FISCAL POLICY & MONETARY POLICY: PROSPECTS FOR THE POST-COVID RECOVERY

 The pandemic isn’t over, but with most of our population vaccinated, we can hope that the worse of it is over and it won’t greatly disrupt the economy in future. Australia has had great success in containing the virus, and the “coronacession” has proved to be much shorter and shallower than expected. The economy has bounced back from each of the two periods of lockdown, the unemployment rate has fallen to its lowest in almost 50 years and strong growth of a bit over 4 pc is expected in calendar 2022. However, global supply-side shocks have lifted the inflation rate to 5.1 pc over the year to March, and it’s expected to go a bit higher before it starts falling back. To ensure the strong economy doesn’t cause the once-only supply-side price rises to get built into the wage-price spiral, the Reserve Bank has begun increasing the official cash rate to withdraw the “extraordinary monetary support” put in place to help the economy through the pandemic. The government is likely to come under pressure from macro-economists to tighten fiscal policy somewhat for the same reason.

Why the “coronacession” was shorter and shallower than expected

What I call the “coronacession”, which ended Australia’s record run of almost 30 years without a recession in the March quarter of 2020, proved to be much shorter and shallower that originally feared. The initial, nation-wide lockdown in the economy caused real GDP to contract by more than 7 pc in the March and June quarters of 2020. The unemployment rate peaked at 7.5 pc in July 2020, and the under-employment rate peaked at 11.4 pc in September 2020. But, to everyone’s surprise, GDP rebounded strongly in the following two quarters, to end 2020 just 1 pc below where it was in December 2019. Then followed a second lockdown in NSW, Victoria and ACT, which caused real GDP to contract by 1.9 pc in the September quarter of 2021, before bouncing back with growth of 3.4 pc in the December quarter after the lockdown ended. By coincidence, the net growth in real GDP over the two years to December 2021 was also 3.4 pc.

The latest figures for the labour market, for March 2022, show net growth in employment of more than 390,000 jobs in two years, almost all of which were full-time. The rate of unemployment had fallen to 4 pc and the rate of underemployment to 6.3 pc. The participation rate was at a record 66.4 pc, and the proportion of the working-age population with jobs at a record 53.8 pc. Remember, however, that this amazing performance was assisted by the temporary closing of our borders to “imported labour” during the worst of the pandemic. Immigration has now resumed.

Four main factors explain why the coronacession proved shorter and shallower than originally expected. First, the virus wasn’t as virulent as first feared by epidemiologists and our hospital system was stretched but not overwhelmed. We took advantage of our island status to close our borders, all states co-operated in limiting the spread of the virus, a vaccine became available and was distributed far sooner than originally expected, and we didn’t have a big problem with anti-vaxxers or people refusing to wear masks.

Second, the coronacession can’t be compared with an ordinary recession. Whereas ordinary recessions are caused by weak demand by households and firms, the corona recession was caused by a government-ordered temporary cut in supply, as federal and state governments sought to suppress the virus by closing our borders, ordering many industries to cease trading, and requiring people to leave their homes as little as possible. This meant that, when the lockdowns were lifted, people and businesses were able to resume (almost) normal activity. The JobKeeper wage subsidy program was designed to keep workers attached to their employers until the lockdown ended. The temporary JobSeeker supplement was intended to help anyone who did lose their job to keep spending. The two programs were highly effective.

Third, the rebound strategy was hugely effective in restoring employment to roughly where it was before the lockdown. However, the rate of unemployment has fallen by more than would normally happen in response to such a rise in employment. This is because the closing of our border to immigrants caused the size of the labour force to grow by about half the rate it normally does, thus making it easier for increased employment to lead to reduced unemployment.

Fourth, when you remember the massive amount of fiscal stimulus the federal government has applied – more than $300 billion, or about 15 pc of GDP - it shouldn’t be so surprising that the economy has grown so strongly. What this proves is that fiscal stimulus works.

Households have yet to spend much of the stimulus money and ordinary income they received over the past two years. Household saving as a proportion of household disposable income is an unusually high 13.6 pc, and households have an extra $240 billion in bank accounts. Because of this, and because so many people have jobs, the outlook for the economy at present is unusually strong. Real GDP is expected grow by a huge 4 pc or more in calendar 2022, but slow to a below-trend 2 pc in 2023 (because population growth won’t be back to normal). The unemployment rate is expected to fall further to 3.5 pc.

The return of inflation

Like all the advanced economies, Australia had enjoyed low inflation in the RBA’s target range of 2 to 3 pc on average since the mid-1990s. But over the past few quarters we’ve been hit by an unusual coincidence of global supply-side price shocks arising from disruptions caused by the pandemic, by Russia’s attack on Ukraine causing a big increase in oil and gas prices, and even by climate change, with restocking since the end of the severe drought causing a jump in beef and lamb prices. The “headline” inflation rate rose to 5.1 pc over the year to March, while the “underlying” rate rose to 3.7 pc. Both are expected to rise further, with the headline rate getting to about 6 pc before starting to fall back. As a consequence of this return to inflation well above the target range, and with the economy growing strongly, in early May – during the election campaign - the RBA began increasing the official interest rate.

The policy mix returns to normal

For many years, the “policy mix” was for monetary policy to be the primary policy instrument used to achieve “internal balance” – to smooth the path of aggregate demand as the economy moves through the ups and downs of the business cycle  – with fiscal policy playing a subsidiary supporting role. This worked well when the primary policy problem was seen as high inflation rather than high unemployment.

But when the economic disruption of the pandemic arrived, with its need to lockdown the economy, the policy mix reversed, with fiscal policy becoming the main instrument, and monetary policy playing the supporting role. Governments always resort to fiscal stimulus during recessions, but this was especially necessary in the response to the pandemic because the official interest rate was already down to 0.75 pc when it began, leaving little room to cut it further.

Now, however, with the econocrats’ need to ensure the surge in imported inflation doesn’t get built into the wage-price spiral, inflation has become the big worry and monetary policy has returned to primacy in the policy mix. In any case, this year’s budget papers say the government has transitioned to the second phase of its medium-term fiscal strategy which is to “focus on growing the economy in order to stabilise and reduce debt”.

Now let’s turn to the basic facts you need to know about the two arms of macroeconomic management and how they are now being used to continue the economy’s recover from the coronacession while returning inflation to the target range.

