Wednesday, February 23, 2022

Interest rates won't rise until wages are higher

Let’s talk about pay. Been getting pretty good rises of late? Well, some people have. But if your pay increases have been small and far between, you’re in good company. And I have some good news. Well, not so much good news as not-as-bad-as-it-could-be news.

In recent times people in our financial markets – including the banks – have been predicting that the Reserve Bank will start raising its official interest rate within a few months and, once it starts, there’ll be more increases in quick succession.

The media have been reporting these predictions with great enthusiasm, almost implying they’re a certainty. The financial types are so confident because interest rates really are about to rise in America, and they save on research time by assuming anything the Americans do, we’ll do a few months later.

The Americans have had a lot of price rises lately and, thanks partly to their Great Resignation, also seen strong growth in wage rates. When prices rise a lot and this flows through to higher wages, that’s when you do have a problem with ongoing inflation – a “wage-price spiral”.

But here’s the thing. We’ve had a smaller rise in prices but, so far, little rise in wages. (We’ll see on Wednesday, with the publication of the Bureau of Statistics’ wage price index, how much that changed in the three months to December.)

And Reserve Bank governor Dr Philip Lowe has said repeatedly that he won’t be raising interest rates until he sees that the rise in prices is also reflected in wage rises. As he put it in his recent parliamentary testimony, “the higher interest rates will be occurring in an environment where people have stronger wages growth and jobs”.

So the banks’ predictions about rising interest rates imply that most workers will be getting a pay rise of 3 per cent or so this year. Find that hard to believe?

According to the wage price index, wage rises have averaged 2 per cent a year over the past six years. And, as you remember, businesses and governments were quick to impose wage freezes when the pandemic began in 2020.

A move to 3 per cent rises is always possible of course but, given recent history, I’ll believe it when I see it. And Lowe’s also waiting for the evidence. As he puts it, “is the stronger labour market going to translate to higher wages?”

The fad of assuming that whatever happens in America also happens here has led some to talk about our own Great Resignation. It’s not true.

In the US, many workers have simply given up working or looking for work. Some are staying home to care for family, some to avoid the plague, some because the upheaval has caused them to re-evaluate their lives.

“Especially if you were working in a low-wage job, you probably thought that the risk [of infection] was not worth the return,” Lowe says. Older Americans were “leaving the workforce in droves”.

But whereas the proportion of working-age people who are in the US labour force has fallen heavily – thus requiring employers to offer higher wages to attract the workers they need – this hasn’t happened here. Our rate of people “participating” in the labour force has returned to its record level pre-pandemic.

Which is just one sign of how much “tighter” our jobs market has become. We have 270,000 more people in jobs than we did before the pandemic, and both unemployment and underemployment are at 13-year lows, while the number of job vacancies is at a record high. (Our closed borders to skilled workers, backpackers and overseas students have helped in this, of course.)

This tight market is the main reason the econocrats are hoping it won’t be long before employers are obliged to start offering higher pay rates to get – poach – the workers they need.

When that happens, it will be a new experience for a lot of employers, many of whom have got into the habit of thinking their profitability comes from keeping wage costs as low as possible.

In the old days, the unions and the regulated wage-fixing system could be relied on to ensure that wages kept up with rising prices – plus a bit more to ensure living standards kept rising. Not any more.

These days, few workers belong to unions, and it’s not hard for employers to stop engaging in enterprise bargaining. And, as we’re seeing with the NSW government’s resistance to its transport workers’ wage claim, workers don’t get much sympathy from conservative governments.

These days, if you want a pay rise you have to get it yourself. Although we haven’t had a Great Resignation, the econocrats say we have had a significant increase in workers willing to change jobs for higher pay. We’ve also had employers agreeing to move workers to a higher pay grade.

The top econocrats hope that by keeping the job market tight they’ll finally crack the wages dam, getting the latest generation of employers used to the frightening idea than their workers are entitled to decent pay rises. Good luck, guys.

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Friday, February 18, 2022

Unlike the media, econocrats in no great hurry to raise interest rates

The financial markets and financial press may have convinced themselves we have a serious inflation problem and must hit the interest-rate brakes early and often, but the clear message from our top econocrats is that they aren’t in such a hurry. Their eyes haven’t moved from the prize: seizing this chance to achieve genuine full employment.

Nothing in Treasury secretary Dr Steven Kennedy’s remarks to a Senate committee this week suggested he was anxious about our recent rise in prices, nor hinted that a rise in the official interest rate was imminent.

Indeed, “interest rates are still close to zero and expected to remain historically low for some time,” he said.

What little he said about inflation was that “the effects of COVID on inflation, often characterised as a combination of increased demand for goods [at the expense of demand for services] and supply-side shocks, are still passing through the economy.

“Fortunately, these impacts have been much less pronounced in Australia than in other countries. Nevertheless, the impacts have been felt and headline inflation is currently at an 11-year high.” (Not hard when inflation has been so low for so long.)

It’s true Kennedy also said that “it will not be until we see interest rates rise back to more usual levels that the risks associated with very low interest rates abate”.

But it’s clear he meant it would take years before the Reserve had rates back up to “more usual levels” - such as an official rate of 3, 4 or 5 per cent – not to give a big hint that Commonwealth Bank economists were right in predicting this week that the Reserve would start whacking up the official rate at its first board meeting after the May election.

And he was also making a quite different point. Settle back. Usually, he said, monetary policy (the manipulation of interest rates) is the primary tool with which to manage economic cycles, with fiscal policy (the manipulation of government spending and taxes in the budget) focusing on economic growth and budget stability.

Of course, in this conventional approach fiscal was complementary to monetary policy primarily through the workings of the budget’s “automatic stabilisers” (which cut tax collections and increase the number of dole payments when private sector demand is weak, but do the reverse when private demand is strong).

However, when major shocks to the economy come along, fiscal policy plays a more active role. And shocks to the economy don’t come bigger than the pandemic.

In any case, lockdowns cut the supply of goods and services, whereas monetary policy works to encourage demand – provided there’s plenty of scope to cut interest rates, which there wasn’t because rates were already close to zero.

So fiscal became the dominant policy instrument, with huge increases in government spending – including on the JobKeeper wage subsidy scheme – leading to huge increases in the budget deficit and public debt.

Got that? Now for Kennedy’s big announcement: “This unusual episode of macro-economic policy is now coming to an end.”

From here on, the dominant role will revert to monetary policy, with fiscal policy taking a step back.

Why? Well, partly because monetary policy will be busy for years getting interest rates back to “more usual levels”.

In which case, Kennedy says, “it is important that the withdrawal of fiscal policy support is tapered, as it currently is, to ensure that monetary policy has an opportunity to normalise”. (In the lingo of econocrats, “tapered” means something reduces slowly and steadily, not sharply and suddenly.)

As Kennedy says, the tapered withdrawal of fiscal policy support has already been arranged. That’s because all the government’s stimulus measures were designed to be temporary. So, as those programs wind up, the level of government spending – and the size of the budget deficit – will fall noticeably over the next few financial years.

Which means that what he’s really saying is there should be no additional, discretionary moves to hasten the return to a lower budget deficit. Why not? So monetary policy has an opportunity to “normalise”.

Get it? Over coming years, the Reserve will have to move interest rates up a long way to get them back where they should be – that is, to a level where borrowers have to compensate savers both for the loss of their money’s purchasing-power (that is, for inflation) and for being given the (temporary) use of the savers’ money.

But the Reserve’s scope to do this will be constrained if, while it’s trying to tighten monetary policy, the government’s rapidly tightening fiscal policy.

And Kennedy says there’s “an even more compelling reason” for fiscal policy support for demand not to be withdrawn too abruptly. Which is? “The opportunity to achieve full employment”. The “important opportunity to achieve and sustain full employment.”

No one knows how far unemployment can fall before shortages of labour cause wages to grow at rates that worsen inflation. Which, Kennedy says, suggests we need to exercise “a degree of caution” in tightening both fiscal policy and monetary policy.

All this fits with the remarks Reserve Bank governor Dr Philip Lowe made to a House of Reps committee the week before.

Lowe made it clear most of our inflation problem was temporary, not lasting. Although underlying inflation was 2.6 per cent, for the first time in years, “it is too early to conclude that inflation is sustainably in the target range”.

The Reserve has “scope to wait and see how the data develop and how some of the uncertainties are resolved” – one of which is whether “the stronger labour market [is] going to translate to higher wages”.

“I think it’s worth taking the time to have the uncertainties resolved and trying to secure this low rate of unemployment, which we have not had for 50 years.”

The financial types may be in panic mode over inflation, but it doesn’t sound to me like our top econocrats are in any mood to join them.

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Monday, February 14, 2022

Boring auditors-general our last defence against dodgy governments

You may be appalled by the ever-declining standards of propriety as the two main parties chase each other to the bottom of the barrel, putting career advancement ahead of their duty to voters. But recent events show our courageous auditors-general haven’t lost their commitment to upholding honest behaviour.

Which, particularly in the absence of a federal independent commission against corruption, is one thing to be thankful for.

Just last week in NSW, state Auditor-General Margaret Crawford issued a highly critical report on the Stronger Communities grants program established by the Berejiklian government before the 2019 state election.

