Years of neglect won't make it easy to get wages up

In Tuesday night’s budget, it will be important to note its assumptions about when our international borders will be back to functioning normally. Not because they’re sure to be right, but because our borders will have a big impact on Scott Morrison’s new strategy of getting unemployment down to get wages – and thus living standards – up.

As the Commonwealth Bank’s Gareth Aird has reminded us, fancy calculations about how low unemployment has to fall before labour shortages force employers to bid up wages, rest on the (usually reasonable) assumption that our borders will be working the way they always have.

If our borders are temporarily closed to immigration and overseas students, however, the point where skill shortages emerge may arrive a lot earlier than the fancy calculations suggest. What’s more, it’s become clearer that the day where our border conditions return to normal may be a lot further into the future than we’d first hoped.

It will be interesting to search the budget papers for signs that these complications don’t come as news to the economic managers, but have been built into the new strategy’s design.

The point is that over the decades of what we used optimistically to call “micro-economic reform”, our employers have become used to the idea that finding enough skilled labour – or even unskilled people willing to do the crappy, badly paid jobs that most Australians aren’t, fruit-picking for instance – isn’t something you have to worry much about.

Whenever you look like running out of the workers you need, you just bring someone in on a temporary visa. If they turn out okay, you help them move to a permanent visa. Our immigration program used to be about recruiting factory fodder for the manufacturers, now it’s about people on many classes of temporary visas allowing employers instant access to skilled workers trained by someone else at some other country’s taxpayers’ expense.

The trouble with this is that it’s come at the expense of our technical education system and our young people. Our business people no longer need to worry about whether they’ll have enough skilled workers a few years down the track, so no longer put enough money and effort into training apprentices, trainees and other technical workers.

I see it as further evidence for my theory that part of the reason both productivity improvement and wages have been weak for some years is our businesses’ preference for improving their profits by cutting costs – particularly wage costs – rather than improving their efficiency.

One implication of this emphasis on employers buying skilled (or cheap) labour off the shelf, so to speak, is that the longer the economy recovers behind closed borders, and the more the government tries to use labour shortages to get some decent wage growth, the more pressure employers and their lobby groups will put on the government to open the temporary-visa floodgates.

The more the government gives in to its business mates – who are used to getting their way – the more it will sabotage its strategy for getting wages, consumer spending and the voters’ standard of living going up not sideways.

But Dr Mike Keating, a former top econocrat, argues there’s a different weakness in the new strategy: it continues the economic managers’ earlier error of analysing the wages problem in purely cyclical terms.

For seven years they told us not to worry about weak wage growth because the recovery from the global financial crisis was just taking longer than usual. Wrong. Now they’re saying the problem is too much slack in the labour market, so we must stimulate harder to reduce the rate of labour underutilisation (unemployment plus under-employment) and, once we have, healthy wage growth will return as sure as demand and supply go together.

This thinking fails to acknowledge the likelihood that the problem is more structural than cyclical. It’s not just weak demand that’s the problem, it’s a change in the structure of the labour force, particularly as skill-biased technological change has increased employers’ demand for high-skilled labour and dramatically reduced demand for semi-skilled labour, while not having as much effect on demand for services-performing less-skilled labour.

Even so, the notion that much unemployment is the result of “structural mismatch” rather than weak demand is hardly new. That is, many of the unemployed lack the particular skills employers are looking for. So it’s wrong to assume that unemployment falls in lock-step with rising demand.

We’ve been marvelling at the recent rapid increase in job vacancies, which has reduced the number of unemployed per vacancy to 2.75, well below its decade average of 3.9. Many have taken this as indicating the strength of the recovery and a sign that unemployment will continue its rapid fall.

But Keating, a labour economist, says it indicates “a substantial and increasing degree of structural mismatch in the labour market”. (It could also be a sign that our employers’ dependence on importing the skilled labour they need is already making itself felt.)

“If this mismatch continues through the economic recovery, the wage increase in some jobs will most likely exceed the increase in other jobs. Consequently, pursuit of the target rate of unemployment may well result in an increase in wage inequality, which in turn may not produce the increase in demand that economic recovery requires,” Keating says.

I think the econocrats need to remember that, in the old days, the tendency for wage rises caused by skill shortages in some occupations – or some parts of the country – to spread to all other workers was caused by the operation of the old centralised wage-fixing system. The move to enterprise bargaining was intended to stop that happening. And it has.

These days, the labour market’s only equalising tendency comes from the existence of the more amorphous “wage norms” (“other bosses are giving pay rises of X per cent, so I’ll do the same”).

Keating says the best way to remove structural impediments in the labour market is to ensure the necessary development of education and training so that people have the particular skills needed to meet the requirements for the jobs that are available.

But that, of course, is just what we haven’t been doing.

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Our closed borders have turbo-charged the economy's recovery

The economy’s rebound from the lockdowns of last year has been truly remarkable – far better than anyone dared to hope. Even so, it’s not quite as miraculous as it looks.

As Tuesday’s budget leads us to focus on the outlook for the economy in the coming financial year, it’s important to remember that the coronacession hasn’t been like a normal recession. And the recovery from it won’t be like a normal recovery either.

The coronacession is unique for several reasons. The first is that the blow to economic activity – real gross domestic product - was much greater than we’ve experienced in any recession since World War II and almost wholly contained within a single quarter.

The reason for that is simple: it happened because our federal and state governments decided that the best way to stop the spread of the virus was to lock down the economy for a few weeks. But because this was a government-ordered recession, the governments were in no doubt about their obligation to counter the cost to workers and businesses with monetary assistance.

So the second respect in which this recession was different was the speed with which governments provided their “fiscal stimulus” and the unprecedented amount of it: for the feds alone, $250 billion, equivalent to more than 12 per cent of GDP.

But there’s a less-recognised third factor adding to the coronacession’s uniqueness: this time the government ordered the closing of our international borders. Virtually no one entering Australia and no one going out.

The independent economist Saul Eslake points out that “an important but under-appreciated reason for the so-far surprisingly rapid decline in unemployment, from its lower-than-expected peak of 7.5 per cent last July, is the absence of any immigration: which means that the civilian working-age population is now growing at (on average over the past two quarters) only 8,300 per month, compared with an average of 27,700 per month over the three years to March 2020,” he says.

This means that, with an unchanged rate of people choosing to participate in the labour force by either holding a job or seeking one, a rate that’s already at a record high, employment needs only to grow at about a third of its pre-pandemic rate in order to hold the rate of unemployment steady.

So any growth in employment in excess of that brings unemployment tumbling down.

Get it? It’s not just that the bounce back in jobs growth has been much quicker and stronger than we expected. It’s also that, thanks to the absence of immigration, this has reduced the unemployment rate much more than it usually does.

To put it another way, Eslake says, if the population of working age continues growing over the remainder of this year at the much-slower rate at which it’s been growing over the past six months, employment has to grow by an average of just 17,000 a month to push the unemployment rate down to just below 5 per cent by the end of this year (assuming the rate of labour-force participation stays the same).

By contrast, if the working-age population was continuing to grow at its pre-pandemic rate, employment growth would need to average 29,000 a month to get us down to 5 per cent unemployment by the end of this year.

Now, it’s true that as well as adding to the supply of labour, immigration also adds to the demand for labour. So its absence is also working to slow the growth in employment. But this has been more than countered by two factors.

The obvious one is the governments’ massive fiscal stimulus. But Eslake reminds us of the less-obvious factor: our closed borders have prevented Australians from doing what they usually do a lot of: going on (often expensive) overseas trips.

He estimates that this spending usually amounts to roughly $55 billion a year. But we’re spending a fair bit of this “saving” on domestic tourism – or on our homes.

Of course, we need to remember that, as well as stopping us from touring abroad, the closed borders are also stopping foreigners from touring here. But, in normal times, we spend more on overseas tourism than foreigners spend here. (In the strange language of econospeak, we are “net importers of tourism services”.)

Eslake estimates that our ban on foreign tourists (and international students) is costing us more than $22 billion – about 1.25 per cent of GDP – a year in export income. Clearly, however, our economy is well ahead on this (temporary) deal.

Another economist who’s been thinking harder than the rest of us about the consequences of our closed borders is Gareth Aird, of the Commonwealth Bank.

The decision by Scott Morrison and Josh Frydenberg to “continuing to prioritise job creation” and so drive the unemployment rate down much further, has led to much discussion of the NAIRU – the “non-accelerating-inflation rate of unemployment” – the lowest level unemployment can fall to before wages and prices take off.

The econocrats believe that little-understood changes in the structure of the advanced economies may have lowered our NAIRU to 4.5 per cent or even less. But Aird reminds us that, for as long as our international borders remain closed, the NAIRU is likely to be higher than that.

“If firms are not able to recruit from abroad then, as the labour market tightens, skill shortages will manifest themselves faster than otherwise and this will allow some workers to push for higher pay,” he says.

“There is a lot of uncertainty around when the international borders will reopen, what that means for net overseas migration and how that will impact on wage outcomes.”

But “in industries with skill shortages, bargaining power between the employee and employer should move more favourably in the direction of the employee and higher wages should be forthcoming,” he concludes.

Higher wages is what the government’s hoping for, of course. Interesting times lie ahead.

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Politics and economics have aligned to permit a ripper budget

Sometimes I think the smartest thing a nation can do to improve its economic fortunes is elect a leader who’s lucky. The miracle-working Scott Morrison, for instance.

This may be a controversial idea in these days of heightened political tribalism, when one tribe is tempted to hope the other tribe really stuffs up the economy and so gets thrown out. What does a wrecked economy matter if your tribe’s back in power?

Morrison was not only lucky to win the 2019 election, there’s been as much luck as good management in his success in suppressing the virus and the way the economy’s bounced back from the coronacession. (Of course, it may be blasphemous of me to attribute his success to luck if, in truth, he’s getting preferential treatment from above.)