The monetary policy “framework”

Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the RBA independent of the elected government. With the recovery from the coronacession now well under way, it has returned to being the primary instrument by which the managers of the economy pursue internal balance - low inflation and low unemployment. Monetary policy is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 pc, on average, over time. The primary instrument of MP is the overnight cash rate, which the RBA controls via market operations.

Recent developments in monetary policy

Because of the seven successive years of below-trend growth since 2011-12, the Reserve Bank cut its cash rate from 4.25 pc at the end of 2011 to 0.75 pc at the end of 2019. It’s not hard to see why it kept the official interest rate low and getting lower for so long: the inflation rate had been below its target range; wage growth has been weak, suggesting no likelihood of rising inflation pressure; the economy had yet to accelerate and had plenty of unused production capacity, and the rate of unemployment showed little sign of falling below its estimated NAIRU of 5 pc, which the RBA revised down to 4.5 pc before the arrival of the pandemic.

Then the advent of the virus led the RBA to cut rates twice in one month, March 2020, lowering the rate to 0.25 pc. Despite its previously expressed reservations, it also joined the US Federal Reserve and other major central banks in engaging in quantitative easing, QE. It announced its intention to buy sufficient second-hand government bonds to ensure the “yield” (interest rate) on three-year bonds was about the same as the cash rate. And, to ensure the banks keep lending to small business during the recession, it announced it was prepared to lend to them at the same rate as the cash rate.

In November 2020, the RBA cut the cash rate even further to 0.1 pc, along with the target for three-year government bonds. It announced the further measure of spending $100 billion every six months buying second-hand government bonds with maturities of 5 to 10 years. Note that all the QE measures were intended to lower the interest rates paid by governments and private firms on longer-term borrowing. The RBA’s total purchases of second-hand bonds worth more than $350 billion are equivalent to it funding more than all the government’s fiscal stimulus by merely “printing money”.

In May 2022, following news that the inflation rate had jumped to 5.1 pc, the RBA announced its decision to raise the cash rate by 0.25 pc points to 0.35 pc to “begin withdrawing some of the extraordinary monetary support that was put in place to help the economy during the pandemic”. This would “start the process of normalising monetary conditions” and returning to “business as usual”. Ensuring that inflation returns to target over time “will require a further lift in interest rates over the period ahead”. If the goal were to return the real cash rate to “neutral” – that is, neither expansionary nor restrictive – at about 2.5 pc (the mid-point of the inflation target) by the end of 2023, the cash rate would have to be increased by 0.25 pc points every month or so. Note that this will involve the RBA taking its foot off the accelerator, so to speak, not jamming on the brakes. The RBA also announced that, having ended further QE bond purchases in February, it would now move to QT – quantitative tightening – by not “rolling over” (renewing) its bond holdings as they reach maturity.

Fiscal policy “framework”

Until the arrival of the pandemic, fiscal policy - the manipulation of government spending and taxation in the budget – had been conducted according to the Morrison government’s then medium-term fiscal strategy: “to achieve budget surpluses, on average, over the course of the economic cycle”.

Since the coronacession, however, the government has adopted a two-phase strategy. Phase one, the economic recovery plan, involved huge fiscal stimulus to promote employment, growth and business and consumer confidence. It was to remain in place until the unemployment rate was “comfortably below 6 per cent”. Phase two now involves a “focus on growing the economy in order to stabilise and reduce debt”. “This underlines the commitment to budget . . . discipline and provides flexibility to respond to changing economic conditions,” the budget papers say.

Recent developments in fiscal policy

At the time of its election in 2013, the Coalition government expressed great concern about the high budget deficit and mounting public debt it inherited, resolving to quickly get on top of both. But it turned out to lack enthusiasm for either cutting government spending or increasing taxes. And the years of below-trend growth caused by secular stagnation meant the debt kept growing and the budget didn’t return to balance until 2018-19. Mr Frydenberg was expecting the budget to return to surplus in 2019-20, but this was overturned by the pandemic, which caused the budget’s automatic stabilisers to go into reverse and return the budget to a large deficit. The government’s massive fiscal stimulus has added further to the deficit and public debt.

The budget deficit reached a peak of $134 billion (6.5 pc of GDP) in 2020-21, and is expected to fall to $80 billion (3.5 pc) in 2021-22, $78 billion (3.4 pc) in the coming financial year, 2022-23, then have fallen to $43 billion (1.6 pc) in 2025-26. The budget is projected still to be in a deficit of 0.7 pc of GDP in 2032-33. The gross federal public debt is projected to reach a peak of 44.9 pc of GDP ($1.1 trillion) in June 2025, before beginning a slow decline as a proportion of national income.

With the election over, the government is likely to come under pressure from macro-economists to tighten fiscal policy somewhat and reduce the budget deficit, so as to hasten the decline in the public debt as a proportion of GDP, as well as to help monetary policy return inflation to the target range.

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MACROECONOMIC MANAGEMENT AND THE CHANGING ‘POLICY MIX’

UBS HSC Online Economics Day

I want to talk to you today about the two “arms” or “instruments” of macroeconomic management – monetary policy and fiscal policy – used by the economic managers to stabilise aggregate demand, to smooth it out as much as possible as the economy moves through the ups and downs of the business cycle. Their goal is to achieve “internal balance” – low inflation and low unemployment – but, like most balancing acts, this combination isn’t easy to achieve and maintain. That’s because the thing that makes it easy to achieve low inflation is a low rate of growth in aggregate demand – GDP – but low growth usually means high or rising unemployment. On the other hand, the thing that makes it easy to achieve low unemployment is a high rate of economic growth, but high growth usually means rising inflation pressure, as the demand for goods and services runs ahead of the economy’s ability to supply those goods and services.

In other words, there is much potential for conflict between the two objectives of macro management, low inflation and low unemployment. They don’t easily fit together, but we do want both of them. So achieving both at the same time is the great challenge the macro managers – the RBA and the elected government, as advised by Treasury – must continually struggle to achieve.

Both policy arms should push in the same direction

In principle, both arms of policy are capable of being used either to speed up demand or slow it down. For instance, if you use monetary policy to lower interest rates, that should encourage borrowing and spending and so strengthen demand. If you use monetary policy to raise interest rates, that should discourage borrowing and spending and so weaken demand. But similarly, if you use fiscal policy to increase government spending and/or cut taxes, that should stimulate demand, whereas if you use fiscal policy to cut government spending and/or increase taxes, that should restrict demand.

