Doing health admin on the cheap may mean things go wrong

In my game, where you spend years watching the antics of politicians and bureaucrats from a ringside seat – say, watching the inquiry into Victoria's tragic hotel quarantine debacle – you tend to become cynical. But not as cynical as a gym buddy of mine, who's had much experience of such inquisitions.

He says that when everyone's denying having made the fateful decision, but saying they don't know who did make it, it's usually a sign they're trying not to dob in the boss.

It's possible the boss in question was now-departed health minister Jenny Mikakos, but I doubt it. Bureaucrats from one department don't usually cover for some other department's minister.

One thing I've noticed over the years is that when the hue and cry is closing in on the really big political boss, it's not surprising to see someone else take the dive on their behalf. If it's a public servant writing the so-sorry-I-misled-you-prime-minister letter, they can expect to be looked after in their next appointment. When it's another minister, it's usually less congenial.

The inquiry revealed various instances of ministers claiming not to have been briefed by their departments. So, the Sir Humphreys work it out themselves and let their ministers know later? Don't believe it. The days of Yes, Minister are long gone.

These days, department heads – federal and state – are sacked so often that senior public servants live in fear of displeasing their minister. How might that happen? If you told them something they'd prefer to be able to say they hadn't been told. Or even if you gave them advice that really annoyed them.

As so often happens, what was missing from the quarantine inquiry's proceedings was acknowledgment of the role of ministerial staffers. They're invisible, apparently. These days, much communication between a department and its minister goes via the staffers. They decide what's too trivial, inconvenient or potentially embarrassing to be passed on.

In all the toing and froing before the inquiry, you may have noticed a lot of witnesses declining to accept responsibility for "collective decision-making" decisions. Such evasion of responsibility is one of the besetting sins of public servants. Their political masters ought to put a stop to it. Which they would – were they not too busy playing the same game.

Back to the search for a guilty party. In Canberra lore, conspiracies are always trumped by stuff-ups. So I don't find it hard to believe that no one in particular made the decision to outsource the running of hotel quarantine to private contractors. It really was a decision that, in Scott Morrison's memorable phrase, "made itself".

It was taken without much thought or discussion because "that's what we always do". Outsourcing the provision of public services has become so ubiquitous no one thought of doing it any other way.

You may think that outsourcing the delivery of public services to for-profit providers – a form of privatisation – must be the bright idea of some naive economist, and you'd be right. Actually, half right.

An economist who's put much thought into government "contracting out", Oliver Hart, of Harvard, demonstrated that it was a good idea if your goal is to cut costs, but a bad idea if you care about maintaining the quality of the service.

This is because of a problem economists call "incomplete contracts". It's humanly impossible to write a contract that covers every problem that could arise and every way the contractor could game the contract at your expense. When you deliver the service yourself, you retain control over quality. Hart was awarded the Nobel prize for his sagacity.

Outsourcing is hugely fashionable in business as well as government. In my experience, it's always about saving money in the fond hope any loss of quality won't be noticed.

Often, the saving comes from ending the good wages and conditions you pay your own workers by sacking them and sending them down the road to work for some contractor on lower pay and worse conditions. It's a way of side-stepping successful unions.

In the public sector, however, another attraction of outsourcing is that it blurs lines of responsibility. "The contractors are giving you a hard time? Blame them, not me." "You'd like to see the contract I've made with the supplier? Sorry, commercial in confidence."

Truth is, governments at both levels and of both colours have gone for years saving money by contracting out wherever possible and imposing annual "efficiency dividends" (an Orwellian term for public service redundancies).

They've given us government on the cheap because they believed we'd prefer a tax cut to decent service. They could have striven to give us better government – including government that was big on accountability and where lines of responsibility were clear – but they settled for cheaper government.

They've spent decades cutting corners in a hundred ways, hoping we wouldn't notice (or do no more than grumble about) the slow decline in quality. Now the pandemic has caught them out. Pity so many lives were lost in getting the message through.

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Budget warning: more rent-seeking won't create jobs

While we wait to see next week’s budget, think about this: economists must shoulder much of the blame for past "reforms" that ended up doing more harm than good. But more of the blame should go to the politicians who allowed lobbying by generous industries to subvert reform and turn it into rent-seeking, or worse.