Anyway, it’s “providential” – as my sainted mother preferred to say – that the politics and the economics are almost perfectly aligned for Treasurer Josh Frydenberg’s budget next week.

Politically, Morrison must make an adequate response to the royal commission’s expensive proposals for fixing our aged care disaster. And must make recompense for last October’s all-macho budget by making the economic security of women a preoccupation of this one.

Economically, he must lock in the stimulus-driven rebound from the recession by “continuing to prioritise job creation” and driving the rate of unemployment down towards 4.5 per cent or less.

What’s providential is that both aged care and childcare are “industries” largely reliant on federal government funding and regulation, as well as having predominantly female customers and employing huge numbers of women.

The Australia Institute’s Matt Grudnoff has calculated that, if the government were to spend about $3 billion in each of five industries, this would directly create 22,000 additional jobs in universities, 23,000 jobs in the creative arts, 27,000 jobs in healthcare, 38,000 in aged care and 52,000 in childcare.

If ever there was an issue of particular importance to women, it’s aged care. Women outnumber men two to one among those in aged care institutions. Daughters take more responsibility than sons for the wellbeing of their elderly parents. And those working in aged care are mainly women.

The royal commission concluded the government needed to spend a further $10 billion a year to rectify aged care’s serious faults, though the money would need to be accompanied by much tighter regulation, to ensure most of it didn’t end up in the coffers of for-profit providers and big charities syphoning off taxpayers’ funds for other purposes.

With that proviso, most of the new money would end up in the hands of a bigger, better-qualified and better-paid female workforce. The Grattan Institute’s Dr Stephen Duckett estimates that at least 70,000 more jobs would be created.

If you ask the women’s movement – and female economists – to nominate a single measure that would do most to improve the economic welfare of women they nominate the prohibitive cost of childcare.

They’re right. And right to argue the issue is as much about improving the efficiency of our economy as about giving women a fair deal.

Going back even before the days when most girls left school at year 9 and women gave up their jobs when they married, the institutions of our labour market were designed to accommodate the needs of men, not women.

These days, girls are better educated than boys, but we still have a long way to go to renovate our arrangements to give women equal opportunity to exploit their training in the paid workforce – to the benefit of both themselves and their families, and the rest of us.

Wasting the talent of half the population ain’t smart. The key is to eliminate the disadvantage suffered by the sex that does the child-bearing and (still) most of the child-minding. And the key to that is to transfer the cost of childcare from the family to the whole community via the government’s budget.

This government is sticking to the legislated third stage of its tax cuts which, from July 2024, and at a cost of about $17 billion a year, will deliver huge savings to high income-earners, most of whom are old and male (like me).

We’re assured – mainly by rich old men – that this tax relief will do wonders to induce them to work harder and longer. But, as the tax economist Professor Patricia Apps has been arguing for decades, there’s little empirical evidence to support this oft-repeated claim.

Rather, the evidence says that the people whose willingness to work is most affected by tax rates and means-tested benefits are “secondary earners” – most of whom are married women.

There is much evidence that it’s the high cost of childcare that does most to discourage the mothers of young children from returning to paid work, or from progressing from part-time to full-time work.

If the huge cost of the looming tax cuts helps discourage Morrison from spending as much as he should to fix aged care and the work-discouraging cost of childcare, we’ll know his conversion to Male Champion of Change has some way to go.

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Now we're trying Plan C to end wage stagnation

Be clear on this: Scott Morrison and Josh Frydenberg are dead right to make getting the rate of unemployment down to 4.5 per cent or lower their chief objective, with the further goal of inducing some decent growth in wages. But this approach to economic recovery is very different to our econocrats’ former and more conventional advice.

That the econocrats have changed their tune so markedly is an admission that the way the economy works has changed – in ways they don’t understand, for reasons they don’t understand.

What’s changed most is the behaviour of wages. As Treasury puts it in a new research paper, “structural factors may have altered the wage and price-setting dynamics in advanced economies. These include increased competition in goods markets, increases in services being provided internationally, advances in technology and changes in the supply of labour and labour market regulation”.

That’s an econocrat’s way of saying: who knows what’s going on.

Giving priority to getting unemployment down is always a worthy objective, not only because it greatly improves the lives of those who need to support themselves, but also because households now have more money to spend, making the economy grow faster.

A side-benefit is that it improves the budget balance (more people paying tax, fewer needing to be paid the dole). And promising jobs, jobs, jobs always goes down well with voters.

This time, however, the economic managers have an ulterior motive. They’ve concluded that the only way to get wages growing again is to get unemployment down so far that employers are having trouble finding the workers they need and are forced to compete with other employers by bidding up the wages they’re prepared to pay.

This conclusion may be right – it’s certainly worth trying – but it’s a quite depressing one to come to. And one quite foreign to what the econocrats have been telling us about wages for as long as I’ve been in journalism. It’s a sign of how desperate they’ve become to escape the bog that wages have fallen into.

It’s a tacit acceptance of an obvious point many economists (and I) have been making for ages, but the government and its advisers haven’t been prepared to acknowledge: since consumer spending accounts for well over half of gross domestic product, and growth in wages is the chief source of growth in household incomes, without real growth in wages economic recovery simply isn’t sustainable.

What the econocrats are now saying is that there’s little hope of getting wages growing a percent-or-more faster than annual inflation until you put employers on the rack and generate widespread shortages of labour. To mangle a few metaphors, you’ve got to be right on the tightrope edge of re-igniting a wage-price spiral.

Let your attention wander for a moment and you tip over into a “wage explosion” of the sort we experienced under the Whitlam government and the Fraser government, whose efforts to stop the explosion ended up causing the recessions of the mid-1970s and the early 1980s.

Now, if you find it hard to believe such a disaster is very likely, I do too. As, I’m sure, do the econocrats. But that just means we’re unlikely to get much bidding up of wages, and so are unlikely to get much of an improvement in wage growth if that’s the only way an improvement can come.

Another way of putting this is that the NAIRU (the “non-accelerating-inflation rate of unemployment”) – the lowest unemployment can fall before we get accelerating wages and prices – is unlikely to be nearly as high as Treasury’s latest estimate of 4.5 to 5 per cent.

You need a PhD to know enough maths and stats to be able to run these models, but that doesn’t stop them being cartoon caricatures of the real world. The more so when, by Treasury’s own admission, the world has stopped working the way all the historical figures the model relies on say it does.

The truth is it’s never possible to know where the NAIRU lies until you’ve gone through it and wage growth becomes excessive. That’s a risk the economic managers haven’t been willing to take for decades – which explains why the idea of making restoring full employment the top objective of policy is unfamiliar to anyone who can’t remember as far back as the McMahon government.

But, as Professor Ross Garnaut has reminded us, before the pandemic the Yanks got unemployment down to 3.5 per cent without any sign of labour shortages. If they can, why couldn’t we?

There is, however, an important qualification to the belief that our NAIRU is well south of 4.5 per cent. Shortages of labour are a lot more likely for as long as our borders remain closed.

To see how much what we’re now being told is the path to healthy wage growth differs from what we’ve been told in the past, remember this. Over the 15 years to the end of 2012, wages – as measured by the wage price index – rose by 70 per cent, well ahead of the 53 per cent rise in consumer prices.

Over the eight years to last December, however, wages rose by 19 per cent, not much more than the 15 per cent rise in consumer prices. That’s what the fuss is about: since 2012, wages have barely risen faster than prices.

But in each of the six budgets up to the one in 2019, the econocrats told us the same story: don’t worry. The problem was cyclical. Wage growth may be weak again this year, but the economy was just a bit slow to recover from the global financial crisis and, in a year or two’s time, annual growth would be back to the 3 per cent or so we were used to.

“Just wait a little longer” was Plan A for getting wage growth back to a healthy rate. It didn’t work. As this solution started to wear thin, the rhetoric shifted to Plan B: well, of course, any real growth in wages must come from improvement in the productivity of labour, and it’s been pretty slow of late. So, if you want higher wages, think of something to get productivity up.

Plan B didn’t prove much. It’s not clear that what little productivity improvement we have been getting has flowed through to wages. And, in any case, you can make a good argument that the relationship also flows the other way: that the weak growth in wages is actually helping keep productivity improvement low by holding back consumer spending and thus any motivation for businesses to invest in bigger and better equipment and structures.

So now we’re onto Plan C: let’s engineer labour shortages and see if that works.

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New economic rule: the budget's the only game in town

There’s a trick for governments trying to manage their economy. Once in a while – maybe every 30 or 40 years – the rules of the economic game change. What used to be the right thing to do becomes wrong, and now the right thing is something we’ve long believed was not the way to go.

Trouble is, the game change is never announced by thunder and lightning flashes from on high that everybody sees. Those paying close attention soon get the message, but many people – even many economists – don’t.

Some people have invested their careers – and their egos – in the old way of doing things and resist any talk of change. They stick to their ideology when it’s time for pragmatism and re-examination of old ideas to see if they still work.

These rare times of change are dangerous for governments. Those that don’t get the message in time stuff up and get thrown out.

Our last government to badly misread the economy’s changed circumstances was Gough Whitlam’s. And we know what happened to it. But that was more than 40 years ago, and now the sharp-eyed can see the rules have changed again.

If Scott Morrison and Josh Frydenberg can’t see it, the economy’s recovery will peter out and, sooner or later, they’ll be out.

Fortunately, it seems from Frydenberg’s speech on Thursday that they and their Treasury advisers do get it, and are acting accordingly.

For about 30 years after World War II, Australia – and all the developed economies - enjoyed a Golden Age of strong economic growth, full employment, low inflation and a narrowing gap between rich and poor.