Again in principle, at times when the macro managers feel they have a bigger problem with high unemployment than with high inflation, they should have both arms of policy pushing in the same direction: to strengthen demand. At times when the managers feel they have a bigger problem with high inflation than with high unemployment, they should have both arms of policy pushing in the direction of restraining demand. To put it another way, the economic managers will have more trouble achieving internal balance when, for some reason – perhaps political – they have the two arms pushing in opposite directions.

But the two arms have differing strengths and weaknesses

In practice, however, it’s often not that simple. That’s because the two arms have differing sets of strengths and weaknesses. In practice, the managers have found that monetary policy is better at slowing demand than at speeding it up. This is particularly true at times when household debt is very high – as it is at present – meaning that cutting interest rates isn’t very effective in encouraging people to take on even more debt, whereas increasing interest rates is highly effective in limiting people’s ability to keep borrowing and spending. A second reason why monetary policy is less effective in encouraging spending and more effective in discouraging spending is that interest rates in recent years have been so close to zero. There’s been little scope for them to be cut, but much room for them to be increased.

By contrast, fiscal policy is probably better at boosting demand than at slowing demand. This is mainly because the budget is controlled by politicians, who find it a lot easier to increase spending or cut taxes than to cut spending or increase taxes. To put it another way, the things you do to encourage demand are politically popular, whereas the things you do to discourage demand are politically  unpopular, so it makes sense for the encouragement to be done mainly by politicians through the budget, and most of the discouragement to be done by unelected independent bureaucrats through monetary policy.

The ever-changing ‘policy mix’

This brings us to the key decisions the economic managers must make about the relative roles to be played by the two arms at any point in time. Which of the two arms should take the lead, while the other arm plays a subsidiary, supporting role? If monetary policy is better at slowing demand, while fiscal policy is better stimulating demand, which arm plays the leading role will depend on whether, at the time, high inflation or high unemployment is the main problem. As the problem changes, so will the mixture of the two policy arms.

For many years, the “policy mix” was for monetary policy to be the primary policy instrument used to achieve internal balance, with fiscal policy playing a subsidiary supporting role. This worked well when the primary policy problem was seen as high inflation rather than high unemployment.

But when the economic disruption of the pandemic arrived, with its need to lockdown the economy, the policy mix reversed, with fiscal policy becoming the main instrument, and monetary policy playing the supporting role.

Now, however, with the all the fiscal and monetary stimulus having caused the economy to bounce back strongly from the two lockdowns, the economic managers’ greatest need is to ensure the surge in imported inflation doesn’t get built into the price-wage spiral. So inflation has become the big worry and monetary policy has returned to primacy in the policy mix. As well, this year’s budget papers say the government has transitioned to the second phase of its medium-term fiscal strategy which is to “focus on growing the economy in order to stabilise and reduce debt”. So the policy mix has returned to where it was before the arrival of the pandemic.

Now let’s look in more detail at recent developments, first in monetary policy, and then fiscal policy.

Recent developments in monetary policy

Because of the seven successive years of below-trend growth after 2011-12, the Reserve Bank had cut its cash rate from 4.25 pc at the end of 2011, to 0.75 pc at the end of 2019. It’s not hard to see why it kept the official interest rate low and getting lower for so long: the inflation rate had been below its target range; wage growth had been weak, the economy had yet to accelerate and had plenty of unused production capacity.

Then the arrival of the virus led the RBA to cut rates twice in one month, March 2020, lowering the rate to 0.25 pc. Despite its previously expressed reservations, the RBA also joined the US Federal Reserve and other major central banks in engaging in quantitative easing, QE. It announced its intention to buy sufficient second-hand government bonds to ensure the “yield” (interest rate) on three-year bonds was about the same as the cash rate.

In November 2020, the RBA cut the cash rate even further to 0.1 pc, along with the target for three-year government bonds. It announced the further measure of spending $100 billion every six months buying second-hand government bonds with maturities of 5 to 10 years. Note that all the QE measures were intended to lower the interest rates paid by governments and private firms on longer-term borrowing.

In May 2022, following news that the inflation rate had jumped to 5.1 pc, the RBA announced its decision to raise the cash rate by 0.25 pc points to 0.35 pc to “begin withdrawing some of the extraordinary monetary support that was put in place to help the economy during the pandemic”. This would “start the process of normalising monetary conditions” and returning to “business as usual”. Ensuring that inflation returns to target over time “will require a further lift in interest rates over the period ahead”. Note that this will involve the RBA taking its foot off the accelerator, so to speak, not jamming on the brakes. The RBA also announced that, having ended further QE bond purchases in February, it would now move to QT – quantitative tightening – by not “rolling over” (renewing) its bond holdings as they reach maturity.

Recent developments in fiscal policy

At the time of its election in 2013, the Coalition government expressed great concern about the high budget deficit and mounting public debt it inherited, resolving to quickly get on top of both. But the budget didn’t return to balance until 2018-19. Then the pandemic caused the budget’s automatic stabilisers to go into reverse and return the budget to a large deficit. The government’s massive fiscal stimulus has added further to the deficit and public debt.

The budget deficit reached a peak of $134 billion (6.5 pc of GDP) in 2020-21, and is expected to fall to $80 billion (3.5 pc) in 2021-22, then have fallen to $43 billion (1.6 pc) in 2025-26. The budget is projected still to be in a deficit of 0.7 pc of GDP in 2032-33. The gross federal public debt is projected to reach a peak of 44.9 pc of GDP ($1.1 trillion) in June 2025, before beginning a slow decline as a proportion of national income.

With the election over, the government is likely to come under pressure from macro-economists to tighten fiscal policy somewhat and reduce the budget deficit, so as to hasten the decline in the public debt as a proportion of GDP, as well as to help monetary policy return inflation to the target range.

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The cost of living is soaring, but raising interest rates won't help

This week removed any doubt that the cost of living is the dominant issue in this election campaign. We got official confirmation that the many people complaining about rising prices are, to coin a phrase, right on the money.

Now the Reserve Bank is under immense pressure to begin increasing interest rates at its board meeting on Tuesday. If it does so, this will add to the cost pressures facing many consumers, making the cost of living an even bigger issue politically.

