Friday, August 5, 2022

If higher productivity comes from new ideas, it's time we had some

Economists and business people talk unceasingly about the crying need to improve the economy’s productivity, but most of what they say is self-serving and much of it’s just silly. Fortunately, this week’s five-yearly report on the subject from the Productivity Commission, The Key to Prosperity, is far from silly, and might just stand a chance of getting us somewhere.

It’s the first of several reports and, unlike the tosh we usually get, it’s not selling any magic answers. Business people mention productivity only when they’re “rent-seeking” – asking the government for changes that will make it easier to increase their profits without them trying any harder.

Their favourite magic answer is to say that if only the government would cut the tax paid by companies and senior executives, this would do wonders for productivity.

As for the econocrats, too often they see it as a chance to advertise the product they’re selling: “microeconomic reform” – by which they usually mean reducing government intervention in markets.

A lot of people think wanting higher “productivity” is just a flash way of saying you want production to increase. Wrong. The report makes it clear that improving productivity means producing more outputs, but with the same or fewer inputs.

It sounds like some sort of miracle, and it is pretty amazing to think about, but it happens all the time.

Another mistake is to think that wanting to increase productivity is the bosses’ way of saying they’re going to make us work harder. No, no, no. As the report repeats, productivity comes from working smarter, not harder or longer.

In response to the scientist-types who keep repeating that unending economic growth is physically impossible, and then wondering what bit of this the economist-types don’t get, the report says that “while economic growth based solely on [increased] physical inputs cannot go on forever, human ingenuity is inexhaustible”.

Get it? Economic growth doesn’t come primarily from cutting down trees and digging stuff out of the ground – and the scientists are right in telling us we must do less despoiling of the environment, our “natural capital” – it comes overwhelmingly from using human ingenuity to think of ways to produce more with less.

That’s why the report says improved productivity is “the key to prosperity” and is based on “the spread of new, useful ideas”.

To be more concrete, productivity is improved by people thinking of ways to improve the goods and services we produce, ways to make the production process less wasteful – more efficient – and thinking up goods and services that are entirely new.

This gives us a mixture of novel products, improved quality and reduced cost.

Over the past 200 years, since the start of the Industrial Revolution, the productivity of all the developed economies has improved by a few per cent almost every year. In our case, over the past 120 years the economic output of the average Australian is up seven-fold, while hours worked has consistently fallen.

Trouble is, the miracle of productivity improvement has been a lot less miraculous in recent times. Over the past 60 years, our productivity improved at an average rate of 1.7 per cent a year. Over the decade to 2020, it “slowed significantly” to 1.1 per cent a year.

The report is quick to point out that much the same has been happening in all the rich countries. (It does note, however, that the level of our productivity is now lower than it was compared with the levels the other rich countries have achieved.)

This is significant. It suggests that whatever factors have caused our productivity performance to fall off are probably the same as those in the other rich economies. But as yet, none of them has put their finger on the main causes of the problem.

If they’re still working on the answers, so are we. So the report focuses on thinking about what may be causing the problem and where we should be looking for answers. Remember, this is just first of several reports.

So, unlike the rent-seekers and econocrats, it’s offering no magic answers. But it does come up with a good explanation for at least part of the productivity slowdown: for most of the past two centuries, one of the main ways we’ve produced more with less is by using newly invented “labour-saving equipment” to replace workers with machines in farming, mining and then manufacturing.

The quantity of goods we produce in those industries has never been greater, but the number of people employed to produce it all is a fraction of what it once was. And this accounts for a huge proportion of the productivity improvement we’ve achieved since Federation.

Because producing more with less makes us richer, not poorer – increases our real income – total employment has gone up rather than down as we’ve spent that extra income employing more people to perform all manner of services – from menial to hugely skilled.

So successful have we (and all the rich economies) been at shifting workers from making goods to delivering services that the service industries now account for about 80 per cent of all we produce and about 90 per cent of all employment.

See the problem? In the main, services are delivered by people. So the economy’s now almost completely composed of industries where it’s much harder to improve productivity simply by using machines to replace workers. It’s far from impossible, but it’s much harder than on a farm, mine site or factory.

That’s the more so when you remember that two of the biggest service industries are health and social assistance, and education and training.

It’s pretty clear that, if we’re going to get back to higher rates of productivity improvement, we’ll have come up with some new ideas on how to make the service industries more productive, without diminishing quality. That’s what comes next in the Productivity Commission’s series of reports.

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Wednesday, August 3, 2022

A damaged environment leads to an unlivable economy

Economists are paid to worry about the economy, which they usually define fairly narrowly. And, like all specialists, they tend to overemphasise what they know so much about and underrate everything else.

Karl Marx usually gets the credit for saying that, in the economy, “everything’s connected to everything else”. The most conservative economist would agree. The economy is circular because what’s an expense to you, is income to me.

But what applies inside the economy applies equally outside it. Everything inside what we call the economy is connected to everything outside it. What is outside it? The rest of the world – the natural world.

The “economy” sits inside what we call “the environment”. Without the environment, there wouldn’t be an economy. Humans wouldn’t be here, and we wouldn’t need one.

When you step back from our daily preoccupations – at the minute, inflation and interest rates – the bigger picture reveals that economic activity – producing and consuming goods and services – mainly involves doing things to the natural environment: we clear the forest to grow food, scar the countryside to mine minerals, which we manufacture into a thousand kinds of machines.

As we get more prosperous, the population grows, our towns and cities get bigger and we clear more forest to build more houses, roads, highways and bridges. We pull more fish from the sea. We move around a lot. And we power it all by digging up fossil fuels and burning them.

As the population’s grown, but more particularly as consumption per person has multiplied, we’ve done more and more damage to the environment.

But here’s the trick: we’ve hit the environment so hard, it’s started punching back.

That’s why the most important economic event of recent times is not the latest rise in interest rates, it’s last month’s State of the Environment report – whose release was delayed until we found a government with the courage to break the bad news.

The report’s significance is not only its rollcall of how much damage we’ve done so far, but its account of the way that damage is damaging the humans who’ve done it.

We’ve been damaging the environment in many ways – loss of habitat and species, introduction of invasive animals and plants, pollution and waste disposal, salinity and other damage to soil and waterways, overfishing – but the greatest single source of damage, of course, is climate change.

The five-yearly report brings the bad news that climate change is compounding all the other problems. And whereas previous reports warned of future damage from climate change, this one shows it’s already happening – and getting worse.

It documents the extreme floods, droughts, heatwaves, storms and bushfires that have occurred across Australia in the past five years. The immediate effects have been millions of animals killed and habitats burnt, enormous areas of reef bleached, and people’s livelihoods and homes lost.

But there are many longer-term effects still to play out. Extreme conditions put immense stress on species already threatened by habitat loss and invasive species. An extreme heatwave in 2018, for example, killed 23,000 spectacled flying foxes, making them an endangered species.

Many of our ecosystems have evolved to rebound from bushfires. But now that the fires are coming more often and are more intense, the bush doesn’t have enough time to recover, which scientists expect will make it weedy – only those species that live fast and reproduce quickly will thrive.

But enough about plants and animals, what about us? While cyclones, floods and bushfires directly destroy our homes and landscapes, Professor Emma Johnston, of Sydney University, an author of the report, writes that heatwaves kill more people in Australia than any other extreme event.

Heatwave intensity has increased by a third over the past two decades. And climate change worsens air quality through dust, smoke and emissions. The Black Summer of 2019-20 exposed more than 80 per cent of our population to smoke, killing about 420 people.

As Liz Hanna and Mark Howden, of the Australian National University, remind us, clean air is just one of the “ecosystem services” the environment provides to you and me in the economy. Another is clean food. A lot of our recent complaints about the cost of living – the high cost of meat and vegetables, the mythical $10 iceberg lettuce – come from the delayed effect of the drought and the recent effect of the floods.

Yet another service is clean water. But many country towns had to truck in water during the last drought. Land clearing affects water quality. Run-off from agriculture damages water ecosystems and encourages algal bloom and species loss. More than 4 million people depend on the Murray-Darling rivers for their water, but the catchments are rated as poor or very poor.

Finally, the report reminds us that contact with (healthy) nature is associated with mental health benefits, promotes physical activity and contributes to overall wellbeing. Biodiversity and green and blue spaces in cities are linked to stress reduction and mood improvement, increased respiratory health, and lower rates of depression and blood pressure. Enjoy ’em while they last.

Read more >>

Monday, August 1, 2022

We're struggling with inflation because we misread the pandemic

It’s an understandable error – and I’m as guilty of it as anyone – but it’s now clear governments and their econocrats misunderstood and mishandled the pandemic from the start. Trouble is, they’re now misreading the pandemic’s inflation phase at the risk of a recession.

The amateurish way governments, central banks and economists have sought to respond to the pandemic is understandable because this is the first pandemic the world’s experienced in 100 years.

But it’s important we understand what we’ve got wrong, so we don’t compound our errors in the inflation phase, and so we’ll know how to handle the next pandemic - which will surely arrive in a lot less than 100 years.

In a nutshell, what we’ve done wrong is to treat the pandemic as though it’s a problem with the demand (or spending) side of the economy, when it’s always been a problem with the supply (or production) side.

We’ve done so because the whole theory and practice of “managing” the macroeconomy has always focused on “demand management”.

We’re trying to smooth the economy’s path through the ups and downs of the business cycle, so as to achieve low unemployment on one hand and low inflation on the other.

When demand (spending by households, businesses and governments) is too weak, thus increasing unemployment, we “stimulate” it by cutting interest rates, cutting taxes or increasing government spending. When demand is too strong, thus adding to inflation, we slow it down by raising interest rates, increasing taxes or cutting government spending.