The economy pretty much managed itself, leaving governments free to focus on other issues. After 23 years in opposition, Whitlam’s Labor came to power with a long list of economic and social reforms to be made.

It got on with “the Program” – involving massively increased government spending – not realising that inflation had got away, that “stagflation” meant rates of unemployment of less than 2 per cent would never be seen again, and that governments now had to spend most of their time worrying about the economy and making sure their “reforms” didn’t make things worse.

In the years after WWII, the rich economies’ focus was on keeping demand for goods and services growing strongly so the workforce could stay fully employed. It was decided that, of the two main “instruments” available for managing the economy, “fiscal policy” – using the budget to change government spending and taxation – was better.

The other instrument, “monetary policy” – moving interest rates up or down to discourage or encourage borrowing and spending – should play a subsidiary role by keeping rates perpetually low.

But by the late 1970s, the rich economies realised that high inflation – caused by the demand for goods and services running ahead of the economy’s ability to supply them – was the key problem, and the best instrument to control inflation was monetary policy. This would leave fiscal policy free to be used to keep budget deficits down and limit the build-up in government debt.

That’s been the conventional “assignment of instruments” for the many decades since then, the one everyone’s used to and many have come to view as the God-ordained way for the economy to be managed. It fits well with the populist fearmongering about “debt and deficit” that Tony Abbott & Co used to help get the Coalition back to power in 2013.

Trouble is, over the decades, inflation in the prices of goods and services has pretty much gone away. But weak growth in the advanced economies since the global financial crisis means unemployment has remained high – well above anything that could be called full employment.

It’s clear the basic problem we face has switched from excess demand relative to supply to insufficient demand relative to supply. Low inflation means low nominal interest rates, but when rates are already low, cutting them a bit further doesn’t do much to encourage businesses to borrow for expansion or households to borrow more for consumer spending (as opposed to bidding up the price of houses).

That’s been true for some years, but now the coronacession has pushed the official interest rate almost to zero, while “quantitative easing” only seems to push up the prices of houses and other assets.

Get it? With monetary policy having lost its potency, fiscal policy becomes the only game in town. The only policy instrument capable of being used to stimulate growth and keep our economy and everyone else’s recovering and unemployment falling.

But as well as being the only lever left, it’s also the one better suited to boosting demand and taking up idle supply capacity. When the problem is the private sector’s reluctance to expand, and the wages households use to increase their consumer spending have stopped rising, the only way to keep the economy moving until the private sector revives is spending by the public sector.

Frydenberg’s speech makes it clear he gets this and, rather than use the budget to get the deficit down, he’ll focus on continuing to use it to foster growth. In time, this will “repair the budget by repairing the economy”.

I think most voters will happily go along with this policy switch.

But there are still many economists and others who don’t get the need to change tack and will oppose it. Particularly those with a vested interest in active monetary policy – money-market people and economists specialising in monetary economics.

But also, amazingly, Labor’s Shadow Treasurer, Jim Chalmers, who’s calling for an inquiry – a royal commission? - into the Reserve Bank’s alleged mishandling of monetary policy.

He seems to think monetary policy’s steady loss of potency in Australia (and all the rich countries) over a decade or more can be explained by the Reserve Bank governor’s repeated failure to meet his KPIs for inflation.

Sack the governor, change the procedures, problem goes away. Really, Jim?

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Morrison's budget task: stop the economy's roar turning to a meow

Scott Morrison and Josh Frydenberg look like they’re sitting pretty as they finalise what may be their last budget before the federal election due by the first half of next year. Look deeper, however, and you see they face a serious risk of the economy’s recovery losing momentum over the coming financial year. But, equally, they have a chance to show themselves as the best economic managers since John Howard’s days.

So far, the strength of the economy’s rebound from the “coronacession” has exceeded all expectations. Judged by the quantity of the nation’s production of goods and services, the economy contracted hugely during the three months to June last year. As our borders were closed, many industries were ordered to stop trading and you and I were told to leave home as little as possible.

But with the lifting of the lockdown in the second half of the year, the economy took off. It rebounded so strongly in the next two quarters that, by the end of December, our production – real gross domestic product – was just 1 per cent below what it had been a year earlier, before the arrival of the coronavirus.

The rebound in jobs is even more remarkable. The number of people in jobs fell by almost 650,000 in April and May, and that’s not counting the many hundreds of thousands of workers who kept their jobs thanks only to the JobKeeper scheme.

But as soon as the lockdown was eased, employment took off. By last month, it was actually a fraction higher than it had been in March 2020. We’d been warned the rate of unemployment would reach 10 per cent, but in fact it peaked at 7.5 per cent in July and is now down to 5.6 per cent. Before this year’s out, it’s likely to have fallen to the 5.1 per cent it was before the pandemic.

The confidence of both businesses and consumers is now higher than it has been for ages. Same for the number of job vacancies. Share prices are riding high (not that I set much store by that).

Little wonder the financial press has proclaimed the economy to be “roaring”. Hardly a bad place to be when preparing another budget. What could possibly go wrong?

Just this. The main reason the economy has rebounded so strongly is the unprecedented sums the government spent on JobKeeper, the JobSeeker supplement, HomeBuilder and countless other programs with gimmicky names. Spending totalling a quarter of a trillion dollars.

What it proves is that “fiscal stimulus” works a treat. Trouble is, all those programs were designed to be temporary and the biggest of them have already been wound up. So, though not all the stimulus has yet been spent, it’s clear the stimulus is waning.

And this at a time when there’s no other major force likely to drive the economy onwards and upwards. Business investment spending is way below normal. Growth in the wage income of consumers has been weak for six years or more and, for many workers at present, frozen.

Because all the stimulus programs are stopping, the government’s update last December estimated that the budget deficit for the next financial year will be $90 billion less than the deficit for the year soon ending.

This may sound good, but it means that, whereas last year the government put far more money into the economy than it took out in taxes and charges, in the coming year it expects the budget’s contribution to growth to fall by $90 billion – the equivalent of about 4 per cent of GDP.

So that’s the big risk we face: that before long the economy’s roar will turn to no more than a loud meow.

Now to Morrison and Frydenberg’s chance of greatness. Their temptation is to get unemployment back to the pre-pandemic rate of 5 per cent and call it quits. That’s certainly what previous governments would have done.

But let me ask you a question: do you regard an unemployment rate of 5 per cent as equal to full employment? Is that where everyone who wants a job has got one?

Hardly. And, as Professor Ross Garnaut has argued in his latest book, Reset, there’s evidence that we can get unemployment much lower – say, 3.5 per cent or less – before we’d have any problem with soaring wage and price inflation.

The good news is that the answers to the Morrison government’s risk of economic failure and its chance of economic greatness are the same: keep the budgetary stimulus coming for as long as it takes the private sector to revive and take up the slack.

That means finding new spending programs to take the place of JobKeeper and the rest. And here Morrison’s political and economic needs are a good fit. Making an adequate response to the report of the aged care royal commission will take big bucks.

And he needs to make this a hugely women-centred budget in marked contrast to last year’s. Obvious answer: do what the women’s movement has long been demanding and make childcare free.

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My love letter to The Sydney Morning Herald

It’s not something any hard-bitten journalist should admit, but I’m in love with The Sydney Morning Herald. Have been since, at the age of 26, I quit chartered accounting in disillusionment and stumbled into a cadetship at the Herald. I quickly realised I’d found the only place I wanted to be.

After four years they gave me the title of economics editor and sat me in an armchair with a licence to air my opinions about anything economic. It’s probably the only job I’m capable of doing with any competence. I’ve been so fulfilled by my work that, in 47 years, I’ve never wanted another job on the paper and, certainly, never wanted to move to another paper.

I suspect that by now I’m actually addicted to column-writing and to staying one of the Herald‘s roosters rather than one of its many feather-dusters. When my designated retirement date arrived, I had no desire to hang up my boots and luxuriate on the Herald’s more-than-generous super scheme. And, apart from Jessica Irvine, detected no desire by my colleagues to wave me off.

But I promise you (and Jessica) this: I’ll be out of here the moment I find I’ve worn out my welcome with our readers or my bosses, or realise I’m starting to lose my marbles. That I’m still keen to learn more about the economy and to work rather than play, I credit mainly to three gym sessions a week with my physio trainer, Martin Doyle. Exercise is good for mental as well as physical fitness.

I did feel I should at least stay on to do my bit in helping the Herald make the seemingly improbable “transition” – what a fashionable word that’s become – from “legacy asset” to successful digital “masthead”. Fortunately – and touch wood – we’ve passed that test now we’ve switched from chasing clicks to seeking digital subscriptions.

The thought of the Herald ceasing to be appalled me. As Australia’s oldest metropolitan daily newspaper, for 190 years it’s been one of the pillars on which Sydney rests. I get an enormous kick from being a tiny part of that grand history – for, I realise to my amazement, almost a quarter of its existence. It tickles me that, in the days when governors of NSW and Anglican archbishops of Sydney were recruited from England, so were editors of the Herald.

I’m proud of the many big names to have worked for the Herald at some point in their career. Banjo Paterson was our correspondent covering the Boer War. C.E.W. Bean was a Herald writer before becoming the federal government’s official war correspondent in World War I. Angus Maude, one of our last English-export editors, became Maggie Thatcher’s Paymaster General. I remember Thatcher’s daughter Carol working for a few months in our newsroom.

The playwright and speech writer Bob Ellis’ Herald career lasted 11 days. Columnist and poet Clive James lasted longer before he went off to England to make his name. I remember author Geraldine Brooks cutting a swathe through our feature writers’ room before she went off to New York to make her name. The others wrote one feature a week; she wrote one a day.