But were it to wait for the latest information on wages that it will get three days before the election – which it really ought to – then increase rates in early June, it will be accused of choosing its timing to help the Coalition. And rightly so.

As Reserve Bank governor Dr Philip Lowe’s predecessor, Glenn Stevens, argued convincingly when he increased the official interest rate just before the 2007 election, which saw John Howard thrown out of office, the only way for the Reserve to be apolitical is for it to do what it believes the economy needs without regard to what’s happening politically.

Speaking of politics, The Conversation’s Peter Martin has used the ABC’s Vote Compass – a questionnaire which, among other things, asks respondents to name the issue of most concern to them – to show that, at the 2016 election, only 3 per cent picked “cost of living”.

At the 2019 election, it was only 4 per cent. At this election, however, 13 per cent of voters have picked it, making it the respondents’ second biggest concern, behind only climate change. (Which should be biggest. But that’s for another day.)

After this week, it’s probably more than 13 per cent.

This week the Australian Bureau of Statistics released figures showing the consumer price index rose by 2.1 per cent during the three months to the end of March, and by 5.1 per cent over the year to March.

Strictly speaking, the CPI is a measure of consumer prices rather than the cost of living, but it’s near enough. So this “headline” figure is the right one for people concerned about living costs. It’s the highest annual rate for two decades.

But it can be affected by extreme prices changes that don’t represent the general price pressures on the economy, so “for policy purposes” (that is, for its decisions about changing the official interest rate) the Reserve focuses on a measure of “underlying” inflation called the “trimmed mean”.

This excludes the 15 per cent of prices that rose the most during the quarter and the 15 per cent of prices that rose the least or fell.

By this measure, prices rose by 1.4 per cent during the quarter and by 3.7 per cent over the year. This is the highest it’s been since 2009, and well above the Reserve’s 2 to 3 per cent target range.

It’s standard behaviour for incumbent politicians to claim the credit for anything good that happens in the economy during their term, regardless of whether they’re entitled to.

So it’s only rough justice for opposition politicians to blame the government for anything bad that happens – which is just what Labor’s been doing this week.

But Scott Morrison and Josh Frydenberg have been arguing furiously that the leap in most prices has had nothing to do with them. And I think there’s a lot of truth to their claim.

Let’s look at the particular prices that do most to explain the March quarter jump in living costs. The biggest was a 5.7 per cent rise in the cost of newly built houses and units.

This has been caused by shortages of certain imported building materials due to pandemic-related disruptions to supply, worsened by a surge in demand for new homes arising from the authorities’ efforts to counter the “coronacession” by cutting interest rates and using HomeBuilder grants to keep the building industry moving.

Next in importance in explaining the surging cost of living is an 11 per cent rise in the cost of petrol and diesel fuel, caused by Russia’s war on Ukraine. These prices are up 35 per cent over the year to March.

The higher world oil price has also raised fresh food prices by increasing the cost of fertiliser, as well as increasing the cost of transporting many goods. The pandemic has temporarily increased the cost of international shipping.

Third in importance this quarter is a 6.3 per cent increase in university fees caused by a federal government decision last year.

Add in the 12 per cent annual rise in beef and lamb prices caused by graziers’ restocking following the end of the drought and you see that most of the rise in living costs so far comes from factors far beyond the government’s control.

So, are Morrison and Frydenberg off the hook on rising living costs? No. People feel the pain of rising prices more acutely when their wage rises haven’t been keeping up, let alone getting ahead.

In a well-managed economy, workers’ wages rise a little faster than prices. This hasn’t been happening, particularly in the past two years or so, and the government has made no attempt to rectify the problem.

Raising interest rates can do nothing to fix all the problems we’ve noted on the supply-side of the economy. The only thing it can do is dampen the demand for goods and services by increasing the cost of borrowing and by leaving those people with mortgages with less disposable income to spend.

Which is an economist’s way of saying what everybody knows: that higher interest rates add to the living costs of the third of households paying off a home loan. Those who’ve taken on loans in recent years will feel it most.

Of course, all those people living off their savings will be cheering the return to rising interest rates. But from an economy-wide perspective, the winners are far outweighed by the losers.

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Banking royal commission: much misconduct, not much follow-up

Can you remember as far back as three years ago? Scott Morrison and Josh Frydenberg are hoping you can’t. And fortunately for them, the media’s memory is notoriously short.

The media mostly live in the now. What’s being promised in this election campaign? Not much as yet on what promises were made last time and what became of them.

A big issue in the years before the election in May 2019 was the many complaints about people’s mistreatment by the banks, much of it brought to light by this masthead’s Adele Ferguson. There was growing pressure for a royal commission.

But the banks denied there was a problem, and then-treasurer Morrison repeatedly dismissed the need for an inquiry. Finally, when some government backbenchers signalled their support for a motion to establish a commission, the banks begged the government to take over and ensure the inquiry had appropriate terms of reference.

Former High Court judge Kenneth Hayne was appointed to inquire into misconduct in the banking, superannuation and financial services industry. For months, the public was shocked by the misbehaviour his hearings revealed.

People – even dead people – being charged for services they didn’t receive, signatures being forged, banks finding many ways to put their profits ahead of the fair treatment of their customers.

The government, too, professed its shock and utter disapproval of the banks’ behaviour. When the commission’s final report was submitted just a few months before the election was due, the government took three days to announce it was acting on all 76 recommendations and going further in “a number of important areas”.

“My message to the financial sector is that misconduct must end and the interest of consumers must now come first. From today the sector must change, and change forever,” Treasurer Frydenberg declared.

But the backdown began just five weeks later, even before the election. Frydenberg announced that “following consultation with the mortgage broking industry and smaller lenders, the Coalition government has decided to not prohibit trail commissions on new loans, but rather review their operation in three years’ time”.

As Professor Richard Holden of the University of NSW observed at the time, Frydenberg offered nothing in its place.

Back in 2009, in the aftermath of global financial crisis, the Rudd government imposed “responsible lending obligations” making it illegal to offer credit that was unsuitable for a consumer based on their needs and capacity to make payments.

These have always irked the banks, and soon after the Coalition came to power in 2013 it attempted to wind them back, but was blocked in the Senate. The Hayne commission said they were fine.

But in September 2020, under cover of the “coronacession”, Frydenberg announced plans to dismantle the obligations because they’d become “overly prescriptive, complex and unnecessarily onerous on consumers”.