Lefty academics who bang on about the evils of what they love calling "neoliberalism" seem to see it as some kind of conspiracy between the economics profession and big business.

There’s some truth to this – after all, many economic practitioners work for or produce "independent" consultant reports for big business. But the old rule from politics applies: what may look like a conspiracy is more likely to be just a stuff-up.

The term neoliberalism – a pompous, hipster word only a "problematic" academic could love – conceals more truth than it reveals. The words we used in Australia when this way of thinking became dominant in the 1980s were "economic rationalism" in pursuit of "micro-economic reform" – the very thing Productivity Commission boss Michael Brennan advocated a return to in a speech last week.

The more revealing label, however, is the one preferred by two leading British economics professors, Paul Collier and John Kay, in their new and enlightening book, Greed is Dead: "market fundamentalism".

The economic rationalist thinking that drove extensive economic policy change in the ‘80s and ‘90s took the profession’s ubiquitous neo-classical, demand-and-supply model of how markets work and assumed it was all you needed to know about how the economy worked.

It thus overemphasised the role of competition between "self-interested" (selfish, greedy) individuals, but underestimated the role of co-operation and community spirit and the importance of touchy-feely things such as job security, loyalty and our trust in economic and political institutions in making the economy work well.

The simple model’s assumption that all individuals and firms unfailingly act with full foresight of their best interests implies that government intervention is unnecessary and may well make things worse.

So the greatest crime of the rationalists (including, until far too late, yours truly) was naivety. They saw reforms that worked well in theory and assumed they’d work just as well in practice. In many cases they did work well enough, but in too many others they failed badly.

Unintended consequences abounded, the greatest of which was what I call "the sanctification of selfishness". When the econocrats were planning the removal of import protection they confidently predicted a benefit would be to discourage "rent-seeking" – businesses incessantly lobbying the government for favours when they should be getting on with running their businesses more efficiently.

In reality, rent-seeking has become rife. Since the mid-80s, the Canberra-based lobbying industry must surely have been one of our fastest growing and most lucrative. The economists’ greatest naivety has been their assumption that successive governments would faithfully implement their reform plans while resisting the temptation to do favours for generous mates.

Which brings us to next week’s budget. Recent days have seen big business campaigning for tax breaks, a further shift in the industrial relations power balance in favour of employers, and the removal of "burdensome regulations", all to create jobs.

Trouble is, years of bitter experience have taught us to recognise rent-seeking when we see it. Because economic rationalists have left people with the notion that economic progress is driven solely by self-interest, the rich and powerful now see themselves as justified in demanding that the economy be re-organised in ways that facilitate their efforts to get richer and more powerful.

Among the various micro-economic reforms advocated last week by the Productivity Commission’s Brennan as ways of speeding up the recovery were: removing rigidities in the labour market, streamlining the approvals process for new businesses and improving the “culture” of regulators.

I have no doubt there are plenty of anachronistic, pettifogging, cumbersome provisions of industrial relations law that both sides could readily agree to remove. But I doubt that’s what the employers are seeking. They want their quid without any quo.

Equally, I don’t doubt that much could be done to minimise the time-wasting involved in the regulation of business, without compromising other public policy goals. But too often removing "green tape" is code for sacrificing long-term protection of our environmental assets in favour of letting a few developers temporarily create a few hundred jobs while they build some highly automated mining project.

And while the culture of pushing people around at Centrelink or the local council should definitely be corrected, the last time the pollies went down this road they left the banking and corporate regulators with the clear impression that what they wanted was a buddy-buddy culture. The banks concluded that, for them, obeying the law was optional, and we all remember what happened next.

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It won’t be just the budget that sets our speed of recovery

 In Scott Morrison’s efforts to get us out of the coronacession, lesson No. 1 is that it’s up to the government to produce the increase in demand we need by spending an absolute shedload of money. But this week the boss of the Productivity Commission interjected with lesson No. 2: while you’re at it, don’t forget the role of the supply side.