Together with her journalist husband George Johnston, Charmian Clift was a celebrity in 1960s Sydney before the word had been invented. This was explained by the years they’d spent living on a Greek island, where (we’ve learnt only recently) they were friendly with some Canadian singer named Leonard and his girlfriend Marianne. Charmian wrote a highly popular weekly column in the Herald, before ending her life.

William Stanley Jevons, a celebrated English neo-classical economist and polymath of the 19th century, discoverer of the Jevons paradox, spent part of his early career working at the Sydney Mint. He didn’t work for the Herald, but he did write letters to the editor. Hearing that made me proud to work where I did.

The Herald has changed greatly over the years I’ve been here and, leaving aside the many journalists we lost as we made our painful adjustment to the digital revolution, mainly for the better. Some years ago, someone got the idea of honouring our longest-serving journos by presenting them with a framed copy of our front page from the day they joined the paper. I was shocked by how dreary mine was. We were busy sticking to traditional standards as the world around us was changing without us noticing.

These days we cover a wider range of subjects – crime and lifestyle interests – all in a livelier, brighter, cleaner, more cleverly written way. I like to think I’ve been part of our move to a less formal, more relaxed and conversational writing style. The old-timers would be appalled to see us saying “kids” rather than “children”.

The Herald is far from perfect – no “first draft of history” ever is – but I value being at the more careful, intellectually respectable and, dare I say, gentlepersonly end of the news media. I feel privileged to write for such a well-educated audience.

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Wealth and happiness don't give meaning to our lives

Easter Monday’s a good a time to reflect on what we’re doing with our lives and why we’re doing it. I’ve been banging on about all things economic for more than 40 years, but if I’ve left you with the impression economics and economic growth is the be-all and end-all, let me apologise for misleading you.

The more I’ve learnt about economics, the more aware I’ve become of its limitations. Economics is the study of production and consumption, getting and spending. But as someone connected with Easter – not the Easter Bunny – once said, there’s more to life than bread alone.

Unfortunately, the conventional way of thinking about the economy has pretty much taken for granted the natural environment in which our economic activity occurs, and the use of natural resources and ecosystem services on which that activity depends.

We’re learning the hard way that this insouciance can’t continue. We’re damaging our environment in ways that can’t continue. I keep writing about the need for economic growth because, as the economy is presently organised, it’s pretty much the only way to provide sufficient jobs for our growing population.

But that just means we need to redefine economic growth to mean getting better, not bigger (and probably should do more to limit world population growth).

Conventional economics focuses on the material aspects of life: producing and consuming goods and services; buying and selling property. There’s no denying the inescapable importance of the material in our lives – “bread” – but conventional economics encourages our obsession with material accumulation at the expense of other important dimensions of our lives.

Some aspects of economic activity can damage our physical health – smoking, drinking, burning dirty fossil fuels, even eating fast foods – but we need to become more aware of the way the fast pace and competitive pressures of modern life also threaten our mental health. Too many people – particularly the young – suffer chronic stress, anxiety, depression and suicidal thoughts.

Too much emphasis on material success can also come at the expense of the social aspect of our lives – our relationships with family, friends and neighbours – which, when we’re thinking straight, we realise give us far more satisfaction than any new car or pay rise. Economists often advocate policies that will increase the efficiency of our use of resources without giving a moment’s thought to their effect on family life.

Nor should we allow our pursuit of material affluence to come at the expense of the moral and spiritual aspects of lives. I’ve just read social commentator Hugh Mackay’s book, Beyond Belief, which has done so much to clarify my thinking about Christianity, religion and spirituality that I’m sorry I didn’t get to it earlier.

Yet another thing that mars conventional economic thinking is its emphasis on the individual as opposed to the community, it’s effective sanctification of self-interest as the economy’s only relevant driving force, and its obsession with competition and neglect of the benefits of co-operation.

Mackay says that, if you ignore the doctrines and dogmas of the church – all the things you’re required to believe in – and focus on the teachings of Jesus, the first thing to strike you is that none of it was about the pursuit of personal happiness.

“The satisfactions offered or implied are all, at best, by-products of the good life,” he says. “The emphasis is on serving others and responding to their needs in the spirit of loving-kindness, the strong implication being that the pursuit of self-serving goals, like wealth or status, will be counterproductive.”

Jesus’ teachings “were all about how best to live: the consistent emphasis was on loving action, not belief. According to Jesus, the life of virtue – the life of goodness – is powered by faith in something greater than ourselves (love, actually), not by dogma.”

Mackay says we should “avoid the deadly trap of regarding faith as a pathway to personal happiness. The idea that you are entitled to happiness, or that the pursuit of personal happiness is a suitable goal for your life, is seriously misguided.

“If we know anything, we know that’s a fruitless, pointless quest – doomed to disappoint – because . . . our deepest satisfactions come from a sense of meaning in our lives, not from experiencing any particular emotional state like happiness or contentment.”

The self-absorbed mind’s entire focus is individualistic. It’s “the polar opposite of the moral mind. Its orientation is towards the self, not others; its currency is competition, not cooperation; it’s all about getting, not giving. Its goal is the feel-good achievement of personal gratification, however that might be achieved and regardless of any impact it might have on the wellbeing of ‘losers’.”

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Cutting workers' pay and conditions worsens productivity

It’s a long weekend, so let’s relax and think more laterally than usual. I’ve been pondering one of the great mysteries puzzling the rich world’s economists: why has there been so little improvement in the productivity of our businesses over the past decade or two?

I’m wondering if a big part of the explanation is that business people have been finding easier ways to make a bigger buck.

Economists worry about productivity – producing more output of goods and services from a given quantity of inputs of labour, physical capital and raw materials – because it’s the secret sauce that’s made market capitalism so hugely successful over the past 200 years. That’s made us many times more well-off materially than we were back then.

The key driver of productivity improvement is technological advance: mainly bigger and better machines, but also better roads, railways and other infrastructure, as well as more efficiently organised farms, mines, factories, offices and shops. Not to mention increased investment in “human capital”: better educated and trained - and thus more highly skilled - workers.

You’d expect the digital revolution that’s working its way round the economy – disrupting industry after industry while creating new or improved products that meet customers’ needs much better – to be causing a marked improvement in productivity, but it’s not showing up in the figures.

So, why has productivity – most simply measured as gross domestic product per hour worked – been improving much more slowly in the past decade or two than in earlier times, not just in our economy but in all the advanced economies? Why is our material standard of living improving only very slowly – if at all?

As I say, that’s something economists are still debating. But I’ve been thinking much of the explanation may lie in the changed way our business people are going about their business.

If you listen to the business lobby groups, productivity isn’t improving because of successive governments’ failure to “reform” the economy. Nonsense. A moment’s thought reveals that the efficiency with which inputs are turned into outputs is determined primarily by the collective actions of each of the nation’s businesses.

Firms improve their productivity as part of their efforts to increase their profits. But their ultimate goal is higher profits, not necessarily being more productive. And, since improving productivity can often be quite hard, I’ve been wondering if productivity isn’t improving much because firms have found easier ways of increasing their profits.

Such as? Just by cutting costs. Particularly the cost of labour. One way to cut labour costs is to install better labour-saving machines. Doing so does improve the productivity of the workers who remain – and will show up in the productivity figures.

But if you find ways to limit the increase in – or even cut – your workers’ hourly wage rate, this does nothing to improve your productivity, but does increase your profits. Many employers have moved from fixing their wage rates by “collective bargaining” – which involves workers pressing for higher wages by having their union threaten to go on strike – to “individual contracts”, which often involve no bargaining at all.

Or you could cut your labour “on-costs” (including sick leave, annual leave, workers compensation insurance and superannuation contributions) by changing your workers from employees into (supposedly) independent contractors.

This, of course, is a big part of the motive for the rise of the “gig economy”. And there must surely be cost savings associated with the use of labour-hire firms.

Businesses have become a lot more conscious of the costly risks involved in running a business. They’ve sought better ways of “managing” those risks – which, in practice, has often involved shifting risks from the firm to its workers. For instance, moving to independent contractors shifts to workers the costs associated with the risks of them getting sick, being injured on the job, or even not having saved enough for retirement.

The move to firms carrying much lower inventories of raw materials and spare parts – “just-in-time” inventory management – means that the risk of interruptions to a firm’s supply chain can cause workers to be stood down on no pay until the problem’s fixed.

Yet another way firms have been saving on labour costs is by spending less on training their own workers and then, when they’re short of skilled workers, bringing them in from overseas on temporary work visas.

The trick is, these cost-saving measures don’t just fail to improve the productivity of labour, they can actually worsen it. Textbook economics sees firms continually comparing the cost of employing workers to perform tasks with the cost of using a machine to do it.

When wage costs are rising strongly, firms are more inclined to invest in labour-saving equipment. When wage costs are low or falling, however, firms become more inclined to avoid investing in machines and just hire more workers – even to perform quite menial tasks.

Before the pandemic, economists were continually surprised to see employment growing at a faster rate than the fairly weak growth in production (real GDP) would imply. That’s good news for employment but – as a matter of simple arithmetic - bad news for labour productivity: GDP per hour worked.

But it’s worse than that. For technological advances to improve our living standards, you don’t just need people inventing new and better machines, you need businesses across the economy regularly buying and using the latest, whiz-bang models to produce whatever it is they do.

That’s just what hasn’t been happening. As Reserve Bank governor Dr Philip Lowe noted recently, business investment in plant and structures has averaged just 9 per cent of GDP since 2010, compared with 12 per cent over the previous three decades.

Sometimes I think that, while businesses’ modern obsession with finding any and every means to minimise their wage costs no doubt fattens their profits in the short term, one day we’ll realise it’s been hugely destructive of our living standards.

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Banks: bad guys one minute; put-upon credit providers the next

With Scott Morrison hit by a seemingly unending series of headline-making problems, his standard techniques for dealing with them are getting easier to detect. He sees them not so much as policy deficiencies to be rectified as political embarrassments to be “managed” away.

