A home of one's own: So good only the rich need apply

Slowly – but sooner than you may think – this country, so proud to be a nation of home owners, is turning into a nation of renters.

Perversely, it’s happening because we value home ownership so highly. And we’ve never much worried about what happens to those who don’t make it onto the home owners’ merry-go-round.

Historically, the reason we want so much to own the home we live in is security of tenure. We don’t want to be beholden to a landlord deciding whether we stay or must go.

We don’t want to live in a place where someone else decides if we can have a pet, whether we can knock a nail into a wall, whether the place needs a coat of paint, or when they’ll get around to fixing the leaky toilet.

That’s always been the chief reason for wanting to own the place you live in. What’s changed is that a second motivation has become more prominent in our minds: homes turn out to be a good investment, a good place to put your savings and watch them grow.

Whereas the value of shares goes up and down with the vagaries of the sharemarket, the price of homes just keeps going up and up. (As we’re seeing now, that’s not quite true, but we still believe it.)

And because home ownership is such a national priority, it comes with many exemptions. When we decided to start taxing capital gains in the mid-1980s, we exempted the family home. And, unlike other assets, the home you own is largely ignored when assessing your eligibility for the age pension.

Any savings I invest in making my principal residence bigger and better won’t be subject to gains tax, as most other investments would.

Actually, homes are such a good investment, why don’t I invest in more than one? I’ll have to pay gains tax when I sell, but this time I’ll get a tax deduction on the mortgage interest I pay.

And naturally, being a home owner with a big investment, I’ll make sure the local council knows how opposed I am to people building those terrible high-rises anywhere near my place.

See what happens? The more benefits we attach to home ownership and the more people want to own a house or three, the more they bid up the price of houses. That makes being on the home owners’ merry-go-round an ever-better investment, but that much harder for others to climb aboard.

The more we favour home owners, the more we disadvantage renters. The more we encourage multiple home owning by those who can afford it – which most rich countries stopped doing long ago – the more unaffordable buying your first home becomes.

But not to worry. I’ll just give my kids a leg up in putting a deposit together. Of course, this just keeps home prices high and makes those kids without well-off parents worse off. Tough.

The other thing it does is more sharply divide Australia by making home ownership something only the well-off can afford.

Why don’t the politicians do something about it? Because that would involve reducing the privileges of existing home owners, who’d fight it all the way, led by real estate agents and developers.

There’s always been a minority of life-long renters but, home ownership being the national obsession it is, we’ve never worried about them. Renters have much greater legal rights in other rich countries than they do here, but that’s never bothered us. Renters, we happily assume, are just youngsters on their way to their first home.

This was never true, but it becomes more untrue as each census passes. In a major speech last week, the Grattan Institute’s Brendan Coates said “home ownership rates are falling fast, especially among the young and poor”.

Over the 40 years to 2021, home ownership rates among 25- to 34-year-olds fell from more than 60 per cent to 40 per cent. Among the lowest-paid 40 per cent of that age group, it has more than halved, from 67 per cent to 28 per cent, Coates said.

Last year’s census shows we’ve started seeing accelerating declines among middle-income households too, with noticeable falls in home ownership at all age levels, including older middle-income households.

The proportion of people who reach retirement never having been able to afford a home is increasing, as is the proportion of home owners retiring with unpaid home loans.

I wouldn’t like to be in the shoes of the 70-year-old pensioner living in a small town, who told Tenants Victoria she had to work two days a week to afford the ever-increasing rent on a granny flat in an old house.

We can keep ignoring the poor treatment of renters because they’ll soon get a place of their own, or we can take the controversial measures needed to stop housing from becoming ever-more unaffordable.

But even if we put through all the necessary changes tomorrow, we’d still end up with many more people spending most of their life as a tenant. Time we cared about renters.

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Don't worry about inflation, the punters will be made to pay for it

Our sudden, shocking encounter with high inflation has brought to light a disturbing truth: we now have a dysfunctional economy, in which big business has gained too much power over the prices it can charge, while the nation’s households have lost what power they had to protecting their incomes from inflation.

It has also revealed the limitations and crudity of the main instrument we’ve used to manage the macro economy for the past 40 years: monetary policy – the manipulation of interest rates by the central bank.

We’ve been reminded that monetary policy can’t fix problems on the supply (production) side of the economy. Nor can it fix problems arising from the underlying structure of how the economy works.

All it can do is use interest rates to speed up or slow down the demand (spending) side of the economy. And even there, it has little direct effect on the spending of governments or on the investment spending of businesses.

Its control over interest rates gives it direct influence only on the spending of households. And, for the most part, that means spending that has to be done on borrowed money: buying a home. But also, renting a home some landlord has borrowed to buy.

Get it? The Reserve Bank of Australia’s governor’s power to manipulate interest rates largely boils down to influencing how much households spend on their biggest single item of spending: housing. Because no one wants to be homeless, using interest rates to increase the cost of housing leaves people with less to spend on everything else.