When the pandemic arrived in early 2020, we sought to limit the spread of the virus by closing our borders to travel, ordering many businesses to close their doors and ordering people to leave their homes as little as possible, including by working or studying from home.

So, the economy is rolling on normally until governments suddenly order us to lock down. Obviously, this will involve many people losing their jobs and many businesses losing sales. It will be a government-ordered recession.

Since it’s government-ordered, however, governments know they have an obligation to provide workers and businesses with income to offset their losses. Fearing a prolonged recession, governments spend huge sums and the Reserve Bank cuts the official interest rate to almost zero.

Get it? This was a government-ordered restriction of the supply of goods and services, but governments responded as though it was just a standard recession where demand had fallen below the economy’s capacity to produce goods and services and needed an almighty boost to get it back up and running.

The rate of unemployment shot up to 7.5 per cent, but the national lockdown was lifted after only a month or two. As soon it was, everyone – most of whom had lost little in the way of income – started spending like mad, trying to catch up.

Unemployment started falling rapidly and – particularly because the pandemic had closed our borders to all “imported labour” for two years – ended up falling to its lowest rate since 1974.

So, everything in the garden’s now lovely until, suddenly, we find inflation shooting up to 6.1 per cent and headed higher.

What do we do? What we always do: start jacking up interest rates to discourage borrowing and spending. When demand for goods and services runs faster than business’s capacity to supply them, this puts upward pressure on prices. But when demand weakens, this puts downward pressure on prices.

One small problem. The basic cause of our higher prices isn’t excess demand, it’s a fall in supply. The main cause is disruption to the supply of many goods, caused by the pandemic. To this is added the reduced supply of oil and gas and foodstuffs caused by Russia’s attack on Ukraine. At home, meat and vegetable prices are way up because of the end of the drought and then all the flooding.

Get it? Once again, we’ve taken a problem on the supply side of the economy and tried to fix it as though it’s a problem with demand.

Because the pandemic-caused disruptions to supply are temporary, the Ukraine war will end eventually, and production of meat and veg will recover until climate change’s next blow, we’re talking essentially about prices that won’t keep rising quarter after quarter and eventually should fall back. So surely, we should all just be patient and wait for prices to return to normal.

Why then are the financial markets and the econocrats so worried that prices will keep rising, we’ll be caught up in a “wage-price spiral” and the inflation rate will stay far too high?

Short answer: because of our original error in deciding that a temporary government-ordered partial cessation of supply should be treated like the usual recession, where demand is flat on its back and needs massive stimulus if the recession isn’t to drag on for years.

If we’d only known, disruptions to supply were an inevitable occurrence as the pandemic eased. What no one foresaw was everyone cooped up in their homes, still receiving plenty of income, but unable to spend it on anything that involved leaving home.

It was the advent of the internet that allowed so many of us to keep working or studying from home. And it was the internet that allowed us to keep spending, but on goods rather than services. It’s the huge temporary switch from buying services to buying goods that’s done so much to cause shortages in the supply of many goods.

But it’s our misdiagnosis of the “coronacession” – propping up workers and industries far more than they needed to be – that’s left us with demand so strong it’s too easy for businesses to get away with slipping in price increases that have nothing to do with supply shortages.

Now all we need to complete our error is to overreact to the price rises and tighten up so hard we really do have an old-style recession.

Read more >>

The inflation fix: protect profits, hit workers and consumers

There’s a longstanding but unacknowledged – and often unnoticed – bias in mainstream commentary on the state of the economy. We dwell on problems created by governments or greedy workers and their interfering unions, but never entertain the thought that the behaviour of business could be part of the problem.

This ubiquitous pro-business bias – reinforced daily by the national press – is easily seen in the debate on how worried we should be about inflation, and in the instant attraction to the notion that continuing to cut real wages is central to getting inflation back under control. This is being pushed by the econocrats, and last week’s economic statement from Treasurer Jim Chalmers reveals it’s been swallowed by the new Labor government.

I’ve been arguing strongly that the primary source of the huge price rises we’ve seen is quite different to what we’re used to. It’s blockages in the supply of goods, caused by a perfect storm of global problems: the pandemic, the war in Ukraine and even climate change’s effect on meat and vegetable prices.

Since monetary policy can do nothing to fix supply problems, we should be patient and wait for these once-off, temporary issues to resolve themselves. The econocrats’ reply is that, though most price rises come from deficient supply, some come from strong demand – and they’re right.

Although more than half the 1.8 per cent rise in consumer prices in the June quarter came from just three categories – food, petrol and home-building costs – it’s also true there were increases in a high proportion of categories.

The glaring example of price rises caused by strong demand is the cost of building new homes. Although there have been shortages of imported building materials, it’s clear that hugely excessive stimulus – from interest rates and the budget – has led to an industry that hasn’t had a hope of keeping up with the government-caused surge in demand for new homes. It’s done what it always does: used the opportunity to jack up prices.

But as for a more general effect of strong demand on prices, what you don’t see in the figures is any sign it’s high wages that are prompting businesses to raise their prices. Almost 80 per cent of the rise in prices over the year to June came from the price of goods rather than services. That’s despite goods’ share of total production and employment being about 20 per cent.


This – along with direct measures of wage growth - says it’s not soaring labour costs that have caused so many businesses to raise their prices. Rather, strong demand for their product has allowed them to pass on, rather than absorb, the higher cost of imported inputs – and, probably, fatten their profit margins while they’re at it.

Take the amazing 7 per cent increase in furniture prices during the quarter. We’re told this is explained by higher freight costs. Really? I can’t believe it.

Nor can I believe that months of unrelenting media stories about prices rising here, there and everywhere – including an open mic for business lobbyists to exaggerate the need for price rises – haven’t made it easier for businesses everywhere to raise their prices without fear of pushback from customers.

But whenever inflation worsens, the economists’ accusing fingers point not to business but to the workers. No one ever says businesses should show more restraint, they do say the only way to fix the problem is for workers to take a real-wage haircut.

There’s no better evidence of the economics profession’s pro-business bias than its studious avoidance of mentioning the way the profits share of national income keeps rising and the wages share keeps falling.

In truth, the story’s not as simple as it looks, but it seems to have occurred to no mainstream economist that what may be happening is business using the cover of the supply-side disruptions to effect a huge transfer of income from labour to capital.

Allowing real wages to fall significantly for three years in a row – as Chalmers’ new forecasts say they will – would certainly be the quickest and easiest way to lower inflation, but do the econocrats really imagine this would leave the economy hale and hearty?

Yet another sign of economists’ pro-business bias is that so few of them know much – or even think they need to know much – about how wages are fixed in the real world. Hence all the silliness we’re hearing about the risk of lifting inflation expectations. Can’t happen when workers lack bargaining power.

You’d think an understanding of wage-fixing is something a Labor government could bring to the table. But no. All we’re getting from Chalmers is that we need to cut real wages so we can increase them later. Yeah, sure.

Read more >>

Wednesday, July 27, 2022

Inflation: small problem, so don't hit with sledgehammer

It’s an old expression, but a good one: out of the frying pan, into the fire. Less than two years ago we were told that, after having escaped recession for almost 30 years, the pandemic and our efforts to stop the virus spreading had plunged us into the deepest recession in almost a century.

Only a few months later we were told that, thanks to the massive sums that governments had spent protecting the incomes of workers and businesses during the lockdowns, the economy had “bounced back” from the recession and was growing more strongly than it had been before the pandemic arrived.

No sooner had the rate of unemployment leapt to 7.5 per cent than it began falling rapidly and is now, we learnt a fortnight ago, down to 3.5 per cent – its lowest since 1974.

You little beauty. At last, the economy’s going fine and we can get on with our lives without a care.

But, no. Suddenly, out of nowhere, a new and terrible problem has emerged. The rate of inflation is soaring. It’s sure to have done more soaring when we see the latest figures on Wednesday morning.

So worrying is soaring inflation that the Reserve Bank is having to jack up interest rates as fast as possible to stop the soaring. It’s such a worry, many in the financial markets believe, that it may prove necessary to put interest rates up so high they cause ... a recession.

Really? No, not really. There’s much talk of recession – and this week we’re likely to hear claims that the US has entered it – but if we go into recession just a few years after the last one, it will be because the Reserve Bank has been panicked into hitting the interest-rate brakes far harder than warranted.

As you know, since the mid-1990s the power to influence interest rates has shifted from the elected politicians to the unelected econocrats at our central bank. A convention has been established that government ministers must never comment on what the Reserve should or shouldn’t be doing about interest rates.

So last week Anthony Albanese, still on his PM’s P-plates, got into trouble for saying the Reserve’s bosses “need to be careful that they don’t overreach”.

Well, he shouldn’t be saying it, but there’s nothing to stop me saying it – because it needs to be said. The Reserve is under huge pressure from the financial markets to keep jacking up rates, but it must hold its nerve and do no more than necessary.

It’s important to understand that prices have risen a lot in all the advanced economies. They’ve risen not primarily for the usual reason – because economies have been “overheating”, with the demand for goods and services overtaking businesses’ ability to supply them – but for the less common reason that the pandemic has led to bottlenecks and other disruptions to supply.

To this main, pandemic problem has been added the effect of Russia’s invasion of Ukraine on oil and gas, and wheat and other foodstuffs.

The point is that these are essentially once-off price rises. Prices won’t keep rising for these reasons and, eventually, the supply disruptions will be solved and the Ukraine attack will end. Locally, the supply of meat and vegetables will get back to normal – until the next drought and flooding.

Increasing interest rates – which all the rich countries’ central banks are doing – can do nothing to end supply disruptions caused by the pandemic, end the Ukraine war or stop climate change.

All higher rates can do is reduce households’ ability to spend – particularly those households with big, recently acquired mortgages, and those facing higher rent.