One technique is to tough it out, hoping the media caravan will soon lose interest and move on. When that doesn’t work you give the appearance of responding to the outcry without actually doing much. Call an inquiry of some sort – maybe, if the pressure continues, even three or four different inquiries – then say you can’t act, or even discuss the matter further, until the inquiry has reported many months hence.

I’m finding it hard to avoid the suspicion this is how he’s dealing with the huge – and hugely expensive – problems in aged care. When Four Corners came up with (yet another) expose of the mistreatment of old people in institutional care as the election approached in 2019, he neutralised it as an election issue by promising a royal commission.

The commission’s hearings and interim report confirmed our suspicions that mistreatment was widespread. While releasing the interim report, Morrison announced that quite some millions would be spent on measures that sounded like they should help ease the problem – a bit.

When he released the commission’s final report early this month, he announced more millions of spending on this and that, promising the government’s full response to the commission’s multi-billion-dollar recommendations would be revealed in the May budget.

He seemed open to the idea of using an increase in the Medicare income-tax levy to cover the massive cost, but Treasurer Josh Frydenberg lost little time in hosing down that possibility. Aged care has hardly been mentioned again from that day to this.

Why do I have a terrible feeling that, should aged care not come back on the media agenda between now and budget night, what’s announced will be only a token response to the continuing and worsening problem?

You see a similar trickiness in the government’s response to the widespread complaints about the behaviour of the banks and other financial institutions. Those complaints led to repeated calls for a royal commission.

Malcolm Turnbull and his treasurer, Morrison, went for ages fobbing off these demands – denying there was a problem. But when some government backbenchers threatened to support an opposition motion for an inquiry, Turnbull had no choice but to relent.

The hearings by former High Court judge Kenneth Hayne revealed endless instances of financial “misconduct” and received months of media coverage.

Hayne’s final report lobbed just a few months before the 2019 election. Morrison’s successor as Treasurer, Frydenberg, immediately announced he was “taking action on all 76 recommendations” and “going further”. This apparently wholehearted acceptance of the recommendations defused bank misconduct as an issue in the election campaign.

It’s now two years since Frydenberg’s commitment. Professor Kevin Davis, of Melbourne University, says the government has yet to implement 44 of the commission’s recommendations, and has turned its back on five key reforms.

Frydenberg initially accepted the proposal to outlaw the practice of mortgage brokers being remunerated by the lending banks with a commission based on a percentage of the size of the loan. But, after industry lobbying, Frydenberg let it stand, replacing it with an obligation that brokers act in the best interests of their customers.

Hayne’s very first recommendation was that the existing “responsible lending obligation” – making it illegal to offer credit that was unsuitable for a consumer based on their needs and capacity to make payments – not be changed.

But, last September, Frydenberg announced that this obligation had been costly to lenders and was delaying the approval of loans. The present principle of “lender beware” would be replaced with a “borrower responsibility”. Legislation to bring this about is awaiting approval in the Senate.

It’s a “reform” that’s been welcomed by the banks, but vigorously opposed by Davis, various legal academics, consumer groups, the Financial Rights Legal Centre, Financial Counselling Australia – and my co-religionists at the Salvos, whose free Moneycare financial counselling service is offered at about 85 sites across Australia.

Like all the critics, the Salvos note the “asymmetry of knowledge and power” between consumers and the providers of financial services. The credit products offered have become increasingly complex and opaque. “Our experience is that understanding these products requires an above average level of literacy and financial literacy,” they say.

The proposed reduction in the scope of responsible lending obligations would reduce regulatory oversight and thus increase the risks for borrowers. “Our overwhelming evidence [from] delivering financial counselling in Australia for the past 30 years is that credit remains too easily accessible and that this has devastating consequences for the people we support . . .

“For people already experiencing, or at risk of, financial hardship, easier access to credit may mean they will get caught in a cycle of increasing debt. This has significant implications for physical and mental health.”

I fear the Salvos are right.

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More to running the state than keeping a lid on wages and debt

You’d think that, when it came to assessing the performance of a government in power for 10 years, its handling of economic issues would be central. But, in truth, not as central as you’d think. Much that state governments say about their “state economy” is mere boosterism – or another word starting with b.

The present NSW Treasurer, Dominic Perrottet, is no slouch in telling us how well the state’s doing economically. Before the arrival of the coronacession changed his tune, he used to say we had the “fastest-growing state economy over the past five years” and were “leading the nation” in this or that.

He told us about the Coalition’s “strong financial management” which kept the government’s triple-A credit rating secure, had produced a string of budget surpluses and a “negative net debt”.

“The greatest threat to our future prosperity,” he told us, “would be a return to the budget deficits ... of the past”. Ask him about the present huge deficit and the return to positive net debt and he’ll tell you we’d be crazy not to be borrowing when interest rates are at rock bottom.

Several of the big banks regularly rank the eight states and territories according to their economic performance. This is like calling a horse race. At any point in the race, some horses will be ahead and some behind. At a different point in the race, the order will be different. What does this prove? Not much.

Time for some sense. The fact is, many silly claims are made about the “state economy” because there’s no such animal. The lack of hard economic borders between the states means there’s one, national economy, with eight corners.

The national economy is managed nationally from Canberra and Martin Place, not Macquarie Street (the Reserve Bank, not the NSW Parliament). Interest rates don’t vary by state, nor the rates of income tax, company tax or the GST.

With a few exceptions – mining and financial and professional services – the industry composition of the states is very similar. The feds carefully divide the proceeds from the GST between the states in a way intended to minimise difference in the quality of public services provided by them. The wealthier states subsidise the poorer ones.

The states have responsibility for public health and hospitals, schools, law and order, roads and transport, planning and local government. But they each deal with them in much the same way.

And, in any case, because NSW accounts for about a third of the nation’s population and economic activity, its performance is rarely far from the national average.

All this explains why talk that purports to be about the management of the state’s economy ends up being about the government’s management of its own finances, as shown by its budget and annual capital works program.

Perrottet and his predecessors are terribly proud of their success in limiting the growth in government spending but, since the wages of state government employees account for well over half that spending, they’ve achieved this mainly by keeping a tight 2.5 per cent cap on annual wage rises and using the excuse of the coronacession to freeze state workers’ wages.

Trouble is, this is a two-edged sword. Every dollar the government doesn’t pay its workers is pretty much a dollar they don’t spend on the products of the state’s businesses. What’s more, there’s evidence that keeping the lid on public sector wages encourages private sector employers to give smaller increases. Screwing down wages is the way to grow the economy?

The Coalition boasts it’s spending a lot more on infrastructure – particularly motorways and railways – than its penny-pinching predecessors. True. Much more. Labor allowed a bunch of discredited American rating agencies to dictate how much it could spend on infrastructure, for fear of what its political opponents would say if it lost its triple-A rating.

This government is no braver, but got the bright idea of “asset recycling”. You privatise government businesses – the electricity companies, ports, buses, ferries, the lottery office, whatever – then use the proceeds to build new stuff without upsetting the Yanks.

Trouble is, the government decided to “fatten the pig for market”. To maximise the sale price of the electricity businesses, it created arrangements that allowed the new owners to put up their prices. When it sold Port Botany and the Port of Newcastle, it did what was intended to be a secret deal where, if the new Newcastle owner decided to build a container terminal in competition with the new owners of Botany, it would have to pay compensation.

So the government got great sale prices at the expense of the state’s electricity users, people who hate all the container trucks rumbling through Sydney streets on their way north, and Novocastrians (including me) who worry about where the jobs will come from as the world stops buying our coal.

Sorry, I can’t say I’m wildly impressed by the Coalition’s decade of financial dealings. Too many bankers, not enough economists.

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Neglect of aged care more proof of PM's blokey blind spot

Everywhere you look, Scott Morrison and his ministers have a women problem. You see it even as he uses the media focus on allegations of sexual assault as cover for his efforts to convey the aged care royal commission’s damning report to the too-hard basket.

When you think about it, aged care is the ultimate women’s issue. Of those receiving aged care, women outnumber men two to one. Who does most of the worrying about how mum or dad are being treated – and probably most of the visiting? More likely to be daughters than sons.

The commission’s report found that the root cause of the common ill-treatment of people in aged care is the insufficient number, inadequate training and low pay of aged care workers. And who are these overworked, undertrained and woefully paid age care workers? Almost all of them are women.

Now do you see why aged care conditions have been low on the priorities of successive governments? Not enough rich white men jumping up and down.

Aged care is huge. Despite understaffing, it has 366,000 paid staff, 68,000 volunteers and 28,000 contractors – about 3 per cent of the whole workforce.

The report found that at least a third of people in residential and at-home care had experienced substandard care. It identified food and malnutrition, dementia care, use of physical and chemical restraints and palliative care as needing urgent improvement.

Aged care used to have prescribed staffing ratios, but they were removed as part of the push to get for-profit providers into the “industry”. The report found that what regulation of facilities exists isn’t enforced because the government knows it’s not paying enough to make quality care possible.

The providers will tell you there’s a shortage of properly qualified personal care workers and nurses. Probably true. But those who are qualified are less attractive because they have to be paid more. Registered nurses have more choice about the industry they work in, so they must be paid more and treated better.

Lack of trained workers is a two-sided problem. If there was more demand for qualified workers and they were offered better pay and conditions – permanency, for instance – more would go to the trouble and expense of acquiring qualifications to supply.

Providers complain of high rates of staff turnover. They don’t mention that when they overwork, underpay and give workers no guarantee of regular work – or delegate their responsibilities as employers to a labour-hire company - a lot of workers soon leave in search of something less terrible - say, picking fruit in the blazing sun at Woop Woop.