The report said there was “little or no [defensible] basis” for the selection of grant recipients, with 95 per cent of all grant money flowing to 22 local councils belonging to Coalition electorates. These decisions were made by the former premier and her deputy, Gladys Berejiklian and John Barilaro.

This is reminiscent of federal Auditor-General Grant Hehir’s equally critical 2020 report on the “sports rorts” grants made by the Morrison government before the 2019 federal election. He found that the Australian Sports Commission’s carefully evaluated recommendations for grants were overridden by the minister’s office.

More than 61 per cent of the grants awarded failed to reach the commission’s merit cut-off. Rather, the grants went predominantly to sporting organisations in marginal electorates held by the Coalition.

When announcing tax cuts, Liberal politicians in particular love making speeches about how they’re only returning taxpayers’ own money. But in their attitude to pork-barrelling – it’s not illegal and everybody does it, in the immortal words of Saint Gladys – pollies on both sides act as though it’s really their money, to be spent as best suits their interests.

We’d know much less about their misuse of our money were it not for our auditors-general. The pollies want to keep it dark, but they can’t stop the auditors doing their duty. Scott Morrison was so grateful to the Australian National Audit Office he cut its funding. (More proof he regards taxpayers’ money as his own.)

As an accountant who was glad to escape auditing and become a journo, I’m pleased to acknowledge our debt to the auditors-general’s diligence. But I’m particularly impressed by the fearless Crawford’s blow against that great blight on budget honesty, “creative accounting” – using loopholes in the rules of public accounting to make the budget balance look better – or less worse – than it really is.

Some years ago, some bureaucrat in the NSW government (I doubt if any pollie could have come up with it) got the bright idea of making the budget look better by transferring the state’s railway assets to a new off-budget body, the Transport Asset Holding Entity.

This way, the cost of additional annual spending on rail infrastructure could be removed from the budget and treated “below the line” as an equity investment in a government-owned business. But this turned into an almighty and long-running battle between the state Treasury and the state Transport department.

Treasury prevailed and the Transport boss was dismissed without explanation. Enter the Auditor-General. Crawford declined to issue an audit report for the government’s 2020-21 accounts until she was satisfied all was in order.

In particular, she required evidence that the new holding entity was genuinely independent of the government and a genuinely profitable business. This would require higher annual payments from the budget for the use of the rail assets, thus reversing the engineered improvement.

Treasury delivered that evidence on December 23, allowing Crawford to issue an unqualified audit report about three months’ late. Soon after, Treasury secretary Mike Pratt, a former banker, announced his return to the private sector.

In another report last week, Crawford accused Treasury of obstructing her investigation into the holding entity by dragging its feet, withholding critical documents and overestimating the expected budget benefit from the transaction.

NSW Treasury’s reputation for probity has been damaged by evidence about the imbroglio given to a long-running parliamentary inquiry. Treasury regularly struggles to extract full and timely information from other departments. Now it has given them a master class in misbehaviour.

The parliamentary inquiry’s hearings have also damaged the reputation of KPMG – one of the big-four auditing firms moving into the more lucrative field of consultancy – which was revealed to have given opposing advice to Treasury on one side and Transport on the other.

The new NSW Treasury secretary is the highly experienced state and federal econocrat Dr Paul Grimes. Grimes has the distinction of having been sacked as head of the federal Agriculture department by Barnaby Joyce.

Joyce claims to have sacked him to show who was boss. It’s easier to believe that “a relationship of strong mutual confidence” between them wasn’t possible. In any case, the era of NSW Treasury being run by itinerant bankers seems to be over.

The holding-entity budget fiddle has its parallel federally. Both sides of politics have exploited a loophole in the definition of the budget balance introduced by Peter Costello’s Charter of Budget Honesty in the late 1990s.

The former Labor government used the loophole to stop its massive spending on the National Broadband Network from worsening the budget deficit by treating it “below the line” as an equity investment in a new for-profit business.

The present government is using the same trick to hide spending on its Nationals-inspired inland freight railway from Melbourne to Brisbane. A profitable business to be sold off at some future date? I think not.

There was a time when Yes, Minister was a reasonably accurate depiction of the relationship between a minister and his department head. But that was in Bob Menzies’ day. These days, the term “permanent head” is hardly apposite. Department heads have renewable fixed-term contracts, but it’s relatively common for prime ministers and premiers to lop off the heads of those who displease them.

When Tony Abbott sacked several department heads on coming to office in 2013, he was following the precedent set by John Howard in 1996. If the objective was to discourage unwelcome advice from bureaucrats – “Sorry, minister, that would be contrary to the Act” – it seems to have worked a treat.

So, how come our auditors-general are still so diligent in telling us when ministers have been playing ducks and drakes? Auditors-general are statutory officers appointed by the governor or governor general, and report to the parliament, not cabinet. They’re appointed for non-renewable eight or 10-year terms, and can’t move on to another government job. It’s a terminal appointment.

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Friday, February 11, 2022

Can we believe the great news on unemployment? Yes and no

Scott Morrison has a great re-election pitch: forget the problems with the pandemic, just look at how well the economy’s going. The rate of unemployment is already down to 4.2 per cent, and his goal is to get it below 4 per cent, the lowest it’s been in 50 years. Wow. What fabulous economic managers the Libs must be. But can you believe unemployment’s that low? Didn’t they fiddle with the figures some time back?

It’s good to be sceptical about the claims politicians make on the economy. Government politicians tend to tell us about the good bits and fail to mention the not-so-good parts of the story. Opposition politicians tend to do the opposite.

But not everything we think we know about the tricks politicians play is true. For instance, many people think they remember that, some years ago, a government changed the definition of unemployment to make the figures look better. They made it so that someone who worked just one hour a week was classed as employed.

This week I’ve had people asking me about this. In my experience, when a Labor government’s boasting about good unemployment figures, Liberal supporters remember Labor fiddled the figures. When, as now, it’s a Liberal government doing the boasting, it’s Labor supporters who remember a Liberal government doing the fiddling.

Which hints at the truth: actually, no government has changed the definition of unemployment. It’s an urban myth which, I suspect, has arisen because people get confused between who’s getting unemployment benefits and who’s unemployed.

The two are related, obviously, but they’re not the same. For instance, you can be unemployed and not get the dole because your spouse is working. On the other hand, single people working a few hours a week wouldn’t be earning enough to make them ineligible for the dole.

Governments can, and do, change the rules about who does or doesn’t get unemployment benefits. But who’s unemployed is measured by a huge monthly sample survey conducted by the independent Australian Bureau of Statistics.

It doesn’t let politicians decide who’s counted as unemployed and who ain’t. Rather, its definitions come from international conventions set by the UN’s International Labour Organisation in Geneva.

So it was the ILO that decided, decades ago, to define anyone doing as little as an hour’s work a week as employed. (I remember talking to an official of the Australian Council of Trade Unions who was an Australian delegate on the sub-committee that, a few years ago, decided to leave that definition unchanged. He vigorously defended the decision.)

Remember, you have to draw the line between being employed or unemployed somewhere – where would you draw it? Five hours work a week? Fifteen? Thirty-five? – and it was set so low ages ago when part-time work was much less common than it is today.

What’s true is not that the unemployment figures have been fudged, but that classing everyone working an hour or more as employed defines unemployment too narrowly. So narrowly as to understate the extent of the problem.

In fact, few people work as little an hour a week. But, though it’s wrong to imagine the only satisfactory jobs are full-time – it suits many students, parents of young children and retirees to work only a few days a week – it’s also true that many people working part-time would prefer more hours.

So for several decades, the bureau has supplemented the official unemployment figures by also publishing the number of people underemployed – those part-timers who’d prefer working work more hours. The latest figures show an unemployment rate of 4.2 per cent, plus an underemployment rate of 6.6 per cent.

Thus it is true the official unemployment rate of 4.2 per cent isn’t as good as it looks. It does understate the proportion of people who aren’t able to find as much work as they want.

And, since we know the proportion of underemployed workers is much higher today that it was 50 years ago, it’s also true that getting back to the lowest unemployment rate in 50 years isn’t likely to be as good as it was 50 years ago.

Even so, it’s quite realistic to expect that, since unemployment is already down to 4.2 per cent, and regardless of who wins the federal election, it won’t be too hard to get the rate down below 4 per cent sometime this year or next.

And whether you hate Morrison – or hate Anthony Albanese – don’t let any smarty pants tell you that will be anything other than a great achievement. If it’s not the best we’ve had the jobs market in 50 years, add in underemployment and it would be the best in maybe 40 years. Unemployment isn’t something you should wish on anyone.

No, the main reason for having reservations is the uncertainty about how long we’ll be able to keep unemployment that low.

We’ve had great success in creating extra jobs in the past year – most of which have been full-time – mainly because the government has responded to the pandemic with massively increased government spending. But the economy may slow if, as all that “fiscal stimulus” runs out, the private sector doesn’t take up the running.

The jobs market has also had a lot of help from an unprecedented (and temporary) source: for two years our borders have been closed to incoming workers. Skilled workers on temporary visas, and overseas students and backpackers doing unskilled and casual jobs.

You’ve heard employers complaining they can’t get workers and that job vacancies are at a far higher level than usual. The consequence is that many older workers who might have been pensioned off, haven’t been. And some of the jobs that haven’t been filled by overseas students and backpackers have gone to local young people.

But now our borders are re-opening to immigrant labour, we’ll see how tight the jobs market stays. I reckon it’ll be a fair while before we get back to the high levels of immigration pre-pandemic.