Professor Kevin Davis, of the University of Melbourne, a respected expert in this field, has argued that these justifications don’t make much sense.

By January last year, Davis found that the government was yet to implement 44 of the 76 recommendations it had accepted, and had “turned its back on five key reforms – including curbing irresponsible lending practices”.

“Instead, it appears to be banking on market forces and voluntary codes of conduct to protect financially unsophisticated borrowers. This is the triumph of ideology and vested interests over logic and evidence,” Davis said.

The Hayne commission was highly critical of the Australian Securities and Investments Commission, saying it was too accommodating towards the bodies it was regulating, being too ready to negotiate and not keen enough to litigate.

In August last year, Frydenberg significantly changed his “statement of expectations” of ASIC from the one issued in 2018. The new directions start by saying the government expects the body to “identify and pursue opportunities to contribute to the government’s goals, including supporting Australia’s economic recovery from the COVID pandemic”. Hmmm.

Hayne recommended setting up a “compensation scheme of last resort”, funded by the industry, to ensure that victims of financial misconduct actually receive compensation that had been awarded where the firm was unable to pay because it had collapsed.

Hayne also recommended a “financial accountability regime” to hold finance leaders accountable for misconduct that occurs on their watch.

The two measures were finally recommended for passage by the relevant Senate committee in mid-February. But neither was passed before parliament was prorogued for the election.

It’s remarkable what miraculously winning an election can do to your determination to make the bankers behave.

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If you care about our future, care about declining home ownership

The most thought-provoking contribution I’ve heard so far in this utterly dumbed-down election campaign is from barrister Gray Connolly, saying the big issue we should be debating is housing and intergenerational wealth.

Connolly was speaking as a self-proclaimed Red Tory, on ABC Radio National’s Religion and Ethics Report. Red Tories, he says, are people on the political Right who have a more traditional view of what we’re trying to achieve. They are true conservatives, trying to conserve the institutions and practices that have given us the way of life we value.

Red Tories believe in communitarianism – much more about “we” than “me”. They highlight the virtues of home and family. They emphasise the boring virtues, like duty, perseverance and loyalty, not just people’s rights.

That so few Australians under 40 have any form of home ownership or wealth of any kind is a ticking timebomb socially, Connolly says. It’s this that could split the country demographically.

“I cannot believe how little work either side of politics has done on the housing issue. It’s an absolute disgrace that the Coalition, on the Right of politics, for whom home ownership is usually something very important, has done so little to promote home ownership among young people.

“You cannot have a stable country where so many people do not have security in their homes, do not have security in their work, don’t feel they’re getting ahead, and do not feel they have a stake in society that causes them to want to preserve it.

“I cannot believe that so many people on the Right of politics do not get this,” he says.

How do the economic policies of recent decades adversely affect traditional conservative values?

“For the better part of 20 years, nothing has been done other than pour fuel on the housing-price fire,” he says. This has continued even to the point of not looking after renters, not looking after people with insecure work.

It has delayed coupling and family formation for most people. “If you don’t have secure work, chances are you’re not going to form a family because chances are you cannot afford a home.”

If you have housing that is so expensive, then you have young people moving away from where their parents are. You have the family bond dissolve, he says.

“If you are a conservative, you want to conserve [that bond].” You want adult children to be able to look after their ageing parents. You want grown-up children to be able to turn to their parents for childcare. This, he says, is the natural order of society.

But because “the market” and government policy mean we don’t “prioritise residential housing for actual residence, but for investment, you have the absolute social disaster where these bonds are being split apart.”

Does it surprise you to hear anyone on the Right accepting that insecure work is a major social problem? Though the Red Tory label is a recent British invention, Connolly traces its origins back to the mid-19th century and Benjamin Disraeli.

Then, then the Conservatives saw the trade union movement as a necessary counterbalance to the “viciousness and brutality of Manchester liberalism,” Connolly says. (Manchester would have been seen as centre of the dark satanic mills.)

Connolly says Red Tories accept the role of the state as protector of the nation, but also of the family and the family structure. They see the state as being useful for achieving bigger projects for the national good.

Phillip Bond, instigator of Britain’s Red Tory revival, says the market has a tendency to devour its host society. Connolly says this is a very dangerous tendency and that’s where the state comes in.

Corporations are creatures of statute, and what statutes make they can unmake and can regulate, he says. So rather than fearing the state is too powerful, “I am much more scared of the state that’s too reluctant to bring corporations to heel”.

A corporation has no special rights in society any more than any other group does. The state is meant to protect the rights that people need to be protected. We should be conserving society and the community and serving the weakest and the hurt, he concludes.

I think there’s much sense in what Connolly says, and not just about the high social price we’ll pay for making too many jobs insecure and homes too hard for too many young people to afford. We’ll damage the Australian way of life.

The economy is all of us. It belongs to all of us, not just a few big corporations. It must be the servant of our society. Governments’ job is to ensure the economy improves our way of life and doesn’t diminish it.

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Job insecurity: close your eyes and you can't see it

Well, that’s a relief. Labor and the unions are claiming we have a problem with increasing casualisation and job insecurity, but The Australian Financial Review has looked up the official figures and discovered that, if anything, the proportion of casual workers has been falling. So, the problem’s a furphy? Sorry, ain’t that simple.

Strictly speaking, the Australian Bureau of Statistics’ labour force survey doesn’t measure “casual” employment, and certainly makes no attempt to measure whether jobs are secure or insecure, precarious or solid as a rock.

What it does do is ask the workers it surveys whether their job entitles them to annual and sick leave. We’re left free to assume that those who say no must be “casuals”, whereas those who say yes must be “permanents”.

It is true that, by this measure, the proportion of all workers who are casuals grew strongly in the decades before 2000, but then was little changed until the onset of the pandemic in 2020.

But it’s also true that the absolute number of casuals continued to rise until the pandemic.

In the two years since February 2020, the number has fallen – by 61,000, or 2.3 per cent – and so have casuals as proportion of total employment.

I very much doubt the pandemic has cured us of insecure employment.

With some people unable to work because they had the virus or were in isolation, and with our borders closed to the usual supply of temporary workers from overseas, employers became acutely short of labour. But I wouldn’t assume that what employers do during a pandemic is what they’ll keep doing when conditions improve.

