real wages of their own employees.

This helps sustain household income directly, but also indirectly because employer and employee judgments about what’s “a fair thing” are influenced by what other employers are doing – that is, by wage “norms”.

State Labor governments have been as bad as Coalition governments in using weak growth in private sector wages as an excuse to slow the growth in their own wages. They haven’t, however, been as muddle-headed as the NSW government in freezing its public servants’ wages so as to “stimulate” their economy by using the saving to pay for additional infrastructure spending.

Robbing Peter to pay Paul ain’t stimulus. And the Australia Institute has used the Australian Bureau of Statistics’ “input-output tables” to show that whereas every $1 million spent by consumers (including public servants) generates 1.79 jobs directly, every $1 million spent on construction generates only 0.97 jobs.

But federal Labor is worse. It’s thrown its weight behind the for-profit and industry superannuation funds’ campaign to ensure the rate of compulsory employer super contributions is raised from 9.5 per cent of wages to 12 per cent over the next few years.

Labor and the unions have turned a blind eye to the theoretical and empirical evidence that employers largely recover the cost of super contributions by granting pay rises that are lower than otherwise.

So, at a time when we need workers to be spending as much as they can, and the rate of household saving is way too high, the labour movement wants workers to save an even higher proportion of their wage – even though the more we save the less jobs growth we get.

(The Grattan Institute’s Brendan Coates has demonstrated that the present contribution rate of 9.5 per cent is sufficient to yield workers a comfortable income in retirement, and that the Morrison government’s early release of super to distressed workers will have little effect on this because most of it will be made up by part-pension payments that are higher than otherwise.)

Finally, Morrison and the Liberals are working on plans to further “reform” the wage-fixing system by making changes that the employers want but the unions oppose. This would leave everyone better off, we’re told, by making the system more “flexible”.

At a time when the system is, if anything, too flexible – witness: so much part-time and casual labour, labour-hire, phoney self-employment, the “gig economy”, almost non-existent strikes, and six years of chronically weak wage growth – this could only increase employers’ power to keep wages low.

See what I mean? Wage growth looks set to stay even weaker than it was before the coronacession.

Read more >>

The last thing we need: neutering the free-trade referee

With the coronavirus putting the world economy into its worst dive in almost a century, it would help if the surviving trade in goods and services between countries was continuing in an orderly way. But, as if we didn’t have enough problems, the future of the international body responsible for ensuring free and fair trade, the World Trade Organisation, is in grave doubt.

The eternal temptation in international trade is protectionism: please buy all our exports, but we’ll be importing as few as possible of your exports. It’s tempting because, to the voters in every country, it seems just common sense to favour your own industries over their rivals in other countries.

Only when you’ve learnt a bit of economics – about the gains from specialisation and exchange, in particular – do your realise that first, it’s the consumers of the protected products and all the local industries you don’t protect who pick up the tab, and second, when you try to steal a march on other countries, they usually retaliate, which ends up meaning you’re both screwed.

That’s why the WTO was set up: to help its 164 member countries reduce their import duties (“tariffs” as economists call them) and other restrictions on imports, and then keep them down, so all the members are better off.

As explained in a report from the Lowy Institute, prepared by Dmitry Grozoubinski, a former trade negotiator with our Department of Foreign Affairs and Trade, the WTO has three main roles.

First, the negotiation of successive “rounds” of mutual reductions in tariffs and import bans or quotas by all the members. After the establishment of the Geneva-based General Agreement on Tariffs and Trade (GATT) after the end of World War II, eight multilateral rounds of reductions were negotiated.

In the early rounds, the members were mainly the developed countries and they concentrated on reducing the tariffs on manufactures that had built up in the 1930s as countries tried to use protection to end the Great Depression, but succeeded only in making it worse.

The result of the rounds was hugely increased trade between the rich countries, which many economists believe contributed greatly to the post-war period of rapid economic growth, rising living standards and full employment, but which ended with the coming of “stagflation” – high inflation and unemployment – in the mid-1970s.

By the “Uruguay round”, completed in 1994, the negotiations had broadened to cover textiles, agricultural subsidies, services and intellectual property. Many developing countries had joined the agreement and benefited from the liberalisation of trade in clothing and textiles, and rural products.

But the round’s most spectacular achievement was turning the GATT into the World Trade Organisation, still based in Geneva. Many more developing countries joined, as did China in 2001.

The WTO’s second role is to monitor member countries’ compliance with the rules agreed on during the rounds. One rule is that once a tariff reduction has been agreed on, it’s then “bound” and mustn’t be increased.

But the most important rule is “most favoured nation”: no other country should be given a special deal. So the lowest tariff you impose on some nation must be the one you impose on every other member. Another key rule is “national treatment”: imported and locally produced goods must be treated equally.

The point of these rules is to keep world trade both free and fair; to discourage countries from backsliding and help governments resist local pressure to revert to protection. In particular, to stop small countries being pushed around by big countries.

And so you see why a middle-size country like ours has much to gain from living in a world where every country sticks to the rules – and much to lose when the big boys on the block decide to start throwing their weight around.

The WTO’s third role is to formally adjudicate trade disputes between its member countries, thereby enforcing its rules. Serious disputes go to a court-like “dispute settlement body” and, if necessary, to an “appellate body”.

So, what’s the problem? Why is the WTO in deep trouble? Because, in Grozoubinski’s words, “all three pillars are wobbly, and had been long before the Trump administration started taking a sledgehammer to them. Unquestionably, however, the picture in 2020 is grim.”

The first role – negotiating further rounds of reduced barriers to trade – is, he says, “hopelessly stalled”. The “Doha round” was launched in 2001, but was unable to reach agreement, partly because it’s much harder for so many developed and developing countries to find common ground. The last attempt to make progress was in 2013.

Meanwhile, countries have shifted from seeking multilateral agreements to doing any number of bilateral (misnamed) “free-trade agreements,” which breach the spirit if not the letter of WTO rules such as “most favoured nation”.

The second role – monitoring members’ compliance with the rules – “relies on international peer pressure for the bulk of its enforcement,” but the world is in the grip of a trade war between the United States and China, meaning the US has gone from decades of getting everyone else to agree on sensible rules and stick by them to ignoring any rules it finds inconvenient in its quest to “make America great again”.

As for the third role – a binding dispute settlement mechanism – in December the US used a procedural blockade to render the WTO’s appellate body “impotent and unable to convene the required quorum of three panellists,” thus rendering the formerly legally binding system of arbitration optional.

If that wasn’t enough, the US is refusing to approve the organisation’s budget, and Congress has bills that would withdraw the US from the WTO (but which are unlikely to be passed). The outfit’s director-general has resigned, and any member could sabotage his replacement. The next conference of trade ministers has been delayed until at least 2021.

And all this is happening at a time of pandemic and escalating protectionism. Well done, chaps.

Read more >>