It’s a funny thing: workers who are given little loyalty don’t tend to give much back. You’ve no idea how selfish workers can be. Don’t they know I’m trying to increase profits? Next time I see a Coalition MP I’ll give him (the hims are more receptive) an earful about how the dole’s so cushy these young bludgers don’t want to work.

It takes a lot of dedication to deal with the bodily needs of elderly people you’re not related to. But if you can find the motherly types, surely they won’t mind if you pay them peanuts. The full-time award rate for base-level aged care workers is $21.09 an hour, a fraction less than for base-level cleaners and just $1.25 above the Australian minimum wage.

Much of the poor treatment of people arises from the use of casualisation to save on wages and the resulting high rate of staff turnover, which makes it hard for residents and their carers to develop relationships.

The report found that “older people get the best care from regular workers they know, who respect them and offer continuity of care as well as insights into their changing needs and health requirements”.

In contrast, casually employed carers can struggle to “provide continuity of care and form ongoing relationships with older people”.

Professor Kathy Eagar, of the University of Wollongong, has said that “the staff are so busy that all they get time to do is tasks, like helping with toileting, showering, dressing and feeding residents. A lot of residents report they’re relatively lonely because, even if there are staff, they don’t have the time to talk to them.”

“For people with dementia, it helps to have the same people every day. If I don’t know my name because I’ve forgotten it, but the care worker does know my name, that’s a whole different proposition to if I don’t know it and my carer doesn’t know either,” she said.

Morrison says he’s focused on getting more jobs in the economy. Eagar has estimated that implementing the report’s proposals on staffing would increase the aged care workforce by about 20 per cent.

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Unless Morrison does a lot more, the recovery will be weak and slow

I fear we may be changing places with the United States. I fear the economy’s rapid rebound may have misled Scott Morrison into believing we’re home and hosed. I fear the Smaller Government mentality may trip us up again.

In response to the global financial crisis of 2008, the Americans and Europeans spent huge sums and ran up big budget deficits and public debt. They had to rescue their teetering banks and get their frozen economies going again.

It worked. The financial crisis dissipated and their economies started to recover. But before long they got a bad case of the Smaller Government frights. Look at those huge deficits! What have we done? Our children will drown in government debt!

So they put their budgets into reverse and cut government spending – especially spending aimed at helping the poor and unemployed – to get their deficits down and slow the growth in debt. Critics dubbed this a policy of “austerity”.

Trouble was, it backfired. Their economies weren’t growing strongly enough to withstand the withdrawal of government support. Their growth slowed, their budget deficits didn’t fall much, and their premature removal of support contributed to the deeper, structural problems that caused the developed economies to endure a decade of weak growth.

Point to note: unlike the Americans (and the others) our Rudd-Gillard government didn’t take fright and start slashing government spending. But now we’ve come to the global coronacession, it seems this time the roles may be reversed.

The Americans – who, admittedly, are in a much deeper hole than us – have just legislated a third, $US1.9 trillion ($2.5 trillion) spending package.

So what are we doing? With the economy having rebounded strongly in the second half of last year, we’re concluding the recovery’s in the bag and proceeding to wind back the main stimulus measures as fast as possible.

In the budget last October, the government foresaw the budget deficit falling from a peak of $214 billion last financial year to $88 billion next financial year.

At the Australian Financial Review’s business summit on Wednesday, one speech was given by Morrison and another by Reserve Bank governor Dr Philip Lowe. Their contrasting tones really worried me.

Morrison’s self-congratulatory speech could have come with a big, George W Bush-like sign, MISSION ACCOMPLISHED. He said it had been a tough 12 months, “but here we are, leading the world out of the global pandemic and the global recession it caused”.

He recalled telling last year’s summit that the government’s economic response “would be temporary and have a clear fiscal [budgetary] exit strategy”.

And “thankfully, we are now entering the post-emergency phase of the . . . response. We can now switch over to medium and longer-term economic policy settings that support private sector, business-led growth in our economy.”

Get it? Now it’s the time for the government to pull back and for business to take the running. Why? “Because you simply cannot run the Australian economy on taxpayers’ money forever. It’s not sustainable.”

(Note the trademark Morrison argument-by-non-sequitur: since you can’t do it forever, you mustn’t do it for another few years.)

Trouble is, Lowe gave an unusually sombre speech, highlighting the key respects in which business wouldn’t be taking the running.

He warned that the better-than-expected rebound after the lifting of the lockdown “does not negate the fact that there is still a long way to go and that the Australian economy is operating well short of full capacity. There are still many people who want a job and can’t find one and many others want to work more hours”.

“And on the nominal side of the economy [that is, on wages and prices] we have not yet experienced the same type of bounce-back that we have in the indicators of economic activity [such as employment and GDP]. For both wages and prices, there is still a long way to go to get back to the outcomes we are seeking.”

One of the main ways we get “business-led growth” is by growth in its investment in expansion. But it’s clear Lowe’s worried that it’s not really happening and may not for some years.

“While there was a welcome pick-up in the December quarter, particularly in machinery and equipment investment, investment is still 7 per cent below the level a year earlier . . . Non-residential construction is especially weak, with the forward-looking indicators suggesting that this is likely to remain so for a while yet,” he said.

Since 2010, business investment as a proportion of gross domestic product has averaged just 9 per cent, compared with 12 per cent over the previous three decades.

“A durable recovery from the pandemic requires a strong and sustained pick-up in business investment. Not only would this provide a needed boost to aggregate demand over the next couple of years, but it would also help build the [stock of physical capital] that is needed to support future production,” Lowe said.

Next is weak wage growth. “For inflation to be sustainably within the 2 to 3 per cent [target] range, it is likely that wages growth will need to be sustainably above 3 per cent . . .

“Currently, wages growth is running at just 1.4 per cent, the lowest rate on record. Even before the pandemic, wages were increasing at a rate that was not consistent with the inflation target being achieved. Then the pandemic resulted in a further step-down. This step-down means that we are a long way from a world in which wages growth is running at 3 per cent plus.”

The financial markets need to remember that you don’t get high inflation without high wages. Business needs to remember that its sales won’t grow strongly if it keeps sitting on its customers’ wages.

And Morrison needs to remember that if he withdraws budgetary support at a time when business is unlikely to take up the slack, the economy will go flat and the voters will blame him.

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Stuck with crappy aged care because Morrison won’t ask us to pay

I’m sorry to be so pessimistic but I fear that, in just its first week, the likelihood of the aged care royal commission’s report leading to much better treatment of our elderly has faded.

Within a day or two, Scott Morrison and his Treasurer, Josh Frydenberg, made it known they had “little appetite” for the commission’s plan to use an “aged care improvement levy” of 1 per cent of taxable income to cover the considerable cost of the reforms it proposed.

Morrison wants to be seen as delivering lower – not higher – taxes. I suspect the pair have realised that announcing an increase in tax on all income earners wouldn’t fit well with the costly third stage of their tax cuts, due in 2024, which will go mainly to high income-earners (like my good self).

Rather, the pair are murmuring about making the elderly contribute more from their own retirement savings towards the cost of their care by tightening the means-testing of aged care benefits. Maybe there’d be more and bigger “refundable accommodation deposits”.

Making the better-off old cover more of their own costs – including by taking account of the much-increased value of their homes – would be very fair. Too fair, you’d have thought, for the Liberal Party and its heartland.

Remember how the party’s “base” revolted against Malcolm Turnbull’s measures to restrict tax concessions to just the first $1.6 million of superannuation balances? Remember how hard well-off retirees fought against Labor’s plan to limit dividend franking credits at the last election, with the Libs egging them on?

Can you imagine how keen Morrison would be to have the tables turned in the coming election? He’d be the one seeking support for what Labor would quickly label his “retirement tax”.

Implementing the commission’s report would cost a minimum of $10 billion a year and probably a lot more. It’s impossible to imagine this government having the courage to raise anything like that much by tightening the means-testing of its own well-off supporters.

The commission’s report has been pushed aside before we’ve had time to understand what it’s proposing and why it would be so expensive. Whereas the present Aged Care Act was designed to help the government limit its spending, the report goes the opposite way, proposing a new act which enshrined every person’s statutory right to aged care of decent quality, with reasonable choice.

This would remove the government’s ability to limit the number of people receiving care, making access to free aged care “universal” – just as access to free public schooling has long been universal and, since Medicare, access to free care in public hospitals is universal.

In this context, “free” means the cost is covered by general taxation, not by user charges or means-tested charges. (Note that the freedom from direct charging would apply only to aged care proper. People’s food and accommodation costs would be means-tested. But refundable accommodation deposits would probably go.)

The report found that the root cause of the (often literally) crappy treatment of people in age care was the inadequate number, training and pathetic pay of aged care workers (almost all of them women). Properly done, almost all the increased cost of aged care would end up in the hands of these women.

In principle, it would be perfectly fair to cover the cost of better, universal aged care with a tax levy paid by all income-earners. We’d be paying for aged care the way we’ve always paid for the age pension and much else – by a “generational bargain”.

It’s fair to ask the present generation to pay for the retirement costs of the older generation because the present generation will be old themselves soon enough. When they are, their retirement costs will be paid for by the generation coming behind them. In the end, every generation pays and every generation benefits.

But that’s just in principle. In practice, the Grattan Institute has shown that successive governments – particularly the Howard government – have reneged on the intergenerational bargain by changing the tax and welfare system in ways that favour the old and penalise the young.

Tax concessions on super are now so generous that few retirees pay any income tax, no matter how well-off. As my colleague Jessica Irvine has shown, tax and welfare concessions to existing home owners have made homes such a desirable investment that a growing proportion of the young will never be able to afford to join the charmed circle.

The young bear the brunt of our willingness to live with high unemployment and underemployment and our unwillingness to regulate the gig economy. And the young pay far more for their higher education than earlier generations (and now those with the temerity to do an arts degree pay double).