The Reserve keeps reminding us that – because most of us were able to keep working, but not spending as much, during the lockdowns – households now have an extra $260 billion in bank accounts. But much of this is in mortgage redraw and offset accounts, and will be rapidly eaten up by higher interest rates.

Of course, the higher prices we’re paying for petrol, electricity, gas and food will themselves reduce our ability to spend on other things, independent of what’s happening to interest rates. It would be a different matter if we were all getting wage rises big enough to cover those price rises, but it’s clear we won’t be.

The main part of the inflation problem that's of our own making is the rise in the prices of newly built homes and building materials. This was caused by the combination of lower interest rates and special grants to home buyers hugely overstretching the housing industry. But higher interest rates and falling house prices will end that.

So, while it’s true we do need to get the official interest rate up from its lockdown emergency level of virtually zero to “more normal levels” of “at least 2.5 per cent”, it’s equally clear we don’t need to go any higher to ensure the inflation rate eventually falls back to the Reserve’s 2 to 3 per cent target range.

Read more >>

Monday, June 27, 2022

Business volunteers its staff to take one for the shareholders' team

An increase in wages sufficient to prevent a further fall in real wages would do little harm to the economy and much good to businesses hoping their sales will keep going up rather than start going down.

It’s hard enough to figure out what’s going on in the economy – and where it’s headed – without media people who should know better misrepresenting what Reserve Bank governor Dr Philip Lowe said last week about wages and inflation.

One outlet turned it into a good guys versus bad guys morality tale, where Lowe rebuked the evil, inflation-mongering unions planning to impose 5 or 7 per cent wage rises on the nation’s hapless businesses by instituting a “3.5 per cent cap” on the would-be wreckers, with even the new Labor government “bowing” to Lowe’s order that real wages be cut, and the ACTU “conceding” that 5 per cent wage claims would not go forward.

ACTU boss Sally McManus was on the money in dismissing this version of events as coming from “Boomer fantasy land”. What she meant was that this conception of what’s happening today must have come from the mind of someone whose view of how wage-fixing works was formed in the 1970s and ’80s, and who hadn’t noticed one or two minor changes in the following 30 years.

No one younger than a Baby Boomer could possibly delude themselves that workers could simply demand some huge pay rise and keep striking – or merely threatening to strike – until their employer caved in and granted it.

Or believe that, as really was the case in the 1970s and 1980s, the quarterly or half-yearly “national wage case” awarded almost every worker in the country a wage rise indexed to the consumer price index. Paul Keating abolished this “centralised wage-fixing system” in the early ’90s and replaced it with collective bargaining at the enterprise level.

John Howard’s changes, culminating in the Work Choices changes in 2005, took this a lot further, outlawing compulsory unionism, tightly constraining the unions’ ability to strike, allowing employers to lock out their employees, removing union officials’ right to enter the workplace and check that employers were complying with award provisions (now does the surge in “accidental” wage theft surprise you?) and sought to diminish employees’ bargaining power by encouraging individual contracts rather than collective bargaining.

Julia Gillard’s Fair Work changes in 2009 reversed some of the more anti-union elements of Work Choices but, as part of modern Labor’s eternal desire to avoid getting off-side with big business, let too many of them stand.

As both business and the unions agree, enterprise bargaining is falling into disuse. On paper, about a third of the nation’s employees are subject to enterprise agreements. But McManus claims that, in practice, it’s down to about 15 per cent.

All these changes in the “institution arrangements” for wage-fixing are before you take account of the way organised labour’s bargaining power has been diminished by globalisation and technological change making it so much easier to move work – particularly in manufacturing, but increasingly in services – to countries where labour is cheaper.

In the ’80s, about half of all workers were union members. Today, it’s down to 14 per cent, with many of those concentrated in public sector jobs such as nursing, teaching and coppering.

All this is why fears that we risk returning to the “stagflation” of the 1970s are indeed out of fantasy land. Only a Boomer who hasn’t been paying attention, or a youngster with no idea of how much the world has changed since then, could worry about such a thing.

The claim that Lowe has stopped the union madness in its tracks by imposing a “3.5 per cent cap” on wage rises misrepresents what he said. It ignores his qualification that 3.5 per cent – that is, 2.5 per cent as the mid-point of the inflation target plus 1 per cent for the average annual improvement in the productivity of labour – is “a medium-term point that I’ve been making for some years” (my emphasis) that “remains relevant, over time,” (ditto) and is the “steady-state wage increase”.

Like the inflation target itself, it’s an average to be achieved “over the medium term” – that is, over 10 years or so – not an annual “cap” that you can fall short of for most of the past decade, but must never ever exceed.

Supposedly, it’s a “cap” because of Lowe’s remark that “if wage increases become common in the 4 to 5 per cent range, then it’s going to be harder to return inflation to 2.5 per cent.”

That’s not the imposition of a cap – which, in any case, Lowe doesn’t have to power to do, even if he wanted to – it’s a statement of the bleeding obvious. It’s simple arithmetic.

But it’s also an utterly imaginary problem. It ain’t gonna happen. Why not? Because, as McManus “conceded”, no matter how unfair the unions regard it to force workers to bear the cost of the abandon with which businesses have been protecting their profits by whacking up their prices, workers simply lack the industrial muscle to extract pay rises any higher than the nation’s chief executives can be shamed into granting.

While we’re talking arithmetic, however, don’t fall for the line – widely propagated – that if prices rise by 5 per cent, and then wages rise by 5 per cent, the inflation rate stays at 5 per cent. As the Bureau of Statistics has calculated, labour costs account for just 25 per cent of all business costs.

So, only if all other, non-labour costs have also risen by 5 per cent does a 5 per cent rise in wage rates justify a 5 per cent rise in prices, thus preventing the annual inflation rate from falling back.

In other words, what we’re arguing about is how soon inflation falls back to the target range. Commentators with an unacknowledged pro-business bias (probably because they work for big business) are arguing that it should happen ASAP by making the nation’s households take a huge hit to their real incomes. This, apparently, will be great for the economy.

Those in the financial markets want to hasten the return to target by having the Reserve raise interest rates so far and so fast it puts the economy into recession. Another great idea.

Meanwhile, Lowe says he expects the return to target inflation to take “some years”. What a wimp.

Read more >>

Saturday, June 25, 2022

Nobbling Afterpay would stifle competition and protect bank profits

There’s nothing new about buying now and paying later. You can do it with lay-by or a credit card. But the version of it invented by Afterpay, and copied by so many rivals, is so different and so hugely popular it’s not surprising it’s raised eyebrows.

The most obvious reaction is to see it as a new way of tempting young people, in particular, to overload themselves with debt and make their lives a misery. The government should be regulating its providers to limit the harm they do.

But to see Afterpay as purely a matter of “consumer protection”, as I used to, is to miss the way this prime example of “fintech” – the use of digital technology to find new ways of delivering financial services – is subjecting the banks and their hugely overpriced credit cards to strong competition from a product many users find more attractive.

And not just that. When you think it through – as I suspect the politicians and financial regulators haven’t – you see that this new approach to BNPL – buy now, pay later – is also threatening the big profits Google and Facebook are making from their stranglehold on online advertising.

The man who has thought it through is Dr Richard Denniss, of the Australia Institute. With Matt Saunders, Denniss has written a paper, The role of Buy Now, Pay Later services in enhancing competition, commissioned by ... Afterpay.

Normally, I’m hugely suspicious of “research” paid for by commercial interests, but Denniss is one of the most original thinkers among the nation’s boring economists.

Buying something via Afterpay allows you to receive it immediately, while paying for it in four equal, fortnightly instalments over six weeks. Provided you make the payments on time, you pay no interest or further charge. The fortnightly payments fit with most people’s fortnightly pay.

If you’re late with a payment, you’re charged a late fee that varies from a minimum of $10 to a maximum of $68, depending on how much you’ve borrowed. If you don’t pay the late fee and get your payments up to date, Afterpay won’t finance any more BNPL deals until you have.

If you never get up to date, you’re not charged interest or any further late fees. Eventually, Afterpay ends its relationship with you and writes off the debt.

The individual amounts people borrow are usually for just a few hundred dollars. You can have more than one loan running at a time, but only within the credit limit Afterpay has set, and only if your existing payments are up to date.

Afterpay sets a fairly low limit initially, but increases it as you demonstrate your payment reliability.

So, what’s in it for Afterpay? It charges the shop that sold you the stuff a merchant fee of about 4 per cent of the sale price. I used to suspect they made a lot from their late fees, but these remain a small part of their total revenue, almost all of which comes from merchant fees.

Despite its huge expansion, Afterpay has yet to turn a profit, putting it in the same boat as Uber, Twitter and other digital platforms. Of late, the BNPLs have had greatly increased bad debts and the sharemarket has fallen out of love with them. This doesn’t affect Afterpay, which has been taken over by a big American fintech, Square, which has many other irons in the fire.

Obviously, Afterpay and its imitators are offering a way to BNPL that’s an alternative to a conventional credit card, which involves charging merchants a fee of a couple of per cent, and offering interest-free credit - provided you pay your balance on time and in full each month.

If you can’t keep that up – as the great majority of credit-card holders can’t – you get hit with interest on your purchases of an extortionate 20 per cent-plus. These rates haven’t changed in decades while other interest rates have fallen. That’s a sign the banking oligopoly has huge pricing power in the provision of consumer credit.

It seems clear from the declining growth in credit-card debt and the amazing popularity of Afterpay and its imitators that people are jack of credit cards and keen to shift to a less onerous form of BNPL.

Many young adults, in particular, seem to have sworn off credit cards because they’re just too tempting. Behavioural economists call this a “pre-commitment device”. The best way to ensure you don’t end up deep in ever-growing debt is not to have a credit card in the first place.

These people regard Afterpay & Co as a much less risky way to BNPL, a ubiquitous practice economists sanctify as “consumption smoothing”.