So whether the labour movement is wrong to say casualisation is increasing is open to debate. And even if the proportion of casuals continues to decline in the years ahead, does that mean insecure employment isn’t worth worrying about?

In any case, casualisation isn’t really what Laborites are on about. It’s job insecurity that’s the issue. And a casual look at the statistics won’t tell you much about that either.

One man who has taken a very careful look is David Peetz, a professor of employment relations at Griffith University. He summarised his findings in two articles for The Conversation.

He started by taking a closer look at what the figures say about the nature of casual jobs. Why do some jobs need to be casual, and why do some employers need casual jobs?

Surely the answer is that employers want flexibility because they need some people to work at varying times for short periods.

But Peetz found that about a third of casuals worked full-time hours. About half had the same working hours from week to week, and were not on standby. More than half could not choose the days on which they worked.

Almost 60 per cent had been with their employer for more than a year. And about 80 per cent expected to be with the same employer in a year’s time.

What this suggests is that many workers classed as casuals don’t need to be casual in the traditional sense. Peetz found that only 27 per cent of casuals worked varying hours and had no minimum guarantee of hours.

This means a huge proportion of the workers classed as casual because they’re not eligible for paid leave could be classed as permanent, but aren’t.

Why not? One possibility is that the employer simply wants to save on the cost of leave. But defenders of the status quo assure us casual workers receive a special 25 per cent loading in lieu of paid leave. What’s more, many casuals prefer the loading to the entitlement, we’re assured.

The statistics bureau no longer asks workers who say they have no leave entitlement whether they receive a loading – or whether it’s as high as 25 per cent. But back when it did ask, less than half of casuals said they got it.

I wonder how many cases of “wage theft” involve the non-payment or under-payment of leave loading. As for people wanting cash now not paid leave in the future, that’s a sign they’re living hand-to-mouth on a wage too low to give them financial security.

Peetz argues the reason so many people working regular full-time jobs are classed as casuals is because employers have the bargaining power to impose insecurity on some of their less-skilled or less senior workers.

Even if the employer isn’t also saving on how much they have to pay the worker, they get the “flexibility” of being able to get rid of workers without notice or redundancy payout. The worker may not even be formally terminated, just not be given any more hours.

Did someone mention job insecurity?

Looking more broadly, Peetz found that the real causes of insecurity aren’t the type of contract workers are on – casual or permanent, full-time or part-time – but rather the way organisations are being structured these days.

“This is designed to minimise costs, transfer risk from corporations to employees, and centralise power away from employees,” he argued.

This motivation helps explain the dramatic increase in franchised businesses. It’s the franchisee that bears responsibility for scandals such as underpaying workers.

Other corporations call in labour-hire companies to take on responsibility for their workers. This cuts costs and transfers risk down the chain – thus making jobs more insecure. Labour-hire workers are usually casual full-time workers, he argues.

Some companies set up spin-offs or subsidiaries. Some just outsource to contracting firms.

“On the other hand, some organisations have found relying on part-time casuals counterproductive, as workers had no commitment and became unreliable. Some large retailers now use ‘permanent’ part-timers rather than casuals,” he wrote.

Between 2009 and 2016, “casual” part-timers grew by just 13 per cent, whereas “permanent” part-timers grew by 36 per cent.

Businesses have used their power to cut their labour costs. Many workers’ jobs have become less secure in the process.

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It's not jobs we're short of, it's jobs that pay decent wages

When it comes to knowing what’s going on in the jobs market, there’s a bit more to it than being able to remember the present rate of unemployment. It helps to know why the unemployment rate is at the level it is, and what that implies for the family’s future finances.

In case you’ve gone deaf – or just stopped listening – Scott Morrison wants you to know the rate of unemployment has been falling rapidly over the past six months, and is now a fraction under 4 per cent.

That’s the lowest it’s been in about 50 years.

But wait, there’s more. Morrison said last week his priorities are “jobs, jobs, jobs, jobs and jobs”. To which effect he’s promising to create a further 1.3 million over the next five years. This will be on top of the 1.9 million jobs already created since the Coalition returned to power in 2013.

The growth in employment and the fall in unemployment since the economy’s massive contraction during the “coronacession” in the June quarter of 2020 is a truly remarkable achievement, for which the Morrison government deserves much credit. Don’t let any carping Labor critic convince you otherwise.

Don’t let anyone tell you the government has changed the definition of unemployment. It isn’t true. What is true is that the problem of underemployment – people who have jobs, but aren’t able to find as many hours as they’d like – is a bigger problem today than it was 50 years ago.

But the rate of underemployment has fallen to 6.3 per cent, down from 8.8 per cent two years ago, and the lowest it’s been since 2008.

In any case, almost all the 395,000 net extra jobs created since the start of the pandemic two years ago are full-time.

Next, get this. The proportion of the working-age population holding a job now stands at 63.8 per cent – the highest it has ever been.

And the biggest winners in this have been young people. Their rate of employment is 4.6 percentage points higher than it was two years ago. The rate for people aged 25 to 64 is up 1.9 percentage points, while the rate for those aged 65 and over is up 0.4 points.

But all the growth in employment hasn’t been sufficient to meet the demand from employers. The number of job vacancies is at a record level of 423,500. That is, getting on for a half a million job openings are going begging.

Now, let me ask you a question: does it sound to you as though our big problem at present is an acute shortage of jobs, jobs, jobs?

If you’ve heard of generals fighting the last war rather than coming to grips with the present one, now you know that prime ministers are prone to the same mistake.

So, why is Morrison claiming to have made getting us a lot more jobs his priority, when there must surely be more pressing problems he should be focused on? Two reasons.

One is that Australia’s had a problem with insufficient jobs – aka high rates of unemployment – since the late 1970s. This was the case for so long – did I mention 50 years? – the notion that a shortage of jobs is an eternal feature of economic life is now lodged deeply in many people’s minds.

And, as is the practice of modern politicians, Morrison finds it easier to pander to our misconceptions than to straighten them out.

“You think we can never have enough jobs? OK, I promise to create another 1.3 million of ’em.”

But how on earth do we finally seem to have got on top of a 50-year problem? Mainly because our first recession in almost 30 years turned out to be more benign than any we’ve had.

In particular, the government spent unprecedented multi-billions on the JobKeeper wage subsidy scheme, which was designed to preserve the link between employers and their workers, even when they had no work for their workers to do. It worked brilliantly.