In the face of this unfairness, the Grattan Institute’s Brendan Coates has sensibly proposed that the cost of fixing aged care be covered by reducing super concessions to higher income-earners, but I doubt Morrison’s game to try that one on his base – or the voters.

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QE is a lobster pot: easy get it, hard to get out unscathed

Since the global financial crisis and more so since the coronacession, the normal way things work in financial markets has been turned on its head. Standard monetary policy (the manipulation of interest rates) has stopped working so, led by the US Federal Reserve, the biggest rich economies have plunged into “quantitative easing” (QE) and other “unconventional policies” which, frankly, are weird and wonderful.

Heading our response to this topsy-turvy world has been Reserve Bank governor Dr Philip Lowe. There’s never a shortage of smarties thinking they could do a much better job than the governor – whoever he happens to be – but Lowe’s getting a double dose of second-guessing. I don’t envy him – I’m just glad it’s him making the impossible calls, not me.

Lowe’s having to respond to forces way beyond his control. We’ve seen official interest rates around the world fall to zero because of a lasting global imbalance between saving and investment (or, alternatively, because the US Fed stuffed up). With interest rates already so low, further rate cuts ceased to have much effect in encouraging borrowing and spending on consumption and investment goods.

Undeterred, the Fed leapt into QE - buying longer-dated second-hand government bonds with created money - and soon was joined by the Europeans, Brits and Japanese. This did little to stimulate demand for goods and services, but did inflate the prices of houses, shares and other assets, as well as lowering your exchange rate relative to everyone else’s.

The Europeans went even further down the crazy paving to “negative” interest rates (where the lenders pay the borrowers to borrow their money) and now the Americans are considering it.

Lowe resisted cutting our official interest rate to zero and engaging in QE, until the pandemic prompted the big boys to do yet more of it. His hesitation revealed his scepticism about the benefits and risks of QE, though he did want to keep the Reserve at the demand management top table.

In any case, he didn’t think he could go on letting the big boys devalue their currencies at the expense of our industries’ international price competitiveness – especially when the return to top-dollar iron ore prices was pushing up our “commodity currency”. Had he not acted, exporters and importers would be screaming abuse and unemployment would be worse.

But this has plunged Lowe into a world of second-guessers. Some smarties are criticising him for not cutting the official rate to zero early enough and not doing much more QE. But others – businessman Andrew Mohl, in the Financial Review, for instance - are making the opposite criticism: why is he engaging in behaviour every ex-central banker knows is bad policy and highly risky?

I think the RBA old boys’ association’s fears about QE make more sense than the critique of the shoulda-done-double brigade. But everyone needs to remember Lowe had little choice but to join the big boys’ high-risk game, where they’ll worry about the fallout later.

It’s a delusion that, in the years before the arrival of the virus, growth would have been much stronger had Lowe acted earlier and harder. These critics conveniently ignore the obvious truth – which Lowe quietly but continually spoke of - that growth was weak not because he wasn’t trying hard enough to stimulate it, but because the elected government had its policy arm (the budget; fiscal policy) pushing in the opposite direction as it sought the glory of a budget surplus.

The shoulda-done-double brigade refuse to accept that monetary policy has lost its potency partly because fixing the economy with monetary policy is their only expertise and way of earning a living, and partly because their Smaller Government political inclination makes them disapproving of using increased government spending – though never tax cuts – to stimulate demand.

The RBA old boys’ association (and they are all boys) is right that we ought to be thinking a lot more about the reasons “unconventional” measures have formerly been verboten. QE doesn’t do what monetary policy’s supposed to, but does foster asset-price inflation, does risk boom and bust in asset markets, does favour the better-off, and does foster “beggar-thy-neighbour” exchange-rate contests.

The most immediate and worrying aspect of this is what it’s doing and will do to house prices and the affordability of home ownership. It’s literally true, but not good enough, for Lowe to say the Reserve doesn’t, and shouldn’t, target house prices. Saying the stability of the housing market isn’t the Reserve’s department won’t, and shouldn’t, save the central bank from copping most of the blame should something go badly wrong. (Little blame will go to the distortions caused by tax policy and local planning rules.)

People have been predicting a collapse in house prices for decades, but the more house prices are allowed to move out of line with household incomes – and the more highly geared the nation’s households become - the greater the risk the Jeremiahs’ prophecies come to pass.

It makes no sense for the people living on a big island to bid the prices of their fairly fixed stock of houses higher and higher and higher, then tell themselves how much richer they all are. Is this prudent central banking?

The equanimity with which some people contemplate negative interest rates is remarkable. Sometimes I think too much maths can make economists mad. The arithmetic works the same whether you put a minus sign or a plus sign in front of an interest rate, but the humans don’t. It’s not much better when you think paying oldies a zero interest rate on their savings a matter of no consequence.

When central bankers manipulate interest rates to encourage or discourage borrowing and spending, they are knowingly distorting prices and behaviour in the financial markets. Conventionally, they have minimised their distortion of market signals by limiting themselves to affecting short-term and variable interest rates.

But QE takes their distortion further out along the maturity “yield curve”, interfering with the market’s ability to decide how much more a saver should be paid for tying up their money for 10 years rather than one. When you move to negative interest rates, you rob pension and insurance funds of the ability to match their financial assets with their long-term liabilities.

One of the signals the market should be sending via longer-term yields (interest rates) on government bonds is the inflation rate it’s expecting down the track. This, by the way, explains why the Reserve is wise to buy only second-hand government bonds – that is, buy them at a market-set price – rather than buying them direct from the government, even though it’s buying them with newly created money either way.

As the economy’s CCO – chief confidence officer – Lowe is in no position to bang on about the costs and risks involved as the big boys force us further down the crazy paving of unconventional monetary policy. It’s the more academically inclined outside monetary experts who should be urging caution rather than criticising Lowe for not doing double.

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Coronacession: great initial rebound, but recovery yet to come

If you’re not careful, you could get the impression from this week’s national accounts that, after huge budgetary stimulus, the economy is recovering strongly and, at this rate, it won’t be long before our troubles are behind us.

The Australian Bureau of Statistics issued figures on Wednesday showing that the economy – real gross domestic product – grew by 3.1 per cent over just the last three months of 2020. This followed growth of 3.4 per cent in the September quarter.

When you remember that, before the virus arrived, the economy’s average rate of growth was only a bit more than 2 per cent a year, that makes it look as though the economy’s taken off like a stimulus-fuelled rocket.

Even the weather is helping. The drought has broken and we’ve had a big wheat harvest. We keep hearing about the Chinese blocking some of our exports, but much less about them going back to paying top dollar for our iron ore. This represents a massive transfer of income from China to our mining companies and the federal and West Australian governments.

So much so that our “terms of trade” – the prices we get for our exports compared with the prices we pay for our imports – improved by 4.7 per cent in the December quarter, and by 7.4 per cent over the year.

Sorry. It certainly is good, but it's not as good as it looks. The trick is that you can’t judge what’s happening as though this is just another recession. It’s called the coronacession because it’s unique – sui generis; one of a kind.

Normal recessions happen because the economy overheats and the central bank hits the interest-rate brakes to slow things down. But it overdoes it, so households and businesses get frightened and go back into their shell. The fear and gloom feed on each other and unemployment shoots up. (If you’ve heard of poets’ license, economists have a licence to mangle metaphors.)

This time, the economy was chugging along slowly, with the Reserve Bank using low interest rates to try to speed things up, when a pandemic arrived. Some people were so worried they stopped going to restaurants and pubs. But to stop the virus spreading, the government ordered many businesses to close and the whole nation to stay at home.

(To translate this into econospeak: normal recessions are caused by “deficient demand”; this one was caused by “deficient supply” - on government orders.)

Knowing this would cause much loss and hardship, governments spent huge sums to support individuals and firms, including the JobKeeper wage subsidy (intended to discourage idle firms from sacking their workers), the temporary JobSeeker supplement (to help those workers who were sacked), help business cash flows and much else.

The politicians and their econocrats assured us this would be sufficient to hold most of the economy intact until they’d be able to lift the lockdown. Despite much scepticism (including from me), this week’s figures offer further proof they were right.

The national lockdown was imposed in March, and caused GDP to contract by a previously unimaginable 7 per cent in just the June quarter. The national lockdown was lifted early in the September quarter, when most of that 7 per cent should have returned.

If it had, it would have been easier to see what it was: not the start of a “recovery”, but just the rebound when businesses are allowed to reopen and consumers to go out and shop.

But the need of our second biggest state, Victoria, to impose a second lockdown – which wasn’t lifted until November - has seen the rebound spread over two quarters, with a bit more to come in the present, March quarter.

When you study the figures, you see that most of the collapse in growth and rebound in the following two quarters is explained by just the thing you’d expect: the downs and ups in consumer spending. It dived by 12.3 per cent in the June quarter, then rebounded by 7.9 per cent in the following quarter and a further 4.3 per cent in the latest quarter.

Consumer spending grew strongly in the December quarter, even though the wind-back of federal support measures caused household disposable income to fall by 3.1 per cent. How could this be? It was possible because households cut their outsized rate of saving.

At the end of 2019, households were saving only 5 per cent of their disposable income. By the end of June, however, they were saving a massive 22 per cent. But by the end of last year this had fallen back to 12 per cent. This suggests people were saving less because they were worried about their future employment and more because they just couldn’t get out to shop.

Note that, by the end of December, the level of real GDP was still 1.1 per cent below what it was a year earlier. Economists figure we’ve rebounded to about 85 per cent of where we were. But what happens when, after the present quarter or next, we’re back to 100 per cent?

Will we keep growing at the rate of 3 per cent a quarter? Hardly. The easy part – the rebound – will be over, most of the budgetary stimulus will have been spent, and it will be back to the economy growing for all the usual reasons it grows.