Those who want to regulate the new BNPL by stopping providers from prohibiting merchants from charging users a surcharge – the way they stopped Visa and Mastercard from banning surcharging – see this as levelling the competitive playing field between the two different forms of BNPL.

But Denniss’ insight is to point out that the two merchant fees are quite different. The credit-card merchant fee can be regarded as a transaction fee – that is, merely covering administrative costs – but in Afterpay’s case it covers much more than that, to justify its much higher cost.

What Afterpay offers is something marketers understand, but economists have yet to: better “customer acquisition”. Being able to offer free credit is one aid to acquiring customers, but Afterpay does much more to attract customers to those merchants who offer its BNPL service.

Younger consumers like the new BNPL so much they search the internet for sellers of the item they want to buy that also offer Afterpay. Afterpay uses a directory of stores on its website – and also its mobile app – to direct potential customers to participating merchants.

Afterpay also sends messages to its users advertising its merchants’ special offers and the like.

So Afterpay’s merchant fee also provides its merchants with a new form advertising, thus reducing their need for online advertising through Google or Facebook.

Afterpay is genuinely disruptive, offering users what they may justifiably regard as a better product. Regulators should think twice before they seek to discourage it by presenting customers with a misleading comparison: a merchant fee of 4 per cent versus 2 per cent.

Read more >>

Wednesday, June 22, 2022

Why interest rates are going up, and won't be coming down

It’s time we had a serious talk about interest rates. And, while we’re at it, inflation. Someone in my job knows it’s time to talk turkey when the man in charge of rates, Reserve Bank governor Dr Philip Lowe, decides to go on the ABC’s 7.30 program to talk about both.

There’s much to talk about. Why are interest rates of such interest to so many (sorry)? Why do some people hate them going up and some love it? How do interest rates and the inflation rate fit together? Why do central banks such as our Reserve keep moving them up and down? When rates go up, they normally come back down – so why won't that happen this time?

Starting with the basics, interest is the price or fee that someone who wants to borrow money for a period has to pay to someone who has money they’re prepared to lend – for a fee.

Legally, the “person” you’ve borrowed from is usually a bank, while the person with savings to lend deposits them with a bank. But economists see banks as just “intermediaries” that bring borrowers on one side together with ordinary savers on the other.

The bank charges borrowers a higher interest rate than it pays its depositors. The difference reflects the bank’s reward for bringing the two sides together, but also the risk the bank is running that the borrower won’t repay the debt, leaving the bank liable to repay the depositor.

You see from this that interest is an expense to borrowers, but income to savers. This is why there’s so much arguing over interest rates. Borrowers hate to see them rise, but savers hate to see them fall. (The media conceal this two-sided relationship by almost always treating rate rises as bad.)

Now we get to inflation. Economists think of interest rates as having two components. The first is the compensation that the borrower must pay the saver for the loss in the purchasing power of their money while it’s in the borrower’s hands. The second part is the “real” or after-inflation interest rate that the borrower must pay the saver for giving up the use of their own money for a period.

This implies that the level of interest rates should roughly rise and fall in line with the ups and downs in the rate of inflation – the annual rate at which the prices consumers pay for goods and services (but not for assets such as shares or houses) are rising.

This explains why, when the inflation rate was way above 5 per cent throughout the 1970s and ’80s, interest rates were far higher than they’ve been since.

Now it gets tricky. Central banks have the ability to control variable interest rates by manipulating what’s known confusingly as the “overnight cash rate”. This “official” interest rate forms the base for all the other (higher) interest rates we pay or receive.

The Reserve Bank uses its control over this base interest rate to smooth the ups and downs in the economy, trying to keep both inflation and unemployment low.

When it thinks our demand for goods and services is too weak and is worsening unemployment, it cuts interest rates to encourage borrowing and spending. When it thinks our demand is too strong and is worsening inflation, it raises interest rates to discourage borrowing and spending.

The pandemic and the consequent “coronacession” caused the Reserve (and all the other rich-country central banks) to cut the official interest rate almost to zero.

The economy has bounced back from the lockdowns and is now growing strongly, with very low unemployment and many vacant jobs. But now we’ve been hit by big price rises from overseas, the result of supply bottlenecks caused by the pandemic and a leap in oil and gas prices caused by the war on Ukraine, plus the effect of climate change on local meat and vegetable prices.

As Lowe explained to Leigh Sales on 7.30, these are once-only price rises and, although he expects the inflation rate to reach 7 per cent by the end of this year, it should then start falling back toward the Reserve’s target inflation rate of 2 to 3 per cent.

His worry is that the economy’s capacity to produce all the goods and services being demanded is close to running out – and already has in housing and construction. This raises the risk that the rate of growth in prices won’t fall back as soon as it should.

This is why Lowe’s started raising the official interest rate from its pandemic “emergency setting” near zero – zero! – to a “more normal setting”. Such as? To more like 2.5 per cent, he told Sales.

Why 2.5 per cent? Because that’s the mid-point of his inflation target.

Get it? Interest rates are supposed to cover expected inflation plus a bit more. Once Lowe’s able to get them back up to that level without causing a recession, they won’t be coming back down until the next pandemic-sized emergency.

A base interest rate of zero was never going to be the new normal. The nation’s saving grandparents would never cop it.

Read more >>

Tuesday, June 21, 2022

Perrottet's bold re-election bid: the world's first teal budget

A budget can tell you a lot about the government that produced it, especially a pre-election budget.

This one reveals a reformist Premier anxious to persuade us his government has reformed itself. It’s your classic, all-singing, all-dancing pre-election affair, offering increased government spending on 101 different things.

In his effort to get re-elected, Dominic Perrottet has left no dollar unturned. Enjoy, enjoy.

But recent lamentations in Canberra remind me to remind you: whoever wins the state election in March, next year’s budget won’t be nearly so jolly. If there’s bad news in the offing, that’s when we’ll get it.

For a government going on 12 years old and up to its fourth premier, this budget should be the Coalition’s swansong. But Perrottet wants us to see him as new, young, energetic and reforming.

On the face of it, proof of his reforming zeal is his controversial plan to press on with replacing conveyancing duty with an annual property tax, despite Canberra’s lack of enthusiasm for helping to fund the loss of revenue during the transition.

Most economists would loudly applaud such reform. On close examination, however, the budget’s first stage doesn’t add up to much.

Even so, let’s not forget that the desire to make their people’s lives radically better has become almost non-existent among today’s self-interested politicians.

Perrottet wants a return to co-operative federalism, and will happily work with a Labor Victorian premier and Labor prime minister to achieve it.

And the reform doesn’t stop there. This pre-election budget is also the first post-election budget following the crushing defeat of the Morrison federal government. The NSW Liberal Party, with the least to learn from Scott Morrison’s many failings, is also the one that’s learnt most.

Genuine action on climate change, measures to improve the treatment of women in the workplace and the home, promoting co-operation rather than conflict and division, increased spending on early education, childcare and hospitals, the educated talking to the educated, Perrottet’s rejection of the pork barrelling condoned by his predecessor – this budget has everything.

I give you ... Australia’s first teal budget.

Much of the credit needs to be shared with the new Treasurer, Matt Kean. He is a reforming Treasurer – with many of his predecessors’ mistakes needing reform. This budget is mercifully free of the funny-money deals that blighted so many previous efforts.

The spirit of positivity that pervades the Treasurer’s fiscal rhetoric also infects his confidence that the budget will be back to surplus in a year or three, and the debt will one day stop growing. Should this optimism prove misplaced, there’s always scope for adjustment after the election.

The government is rightly proud of all it’s done building new metros, light rail and expressways. But the Coalition’s original desire to get on with a hugely expensive transport infrastructure program while limiting the state’s debt and preserving its triple-A credit rating, led it into crazy arrangements to hide much of the debt by, for example, paying businesses such as Transurban over-the-odds to do the borrowing for it.

Now Sydney, much more than any other city, is girdled by a maze of private tollways, most with a licence to whack up the tolls quarterly or annually by a minimum of 4 per cent a year. What was that about fighting inflation and the cost of living?

This was always a way of keeping official debt down by shifting the cost onto the motorists of present and future decades.

This ill-considered mess has proved so costly to people in outer-suburban electorates that the latest “reform” is for taxpayers to subsidise the worst-affected motorists – and thereby the excessive profits granted to the tollway companies.

Another false economy was to fatten the sale price of privatised ports and electricity companies by attaching to them the right for the new owner to increase prices and profitability. This has played a small part in all the trouble we’re having now making the National Electricity Market work for the benefit of users rather than big business.

In my home town, a formerly secret deal to enhance the sale price of Port Botany is effectively preventing the Port of Newcastle from responding to the looming decline of the coal export trade by setting up a container terminal.

And all that’s before you get to the creative accounting madness of transferring the state’s railways to the still-government owned Transport Asset Holding Entity.

Perrottet, who was up to his neck in that trickery, seems to be making a better fist of Premier than treasurer. And Kean seems a better Treasurer than his many Coalition predecessors. But will that be enough to cover all the missteps of the past?

Read more >>

Monday, June 20, 2022

Economic times are tricky, but they're far from 'dire'

It’s a funny thing. The easily impressionable are packing down for imminent recession, while the economic cognoscenti are fretting that the economy is “overheating”. Unfortunately, the two aren’t as poles apart as you may think. Even so, both groups need to calm down and think sensibly.

There was much talk of recession last week as the sharemarket dropped sharply. We dropped because Wall Street dropped. It dropped because the thought finally occurred that if the US Federal Reserve whacks up interest rates as far and as fast as the financial markets are demanding, high inflation might be cured by putting the US into recession.

It’s true that when central banks try to cool an overheating economy by jamming on the interest-rate brakes, they often overdo it and precipitate a recession.