In every recession, “aggregate demand” (gross domestic product) goes backwards, and unemployment shoots skywards, because the private sector – households and businesses – have cut their spending on consumption and physical investment in new houses, business equipment and structures.

To get the private sector going again, the public sector has to more than make up the gap by greatly increasing its own spending. That’s particularly true in this recession because, with the official interest rate already close to zero, there’s been almost no scope for the authorities to do the other thing they usually do to get the private sector spending again: slash interest rates to encourage spending on borrowed money.

Because this government has made so much of the evils of “debt and deficit”, however, it’s been tempted to limit its budget spending by using economic reforms to pursue “jobs and growth”. The response of me and others has been to say “not so fast”. Reforms aimed at making our production of goods and services – the “supply side” of the economy - more efficient are no substitute for boosting the demand side of the economy when that’s what’s causing high unemployment.

After all, what could be more inefficient and wasteful than having hundreds of thousands of people who could be working and producing things sitting on their bums?

But in a virtual speech to the Australian Business Economists this week, Productivity Commission chairman Michael Brennan argued that the state of the supply side of the economy would be highly relevant to our success in having the economy recover as quickly as possible.

He made some good points. Note, he wasn’t challenging the fundamental importance of ensuring adequate growth in aggregate (total) demand. He was saying that the state of the supply side also matters. It’s not a substitute for adequate demand, but is an important supplement to it.

“Supply-side policy is an important enabler of the recovery, without which demand-side stimulus is incomplete or compromised in its effectiveness,” he says. It’s not so much about correcting inefficiency in the allocation of resources (labour, capital and land), as about “dynamic efficiency” – the speed with which the economy can move from one state to another, and how we minimise the various “frictions” that slow it down.

He says there are three main reasons why we should focus on micro-economic policy even in the midst of a recession. First, the coronacession is not just a demand shock, it’s also a reallocation shock. It will involve many workers, and much capital and land-use moving between industries and locations. Some industries will get bigger, some smaller.

Change in the industry structure of the economy is happening continuously, but a lot more of it happens during and after recessions. Many more businesses go out backwards, while new ones spring up. As well, firms use the impetus or excuse of the recession to stop doing unprofitable things they should have stopped doing years earlier.

Classic example: all the firms in this recession slashing the amounts they’re prepared to pay for sport broadcast rights and sponsorships. They’re blaming the tough times, but they’re also correcting their own error in allowing bidding wars to push the salaries of professional sportsmen (but few sportswomen) way above their commercial value.

So recessions involve much reallocation of resources. The economy won’t have fully recovered from the recession until that process is complete. But how long it takes will be heavily influenced by the frictions that slow it down.

Brennan quotes research showing that reasons for delay in reaching the new allocation “include the time needed to plan new enterprises and business activities, the time required to navigate regulatory hurdles and permit processes to start or expand businesses, time [to acquire new financial and physical] capital . . . and [time to seek out] new relationships with suppliers, employees, distributors and customers”.

His point is that some of these delays are caused by government regulation, so there are things governments could do to speed up the reallocation process and thus cause unemployment to come down faster.

Brennan’s second reason for arguing that micro-economic policy is relevant to the recession is the need to facilitate the forming of new businesses, and the possibility that recent experience of the pandemic leads entrepreneurs to overestimate the risk of future disruption to any business they start.

Governments can try to offset such “belief scarring” by streamlining the approvals process for new businesses, improving the culture of regulators, reforming insolvency rules, and in other ways.

Brennan’s third reason for arguing the relevance of micro policy is that reforms can help reduce the disruption caused by macro-economic shocks by making the economy more resilient – able to roll with the punches. (I believe this was one of the big but unexpected benefits of the Hawke-Keating government’s many micro reforms, which helps explain why we went for 29 years between recessions.)

But though Brennan makes good points, let me make two. As he envisages them, the reforms he advocates would leave us better off. But economists’ grand plans have to be implemented by fallible politicians and, as we’ve seen too many times in recent decades, by the time the pollies have engaged with the lobbyists what emerges is often more akin to rent-seeking than good policy.