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Wednesday, February 9, 2022

Aged care crisis a clue we’ll be paying higher, not lower taxes

Do you like paying tax? No, I thought not. With so many other calls on our pockets, it’s easy to tell ourselves we’re already paying enough tax – probably more than enough.

Trouble is, our reluctance to put more into government coffers doesn’t stop us demanding the government spends more on additional and better services.

This presents a problem for politicians on both sides. They solve it by ensuring that, particularly in election campaigns, they tell us what we want to hear, not the unvarnished truth.

They’re often promising a tax cut sometime after the election, but also telling us their plans to spend more on this and more on that. What they don’t mention is what might have to happen after the election to ensure the tax cuts and spending increases don’t add too much to government debt.

But we’ve become so distrusting of our politicians that, in more recent years, they spend less time telling us how wonderful their own policies are and more time telling us how terrible the other side’s policies would be. Fear works better than persuasion.

Scott Morrison won the last federal election partly by claiming the Liberals are the party of lower taxes, whereas Labor is the party of “tax and spend”. It worked so well he’s bound to say it in this year’s election campaign.

So, it’s worth examining the truth of the claim. It strikes a chord because it fits voters’ stereotypical view that the party of the bosses must surely be better at running the economy and managing the government’s budget than the party of the workers.

But just because it fits our preconceived notions doesn’t make it true. It’s true that Labor’s record shows it to be a party that spends more on public services, and so has to tax more. What’s not true is that the Liberals are very different.

The record simply doesn’t support their claim to be the lower taxing party. If you look at total federal tax collections as a proportion of national income (gross domestic product) – thus allowing for both inflation and population growth – over the past 30 years, taxes have been highest under the Howard government and the present government.

Most of this has happened without explicit increases in taxes and despite governments usually having tax cuts to wave in our faces as proof of their commitment to lower taxes.

So, what’s the trick? An old one that all of us know about but few of us notice: bracket creep. It works away behind the scenes slowly but steadily increasing the proportion of our incomes paid in income tax. This usually ends up increasing tax collections by more than governments ever give back in highly publicised tax cuts.

Now, however, the aged care sector’s inability to cope with the additional pressures from the pandemic – where they’re so desperate for workers they even want help from the Army’s clodhoppers – offers a big clue about the tax we’ll be paying in the coming three years: more not less.

Ever since the public rejected Tony Abbott’s plans for sweeping spending cuts in 2014, the government has been trying to keep a lid on government spending in areas where there wouldn’t be much pushback.

By this means the Libs have had remarkable success in limiting the growth in government spending overall but, as the Parliamentary Budget Office has warned, they’re holding back a dam of spending. They can’t keep it up forever.

Eventually, problems and pressures from the public get so great, the government has to relent and start catching up. You can see that in this week’s election-related decision to reverse some of the cuts in grants to the ABC.

But a more significant area where the government’s been trying to limit the money flow is aged care.

It’s clear the sector’s problems getting everyone vaccinated and coping with COVID-caused staff shortages have just piled on top of all its existing problems.

The longstanding attempt to limit costs by moving the sector to for-profit providers has failed, with businesses making room for their profit margin by cutting quality. The aged care workforce is understaffed, underqualified, underpaid and overworked.

Most jobs are part-time and casual; staff turnover is high. When a work-value case before the Fair Work Commission is decided, hourly wage rates may be a lot higher.

After the royal commission’s shocking revelations, the government had no choice but to ease the purse strings, spending an additional $17 billion in last year’s budget. But it’s already clear a lot more will need to be spent to get the care of our parents and grandparents up to acceptable standards.

Turn to the national disability insurance scheme and its problems, and it’s clear we’ll end up having to spend a lot more here, too.

And that’s before you get to the failure of the job network – “employment services” – and the chaotic understaffing of Centrelink.

We have a lot of repressed government spending to catch up with. Don’t let any pollie tell you they’ll be putting taxes down.

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Monday, February 7, 2022

Interest rate rises will be a good thing - provided they're not too soon

Sometimes I think you can divide the nation’s economy-watchers into those desperate to see the Reserve Bank start raising interest rates and those desperately hoping it won’t. As usual, the sensible position is somewhere between them.

To some, interest rate rises are always a bad thing. They’re either speaking from self-interest or they’re victims of a media that unfailingly assumes all its customers are borrowers and none are savers. Tell that to your grandma.

What gets missed in all the angst is that the need to raise rates is always a good sign. A sign the economy’s growing strongly – perhaps too strongly. Trust the media to see the glass as always half empty.

In the present debate, however, the financial-market urgers fear we have a burgeoning problem with inflation, which must be stamped out quickly if it’s not to become a raging bushfire.

On the other side, the econocrats and others not wanting to start raising rates any earlier than necessary see how close we are to achieving a “historic milestone” in getting the rate of unemployment below 4 per cent for the first time in 50 years.

They’re determined to see that goal achieved and put new meaning into the words “full employment” because they see it as key to avoiding a return to the low-growth trap in which we were caught before the pandemic.

And they want to ensure the return to low unemployment is more than fleeting by making sure we play our monetary policy (interest rates) and fiscal policy (the budget) cards right. As Reserve Bank governor Dr Philip Lowe said last week, “low unemployment brings with it very real economic and social benefits”.

In a way, we’re back to the great monetarists-versus-Keynesians debate of the mid-1970s: which is more important, low inflation or low unemployment? But, to use a phrase of Scott Morrison’s, it’s not binary choice. We need both; the trick is to pursue them in the right order.

Right now, the risk is that, by conning central banks into anti-inflation overkill, the markets will weaken the recovery from the pandemic, sending the rich economies back to the slow-growth trap.

But the debate about whether or when our Reserve should start raising interest rates has overshadowed an important development last week: its decision to end QE – quantitative easing; the Reserve buying second-hand government bonds with money it has created with a few computer key-strokes – by ceasing to buy $4 billion worth of bonds each week.

Lowe announced that, in total, the various elements of the Reserve’s QE program involved buying more than $350 billion in bonds. (He didn’t say that this means the Reserve has, in effect, financed more that all the government’s pandemic stimulus spending with created money. It’s all a book entry between the government and the central bank it owns.)

Among the various benefits of the QE program claimed by Lowe was that it led to Australia having “a lower exchange rate than would otherwise have been the case”. He noted, too, that the US Federal Reserve and other central banks were ending their QE programs.

And there you have the real reason why, with us having avoided QE after the global financial crisis, Lowe felt he had little choice but to join in the second, pandemic-related round.

The least doubted “benefit” of QE is that it puts downward pressure on the country’s exchange rate, at the expense of its trading partners’ price competitiveness.

So, when the mighty Fed indulges in QE, most other central banks feel they have to defend their own exchange rates by joining in. Any country that doesn’t join the game becomes the bunny whose exports suffer.

Lowe reminded us that ending the bond-buying program doesn’t constitute a tightening of monetary policy, but rather a cessation of further easing. True. The tightening – quantitative tightening, or QT – will come if, when the bonds it has bought reach maturity, the Reserve decides not to replace them with new bonds. It hasn’t yet decided what it will do.

The financial markets, the media and ordinary citizens are far more interested in what happens to interest rates than in the arcania of unconventional monetary policy. But this ending of QE is a reminder that it would hardly make sense to keep boring on with QE with one hand while putting up interest rates with the other.

It’s important to ensure we don’t risk cutting off our return to a sustained recovery by lifting interest rates too soon – that is, before our business people have been forced to abandon their perverse notion that it’s best to keep wage rates low forever – or raise interest rates too high.

We do want to emerge from the pandemic with more than just a once-only bounce-back from the lockdowns. We need ongoing growth, which requires a return to real growth in wages.

But remember this: the present “stance” monetary policy is highly stimulatory. That can’t go on for ever. With no sign whatever of wage growth becoming excessive, it’s obvious we don’t need to flip to the opposite extreme of interest rates so high they’re contractionary. We’re not trying to put the clamps on demand.

No, the next move, when it comes, will be from a stimulatory stance simply towards a neutral stance – one that’s neither stimulatory nor contractionary. That time will come when we’re confident the economy’s growth will be sustained. That’s when getting interest rates back to more normal levels will be a good sign, a sign of success.

And remember this: thanks to the world’s dubious experiment with unconventional monetary policy for more than a decade – with almost all the rich world’s central banks printing money like it’s going out of style – the monetary side of the world economy (including ours) is way out of whack.

For too long, borrowers have been paying interest rates that, after allowing for inflation, are negative, with savers receiving little or nothing to compensate them for their money’s lost purchasing power, let alone reward them for letting others use their money.

This is perverse. It’s the opposite of the way the economy’s supposed to work. It’s neither fair nor sensible. It’s the way to encourage investment that’s not genuinely productive. We won’t be back to anything like normal until, ultimately, interest rates are much higher.

Don’t forget that. Your grandma hasn’t.

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Friday, February 4, 2022

The news on the economy is better than we're being told

From the way the financial markets – and an easily-led media – are telling the story, our troubles have multiplied. Along with all our other worries, Australia now has a big new problem: inflation is back with a bang. But that’s not the way Reserve Bank governor Dr Philip Lowe told the story this week. He thinks we’re going great guns.