But a few other things are also true. One is Paul Samuelson’s famous quip that the sharemarket has predicted nine of the past five recessions. As the pandemic has taught us to say, it has a high rate of “false positives”. Assume that a sharemarket correction equals a recession, and you’ll do a lot more worrying than you need to.

In truth, the chances of a US recession are quite high. But another truth is that the days when a recession in the US spelt recession in Australia are long gone. Our financial markets are heavily influenced by America, but our exports and imports aren’t. Remember, during our almost 30 years without a serious recession, the Yanks had several.

China, however, is a different matter, and its continuing strength is looking dodgy. But even though a Chinese recession would be bad news for our exports, of itself that shouldn’t be sufficient to drop us into recession.

That’s particularly so because much of the blow from a drop in our mining export income would be borne by the foreigners who own most of our mining industry. It would be a different matter if modern mining employed many workers, or paid much in royalties, income tax and resource rent tax.

Remember, too, that contrary to what Paul Keating tried telling us, all recessions happen by accident. The politician who thinks a recession would improve their chances of re-election has yet to be born. And few central bank bosses think a recession would look good on their CV.

They occur mainly because an attempt to use higher interest rates to slow an overheated economy goes too far and the planned “soft landing” ends with us hitting the runway with a bump. It follows that the greatest risk we face is that the urgers in the financial markets (the ones whose decision rule is that whatever the US does, we should do) will con the Reserve Bank into raising interest rates higher than needed.

But I’m sure Reserve governor Dr Philip Lowe is alive to the risk of overdoing the tightening.

He mustn’t fall for the claim that, because a combination of fiscal stimulus and an economy temporarily closed to all imported labour has left us with a record level of job vacancies and rate of labour under-utilisation of 9.6 per cent, the economy is “red hot”.

Is it red hot when almost all the rise in prices is imported inflation caused by temporary global supply constraints? Or when the latest wage price index shows wages soaring by 2.4 per cent a year and all the Reserve’s tea-leaf reading shows wages rising by three-point-something? And (if you actually read it right, which most of the media didn’t), last week’s annual wage review awarded the bottom quarter of employees a pay rise of 4.6 per cent, not 5.2 per cent.

Is it red hot when employers are reported to be offering bonuses and non-economic incentives to attract or retain staff? That is, when they aren’t so desperate they feel a need actually to offer higher wage rates. Or is it when oligopolised businesses are still claiming they can “afford” pay rises of only 2 per cent or so and, predictably, there’s been no talk of strikes?

Is an economy “overheating” and “red hot” when real wages are likely to fall even further? That is, when the nation’s households will be forced by their lack of bargaining power to absorb much of the temporary rise in imported inflation (plus, the delayed effects of drought and floods on meat and vegetable prices)?

And, we’re asked to believe, households will be madly spending their $250 billion in excess savings despite the rising cost of living, falling real wages, rising interest rates, talk of imminent recession and falling house prices. Seriously?

No, what’s most likely isn’t a recession, just a return to the weak growth we experienced for many years before the pandemic, thanks to what people are calling “demand destruction” by our caring-and-sharing senior executive class.

Read more >>

Saturday, June 18, 2022

Why Albanese needs to protect capitalism from the capitalists

One of the first things Anthony Albanese and his cabinet have to decide is whether the government will be “pro-business” or “pro-market”. If he wants to make our economy work better for all Australians, not just those at the top of the economic tree, Albanese will be pro-market, not pro-business – which ain’t the same as saying he should be anti-business. Confused? Read on.

It’s clear Albanese wants to lead a less confrontational, more consultative and inclusive government – which is fine. He’ll bring back into the tent some groups the Morrison-led Coalition government seemed to regard as enemies: the unions, the universities and the charities.

Conversely, it’s obvious he wants to retain big business within the tent – as, of course, it always is with the Liberals. Business is so powerful the sensible end of Labor never wants to get it offside.

Trouble is, over the years in which the Hawke-Keating government’s commitment to “economic rationalism” degenerated into “neo-liberalism”, big business got used to usually getting its own way – even if the process needed to be lubricated with generous donations to party funds.

If Albanese is genuine in wanting to govern for all Australians, he’ll have to get big business used to being listened to but not blindly obeyed. Which means he and his ministers will have to resist the temptation of having the generous donations diverted in the direction of whichever party happens to be in power.

Labor could do worse than study a recent speech, Restoring our market economy to work for all Australians, by the former boss of the Australian Competition and Consumer Commission, Rod Sims. He is now a professor at the Australian National University’s inestimable Crawford School of Public Policy, home to many of the nation’s most useful former public servants.

Sims starts with an important disclaimer: “I am a strong proponent of a market economy. All the alternatives do not work well. Further, our market economy has delivered significant benefits to all Australians.

“For it to endure, however, it needs improvement. Without this, it and our society will be under threat.”

Couldn’t have said it better myself. Sometimes people criticise an institution not because they hate it, but because they love it and don’t want to see it go astray. And capitalism is too important to the well-being of all of us to be left to the capitalists.

So, what’s the problem? “Running a market economy, where companies are motivated by profit, can only work as expected if there is sufficient competition, and we don’t have this now. We currently have too few companies competing to serve customers in the markets for many products; we need policies that promote competition, not thwart it,” Sims says.

A market-based economy is one where decisions regarding investment, production and distribution to consumers are guided by the price signals created by the forces of supply and demand, he explains.

But here’s the key proviso on which the satisfactory functioning of such an arrangement is based: “An underlying assumption is that there are many suppliers competing to meet consumer demands.”

Right now, that assumption isn’t being met. Sims quotes Martin Wolf, of the Financial Times, saying “what has emerged over the last 40 years is not free-market capitalism, but a predatory form of monopoly capitalism. Capitalists will, alas, always prefer monopoly. Only the state can restore the competition we need.”

What? Wolf is some kind of socialist? Of course not. Sims puts it more clearly: “A market economy also needs the right regulation in place so that companies pursue profit within clear guardrails.” We need some changes to Australian consumer law to provide these guardrails, particularly an unfair practices provision.

Market concentration – meaning there are only a few dominant companies seeking to meet the needs of consumers in many product markets – is high in Australia. “Think banking, beer, groceries, mobile service providers, aviation, rail freight, energy retailing, internet search, mobile app stores and so much more,” Sims says.

He quotes the Harvard economist Michael Porter, a corporate strategy expert, writing as long ago as 1979 that companies achieve commercial success by finding ways to reduce competition, by raising barriers to entry by new players, by lowering the bargaining power of suppliers including their workforce [No! he didn’t include screwing their own workers, did he?] and by locking in the consumers of their products and services.

“Companies don’t want markets . . . with many suppliers all with relatively equal bargaining power,” Sims says. “Instead, what firms seek is market power where they can price, or pay their suppliers, as they want, without being constrained by other competing companies.

“They seek above-normal profits based on using some form of market power.”

This is not controversial, he says. “Every businessperson would agree. None wants to work in a competitive market where they simply seek to outperform their competitors. They want an edge from some form of market power.”

Too much market power in our economy can cause a range of harms to many Australians and to our society. “The most obvious harm is higher prices, which occur particularly when supply is limited relative to demand.

“When supply is plentiful, however, market power means pressure comes on workers and other suppliers.”

Sims points to the way the profits share of national income has been rising at the expense of the wages share. He also notes concerns about the lack of innovation in Australia, as well as our low productivity.

Guess what? When so many markets are dominated by a few big firms, the resulting lack of competitive pressure reduces the incentives to invest, create new products and do other things that increase productivity.

The message for the new government is clear: keep giving big business what it wants – weak merger and competition laws, plus prohibitions on union activity – and the economy will continue performing poorly. Profits will keep growing while household income shrinks.

And it will prove what the Liberals have always said: Labor’s no good at running the economy.

Read more >>

Wednesday, June 15, 2022

What we weren't told before the election: taxes to rise, not fall

The rule for Treasury bosses is that, as public servants, any frank and fearless advice they have about the state of the federal budget must be given only to their political masters, and only in private.

But last week the present secretary to the Treasury, Dr Steven Kennedy, used a speech to economists to deliver a particularly frank assessment of the Labor government’s budgetary inheritance.

We can be sure his remarks came as no surprise to his boss, Dr Jim Chalmers, who would have been happy to have his help to disabuse us of any delusions lingering from an election campaign which, as always, was fought in a confected fantasy-land of increased spending on bigger and better government services and lower taxes.

Surprise, surprise, the post-election truth is very different. The budget released just before the campaign began foresaw a budget deficit of a huge $80 billion in the financial year just ending, with only a trivial decline in the coming year and continuing deficits for at least another decade.

Neither side admitted to any problem with this prospect during the campaign, but Kennedy’s first bit of frankness about such a leisurely approach was to observe that “a more prudent course” would be for the budget deficit to be eliminated and turned to a surplus. (By the standards of bureaucratic reticence, this was like saying, “You guys have got to be joking”.)

Eliminating the deficit would mean adding no more to our trillion-dollar debt. Running budget surpluses would actually reduce the debt, thus leaving us less exposed should there be a threatening turn in the economy’s fortunes.

The two obvious ways of improving the budget balance are to cut government spending or to increase taxes. Some people love making speeches about the need to absolutely slash government spending, but they usually mean spending that benefits other people, not themselves.

The sad truth is that “waste and extravagance” is in the eye of the beholder. There’s always some powerful interest group on the receiving end of government spending – medical specialists, say, or the nation’s chemists – and they don’t take kindly to any attempt to slash their incomes.

The last time a serious attempt was made to cut government spending – by Tony Abbott in his first budget, in 2014 – the public outcry was so great that the Coalition beat a hasty retreat, and never tried it again.