Finally, unlike macro measures, micro reforms usually take some years to be brought into effect and then have their affect on behaviour. So, unless we take years to recover from this recession, any micro reform we begin now will be in time to help us with the next one.

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How economists got it wrong for so long

Most economists are great believers in the need for "reform" – for other people, not themselves. Over the past 30 or 40 years, no profession has had more influence over the policies governments have pursued, but the results have hardly been flash.

Even the lightning speed at which an epidemic in part of China became a pandemic reaching every corner of the globe can be blamed in large part on the globalisation that economists long championed.

After the unmitigated disaster of the global financial crisis of 2008 – which the economists not only failed to foresee, but did much to help bring about by their advocacy of deregulated financial markets – many people assumed this would force the economists, shamefaced, back to the drawing board.

It didn't happen. But the poor performance of economies in the decade following the Great Recession hasn't allowed the more intellectually honest among the world's economists to delude themselves that all's well with their theories and policy prescriptions.

At present, politicians and policymakers are preoccupied with suppressing the virus and countering the coronacession this effort has led to. Economists are worried about the depth of this recession, and are warning politicians that they'll need to spend (and borrow) unprecedented sums to bring about a sustainable recovery.

A big part of the economists' concern arises from their knowledge that deep, structural problems had caused the rich economies to be in a weak state before the arrival of the virus. This suggests that, without an extraordinary effort by governments, the recovery is likely to be slow, with unemployment staying high.

Worse, the "normal" to which we return after the virus has been fully vanquished isn't likely to be nearly as good as the normal we remember. Not only will material living standards be improving at a glacial pace, but there'll be continuing, maybe worsening, social conflict (not to mention a worsening climate).

The good news, however, is that leading thinkers among the world's economists are still grappling with the embarrassing question of why their profession's advice over many decades seems to have made our lives worse rather than better.

I'm just back from a couple of weeks catching up on my reading. I noticed several books by well-known economists coming to similar conclusions about how the ideas of "neoliberalism", which dominated economic advice to governments for so long, led us astray.

In their book Greed is Dead, two leading British economics professors, Paul Collier and John Kay, both from Oxford, argue that the problem with what they (and I) prefer to call "market fundamentalism" – which oversimplifies and takes too literally the basic model of how markets work – is its overemphasis on the role of competition between self-interested individuals in generating economic progress.

By sanctifying selfishness, it has undermined community-mindedness and the role of co-operation in advancing our mutual interests. Voting has become a simple matter of "what's in it for me and mine", while businesses and industries have been licensed to lobby for preferment at the expense of everyone else.

"In recent decades the balance between these instincts [of competition and co-operation] has become dangerously skewed: mutuality has been undermined by an extreme individualism which has weakened co-operation and polarised our politics," they say.

In his book, The Third Pillar, Raghuram Rajan – a US-based Indian economist who did foresee the global financial crisis, but was told by his elders and betters not to be so stupid – argues that society is supported by two obvious pillars, the state and markets, but also by a neglected third pillar: the community. That is, the social aspects of society.

"Many of the economic and political concerns today across the world, including the rise of populist nationalism and radical movements of the Left, can be traced to the diminution of the community," he says.

"The state and markets have expanded their powers and reach in tandem, and left the community relatively powerless to face the full and uneven brunt of technological change. Importantly, the solutions to many of our problems are to be found in bringing dysfunctional communities back to health."

In his book, The Common Good, Robert Reich defines his subject as "our shared values about what we owe one another as citizens who are bound together in the same society – the norms we voluntarily abide by, and the ideals we seek to achieve".

Since the late 1970s, however, Americans have talked less about the common good and more about self-aggrandisement; less "we're all in it together" and more "you're on your own". There's been "growing cynicism and distrust toward all the basic institutions of American society – governments, the media, corporations" and more.

But the last, more hopeful words go to Collier and Kay: "We see no inherent tension between community and market: markets can function effectively only when embedded in a network of social relations.

"Humans are not selfish, maximising individuals, pursuing their conception of happiness; they seek fulfilment which arises largely from their interaction with others – in families, in streets and villages, at work."

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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.

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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.”

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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.

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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.

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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.

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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.

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