According to the markets, recent figures show we’ve caught America’s disease and inflation has taken off. Something must be done urgently to stop the rot and, just as the US Federal Reserve is about to start raising interest rates to get prices back under control, we’ll have no choice but to follow within a month or two.

The bets the financial markets are making about imminent rate rises imply that most of us will be getting big pay rises this year – which I’ll believe when I see it. But if that did happen it would be the first decent pay rise most workers had received in almost a decade. This, apparently, would be very bad news. Really?

In marked contrast, Lowe thinks everything in the economy’s got better, not worse. Right now, he said in a speech this week, “we are closer to full employment and achieving the inflation target than we had anticipated”. Gosh. That bad, eh?

This time last year, the Reserve was expecting the economy - real gross domestic product - to grow by 3.5 per cent last year. Now it’s expected to have grown by 5 per cent. The rate of unemployment was expected to be 6 per cent. Turned out to be 4.2 per cent. Wages were expected to grow by only 1.5 per cent. Now it’s likely to have been 2.25 per cent.

The story in the jobs market does much to explain Lowe’s high spirits. “Australia is within sight of a historic milestone – having the national unemployment rate below 4 per cent” for the first time since the early 1970s.

“This is important because low unemployment brings with it very real economic and social benefits for many Australians and their communities. Full employment is one of the Reserve Bank’s legislated objectives and [its] board is committed to playing its role in achieving that objective, consistent with also achieving the inflation target,” Lowe said.

Already, our unemployment rate is at its lowest in 13 years, along with our rate of underemployment.

Unemployment has also fallen in America and Britain, but whereas in their cases this is partly because a lot of workers have stopped looking for jobs and left the labour force, in our case labour force “participation” is almost as high as it’s ever been.

So why all the market and media gloom and doom? Because the rate of inflation was expected to be a below-target 1.5 per cent by the end of last year, but has jumped to 3.5 per cent.

The market thinks that higher inflation leads immediately to higher interest rates, and the media think higher rates are bad news because all their customers are borrowers and none are savers.

But the news on inflation – and the prospects for more of it – ain’t as bad as they sound, for several reasons.

First, if we really do have an inflation problem, it’s not nearly as great as America’s. The Yanks’ rate is 7 per cent, the Brits’ is 5.4 per cent and the Kiwis’ 5.9 per cent. Even in a globalised world, each economy’s story is different.

Second, it’s not as though most prices in Australia have grown by 3.5 per cent. Much of the jump to 3.5 per cent is explained by big rises in the prices of petrol and home-building. The world price of oil goes up and down over the years. Nothing we did in Australia caused the latest increase, and nothing we could do would have any influence on whether it keeps going up or goes back down a bit.

Other price increases are explained by the effect of the on-again, off-again waves of the virus in causing mismatches between the supply and demand for various goods – mismatches which are unlikely to last very long.

This explains why the Reserve uses a less volatile measure of “underlying” inflation to judge how inflation is going relative to the target of keeping annual inflation between 2 and 3 per cent, on average over time.

Its preferred measure of underlying inflation is running at 2.6 per cent, not the “headline” rate of 3.5 per cent, and 2.6 per cent is close to the middle of the target. So, no cause for concern - unless you have strong reasons to believe it’s rapidly heading up out of the target range.

Third, with this being the first time in six years that underlying inflation’s been high enough to reach the target zone, Lowe’s made it clear he won’t start raising the official interest rate until he’s convinced the return to target is “sustained”.

He made the obvious (but often forgotten) arithmetic point that, for inflation to be sustained at current rates, the prices of many goods would have to keep increasing at their recent rates, not just settle at higher levels.

When we’re talking about petrol prices and virus-caused mismatches between supply and demand, this seems unlikely. That is, there’s a good chance we’ll see a fall rather than a rise in the quarterly inflation rate.

Another basic point. One-off price increases only become part of the ongoing rate of inflation if they flow on to wages – that is, if they add to the “wage-price spiral”.

In the days when we really did have a serious inflation problem, that flow-through could be taken for granted. But over the past seven years, the link between rising prices and rising wages has become much less certain.

That’s why I’ll believe we’re all in for 3 per cent pay rises when I see it. And the man with his hand on the interest-rate lever is saying the same thing.

Read more >>

Wednesday, February 2, 2022

We should make the economy less unequal - and we can

Since the working year doesn’t really get started until after Australia Day, it’s not too late to tell you my New Year’s resolutions. Actually, they’re more in the nature of re-affirming my guiding principles as an economic commentator. Why are we playing the economic game? Who are the people it’s supposed to benefit? And would all the policies I write in support of lead us towards or away from these ultimate objectives?

My first principle is that “the economy” – all the daily effort we put into producing and consuming goods and services – should be managed to benefit the many, not the few.

But it’s hard to believe this has been our overriding objective, particularly in recent decades. Although most of the activity in the economy is undertaken by the private sector – households and businesses – this activity is regulated by the public sector, governments.

Since our governments are democratically elected, this ought to mean that governments govern in the interests of all voters, not just some. But, as we all know, sometimes it doesn’t work out that way.

Sometimes governments pander to the majority when it gangs up against an unpopular minority – asylum seekers, for instance. Other times, governments act in the interests of powerful individuals, businesses and interest groups.

Since the two main political parties have become locked in a hugely expensive contest to influence voters at election time, they seem to have become more receptive to the interests of businesses able to donate generously to party coffers.

The notion that the economy will work best when governments manage it in ways that best suit the interests of business was hugely reinforced by the 30-year reign of a fad called “neoliberalism” – a movement started by na├»ve econocrats and economists (and supported by yours truly) that was soon hijacked by businesses and politicians who saw an opportunity to advance their own interests.

The neoliberal era is over – the proof of which you see every time Scott Morrison announces another government subsidy to a new gas-fired power station, oil refinery or Snowy Mountains scheme.

But our new project, to redress the balance of benefit in favour of ordinary workers and consumers, has a long way to go. It will make more progress when more voters understand the need to give ordinary players in the economic game a bigger share of the prizes.

Business invariably justifies its demand for favourable treatment by the jobs it creates. But increasingly, those jobs are of a lower quality than we have come to expect.

Many are casual, part-time and insecure. They come with fewer safeguards: sick and holiday pay, workers compensation coverage, super contributions. Pay rises are fewer and meaner. Wage theft has become common.

Voters need to realise the rise of crappy jobs in the “gig economy” is not some inescapable consequence of technological progress. It’s a policy choice that governments have made using the power we give them.

Were voters to tell politicians more forcefully that such a deterioration in the quality of the working life of the rising generation is unacceptable, they would act to stop less-scrupulous businesses finding ways to avoid or evade the labour laws that protect the rest of us.

All this is happening while the share of national income going to profits has risen strongly, at the expense of the share going to wages. And the share of income collected by the top 1 per cent of Australia’s income earners has risen to about 9 per cent of total income.

A capitalist economy wouldn’t work as well as it does were entrepreneurs not always trying new ways to increase their profits. The trouble is that not all the ways they try are of benefit to the rest of us, not just themselves and their shareholders.

In such cases, governments should not shirk their responsibility to act in the interests of the many not the few. Nor should we fear that, unless we give businesses free rein in their pursuit of higher profits, our business people will lose all interest in running businesses.

So, a longstanding view of mine is that we’d all be better off if business executives focused less on maximising profits (and their related bonuses) and more on giving their customers value for money and ensuring all their employees had rewarding jobs.

Not just jobs that were better paid and more secure, but more emotionally satisfying because they gave workers more autonomy – more freedom to choose the best ways of doing their job – and jobs better fitted to a worker’s particular strengths and preferences.

Easier said than done? True. Particularly because, though governments can prohibit certain undesirable practices in the treatment of workers, they can’t legislate to force bad bosses to be good ones.

Not easy, but not impossible to reshape the economy to improve it for ordinary people, not just bosses. And we won’t get any improvement until we accept that it is possible, and that we should measure the politicians we vote for according to their willingness and ability to spread the benefits of economic life less unequally.

Read more >>

Friday, January 7, 2022

It's the holidays, so let's have some fun with economic puzzles

So it’s holiday season, when (almost) everyone takes a break, chills out and tries not to think about workaday worries. So let’s have some fun. Let’s do a few economic puzzles.

There’s an old joke in economics that says, “it may work in practice, but does it work in theory?” If you take that to mean economists care more about getting their theory right than about its usefulness then, yes, too many of them do.

But an empirical revolution is happening in economics, where economists test their standard theory to see how well it explains the real world. A big part of this is the rise of “behavioural economics” which, rather than simply making the conventional assumption that everyone acts “rationally” – with carefully considered self-interest – in the economic decisions they make, studies the many reasons people often make decisions that aren’t rational.

So, first puzzle. When, in 2012, prime minister Julia Gillard introduced what she called a “price on carbon” and opposition leader Tony Abbott correctly labelled a “carbon tax”, which increased the price of electricity, she took care to cut income tax and increase pensions in a way designed to leave households on average incomes no worse off.

Among Abbott’s many criticisms, he claimed the move would fail to reduce electricity consumption because people would simply use their tax cut to allow them to keep buying the same amount of power. Puzzle: conventional economics says Abbott was wrong, but behavioural economics suggests he may have had a point.

In compensating most people for the cost of her carbon tax, Gillard was doing just as economists advised. They were confident people would still reduce their electricity use because theory says a change in the price of some item has two, conflicting effects: the income effect and the substitution effect.