Instead, it limited its parsimony to quietly restraining money going to the politically weak – the jobless, the public service, overseas aid – but this didn’t make a huge difference to the more than $600 billion the government spends each year.

Kennedy’s next frank observation was that, even excluding the many billions in spending related to temporarily supporting the economy during the lockdowns, government spending as a proportion of the nation’s income is expected to average 26.4 per cent over the coming decade, compared with 24.8 per cent in the decades before the pandemic.

In other words, government spending is likely to grow much faster than the economy grows, to the tune of about $36 billion a year in today’s dollars.

The new government is undertaking a line-by-line audit of all the Coalition’s “rorts, waste and mismanagement”. But, to be realistic, it’s unlikely to find much more in savings than it needs to cover its own new spending promises.

Kennedy said that most of this additional spending is driven by money going to the National Disability Insurance Scheme (by far the biggest), aged care, defence, health and infrastructure. “Further pressures exist in all these areas,” he said.

To that you can add underfunding by the Coalition in tertiary education and healthcare, plus a massive capability gap over the next 20 years or more which can only be fixed by an immediate increase in spending on defence, diplomacy and foreign aid.

Which leaves us with taxes. Higher taxes. Scott Morrison’s promise to guarantee the delivery of essential services while reducing taxes was delusional – a delusion many of us were happy to swallow.

The simple, obvious truth is that if we want more services without loss of quality, we’ll have to pay higher taxes.

Kennedy warned that the expected (but, in his view, inadequate) improvement in the budget balance over the coming decade will rely largely on higher income tax collections. “Inflation and real wages growth will result in higher average personal tax rates.”

This is a Treasury secretary’s way of saying “the plan is to let bracket creep rip”. And unless other taxes are increased, there’s “little prospect” of giving wage earners any relief via tax cuts.

“This would see average personal tax rates increase towards record levels,” he said, meaning more of the total tax burden would fall on wage earners.

The election saw both sides promising not to introduce new taxes or increase the rates of existing taxes (apart from, in Labor’s case, promising to extract more tax from multinationals).

But neither side made any promise not to let inflation push people into higher tax brackets. One way or another, we’ll be paying higher taxes.

Read more >>

Monday, June 13, 2022

Maybe Left versus Right is turning into smart versus not-so

Here’s a funny thing to think about on a holiday Monday: what if all the well-educated people voted Labor and the lowly-educated voted Liberal or National? How would that change our politics? A preposterous notion? Not as much as you may think.

As I’ve mentioned once or twice before, the great political stereotype is that the Liberals are the party of the bosses, while Labor, with its link to the union movement, is the party of the workers. So the people who own and manage the country vote Liberal, whereas the people who do as they’re told vote Labor.

This is the basis for the Liberals' instinctive confidence that they’re the natural party of government. Such belief is reinforced by their having spent far more of the past 75 years in office than their opponent has.

The better-situated, better-off suburbs in any city tend to vote Liberal, while the inner and outer, less-desirable suburbs vote Labor. Most people living in country areas and voting for the Nationals tend to be on modest incomes, similar to the stereotypical Labor voter.

The owners and managers tend to be pretty happy with the world as it is, whereas those further down the pecking order, with less wealth and less income, can always think of things they’d like to see changed. The Liberals defend the status quo, while Labor is the party of “reform”.

This is the basis for the standard perception of politics as a conflict between the privileged Right and the discontented Left.

But what if this conventional setup was changing - being undermined – before our eyes? We all know that strange things happened in last month’s federal election. As usual, we’ve tried to understand these from the top down. How the parties’ share of the national vote changed, then looking by state and even at the 151 electorates.

But Luke Metcalfe, founder of the property and data analytics consultancy, Microburbs, (and, as it happens, a nephew of mine), has done a bottom-up, more “granular” analysis.

He’s taken the Australian Electoral Commission’s voting figures by polling booth and matched them with all the detailed demographic information for corresponding small statistical areas in the 2016 census. They’re not a perfect fit, but they’re a good guide.

Metcalfe finds that “we’re seeing a continuation of the trend in the [2019] federal election, where the Coalition’s support base is shifting towards poorer, less-skilled, less-educated people born in Australia”.

When Labor lost in 2019, many people noticed the swing against Labor in regional mining seats in the NSW Hunter Valley and Central Queensland. What few noticed was the swing to Labor in many safe Liberal seats.

This time, Metcalfe says, rich, educated professionals swung 11 to 12 per cent against the Coalition, while the country’s working poor - the fifth of polling booths paying the lowest rent, earning the lowest incomes and with the least skills - swung only 3 to 4 per cent against it.

As we know, much of this shift away from the Liberals came via the teal independents in Liberal heartland seats in Melbourne, Sydney and Perth. The teal seats’ most dominant characteristic was their high levels of “educational attainment”.

Unsurprisingly, income and education are highly correlated. But Metcalfe says it’s education, not income, that’s doing the driving.

Many people think they’ve detected in recent election results a growing divide between city and country in Australia, but also in Britain and America. But maybe it’s more about the better-educated concentrating in the big cities – where the best-paying jobs are – leaving the less well-educated in outer suburbs or back in country towns, feeling the world has changed in ways they don’t like and thinking of voting One Nation.

Some political scientists think voters in the rich economies are dividing between the globalists and the nationalists. In the same vein, David Goodhart famously explained Brexit as a battle between those who could live and work “anywhere” and those who had to live “somewhere”.

But it still gets down to education and the way ever-rising levels of educational attainment - particularly among women – are remodelling the party-political landscape.

Take climate change. The better educated you are, the more likely you are to accept the science, believe we should be acting, and not be worried about either losing your job in the mine or paying a bit more for power.

Wouldn’t it be funny if the party of the workers became the party of the well-educated, while the party of the bosses became the party of the battlers?

I can’t see that happening, it’s too incongruous. There’s no way the Coalition could get enough seats without the Liberals’ leafy heartland. But it will need radical policy change to get the well-educated back into the fold, or into bed with the Neanderthal Nationals.

Read more >>

Friday, June 10, 2022

Treasury boss’s message: higher taxes the cure for debt and deficit

Anthony Albanese and his Treasurer, Dr Jim Chalmers, have inherited many problems that won’t be solved quickly or easily. Nor will they be solved without the new government being willing to persuade voters to accept the sort of tax changes no pollie wants to talk about in an election campaign.

That’s the conclusion I draw from Treasury secretary Dr Steven Kennedy’s belated annual speech to the Australian Business Economists this week.

Election campaigns are times when we hear about all the wonderful things the politicians want to do to improve the public services we get and reduce the taxes we pay. It’s after the election that pollies present the bill.

Especially when the election has changed the government. This wasn’t Chalmers bringing us the bill, it was the waiter reminding us we’d eaten quite a lot and the bill was getting pretty long.

The economic story had “shifted significantly”, Kennedy said. Inflation pressures had emerged faster and more strongly than most people expected. These were likely to persist into next year “at the very least”.

This, of course, is why the Reserve Bank has been raising the official interest rate – to eventually bring inflation back to acceptable levels.

“Interest rates are at near-record low levels and therefore highly accommodative and should normalise”, Kennedy said. In other words, they need to be increased until they’re back to more-normal levels. If so, they have a lot further to go.

But, Kennedy says that “just as fiscal [budgetary] and monetary [interest-rate] policy worked together to respond to the pandemic, they will need to work together in managing the risks to inflation and the economy more broadly”.

Ah yes, the dreaded duo, Debt and Deficit. Not a subject to be dwelt on during election campaigns, but one to return to afterwards. Presenting the bill, remember?

Chalmers is, understandably, anxious to remind us that our trillion-dollar public debt is inherited from his predecessors. What Kennedy does is implicitly confirm that the previous government’s “medium-term fiscal strategy” - to “focus on growing the economy in order to stabilise and reduce debt” - is still the go.

With an important, after-the-election qualification: “a more prudent course would be for the budget to assist more over time”.

How? We’ll get to that. But first, he gave the best explanation I’ve seen of how a government can get on top of a big debt simply by ensuring the economy grows at a faster annual rate than the rate of interest on the debt.

To “get” the explanation you have to accept one proposition that many otherwise sensible people and media commentators can’t get their head around: that the government of a nation is in a radically different position to an individual household.

Households have to repay any money they borrow sooner or later, but governments don’t. That’s because every family gets old and dies, whereas nations are a collection of many millions of households that, though the faces change, goes on forever.

For a nation, what matters is not its ability to repay the debt, but just its ability to afford the interest payments on it. As long as the nation continues to exist, it can re-borrow by issuing a new government bond to replace an old government bond as it falls due for repayment.

Kennedy explained that strong economic growth and interest rates that are low compared with what’s been normal for the past 50 years are likely to ease the burden of the debt. This is by reducing its size not in dollar terms, but relative to the size of the economy, measured by the dollar value of all the goods and services the economy produces annually (nominal gross domestic product) in coming years.

Interest payments add to the amount of debt the nation owes, but growth in the economy (nominal GDP) increases the economy’s capacity to “service” (pay the interest on) that debt. “When the economy grows quicker than the interest payments add to the debt, the debt burden will decrease,” he said.

That’s the basic mechanism all governments in all the rich countries have relied on since World War II to get on top of their debt. It’s what the Morrison government was relying on, and it will be what the Albanese government continues relying on.

But – with Treasury there has to be a but – there was a weakness in the previous government’s strategy: their projections showed the budget remaining in deficit for the next decade and, indeed, the next 40 years.

That means it wasn’t just the interest bill that was adding to the debt each year, it was also the continuing deficits.

“The current projected reduction in the debt [relative] to GDP is unusual in that it is relying solely on favourable growth and interest-rate dynamics [that the average rate of interest on the debt will rise more slowly than the rising rate of interest on the new borrowing because the average government bond takes about seven years to fall due] to reduce the ratio [of debt to GDP],” Kennedy said.