The billions federal and state governments spent on this and many other programs to protect the incomes of businesses and workers have given an enormous boost to the demand for workers.

But remember, this surge in demand came at a time when our borders were closed to our usual supply of imported labour: overseas students, backpackers and skilled workers on temporary visas.

Now that our borders have reopened, the demand for workers will increase, but so will their supply. If employment does grow by 1.3 million in the next five years, it will be mainly because of population growth, coming mainly from immigration.

The other reason Morrison wants to talk about jobs, jobs, jobs is to direct our attention towards his economic successes and away from his economic failure: since a year or two before the Coalition’s election in 2013, wages have struggled to keep up with the rising cost of living.

If Anthony Albanese was a sharper politician, he’d be telling us his priorities were wages, wages, wages.

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Easter offers no escape from our responsibility for climate change

Easter is a good time to look up from the daily business of life – getting and spending – and think harder about what we’re doing and why we’re doing it. How grateful are we to those who make sacrifices for us, and how much of our effort goes into sacrificing for others?

For years, I’ve been proud to support Tearfund, a Christian overseas aid organisation. This year its meditations for Lent have focused on its report, They Shall Inherit the Earth: Christian attitudes to climate change.

Why should Christians be particularly concerned about climate change – or what someone in the report prefers to call “climate justice”?

One reason is that those who are and will be worst affected by climate change tend to be the poor – both those in relative poverty in our wealthy country and those in absolute poverty in less developed countries.

You don’t really understand Jesus and his teaching if you haven’t noticed his preoccupation with the poor.

But another reason is that Christians are called to be “stewards of the earth”.

Tim Healy, a lecturer at Alphacrucis College, says “our acceptance of the God-given mandate to care for the earth is an expression of obedience to Jesus’ command to ‘love our neighbours’ – not only those down the street but ‘down time’ as well.

“It’s those who live in the years beyond our own who stand to benefit the most from our faithful and responsible stewardship,” he says.

Susy Lee, an author, says she prefers the term “climate justice” because “the people most likely to be causing [climate change] are not the people most likely to suffer from it.

“The Kingdom of God has a lot to say about justice. God created the world and asked us to look after it justly.”

The report recounts the experience of Hattie Steenholdt, who was on a Scripture Union beach mission trip when bushfires raged through Mallacoota in the early hours of New Year’s Eve in 2019, and stayed around to help.

“We’re called to be stewards of the earth, and yet we live in a time and a society that puts the self first . . . so it is countercultural to go ‘hey, this is something big that’s going on and we’re all playing a part in it’.”

The Christian notion that we’re all responsible for caring for the earth doesn’t sound a million miles from the Aboriginal commitment to “country”.

Many Australian overseas aid agencies include our First Nations people among those they help. And, when it comes to climate change, our Torres Strait Islanders are (forgive the pun) in the same boat as the other South Pacific nations whose worries about climate change we’ve taken so little notice of.

Aunt Rose Elu, last year’s Queensland Senior Australian if the Year, is from Saibai, one of the seven Torres Strait Islands.

“When I was young,” the report quotes her as saying, “I remember that the sea was beautiful, crystal clear and the sea breeze would blow through the houses so beautifully.

“Recently I was home on Saibai and I was shocked by the changes I saw. I cried for my home. The sea level was higher than I have ever seen it. The walls were not working. The graves of my ancestors are being eroded. The high tide washes them away.”

Kuki Rokhum is a director of one of the local Christian organisations that Tearfund works with in India. She says “it is the poorest countries, and within them the poorest people – who have produced the lowest carbon emissions, and have the least resilience to allow them to respond – that feel most strongly the effects of climate-change related disasters, droughts, floods and extreme temperatures.

“With increased disasters there will be more climate-related displacement.”

Farmers in north-west India are already struggling because of unpredictable rainfall and extreme heat, but they know that future generations will feel the impact of a changing climate even more acutely, the report says.

For the family of 80-year-old Dhulji Meghwal, and many others, rainfall has become sporadic over the past two decades and extreme temperatures have led to dry and degraded soil.

“One bigha of land [around 0.4 acres] used to produce enough for the whole year. Now, that land will produce only enough for six months. People are falling into debt because they are purchasing seed from the market and then not getting the production they expect,” Meghwal says.

Economists eschew “anecdotal evidence” and prefer to stick to lofty concepts, backed up by copious facts and figures. Perhaps they’d be more persuasive if they got down to cases more often - as aid agencies have long understood.

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Digital revolution is leaving economists scratching their heads

There should be a law against holding election campaigns while people are trying to enjoy their Easter break. So let’s forget politics and think about the strange ways the economy is changing as the old industrial era gives way to the post-industrial, digital era.

The revolution in information and communications technology is working its way through the economy, changing the way it works. The markets for digital products now work very differently from the markets for conventional products.

So a growing part of the economy consists of markets that don’t fit the assumptions economists make in their basic model of markets, as Diane Coyle, an economics professor at Cambridge University, explains in her book, Cogs and Monsters.

And the way we measure the industrial economy – using the “national accounts” and gross domestic product – isn’t designed to capture the new range of benefits that flow from digital markets.

Starting at the beginning, the great attraction of the capitalist, market economy is its almost magical ability to increase its productivity – its ability to produce an increased quantity of goods and services from an unchanged quantity of raw materials, capital equipment and human labour.

It’s this increased productivity – not so much the increase in resources used – that explains most of the improvement in our standard of living over the past two centuries.

Where did the greater productivity come from? From advances in technology. From bigger and better machines, and more efficiently organised factories, mines, farms, offices and shops, not to mention better educated and skilled workers.

Particularly in the past 70 years, we benefited hugely from the advent of mass-produced consumer goods on production lines. Economists call this “economies of scale” – the bigger the factory and the more you could produce, the lower the cost of each item.

Although each extra unit produced added marginally to raw material and labour costs, the more you produced, the more the “fixed cost” of building and equipping the factory was averaged over a larger number of items, thus reducing the “average cost” per item.

Decades of exploiting the benefit of economies of scale explain why so many of our industries are dominated by just a few big firms.

But the new economy of digital production has put scale economies on steroids. Coyle says software – and movies, news mastheads and much, much else – is costly to write (high fixed cost) but virtually costless to reproduce and distribute (no marginal cost).