The income effect reduces the consumer’s real (after-inflation) income, whereas the higher price relative to the prices of similar items encourages the consumer to substitute other items for the now-dearer item, at least to some extent.

So even though Gillard’s compensating tax cut eliminated the income effect, economists were confident the remaining substitution effect would still encourage people to use less electricity and use what was left of their tax cut on something else they wanted more of.

But behavioural economics says maybe it’s not that simple. One of its early and major findings is that many people are “loss averse” – they hate losing money from the increase in the price of electricity more than they like getting the money back as a tax cut.

So, contrary to theory, many people wouldn’t have felt the tax cut left them no worse off. If so, they may well have chosen to use all their tax cut to keep buying the same amount of electricity.

For the record – and for whatever reason or reasons (remember, this wasn’t an experiment where all else was held equal) – electricity sales and emissions of carbon dioxide fell sharply during the two years before the Abbott government abolished the “carbon pricing mechanism”.

Then they rose again. History will not be kind to that man.

Second puzzle. An ABC series called How to Live Younger presented scientific evidence showing that regular exercise throughout life can rewind the clock on cognitive (mental) decline, fight cancer, prevent disease, beat depression and even enhance our lives by making us smarter and more creative.

So people who’ve exercised throughout their lives generally do much better in old age. It’s also true that people who aren’t used to exercising find it harder to start working out and so don’t get as much “utility” - enjoyment and benefit – from exercising.

The economists’ convention model of “rational decision-making” predicts that knowledge of all this will lead parents to encourage their children to exercise and lead kids to keep it up as young adults and in middle age, thus setting themselves up for a healthy, happy old age.

Doesn’t always happen that way, you say? True. By why not?

Because, as behavioural economists recognise, many people, even those who fully understand how keeping fit will benefit them in old age, still have trouble making themselves exercise regularly. If they get out of the habit, it’s hard to get back into it.

A finding of behavioural economics is that this is partly explained by the “projection bias” that affects the thinking of many people. They mistakenly believe that the benefit they enjoy from exercise at this stage of their life will be the same in later stages. Actually, they’ll benefit more in later stages if they keep exercising now; if they give up exercise now they’ll find it harder to take it up again later.

So, whereas conventional economics can’t see there’s a problem – also with adverse consequences for the health system and the taxpayer – behavioural economics can see it. It can see the case for a government education campaign to help people overcome their projection bias, for instance.

And there are techniques individuals use to overcome their projection bias, short-sightedness and lack of willpower. Psychologists call such techniques "commitment devices". I did little exercise until, in my late 40s, a diabetes doctor ordered me to start.

I’ve been able to keep going to the gym two or three times a week since then, and I enjoy it. The tricks I’ve used to keep it up are to have a highly qualified trainer and go at set times with a bunch of gym buddies who’ve become good friends.

A couple of times last year I criticised academic economists for not doing enough to make their theories more realistic – and more useful to the students they teach.

The two “puzzles” we’ve just looked at are derived from a university exam paper in behavioural economics, sent to me in response to my criticisms by Professor Simon Grant, of the Australian National University.

It seems that, at least at our better universities, economists don’t just bang on with conventional theory oblivious to its limitations.

Read more >>

Monday, January 3, 2022

There are many ways to stuff up productivity

A good New Year’s resolution for readers of the business pages would be to read more widely and think more broadly, so their thinking about economic problems and their solutions doesn’t get into a rut, returning repeatedly to the same old solutions to the same problems.

No reader of these pages needs to be told that the key to higher material living standards is improved productivity – the ability to create more outputs from the same quantity of inputs of land (raw materials), labour and physical and intangible capital.

Almost continuous productivity improvement over the past two centuries is the outstanding achievement of capitalist, market economies, the proof of capitalism’s superiority as a system of organising production and consumption.

It’s what’s made us so much more prosperous than our forebears were, with much of that prosperity spilling over from the owners of capital to the middle class and people near the bottom.

But, as I’m sure you know, over the past decade or so the rate of productivity improvement in Australia and all advanced economies has slowed to a snail’s pace. Hence, all the talk about productivity and what we can do improve its rate of improvement.

So far, a decade of hand-wringing hasn’t got us anywhere. We need to think more broadly about the problem.

One new thought is to wonder if there is – or should be – more to the good life than economic growth and a higher material standard of living. If there are ways we could improve the quality of our lives even if they didn’t lead to us owning more and better toys.

A negative way to express the same thought is to wonder if being able to afford better houses and cars will be much consolation if we succeed in stuffing up our climate, with more heat waves, rainy summers, droughts, bushfires, floods, cyclones and a rising sea level.

But we’ll return to those thoughts another day, and descend now to the more prosaic. One rut we’ve got into is thinking it’s up to the government to lift our productivity by “reforming” this or that intervention in the economy.

This is model-blind thinking on the part of econocrats, hijacked by rent-seeking businesses and high income-earners wanting more power to limit the earnings of their employees and more of the tax burden shifted to other people in the name of improving “incentives”.

The same people show little interest in reforms that really would increase economic growth by increasing women’s participation in paid work, such as free childcare.

Another rut we’re in is thinking that we won’t get faster economic growth until we get back to faster productivity improvement.

This has much truth, but it misses the deeper truth that the relationship between economic growth and productivity can also run the other way: maybe we’re not getting faster productivity improvement because we’re not getting enough economic growth.

In practice, what does much to increase the productivity of labour is businesses – in mining, farming and manufacturing, but also the service industries – replacing old machines with the latest, most improved models.

But business investment has long been at historically low levels, making our weak productivity performance hardly surprising. And the dearth of new investment spending is also hardly surprising considering consumer spending has been so weak for so long.

Nor is weak consumer spending surprising when you remember how weak the growth in real wages has been. One reason wage growth has been so weak, as Reserve Bank governor Dr Philip Lowe has pointed out, is the present fashion of businesses using any and every means – legal or otherwise – to limit labour costs and so increase profits. There are other paths to profitability.

While we’re thinking unfamiliar thoughts on the possible causes of our productivity plateau, remember this one: when businesses have been investing strongly in new equipment in the past, it’s often been a time when labour costs have been rising rapidly, giving them a strong incentive to invest in labour-saving machines.

(Note, it’s precisely because this increases the productivity of labour, and thus increases real national income, that the pursuit of labour saving simply shifts the demand for labour from goods-producing industries to services-producing industries, leaving no decline in the demand for labour overall.)

Last year some economists at the International Monetary Fund wrote a blog post on yet another contributor to weak productivity improvement, which will certainly come as a surprise to “Brother Stu,” federal Education Minister Stuart Robert, who late last month sent a “letter of expectations” to the government’s Australian Research Council outlining the Morrison government’s desire to prioritise short-term research jobs that service the interests of commercial manufacturers.

It’s possible he and Scott Morrison merely wish to swing one for the Coalition’s generous business backers, but my guess is they imagined they were striking a blow for higher productivity. If so, they’ve been badly advised.

Research by the IMF economists finds that productivity improvement in the advanced economies has been declining despite steady increases in research and development, the best indicator we have on “innovation” effort, the thing so many business people give so many speeches about.

But get this: they find that what matters for economic growth is the composition of spending on R&D, with basic scientific research affecting more sectors for a longer time than applied research (commercially oriented R&D by companies).

“While applied research is important to bring innovations to market, basic research expands the knowledge base needed for breakthrough scientific progress,” they say.

“A striking example is the development of COVID-19 vaccines which, in addition to saving millions of lives, has helped bring forward the reopening of many economies . . . Like other major innovations, scientists drew on decades of accumulated knowledge in different fields to develop the mRNA vaccines.”

Which suggests the Morrison government has just jumped the wrong way in its latest intervention into the affairs of our universities. Should have done more R&D of their own before jumping.

Read more >>

Wednesday, December 29, 2021

Prep for the new year: what I've learnt about happiness

Let me wish you a happy new year. And not just a happy New Year’s Eve, a whole year of happiness. But the thing about happiness is to be sure you know what you’re wishing for. It’s something that’s surprisingly easy to get wrong.

Normal economic journalists don’t waste time thinking about such a touchy-feely topic, but I went astray. I spent a lot of time reading and thinking about it. Even wrote a book about it.

I blame Bob Hawke, who once hit the headlines for saying that economics was about happiness. Though many economists today may deny it, he was right. He meant that economics was about helping people maximise their “utility” – the satisfaction they derive from their consumption.

“Happiness” is a word used by ordinary people, so journalists use it freely. Although some economists study it, most would never use such a frivolous word. “Welfare” is the closest they come. They’ve stopped talking about “utility” because they can’t measure it.

It’s psychologists who take most interest in happiness, but even they prefer to call it “subjective wellbeing”. Sounds more scientific.

A recent article from the British Psychological Society says that “people who are happy – who enjoy ‘hedonistic wellbeing’ - experience plenty of positive emotions and are generally pretty satisfied with life”.

But that’s just a psychologist’s way of saying that happy people have been shown to be ... happy. It doesn’t tell you how to become happy – nor whether happiness is what we should be shooting for.

The article does go on to quote the finding of a review of many studies that, while some strategies recommended for boosting happiness – such as taking time in the day to reflect on what you are grateful for – are far from bad in themselves, if you expect them to make you feel noticeably happier, you’re likely to be disappointed.