So here’s the post-election But (which, since it’s the same Treasury, would probably have happened even without a change of government): “A more prudent course would be for the budget to assist more, over time,” Kennedy said.

How? By getting the budget deficit down a lot faster than the Liberals were planning to. Maybe even by running budget surpluses for a while – which would involve repaying a bit of the debt.

Sure, but how do you get the deficit down? The government will be reviewing all the spending programs left by the Coalition, looking for savings. But what savings it finds will mainly be used to pay for Labor’s promised new spending.

So the main way to improve the budget balance will be by “raising additional tax revenues”. Kennedy implied that this would be done by reducing businesses’ and households’ tax concessions.

The next three years will be interesting.

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Wednesday, June 8, 2022

Albanese must stop government malice towards the jobless

I was chuffed on election night to hear Anthony Albanese repeat his election slogan, “No one held back and no one left behind” and his promise of “kindness to those in need”. Really? Kindness? Now that’s a first for Labor. And unimaginable from the Liberals, whose promise to give needy people “a go” was limited to those they judged to have “had a go”.

Albanese’s magnanimity was a surprise considering Labor’s only mention of our wildly generous $46-a-day unemployment benefit – JobSeeker – was an announcement that, doubtless as part of its small-target election strategy, it was abandoning its previous promise to review the payment’s adequacy.

Fortunately for those of us struggling to get by on $548 a day – $200,000 a year and above – Labor’s small-target approach also involved promising to match the Liberals’ stage-three tax cuts in 2024. So our $25-a-day tax cut is safe. That blatantly unfair and unaffordable promise hangs round Albanese’s neck like a millstone.

We’re hearing a lot lately about the need for a higher minimum wage. The basic single JobSeeker payment is just 42 per cent of the national minimum full-time wage.

Two of our leading scholars in this field, Professor Peter Whiteford of the Australian National University and Professor Bruce Bradbury of the University of NSW, calculate that, those people also eligible for the maximum rate of rent assistance get 57 per cent of the minimum wage … sorry, that was at the start of the 2000s. Now it’s down to 50 per cent.

A lot of us worry about the jump in energy costs. Those on JobSeeker won’t have a care. They get a special energy supplement of 63 to 86 cents a day.

Does it surprise you to hear that our “net replacement rate” – which compares JobSeeker with the average wage – is about the lowest in the OECD rich nations’ club? If you set the poverty line at half the median (dead middle) income, the base JobSeeker rate is two-thirds of it.

As the boss of the Australian Council of Social Service, Dr Cassandra Goldie, keeps saying, poverty in a rich country like Australia isn’t inevitable, it’s a policy choice. You can see this from the first six months of the pandemic, when the Morrison government’s policy choice was to almost double the rate of the benefit.

Allowing for those unemployed people getting a little income from casual work, the Centre for Social Research and Methods at ANU calculates that this move cut the proportion of recipients in poverty from 67 per cent to just 7 per cent.

And Anglicare found that, while it lasted, the special supplement allowed families to pay rent, access nutritious food and avoid seeking emergency relief from charities. Thank goodness a stop was put to it. Poor people getting it so easy – it’s not right!

But the meagre rate of JobSeeker is just the start of the punishment. According to recent research by ACOSS, in a typical month more than 200,000 people have their payment suspended.

This is nearly one in four of people using “jobactive” services (the private contractors who’ve taken the place of the Commonwealth Employment Service). Nearly half of these suspensions are because people can’t meet the unrealistic job search targets they’ve been set.

More than two-thirds of these people have been looking for work for more than a year. “Despite the low unemployment rate, employers are still reluctant to employ people who have been out of the paid workforce for more than 12 months, older workers, and people with disability,” Goldie says.

“Setting rigid job search targets so high – a default of 20 per month – is setting people up to fail. Unrealistic and inflexible targets have no place in employment services that are designed to help people, and they are an inconvenience to employers.”

Many people locked out of paid work long-term find themselves at the back of the job queue, not because they aren’t trying, but because many employers are still wary of giving them a chance, she says.

There are more than 850,000 people who’ve been on income-support for over a year, and there are 440,000 people aged 45 or older, 390,000 people with a disability, 120,000 sole carers for children (like Albo’s mum was) and 130,000 from Indigenous communities.

According to ACOSS’s survey, two-thirds of respondents said their payment was suspended because of errors made by employment service providers.

Why was the Morrison government so punitive? Because it was always trying to cut government spending in penny-pinching ways the public wouldn’t see. The illegal “robo-debt” exercise – where many people were falsely accused of owing the government money – was primarily about saving money.

But politicians on both sides have also been content to pander to the prejudices of voters who are happy to see people who don’t work (like they do) given a hard time. This mean-mindedness is ennobled as “mutual obligation”. It’s the antithesis of kindness.

To be fair, the new government is keeping its promise to end compulsory “income management” and the use of the cashless debit card in “selected communities”. It was thinly disguised racial discrimination.

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Sunday, June 5, 2022

Labor mustn't be panicked into doing something stupid

Who’d want to be the new Treasurer, Dr Jim Chalmers? Certainly, not me. But that won’t stop me giving him a shed-load of free advice. Starting now.

As Chalmers sees it, the economy he’s inherited is in “dire” straits. Everywhere he looks there’s another problem. First, “skyrocketing” inflation.

Second, falling real wages as “a consequence of almost a decade of the deliberate undermining of pay and job security, now coming home to roost in the form of a full-blown cost-of-living crisis”.

And third, a budget “heaving with more than $1 trillion in debt” and worse (though he doesn’t mention it), a budget projected to stay in structural deficit for as far as the eye can see, meaning the debt continues to grow in dollar terms, and falls relative to the growing size of the economy only after a delay, and only slowly.

He could have added a fourth problem: a hostile international economic environment, with a fair risk of the US falling into recession and, worse, a major trading partner – China – that’s mishandling both its response to the pandemic (think more supply-chain disruptions) and its management of the macroeconomy.

Chalmers is, of course, doing what all incoming treasurers (and chief executives) do and laying it on thick. Like Mother Hubbard, he’s discovered the cupboard is bare. Actually, he’s cleaning out the cupboards and finding all the bad stuff his predecessor hid. He’s snapping people out of the campaign fairyland, where government spending can go up while taxes go down and deficits fall.

Even so, his four big problems are real enough – and seem to be getting worse as each week passes. The latest gas crisis is a parting gift from the Liberals, arising from nine years of indecision about how the transition from fossil fuel to renewables should be managed to avoid unexpected mishaps – such as a Russia-caused leap in global fossil fuel prices.

So what should he do? Avoid being panicked by the many partisan ill-wishers and ideological barrow-pushers who would do so. He needs to think carefully about the various problems, the highest priorities, the right order in which to tackle them, their varying degrees of difficulty and urgency, and the way they interrelate - the ways he can kill two birds with one stone, or make choices to fix one problem that make another problem worse.

Chalmers should be wary of conventional thinking about problems that are of unconventional origins. Just as the “coronacession” was unlike an ordinary recession because it was caused by government-imposed restraints on the supply side rather than efforts to curb excessive demand, so he shouldn’t be using demand restraint to try to fix disruptions to supply.

Inflation problems normally arise from an overheated economy leading to excessive wage growth. The standard solution will involve cutting real wages to make labour less expensive. But we’ve had weak real wage growth for a decade.

Those ideologically opposed to fiscal stimulus tell us our stimulus has given us a red hot, inflation-prone economy – as proved by our super-tight labour market. They conveniently forget to mention that the pandemic caused us to ban all imported labour for two years, but that this supply constraint has now been lifted.

If excessive wage growth didn’t cause our high and rising prices, what did? Fiscal stimulus has caused shortages of materials and workers in housing and construction, but most of the price rises have come from external supply constraints caused by the pandemic and the war on Ukraine.

Nothing we could do can fix problems coming from the rest of the world. But we shouldn’t forget that these are once-off price increases. And those import prices will fall at some stage as pandemic disruptions are resolved and the war ends.

It’s not that simple, of course. Why not? Because our businesses don’t seem to have hesitated in passing their increased import costs through to retail prices. That’s the start not of a wage-price spiral, but price-wage spiral. And business and employer groups’ solution to the spiral is simple: allow only a token increase in wages, and inflation will come down in no time.

This is the unspoken doctrine that’s the bastard child of the economic rationalist era: give business whatever it demands and everything in the economy will be wonderful. The business lobby has become so consumed by short-sighted self-interest – so used to getting its own way – that we need a new government with the wisdom and strength to save business from its own folly.

We need a government capable of seeing what business can’t: that wages aren’t just a cost to business and an impost on profits, but also the chief source of income for the 10 million households who are the reason we have an economy and whose spending on the things our businesses produce is what generates their profits in the first place.

Screwing the workers by tolerating ever-falling real wages is a delusional way to increase profits in anything but the short term. The bigger the fall in real wages – and the government can’t stop them falling – the more Labor risks joining the US and China in recession.

This is why, in its worthy desire to keep big business in the tent, the government was wrong to ask the Fair Work Commission to increase award wages by 5.1 per cent only for “low-paid” workers – that is, only about the bottom 12 per cent of workers rather than the bottom 25 per cent.

Do you really think the 88 per cent of workers reliant on bargaining with bosses rather than a commission edict will get anything like a 5 per cent pay rise?

Former Reserve Bank governor Bernie Fraser used to say that any fool could get inflation down – all you had to do was crunch the economy. Is that what business would like? It’s certainly what the financial markets – whose model of our economy is a footnote saying “see America” – want.

As I’m sure the Reserve well understands, we need to get inflation down without causing a recession. And that means being patient about how long it takes. We were below the target range for six years; we can be above it for a few years without the sky falling.