So, production of digital products involves “increasing returns to scale”, which is good news for both producers and consumers - everyone except economists because their standard model assumes returns are either constant or declining.

But another thing that makes the digital economy different is “network effects”, starting with the greatest network, the network of networks, the internet. The basic network effect is that the more users of the network there are, the greater the benefit to the individual user. More increasing returns to scale.

Then, Coyle says, there are indirect network effects. Many digital markets involve “matching” suppliers with consumers – such as Airbnb, Uber and Amazon Marketplace. For consumers, the more suppliers the network attracts, the better the chance of quickly finding what you want. But, equally, for suppliers, the more customers the network attracts, the easier it is to make a sale. Economists call these digital networks “two-sided platforms”. The owner of the platform sits in the middle, dealing with both sides.

So, yet more benefits from bigness. And that’s before you get to the benefits of building, mining and sharing large collections of data.

All these benefits being so great, it’s not hard to see why you could end up with only a couple – maybe just one – giant network dominating a market. Welcome to the world of Google, Facebook, Apple, Amazon and Microsoft.

In their forthcoming book, From Free to Fair Markets, Richard Holden, an economics professor at the University of NSW, and Rosalind Dixon, a law professor at the same place, note that a number of leading lights have proposed breaking up these huge tech companies, in the same way America’s big telephone monopoly and interlocking oil companies were broken up last century.

But, the authors object, in most of these markets the power of these giants stems from the “network externalities” we’ve just discussed.

“Unlike traditional markets, when the source of market power is also the source of consumer harm, in these markets the source of market power is also what consumers (and producers, in the case of two-sided platforms) value – being connected with other consumers and producers,” they write.

“The key driver of the value that these firms create is precisely the network externalities that they bring about. Facebook is valuable to users because lots of other users are on Facebook . . .

“Google is a superior search engine because in performing so many searches, machine learning allows its algorithm to get better and better, making it a more desirable search engine.”

So, the driving force that leads to these markets having one dominant player is also the force that creates economic value. “Breaking up the large players will stop there being just a few large players, but it will also stop there being nearly as much economic value created,” they say.

Research by Holden, Professor Luis Rayo and the Nobel laureate Robert Akerlof has found that markets with network externalities tend to have three features. First, the firm that wins the initial competition in the market ends up with most of the market.

Second, it’s difficult to become a winning firm, and success is fragile. For instance, Microsoft has had little success getting its search engine Bing to take business from Google. And Netscape was once dominant in the browser market, but suddenly got supplanted.

Third, winners can’t go to sleep. They must constantly innovate and seek to raise their quality.

This makes the tech markets quite different from conventional markets like oil or even old-style networks like railways.

Economists’ efforts to get a handle on the new economy continue.

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Let's use this election to raise the quality of the politics we get

This may be my 18th election as a journalist, but I confess I find the thought of a six-week campaign a bit daunting. Six weeks of unrelenting political argy-bargy?

Still, it does afford the luxury of one column discussing how we approach elections, before we get down to the many economic challenges the new government will face: climate change, wage stagnation, unaffordable home ownership and wasteful spending on infrastructure, not to mention integrity in government.

In elections, it’s always tempting to vote for the devil you know – a line pushed by all governments. But when you think about it, you see this notion is biased completely in favour of the incumbent. It seeks to shift the voter’s attention away from the government’s performance and play on our timidity.

What do you know about the other lot? Not much. How do you know they won’t be worse? You don’t. But, then again, they could be better.

If we always stuck to the devil-you-know rule, one side of politics would stay in power for ever. The other side would never get a go, and so would become more unknown – more unelectable – as each election passed.

Does that sound like the path to better government? Not to me, it doesn’t. In my experience, the longer governments stay in power, the worse they get. They get lazy and complacent. They worry more about helping their friends and less about keeping the rest of us happy.

They develop a sense of entitlement. They think they own the place and it’s their own money they’re spending. They get more and more reluctant to be held accountable by nosy outsiders and more inclined to keep their failures buried deep.

And that’s just the deterioration in government. The side kept out of power for year after year also goes off. Fewer and fewer of their leading lights have ever been a minister. They lose their corporate knowledge of how to run the country.

I’m old enough to remember the election of the Whitlam government in 1972, after 23 years in opposition. Wow, didn’t it show. And it wasn’t just their inexperience. They wanted to cram 23 years of “reform” into their first three years. Which, of course, is all they were given.

It wouldn’t be good for our governance if government changed hands every three or four years. But I long ago formed the view that no government – Labor or Liberal, federal or state, whether you voted for ’em or whether you didn’t – should be left in office for more than about 10 years.

With their ever-declining standards of behaviour, it’s tempting to give up on our politicians. “They’re all liars.” Actually, they rarely tell outright lies, though some do seem to have very bad memories.

What’s true is that they’re always saying things that are true from some limited perspective, but are calculated to mislead. “Record spending on health”, for instance, means provided you ignore inflation.

But when we give up on our politicians, it means they’ve won. They still get to run the place, but we’ve forfeited our right to a say in how it’s run. We’re happy for other people – including the pollies – to decide our fate. You want to make decisions that benefit your mates at my expense? Be my guest.

The trickier our politicians are, the more closely we should watch them. Whenever I speak to young people about politics, I warn them that the groups the politicians are most likely to screw are the ones that aren’t watching.

Another dangerous attitude is that there’s little difference between the two main parties. It’s true that both sides can be badly behaved, and that many policies are bipartisan. But there are differences between the parties’ approaches and, though the casual observer may find them hard to see, over time they do make a difference.

Paul Keating’s claim that when you change the government, you change the country, is right. Who we vote for in this election will change where we end up in 10 years’ time.

But the more the two major parties seem the same, the more people chose to vote for minor parties or independents – a trend likely to grow in this election. I regard this as a healthy development that will force the duopolists to lift their game.

As the number of independents grows, the possibility of a “hung” parliament increases. Both sides want us to believe this would be a bad thing, leading to instability. That’s the reverse of the truth. Minority governments are so common at state level that their presence goes unremarked.

And independents have a record of using their bargaining power to achieve reforms neither of the big parties fancy – fixed four-year terms in NSW, for instance – and moves towards greater transparency and accountability, such as freedom of information laws, and more resources for ombudsmen and auditors-general.

The way we vote in this election will make a difference. We should be using our votes to impose better quality governance on our wayward and self-serving political servants.

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