The social commentator Hugh Mackay – a man from whom I’ve learnt much – is very critical of the modern preoccupation with happiness. It’s that word “hedonistic” that offends him. It implies that it’s OK to make the pursuit of pleasure our primary goal. Seek out positive emotions and avoid negative emotions as much as possible.

As usual, he’s right. A life of pleasure seeking and avoiding all pain is unlikely to be satisfying. Pain and sadness are part of the human condition, and without our measure of them we aren’t fully human. It’s inhuman not to feel sad over the death of someone we love or the breakup of a relationship.

We’ve evolved to feel pain as well as pleasure, negative as well as positive emotions, for good reason. Pain, for instance, can be a signal to keep our fingers away from hot stoves, or to go to the doctor’s.

The sadness we feel over our own misfortunes should leave us with empathy towards the misfortunes of others, that we should renew our efforts to live up to the Golden Rule.

The British article offers a better kind of happiness: what Socrates called “eudaimonia” – the feeling that your life has meaning, and that you are reaching your potential.

It quotes a study finding that people who felt more strongly that the things they did in their lives were more worthwhile – in other words, that their life had meaning – were better off in all kinds of ways: socially, physically and emotionally.

So, how do we add meaning to our lives? One way could be through our jobs – paid or unpaid. The goal of helping to make the world a better place is easier seen in some jobs than others. But I remember reading of a hospital cleaner who saw her job as vital to speeding the recovery of the patient and the convenience of their visiting families.

The more fundamental way to add meaning is via our relationships with family, friends and workmates. We are, first and foremost, social animals.

Harvard psychologist Daniel Gilbert says “social relationships are a powerful predictor of happiness – much more so than money. Happy people have extensive social networks and good relationships with people in those networks”.

The other thing I’ve learnt is not to be misled by the US constitution and think you can pursue happiness. The founding fathers meant people should be free to run their lives as they see fit. True. But it’s a mistake to have being happy as your primary goal – and even worse to think you can make yourself happy by treating yourself to all the things you enjoy doing (chocolate, for instance).

People who keep asking themselves “am I happy?” or “what can I do to make myself happy?” aren’t happy – and probably never will be. Happy people rarely think about being happy.

Happiness pursuers have got it the wrong way round. Happiness is a side effect of being too busy leading a fulfilling life to think about it.

The way to be happy is to forget your own happiness and concentrate on making other people happy.

Read more >>

Monday, December 27, 2021

This isn't America, so please stop acting like a Yank

If there’s one thing that annoyed me about 2021, it’s the way people have been aping all things American. Our financial markets copped a bad dose of it, the media got carried away, we looked to the Yanks – the smart ones and the crazies - to know what we should think and do about the coronavirus, and many on the Right of politics took their lead from Trump’s Republicans.

One on one, I like the Americans I know. But put them together as a nation, and they seem to have lost their way. We’ve long imagined the US to be the wellspring of everything new and better, but these days it seems to be racing headlong towards dystopia.

Who’d want to be an American? Who’d want to live there?

There’s nothing new, of course, about American cultural imperialism. You’ve long been able to buy a Coke in almost any country. Or, these days, a Big Mac or KFC.

But globalisation has hugely increased America’s influence in the world. Wall Street dominates the world’s now highly integrated financial markets. What’s less well appreciated is the way advances in telecommunications and information processing have globalised the news media. Call it the internet.

These days, news of a major occurrence in any part of the world spreads almost in real time. One thing this means is that you can read the latest from The Age or The Sydney Morning Herald in almost any country.

But another thing is that we get saturation coverage of all things America. These days, America’s greatest export is “intellectual property” – patents and copyright covering machines, medicines and software, but also books, films, TV shows, videos and recorded music, and news and commentary from all of America’s great “mastheads”.

Of course, the little sister syndrome applies. Just as Kiwis know more about us than we know about them, so we and people in every other country know more about the Americans than they know about us. Just ask John Fraser, Malcolm Trumble and “that fella from Down Under”.

And remember this: when you’re as big and as rich as America, you’re the best in the world at most things – but also the worst in the world. These guys win the Nobel Prize in economics almost every year but, no doubt, have the biggest and best Flat Earth Society. They have loads of the super-smart, but even more of the really dumb.

Back to this year’s Yankophile annoyances, as soon as Wall Street decided America had an inflation problem and would soon be putting up interest rates, our local geniuses decided we’d soon be doing the same.

Small problem – we don’t have a problem with inflation. Our money market dealers know more about the US economy than they know about their own. To them, we’re just a smaller, carbon copy of America. If you’ve seen America, you’ve seen ’em all.

The Americans have a lot of people withdrawing from the workforce – leaving jobs and not looking for another – which they’re calling the Great Resignation. Wow. Great new story. So, some people in our media are seizing any example they can find to show we have our own Great Resignation.

Small problem. Ain’t true. Following the rebound from the first, nationwide lockdown in 2020, our “participation rate” – the proportion of the working-age population participating in the labour force by having a job or actively looking for one – hit a record high. With the rebound from this year’s lockdowns well under way, the rate’s almost back to the peak.

A lot of America’s problems arise from the “hyperpolarisation” of its politics. Its two political tribes have become more tribal, more us-versus-them, more you’re-for-us-or-against-us. The two have come to hate each other, are less willing to compromise for the greater good, and more willing to damage the nation rather than give the other side a win. More willing to throw aside long-held conventions; more winner-takes-all.

The people who see themselves as the world’s great beacon of democracy are realising they are in the process of destroying their democracy, brick by brick – fiddling with electoral boundaries and voting arrangements, and stacking the Supreme Court with social conservatives.

Donald Trump continues to claim the presidential election was rigged, and many Republicans are still supporting him.

It’s not nearly that bad in Australia, but there are some on the Right trying to learn from the Republicans’ authoritarian populism playbook.

When your Prime Minister starts wearing a baseball cap it’s not hard to guess where the idea came from. Or when the government wants to require people to show ID before they can vote, or starts stacking the Fair Work Commission with people from the employers’ side only. Enough.

Read more >>

Wednesday, December 22, 2021

Have a good break – this time you’ve more than earned it

Looking forward to some time off over the summer holidays? I am. Long time since I’ve been in more need of a decent break. Few more columns to go, and I’m off for four weeks.

This will surprise and shock you, but regular polling by the Roy Morgan outfit has found that, by September, the total annual leave owing to Australian employees had reached a record 185 million days, up almost a quarter on a year earlier.

No need to tell you it was all the lockdowns and lockouts – not just from other countries and other states, but even 100 kms down the coast. We’ve had little ability to take leave. Nor much desire to either, if it meant holidaying at home.

The proportion of workers owed less than two weeks is down and the proportion owed more than seven weeks (including me) is up past 10 per cent. Of course, the almost 40 per cent people working as casuals don’t get annual leave.

Whether they actually get the 15 to 25 per cent pay loading they’re supposed to instead is something you wouldn’t be sure of – but we’ll leave that unpleasant thought ’til we’re back next year.

I’m a great believer in the benefits of annual leave. When I used to worry about burning out, I decided to follow two rules: always take the leave you’re given and always get a change of scenery.

Sometime back there was a fad of employers allowing people to “cash out” their leave. It was a terrible idea and fortunately seems to have died out. When, decades ago, state governments did what today would be unthinkable and simply passed a law compelling employers to provide paid annual leave, they did so for good reason.

Workers who never get a decent break in which to rest and recuperate – to re-create – do eventually burn out. At the least, the quality of their work falls off. Allowing them to use their leave money to buy a new car does both the worker and the boss an injury. It’s self-harm for capitalists.

The festive season carries risks of family fights and overindulgence as well as pleasures, but a great advantage of living Down Under is that it leads seamlessly to the summer holidays. I’ve been boning up on what advice the psychologists and others on the universities’ The Conversation website give on making sure we get the most from our holidays.

Dr Freya Higgins-Desbiolles, of the University of South Australia, offers several good tips. One is: don’t go into debt. I doubt if many people feel pressure to help the economy by spending big, setting themselves up with huge credit card bills in the new year, but if they do, they shouldn’t.

The economy exists to serve us; we don’t serve it.

Another suggestion: go back to nature. I’ve long believed that humans have an evolutionary affinity with nature – trees, greenery, water, views – which those of us who live in big cities must regularly propitiate. Go bush, do some walks. A holiday cottage backing onto a national park is perfect.

In the same vein: do simple things. In my day, parents on holiday left kids to their own devices. No one ran around spending money to keep kids entertained. Dr Monica Thielking, of Swinburne University of Technology, says “your children may complain they’re dying of boredom, but they are not. It may even be good for them”.

A growing body of research suggests boredom in children can make them more creative. Many use daydreaming to regulate boredom-induced tension. Daydreaming is good, shifting attention to thinking about “situations, memories, pictures, unresolved things, scenarios or future goals”.

Adults need to relax, de-stress, forget our jobs completely for a few weeks. But many people (including me) find this very hard, if not impossible. I like to catch up with professional reading. Many of us are still checking work emails and taking work calls.

Drs Dan Caprar, of Sydney University, and Ben Walker, of Victoria University, Wellington, say the problem for many of us is that we derive a strong sense of self from our work. “Whether we work by choice, necessity, or a bit of both, many of us find work inevitably becomes a source of our identity,” they say.