And remember this: if we did fall into recession, the strategy of growing our way out of debt would explode. Not only would the economy be growing more slowly than the debt, the budget’s “automatic stabilisers” would reverse and the deficit would blow out, greatly increasing the debt.

On the other hand, Chalmers should be sceptical of the argument that an additional reason we need to cut the budget deficit ASAP is to reduce the need for interest rates to rise so far. Getting inflation under control is not a big ask – provided we’re patient.

The Reserve’s stated strategy is to shift the stance of monetary policy only from “emergency expansionary” to “neutral”. That is, to take its foot off the accelerator, not to jam on the brakes. This means slowly lifting the official interest rate to about 2.5 per cent, so the medium-term real interest rate is zero.

In theory, at least, this should not cause the economy to contract, nor great pain to most people with mortgages. And it would be a good thing in itself to get rates up to a level remotely approaching normal.

The real challenge for budget policy is to avoid getting us in deeper by proceeding with the stage-three tax cut in its present timing, size and form. It could be rejigged to make it more effective in relieving cost-of-living pressures for people in the bottom half.

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Friday, June 3, 2022

An economy with falling real wages can’t be “strong”

The main message from this week’s “national accounts” is that the economy isn’t nearly as Strong – Strong with a capital S – as Scott Morrison and Josh Frydenberg unceasingly claimed it was during the election campaign. In truth, it’s coming down to Earth.

According to the Australian Bureau of Statistics, real gross domestic product – the nation’s total production of goods and services – grew by 0.8 per cent during the three months to the end of March, to be up 3.3 per cent over the year.

Almost to a person, the business economists said – and the media echoed - this was “higher than expected”. But that just meant it was a fraction higher than they’d forecast a day or two before the announcement, once most of the building blocks for the figure had been revealed.

But as new Treasurer Dr Jim Chalmers has revealed, when Treasury was preparing its forecasts for the March 29 budget, it forecast growth of not 0.8 per cent for the quarter, but 1.8 per cent. Now that would have been strong.

True, if you compound 0.8 per cent, you get an annualised rate of 3.3 per cent. And that’s a lot higher than our average annual growth rate over the past decade of about 2.3 per cent.

But it’s high because the economy’s still completing its bounce-back from the two pandemic lockdowns when most people gained more income than they were allowed to go out and spend.

In other words, it’s a catch-up following highly unusual circumstances, which will stop once everyone’s caught up. It’s not an indication of what we can expect “going forward” as businesspeople love saying.

If you delve into what produced that 0.8 per cent result, you see we’re probably only a quarter or two away from returning to a much less Strong quarterly growth rate. Indeed, until we’ve fixed our problem of chronic weak wage growth, it’s likely to be quite Weak growth.

Growth during the quarter was led by a 1.5 per cent rise in consumer spending, which contributed 0.8 percentage points to the overall growth in real GDP. Pretty good, eh? Well, not really. Turns out real household disposable income actually fell by 0.9 per cent.

So the growth in consumer spending came from a 2 percentage-point fall in the rate of household saving during the quarter, to 11.4 per cent. Household saving leapt during the two lockdowns, from its pre-pandemic level of about 7 per cent.

This suggests it won’t be long before this honey pot’s been licked out. Note too, that consumer spending was very strong in the states still rebounding from last year’s lockdown – Victoria, NSW and the ACT – and particularly weak in the other states.

Why did real household disposable income fall during the quarter? Because real wages fell. The more they continue falling – as seems likely – the more continued growth in consumer spending will depend on households continuing to cut their saving. Sound sustainable to you?

The other big contributor to growth, of 1 percentage point, came from an increase in the inventories held by retailers and other businesses, caused by an easing of pandemic-related shortages of certain imported goods, including cars.

This is a sign of the economy returning to normal, but it’s a once-only adjustment, not a growth contribution that will continue quarter after quarter.

The third growth factor was a huge 2.7 per cent increase in government consumption spending, contributing 0.6 percentage points to overall growth.

Where did it come from? From increased health spending required by the Omicron variant and spending to help people affected by the floods in NSW and Queensland. Again, not something that will be happening every quarter – we hope.

With those three positive contributions adding up to a lot more than the final 0.8 per cent, there must have been some big negative contributions. Just one, actually. Net exports – exports minus imports – subtracted 1.7 percentage points.

The volume (quantity) of exports fell by 0.9 per cent, thus subtracting 0.2 percentage points from growth – mainly because the floods disrupted mineral exports.

The volume of imports jumped by 8.1 per cent, subtracting 1.5 percentage points from overall growth. Another sign of the economy returning to normal, with pandemic disruption easing and imports of cars (and their chips) resuming. Another once-off.

So, what else happened in the quarter? New home building activity fell by 1 per cent. The pipeline of new homes built up by lockdown-related government stimulus still contains homes yet to emerge, but the output has faltered because the industry’s at full capacity, with shortages of labour and materials.

Even so, with interest rates rising and house prices falling, you wouldn’t expect too many new building projects to be entering the pipeline. Housing won’t be a big part of the growth story “going forward”.

Business investment spending – mainly on plant and equipment – grew by 1.4 per cent during the quarter and by 3.6 per cent over the year. It will need to grow a lot faster than that if it’s to be a big part of the growth story.

The quarter saw the share of national income going to wages continuing to fall, while the share going to profits rose to a record high of 31.1 per cent.

On the face of it, that says the workers are being robbed. But the factors moving the respective shares are more complicated than that. For instance, all the growth in company profits during the quarter was from the mining industry. Coal, gas and iron ore commodity prices have jumped.

But a much less debatable indication that businesses are doing well at the expense of their employees comes from the 2 per cent fall in “real unit labour costs” – real labour costs per unit of production – during the quarter, and by 6 per cent since the start of the pandemic.

An economy whose strength comes from cutting its workers’ wages won’t stay Strong for long.

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Wednesday, June 1, 2022

Why Albanese will bring public servants in from the cold

The election was so much about getting rid of Scott Morrison that few but the party faithful turned to Anthony Albanese with great hope and enthusiasm. He’s not the most charismatic bloke you could meet. Yet almost everything we’ve heard from him so far has been encouraging.

From his victory speech on, he’s said everything you’d want him to say. He made a promise which, to be fair, his predecessor never made and so never broke: to govern for all Australians.

Morrison was in the divide-and-conquer mould. He was the most tribal prime minister I can remember. My tribe, your tribe; us and them; good guys, bad guys; lifters and leaners.

Kevin Rudd had to be strong-armed by his colleagues to give the job of ambassador to the US to his vanquished party predecessor, Kim Beazley, a job for which he was highly qualified.

Rudd wanted to prove his magnanimity by giving it to a Liberal worthy – a gesture that John Howard, nor his protege Morrison, would never have made. To them, the spoils of office went solely to the winners.

I remember when “jobs for the boys” was considered a strictly Labor vice. Morrison has filled the Administrative Appeals Tribunal with Liberal cronies. The Libs have pretty much appointed only people from the employer side to the Fair Work Commission. The convention used to be 50/50.

Albanese said he wanted to bring Australians together. “I want Australia to continue to be a country that, no matter where you live, who you worship, who you love or what your last name is, places no restrictions on your journey in life.”

Of course, grand election-night declarations are like New Year’s resolutions: a lot easier to make than to stick to, day after day, as old habits try to reassert themselves.

As we wonder what kind of PM Albanese will make, two things are worth remembering. First, unlike the Liberals, Labor sees itself as the unnatural party of government, the boys and girls from the wrong side of the tracks.

If the Libs have a superiority complex – if they act like they own the place and can make their own rules – Labor is the opposite. As outsiders to power, they tend to be on their best behaviour in the Big House, to worry about using the right fork.

Paradoxically, they’re more likely than the Libs to stick to the conventions rather than overturn them, more likely to consult widely – the unions come back into the tent, but business stays in – and more likely to seek, and take, advice from officials.

Second, as Julia Gillard demonstrated, prime ministers from Labor’s left faction try to prove they’re not really left-wing by being surprisingly right-wing in the policies they pursue. She was fawning towards the Americans, did too little to reverse the anti-union excesses of Howard’s WorkChoices – did someone say we had a chronic problem with weak wage growth? – and her effort to lift schools’ performance by using the publication of metrics to encourage greater competition between the public and private sectors was a faddish idea that didn’t work.

But, against those two positives, remember this. Whenever a government lowers standards, its opponents always promise to restore them. Nevertheless, the two major parties are obsessed with each other and determined the other side won’t gain an advantage.

So, the moment the new government is criticised for some behaviour and replies that it’s only what the last lot did, you’ll know the game is lost.

Recent Coalition governments have seen the public service as an enemy – the voting figures show Canberra is very much a Labor town – and have progressively cut back admin costs and public service numbers. Morrison went further, telling public servants he didn’t need their advice on policy matters. Much policy expertise has been lost in consequence – as witness, the administrative fumbling of the vaccine and RATs rollouts.

On coming to office, both Howard and Tony Abbott sacked many department heads they considered had been too close to the previous Labor government. There’s little doubt this was also intended “to encourage the others”, making them fearful of losing their own jobs should they be judged as less than fully co-operative.

Nothing could be better calculated to ensure ministers are surrounded by yes-persons. It takes a wise and strong manager to see the benefit of having around them people game to say, “Are you sure that’s a good idea, boss?” when considered necessary.

Albanese has promised not to sack any public servants, and he hasn’t so far. Replacing the head of his own department is, by modern convention, an entitlement of the new prime minister.

Politicians are prone to paranoia. Labor is right to trust the public servants. In my decades of speaking to them privately on policy issues, I can’t remember when they’ve expressed to me any criticism of government policy or lack of confidence in the government of the day. To do so would be unprofessional.

Public servants aren’t omniscient. But I’d rather have a government listening to their advice than trying to wing it.

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