Will it be back to growing at the 10-year average rate of 2.1 per cent a year recorded before the virus interrupted? If so, we’ll still have high unemployment – and no reason to fear rising inflation or higher interest rates.

But it’s hard to be sure we’ll be growing even that fast. On the Morrison government’s present intentions, there’ll be no more stimulus, little growth in the population, a weak world economy, an uncompetitive exchange rate thanks to our high export prices and, worst of all, yet more years of weak real growth in income from wages. The “recovery” could take an eternity.

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Only bipartisanship will let us relieve the squaller of aged care

Despite all the appalling stories of the neglect and even abuse of old people we’ve heard during the two years of the royal commission into aged care, it’s hard to be confident this will be the last time we’ll need an inquiry into what’s going wrong and why.

Looking at the eight volumes of the commission’s report – even its executive summary runs to 115 pages – it’s easy to conclude the problem must be hugely complicated. And if you get into the gruesome detail, it is.

But if you look from the top down, it’s deceptively easy. All the specific problems stem from a single cause: we’ve gone for decades – under federal governments of both colours – trying to do aged care on the cheap, and it’s been a disaster.

The basic solution is obvious: if we want decent care of our oldies we must be prepared to pay more for it – a lot more. The problem is, neither side of politics has been game to ask us to do so.

That’s partly because the first side to do so fears it would be attacked by the other: “Don’t vote for them, they want to put up your taxes!”

But also because neither side believes the public is prepared to put its money where its mouth is. We’re happy to be scandalised by the terrible treatment of many people in aged care, and blame it on our terrible politicians, but don’t ask us to kick the tin. We’re paying too much tax already.

I believe that a government with the courage to make the case for a specific tax increase to cover the cost of better aged care could be successful, but in this age of leaders who find it easier to follow than to lead, it’s not terribly likely.

The commission makes no bones about its conclusion that the aged care system has been starved of funds. It finds that the Aged Care Act, introduced in 1997 by the Howard government, was motivated by a desire to limit its cost to the budget.

“At times in this inquiry, it has felt like the government’s main consideration was what was the minimum commitment it could get away with, rather than what should be done to sustain the aged care system so that it is enabled to deliver high quality and safe care,” the report says.

In 1987, the Hawke government introduced an “efficiency dividend” under which the running costs of government departments and agencies are cut automatically each year by a per cent or two. The practice persists to this day. The report estimates that, by now, this has cut more than $9.8 billion from aged care’s annual budget.

Another way the government has limited costs is by rationing access to home care packages – which help people avoid going into residential care (and so, in the end, help the government save money). There’s a long waiting list for home care, with those in greater need of help waiting longer than those needing less.

Every so often the government announces with great fanfare its decision to cut the waiting list by X thousand places. But since the demand for places is growing – and even though many people die before their name comes up – the list never seems to get lower than about 100,000 at any time.

“The current aged care system and its weak and ineffective regulatory arrangements did not arise by accident,” the report says. “The move to ritualistic regulation was a natural consequence of the government’s desire to restrain expenditure in aged care.

“In essence, having not provided enough funding for good quality care, the regulatory arrangements could only pay lip service to the requirement that the care that was provided be of high quality.”

Yet another way governments have sought to limit the cost of aged care is to contract out responsibility to charities – including Anglicare and United Care – and then for-profit providers.

Commissioner Lynelle Briggs finds that government-run aged care providers “perform better on average than both not-for-profit and, in particular, for-profit age care providers”.

This is hardly surprising. All of them are underfunded, but private operators have to cut costs harder to make room for their profits.

The report doesn’t say how much extra we need to pay to have decent aged care, but the Grattan Institute suggests about $7 billion a year would do it. That would be on top of the $21 billion the government already spends, plus user fees of $5 billion a year.

Briggs says the government should introduce an “aged care improvement levy” of 1 per cent of personal taxable income, from July next year.

Would Morrison do such a thing? Well, “you know our government’s disposition when it comes to increased levies and taxes. It’s not something we lean to,” he says.

Oh. Well-informed sources, however, tell us he’d be prepared to introduce the levy if the opposition supported it. If Labor chooses to play politics, he’ll let the aged care misery continue.

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Funding the budget by printing money is closer than you think

Many people are alarmed by “modern monetary theory”, the seemingly radical idea that the government should cover its budget deficit simply by creating money. But in his new book, Reset, Professor Ross Garnaut, one of our most respected economists, has joined the young turks.

And that’s not all. Last Monday I wrote about the things Reserve Bank governor Dr Philip Lowe doesn’t feel he can say out loud in this era of unconventional “monetary policy” (the manipulation of interest rates). Something else he doesn’t want to say is that the Reserve is funding the budget deficit already.

(By the way, what follows ignores the present flurry in bond markets, where some players have leapt to the conclusion that inflation’s about to take off. I wish. Don’t worry, the market will return to reality soon enough.)

Until Garnaut’s intervention, this issue has seemed divided between two groups. One is younger economics graduates who think of this revolutionary new idea that the federal government shouldn’t bother borrowing to finance its budget deficits but simply print all the money it needs – thus avoiding all that debt and interest payments – as a breakthrough that would transform the management of our economy and hasten our return to full employment.

The rival group is older, more experienced economists – and a lot of ordinary citizens – who see it as a dangerous, even crazy, idea that would surely end in disaster. It would be the primrose path of indiscipline that led to ever-rising inflation, maybe even hyper-inflation – a dollar that was worth next-to-nothing – and unemployment that was worse, not better.

Ostensibly, the opponents of modern monetary theory (MMT) are led by Lowe, as boss of our central bank. At his appearance before a parliamentary committee last month, he replied to a question from Greens leader Adam Bandt that he would “push back” against any assertion the Reserve was “financing the government”. (Note the curious wording: not that it should, but that it already was.)

Debate between the two sides has established that MMT is neither as modern and revolutionary as its proponents imagine, nor as crackpot as many of its critics imagine. The fact is, until as recently as the mid-1980s, it was common practice for national governments (including ours) to cover their budget deficits partly by borrowing from the public and partly by “borrowing” from the central bank – which would create the money the government wanted.

This was when the developed economies were struggling with high inflation, and Milton Friedman’s “monetarists” were telling people that adding to the supply of money would inevitably lead to inflation.

So all the governments (including the Hawke-Keating government) decided to fund their deficits solely by selling government bonds to the public. Ironically, this meant the banking system (not an individual bank, but the system as a whole) could and did continue creating money, but the government – despite being the issuer and backer of the currency – couldn’t.

The monetarist dogma that creating money inevitably leads to inflation turned out to be wrong. It’s inflationary only if it causes the demand for the “real resources” – land, labour and physical capital – used to produce goods and services to exceed the supply of real resources. Until you reach that point, the creation of more money – whether by the banking system or the government – should give you stronger demand and more jobs without causing problems.

So the real reason for worry about MMT isn’t the theory, but the practice. If you give a bunch of vote-buying politicians a licence to spend as much as they like up to a certain point, how could you be sure they’d stop, and revert to borrowing, when they reached that point?

It’s this that Lowe is really on about, though he doesn’t want to say so.

Since last year he’s had little choice but to join the other, bigger economies in resorting to “quantitative easing” (QE) – the central bank buying second-hand government bonds, so as to lower the “yields” (interest rates) on such bonds, but paying for them merely by crediting the bond sellers’ bank accounts.

In particular, since March last year the Reserve has guaranteed that it would buy sufficient bonds to stop the yield on three-year Australian government bonds rising above 0.25 per cent (later lowered to 0.1 per cent). In practice, because the market believed the Reserve would honour its promise, it hasn’t had to actually buy all that many bonds – until last week.

Then, last November, the Reserve went further into QE, announcing it would buy $100 billion worth of second-hand federal and state government bonds with maturities of five to 10 years so as to force their yields down, too. The Reserve estimates that these purchases have lowered yields by about 0.3 percentage points.

Last month it decided to buy another $100 billion worth. Under questioning by Labor’s Dr Andrew Leigh at the parliamentary committee, Lowe and his deputy, Dr Guy Debelle, revealed that $80 billion of the first $100 billion had gone on federal (as opposed to state) government bonds, which represented about 10 per cent of the feds’ entire stock of bonds outstanding.

The further $100 billion would take the Reserve’s holding of the feds’ total debt to 20 per cent. If there was yet another $100 billion purchase after the second, that would take its holding to 30 per cent. With the Reserve buying second-hand bonds at the steady rate of $5 billion a week, it was buying more than the new bonds the government was issuing to fund its huge budget deficit, Debelle revealed.

In his opening statement to the committee, Lowe insisted that “the RBA does not, and will not, directly finance governments. The bonds we own will have to be repaid in the same way as if they were owned by others.

“We are lowering the cost of finance for governments – as we are for all borrowers – but we are not providing direct finance. There remains a strong separation between monetary and fiscal [budgetary] policy,” he said.

That last sentence is the key to why Lowe is drawing such fine distinctions. Fiscal policy is controlled by the politicians, whereas monetary policy is controlled by the Reserve, which is independent of the elected government.

The Reserve is buying all these second-hand bonds of its own volition, and doing so because it believes QE is part of monetary policy’s best contribution to getting people back in jobs. It’s not acting under any directive from the government to fund its deficit directly. So the problem of the pollies continuing to spend beyond the point where this becomes inflationary doesn’t arise.

All true. But Lowe can’t suspend the truth that money is “fungible” – all dollars are interchangeable. Funding the deficit indirectly rather than directly may be important from the perspective of good governance, but from the perspective of the economic effect, they’re the same.

Back to the views of Professor Garnaut: “The fiscal deficits should be mainly funded directly or indirectly by the Reserve Bank, at least until full employment is in sight.”

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