We develop professional identities (“I’m a lawyer”) organisational identities (“I’m a Google employee”) or performance-based identities (“I’m a top performer”). This can be beneficial. It’s been linked with increased motivation and work performance, and even better health, they say.

But it does prevent us from switching off. And, though I suppose I should be turning my attention to post-retirement interests, I can’t make myself read some famous person’s biography. Pop psychology is the furthest I stray from economics.

My retired mates seem heavily into streaming video, and that does tempt me – I’ll watch all the various fictional accounts of the struggles of the Murdochs – or the Windsors - and Vienna Blood on SBS On Demand even beats Vera.

Sorry. Serious suggestion: try a digital detox.

Read more >>

Monday, December 20, 2021

Frydenberg right to put full employment ahead of budget repair

It’s hard to feel sympathy for a government that used ignorant scaremongering about the public debt to get elected in 2013, but now doesn’t want to mention the D-word and is being attacked by its own deluded conservatives (plus point-scoring Laborites). Even so, Treasurer Josh Frydenberg has his priorities right in leaving budget repair for later.

It’s noteworthy that the governments’ critics have turned their guns on the likelihood that Scott Morrison will use next year’s pre-election budget to announce yet another one-year extension of the low and middle-income tax offset at a one-off cost to the budget of $8 billion, while studiously ignoring the stronger case for abandoning the stage three tax cut legislated for July 2024, with an ongoing cost of double that.

Stage three is aimed at benefiting higher income-earners. Could this be mere coincidence? Trouble is, as Frydenberg has explained, “we have been working to a clear fiscal [budgetary] strategy to drive the unemployment rate to historically low levels” as we emerge from this great economic shock.

This being so, the only justification for a country with so much debt awarding itself another unfunded tax cut is that most of it will be spent rather than saved and thus hasten our achievement of very low unemployment.

But since households’ rate of saving tends to rise with their income, that makes the cheaper temporary low-and-middle tax cut likely to help much more than the dearer and long-lasting tax cut aimed at higher income-earners.

The belief that cutting tax rates helps by giving people greater incentive to work is an article of (self-interested) faith among high income-earners. And for the Liberal Party. Indeed, Frydenberg repeats this supposed self-evident truth many times a week.

But it’s not based on economic theory, nor supported by empirical evidence. The evidence is that a person’s marginal tax rate (the tax on any extra income they earn) doesn’t greatly affect the work effort of primary earners (mainly, men with full-time jobs) but does affect the work effort of secondary earners – particularly those with young children.

This is why the government’s decision in this year’s budget to greatly reduce the cost of childcare for second and subsequent children should do far more to raise workforce participation than the stage three tax cut ever could. Money well spent.

This, however, doesn’t fit the biases of many of those who profess to be so worried about our high public debt. Their real motive is just to pay less tax, which explains why they think all tax cuts and tax concessions are good, but all government spending is bad. This is economic nonsense.

Leaving aside the self-interest of high income-earners, many conservatives’ concern about our high level of debt is just instinctive. They have a gut feeling that it must be dangerous. They really ought to give the matter more study.

But here’s something even many well well-versed people don’t realise, mainly because it hasn’t suited the politicians and econocrats to tell them: effectively, all the bonds the government has had to issue to cover the huge budget deficits since the pandemic are now held by . . . the Reserve Bank of Australia - which, of course, is owned by the federal government.

So most of the extra interest the feds are paying will find its way back to the budget in the form of higher dividends from the Reserve.

This is not because the Reserve bought the new bonds directly from the government, but because its extensive program of “quantitative easing” – buying second-hand government bonds and paying for them by creating money out of thin air – has amounted to a sum roughly equal to the new bonds sold to the public (mainly to superannuation funds).

But the most important thing to understand is Frydenberg’s repeated statement that the government’s strategy is to “repair the budget by repairing the economy”. This is not just another meaning-free slogan, it’s a statement of fundamental economic truth and political reality.

Governments rarely pay off the debt they incur. Rather, they reborrow to cover their bonds as they fall due, and concentrate on ensuring the economy grows faster than the debt’s growing, thus reducing the debt relative to the size of the economy – and the taxes being paid by the people in the economy.

Which brings us back to where we started: Frydenberg’s strategy of forcing the pace of economic growth to get the rate of unemployment sustainably down to the low 4s or even lower.

This strategy – to keep pushing unemployment down until it’s clear the inflationary pips are squeaking – was first suggested by Professor Ross Garnaut in his book, Reset, and taken up by Peter Martin, of The Conversation website.

It was inspired by the example of the United States which, before the pandemic, got unemployment down to near 3 per cent before wages got moving.

The first point is that there’s nothing better you could do to make the economy bigger (and bigger relative to the public debt) than to ensure more of those who want to work actually get jobs, earning incomes and paying taxes.

Labour lying idle is the worst kind of economic inefficiency.

But the strategy has a deeper objective: to make the market for labour so tight that employers have no option but to increase wages to retain the people they need.

Like all sensible economic managers, Frydenberg’s unspoken concern is the risk that, once the economy has rebounded from the coronacession - with considerable help from temporary fiscal stimulus - it falls back into the “secular stagnation” low-growth trap that the rich countries have been caught in since the global financial crisis.

Our wage growth has stagnated since this government came to power. It’s the most important single cause and consequence of our low growth. Labor will be making hay with this in the election campaign.

Ending wage stagnation is the key to a sustainable return to a healthy rate of economic growth. And given the Coalition’s tribal objection to using regulatory reform to get wages moving, getting unemployment down and tightening the labour market is the right solution to the problem.

Once it has been solved, the budget balance will be improved and the public debt will be less worrying to the unversed. If Frydenberg can get us back to the lowest unemployment since the 1970s, he’ll be up there with Paul Keating as one of our greatest treasurers.


In this column last Monday I overstated the regressiveness of the stage three tax cut. I quoted a summary of the findings of analysis by the Parliamentary Budget Office, but should have checked it. The office’s actual findings are that about two-thirds of the tax cut will go to taxpayers earning $120,000 or more. The highest-earning 20 per cent of taxpayers will receive more than three-quarters of the money. My statement that only a third will go to women remains correct.

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Friday, December 17, 2021

Like election promises, many budget forecasts never materialise

You’d think after the fiasco of Back in Black, Josh Frydenberg would have learnt not to count his budgets before they’re hatched. But no, he’s a politician facing an election and nothing else matters.

His message in this week’s mid-year budget update is: the virus is in the past and the economy is fixed – as you’d expect of such great economic managers as our good selves.

Well, it’s not certain the pandemic has finished messing with the economy. Unmessed with, we can be confident the economy will bounce back the way it did after last year’s national lockdown. But there’s no guarantee it will be soaring high into the sky.

The main thing to remember is that a budget forecast is just a forecast. Under all governments – but particularly this one – a lot of forecasts never come to pass.

It was the unexpected pandemic, of course, whose arrival stopped the budget deficit ever turning into a surplus, despite Morrison and Frydenberg’s repeated claim in the last election campaign that we already were Back in Black. They even produced coffee mugs to prove it.

Frydenberg’s big word this week for the economy under his management is “strong”. He is sticking to the government’s “plan to secure Australia’s strong recovery from the greatest economic shock since the Great Depression”.

“Having performed more strongly than any major advanced economy throughout the pandemic, the Australian economy is poised for strong growth” in real gross domestic product of 4.5 per cent this calendar year and 4.25 per cent next year, his budget outlook says.

This reflects “strong and broad-based momentum in the economy”. “Income-tax cuts and a strong recovery in the labour market are seeing household consumption increase at its fastest pace in more than two decades” while “temporary tax incentives will drive the strongest increase in business investment since the mining boom, with non-mining investment expected to reach record levels”.

Consistent with the “strong economic recovery”, the rate of unemployment is forecast to reach 4.25 per cent in the June quarter of 2023 which, apart from a brief period before the global financial crisis in 2008, would be the first time we’ve had a sustained unemployment rate below 5 per cent since the early 1970s.

This, should it actually come to pass, really would be something to crow about. But the return to a goal of achieving genuine full employment has been made necessary by this government’s chronic inability to achieve decent growth in real wages.

Without such growth you don’t get sustained strong growth in consumer spending and, hence, adequate growth in the economy overall. Thus the economic managers have become so desperate they’re trying to create a shortage of labour, as the only way of forcing employers to resume awarding decent pay rises.

Trouble is, this could become a vicious circle: you won’t get employment growing strongly and unemployment falling without sustained strong growth in consumer spending, but you won’t get that until real wages are growing strongly.

Frydenberg’s advance advertising for the budget update said that, under his revised forecasts, the rate of increase in wages will get greater each year for the next four years. According to his modelling, he said, on average a person working full time could see an increase of $2500 a year till 2024-25.

But, assuming it happens, that makes it sound a lot better than it is. Comparing the rise in the wage price index with the rise in the consumer price index, real wages fell by 2.1 per cent last financial year, 2020-21.

Since that’s in the past, we know it actually happened. Turning to the budget’s revised forecasts, real wages are expected to fall by a further 0.5 per cent this financial year, before rising by 0.25 per cent in the following year, then by 0.5 per cent the next year and by 0.75 per cent in 2024-25.

Doesn’t sound like a lot to boast about. If it actually happens, Frydenberg’s “plan to secure the recovery and set Australia up for the future” will have taken another three or four years before it’s delivering for wage earners.

To be fair, this week we did get impressive evidence that the economy is rebounding strongly from the lockdowns in Sydney, Canberra and Melbourne. In just one month – November – employment grew by a remarkable 366,000, while the unemployment rate fell from 5.2 per cent to 4.6 per cent. And there was a big fall in the rate of underemployment.

It’s a matter of history that the economy did bounce back strongly from the initial, nationwide lockdown last year. (This, by the way, shows the pandemic bears no comparison with the Great Depression.)

It’s noteworthy that, whereas the update’s fine print says the economy is “rebounding” strongly, Frydenberg says the economy is “recovering” strongly. The two aren’t the same. This week’s wonderful employment figures say we can be confident the economy is rebounding after the latest lockdowns just as strongly as in did the first time.

But a rebound gets you quickly back to square one. It doesn’t necessarily mean that, having rebounded, you’ll go on growing at a faster rate than the anemic rate at which we were growing before the pandemic.

That remains to be seen. And that’s where Frydenberg is being presumptuous with all his confident inference that a strong recovery’s already in the bag.

Lots of things could confound his happy forecasts. The obvious one is more trouble from the virus. Less obvious is this. You may think that getting unemployment down to 4.6 per cent in November means we’ll have no trouble achieving the forecast of getting it down to 4.25 per cent by June 2023.

But you’ve forgotten something. One important reason we’ve had so much success getting unemployment down to amazing levels is because we’ve done it with closed borders. When the borders reopen, it will become a lot harder.

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Wednesday, December 15, 2021

Inheritance: the major life event no politician wants to mention

When I was growing up, my family didn’t have much. We lived rent-free in a succession of down-at-heel manses (the Salvos called them “quarters”), but my father’s stipend was a small one on which to support four kids.

Mum worried about where my parents would live after they retired but, with much scrimping and saving (including making my sisters hand over almost all their wages), they built and paid off a small cottage at Lake Macquarie, near Newcastle.

After my father died, Mum spent many impatient years in God’s waiting room, longing to be “promoted to Glory” and thus reunited with my Dad.

That was in 2004 but, though all she had was the cottage and a thousand or two in the bank, that was enough for the four of us to receive one or two hundred thousand each. By then, we were middle-aged and well established. It was nice to add it to the pile, but we didn’t desperately need it.

More people are receiving significant inheritances these days. They’re getting bigger and will get bigger still.

We worry that houses are becoming unaffordable, but the other side of ever-rising house prices is that inheritance has become an important event in most people’s lives. Many people look forward to it, and family disputes or unhappiness over wills is not uncommon.

But here’s a funny thing. When was the last time you heard a politician talking about inheritances? You didn’t. They never do. I’m sure they think about their own inheritance, but they never want to mention yours or anyone else’s.

In the 1970s, Australia became one of the few rich countries to abolish death duties (state and federal). People were so happy to see the end of them that death duties have become one of the bogeymen of federal politics.

Want to start a scare campaign? Spread a rumour that the other side has a secret plan to reintroduce death duties. Want to oppose limits on share franking credits? Claim it’s a form of death duties.

This is why, compared with other countries, we have little information – and even less reliable figures – on the size and dispersion of inheritances. The pollies fear that if they let the bureau of statistics ask people questions about their wealth, their opponents would jump to conclusions.

This explains why last week’s report from the Productivity Commission was “the first comprehensive research report on wealth transfers” and was initiated by the commission, not requested by the government.

The report explains that rising house prices are just the main reason inheritances are getting bigger. Another is that, with superannuation having been compulsory for about 30 years, more people are dying with unspent super balances. And, of course, family sizes are getting smaller.

The report finds that each generation has been wealthier than the previous one, though Baby Boomers have done particularly well. It found that $120 billion was transferred in 2018 – 90 per cent as inheritances and 10 per cent as earlier gifts – which was more than double that in 2002.

The average inheritance, we’re told, was $125,000. But that included a few large inheritances plus many much smaller ones. The average inheritance received by the wealthiest 20 per cent of recipients was $121,000, and by the poorest 20 per cent was about $35,000. Or so we’re told.

Not surprisingly, the children of rich parents received much bigger inheritances than the children of poor parents. Nor is it very surprising that the children of rich parents tend also to be rich, while the children of poor parents tend also to be poor.

But this may surprise: if you switch from focusing on absolute dollars to looking at relative size, you find that the smaller inheritances received by people without much wealth increase that wealth by a much higher percentage than the larger inheritances increase the wealth of already-rich recipients. The same thing can be seen in other countries’ figures for wealth transfers.

So, to a small extent, the growing prevalence of inheritance is reducing the gap between rich and poor. And, as the report’s authors stress, inheritance isn’t the main reason the children of the rich are also rich and the children of the poor also poor.

No, monetary inheritances explain only about a third. The rest is explained by “all the other things parents give their children – education, networks, values and other opportunities”. And remember, IQ is mainly genetic. Luck is another factor.

Did you notice how little of the wealth transfers gifts accounted for? The authors say they couldn’t find strong evidence of larger transfers from the Bank of Mum and Dad “despite popular belief”.

Sorry, not convinced. By their own admission, the data they’ve been using are “somewhat limited”. My guess is that more people receive inheritances than their figures show. The size of inherited amounts seems very low. As for parents having to cough up to help their kids buy a home, it’s become a big deal relatively recently.

So if the statisticians can’t find much evidence of it, that’s probably because they haven’t been asking the right questions.

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Sunday, December 12, 2021

Stop kidding: the 2024 tax cut will be economically irresponsible

It’s a safe bet that, once we’ve seen the mid-year budget update on Thursday, we’ll hear lots of economists and others saying the government should be getting on with budget repair: spending cuts and tax increases.

That’s despite the update being likely to show that the outlook for the budget deficit in the present financial year and the following three years is much better than expected in the budget last May.

It’s also true even though the case for “repairing the budget by repairing the economy” is sound and sensible. The federal public debt may be huge and getting huger, but, measured as a proportion of gross domestic product, the present record low-interest rates on government bonds mean the interest burden on the debt is likely to be lower than we’ve carried in earlier decades.

It’s true, too, that recent extensive stress-testing by the independent Parliamentary Budget Office has confirmed that the present and prospective public debt is sustainable.

It remains the case, however, that both this year’s Intergenerational report and the budget office project no return to budget surplus in the coming decade, or even the next 40 years – “on present policies”.

So, it’s not hard to agree with former Treasury secretary Dr Ken Henry that doing nothing to improve the budget balance is more risky than it should be, too complacent. It leaves us too little room to move when the next recession threatens.

And, indeed, the Morrison government’s revised “medium-term fiscal strategy” requires it to engage in budget repair as soon as the economy’s fully recovered.

But there’s no way Scott Morrison wants to talk about spending cuts and tax increases this side of a close federal election. Nor any way Anthony Albanese wants to say he should be.

Of course, that won’t stop Morrison & Co waxing on about how “economically responsible” the government is – especially compared to that terrible spendthrift Labor rabble. Nor stop Labor pointing to all the taxpayers’ money Morrison has squandered on pork barrelling, and promising an Albanese government would be more “economically responsible”.

But here’s my point. There’s a simple and obvious way both sides could, with one stroke, significantly improve prospective budget balances, and because it would be front-end loaded, disproportionately reduce our prospective public debt over years and decades to come.

There’s no way such a heavily indebted government should go ahead with the already-legislated third stage of tax cuts from July 2024, with a cost to the budget of more than $16 billion a year.

Those tax cuts were announced in the budget of May 2018 and justified on the basis of a mere projection that, in six years’ time, tax collections would exceed the government’s self-imposed ceiling of 23.9 per cent of GDP. That is, the government would be rolling in it.

It was said at the time that it was reckless for the government to commit itself to such an expensive measure so far ahead of time. It was holding the budget a hostage to fortune.

But so certain were Morrison and Josh Frydenberg that the budget was Back in Black that, soon after winning the 2019 election, they doubled down on their bet and insisted the third-stage tax cuts be legislated. Desperately afraid of being “wedged”, Labor went weak-kneed and supported the legislation.

If, at the time, a sceptic had warned that anything could happen between now and 2024 – a once-in-a-century pandemic, even – they’d have been laughed at. But they’d have been right.

Just last week, Finance minister Simon Birmingham righteously attacked his opponents for making election promises that were “wasteful and unfunded” – by which he meant that they would add to the budget deficit.

But the tax cut both sides support is now also “unfunded”. We’ll be borrowing money to give ourselves a tax cut. That’s economically responsible?

It might be different if you could argue that the tax cut would do much to support the recovery, but it wasn’t designed to do that, and it won’t. Stage three is about redistribution, not stimulus and not (genuinely) improved incentives.

The budget office has found that about two-thirds of the money will go to the top 10 per cent of taxpayers, on $150,000 or more. Only a third will go to women. So, the lion’s share will go to those most likely to save it rather than spend it. Higher saving is the last thing we need.

Now, I know what you’re thinking. Get real. There’s no way either side would want to repeal a tax cut, especially just before an election.

Regrettably, that’s true. But, this being so, let’s tolerate no hypocrisy from politicians – or economist urgers on the sidelines – making speeches about “economic responsibility” without being willing to call out this irresponsible tax cut.

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