This means the governor has little direct influence over big business’s ability to take advantage of strong demand to widen its profit margins. He must get at businesses indirectly, via his power to reduce their customers’ ability to keep buying their products.

Get it? Households are the meat in the sandwich between the Reserve and big business (with small business using the cover of big business’s big price hikes to sneak up their own profit margins).

Join the dots, and you realise the Reserve’s plan to get inflation down quickly involves allowing a transfer of many billions from the pockets of households to the profits of big business.

On one hand, big business has been allowed to raise its prices by more than needed to cover the jump in its costs arising from the supply disruptions of the pandemic and the Ukraine war. On the other, the loss of union bargaining power means big business has had little trouble ensuring its wage bill rises at a much lower rate than retail prices have.

So, it’s households that are picking up the tab for the Reserve’s solution to the inflation problem. They’ll pay for it with higher mortgage interest rates and rents, and a fall in the value of their homes, but mainly by having their wages rise by a lot less than the rise in their cost of living.

The RBA’s unspoken game plan is to squeeze households until demand for goods and services has weakened to the point where big business decides that raising its prices to increase its profits would cost it so many sales that it would be left worse off.

It may even come to pass that households have been squeezed so badly big businesses’ sales start falling, and some of them decide that cutting their price to win back sales would leave them better off.

In economists’ notation, maximising profits – or minimising losses – is all about finding the best combination of “p” (price) and “q” (quantity demanded).

You don’t believe big businesses ever cut their prices? It’s common for them to “discount” their prices in ways that disguise their retreat, using special offers, holding sales, and otherwise allowing a gap between their advertised price and the price many customers actually pay.

But why would that nice mother’s boy Dr Philip Lowe, whose statutory duty is to ensure that monetary policy is directed to “the greatest advantage of the people of Australia”, impose so much pain on so many ordinary people, who played no part in causing the problem he’s grappling with?

Because, as all central bankers do, he sees keeping inflation low as his central responsibility. And he doesn’t see any other way to stop prices rising so rapidly. It’s a case study in just what a crude, inadequate and blunt instrument monetary policy is.

Lowe justifies his measures to reduce inflation quickly by saying this will avoid a recession. But let’s not kid ourselves. This massive transfer of income from households to business profits will deal a great blow to the economy.

After going nowhere much for almost a decade, real household disposable income is now expected to fall for two years in a row. And who knows if there’ll be a third.

Economists have made much of the extra saving households did during the pandemic. But during Lowe’s appearance before the parliamentary economics committee on Friday, it was revealed that about 80 per cent of that extra $270 billion in saving was done by the 40 per cent of households with the highest incomes. So, how much of it ends up being spent is open to question.

The likelihood that our measures to weaken household spending will lead to a recession must be very high.

Until Lowe’s remarks before the committee on Friday, his commentary on the causes and cure of inflation seemed terribly one-sided. The key to reducing inflation was ensuring wages didn’t rise by as much as prices had, so that rising inflation expectations wouldn’t lead to a wage-price spiral.

He warned that the higher wages rose, the higher he’d have to raise interest rates. He lectured the unions, saying they needed to be “flexible” in their wage demands. You could see this as giving an official blessing to businesses resisting union pressure and granting pay rises far lower than prices had risen.

Lowe could just as easily have lectured business to be “flexible” in passing on all the higher cost of their imported inputs, when these were expected to be temporary – but he didn’t. He’s always quoting what business people are saying to him, but never what union leaders say – perhaps because he never talks to them.

But on Friday he evened up the record. “It is also important to note that, to date, the stronger growth in wages has not been a major factor driving inflation higher,” he said. “Businesses, too, have a role in avoiding these damaging outcomes, by not using the higher inflation as cover for an increase in profit margins.”

That’s his first-ever admission that, when conditions allow, business has the market power to raise its prices by more than just its rising costs. Problem is, monetary policy’s only solution to this structural weakness – caused by inadequate competitive pressure – is to keep demand perpetually weak.

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The housing dream that became a nightmare - and isn't over yet

If you think the rich are getting richer, you’re right – but maybe not for the reason you think. It’s mainly the rising price of housing, which is steadily reshaping our society, and not for the better.

We know how unaffordable home ownership has become, but that’s just the bit you can see, as the Grattan Institute’s Brendan Coates outlined in the annual Henry George lecture this week, “The Great Australian Nightmare”, a magisterial survey of housing and its many implications.

But first, let’s be clear what we mean by “the rich”. Is it those who have the most annual income, or those who have the most wealth – assets less debts and other liabilities? The two are related, but not the same. It’s possible to be “asset rich, but income poor” – particularly if you’re living in your main asset, as many oldies are.

The Productivity Commission argues that the distribution of income hasn’t got much more unequal in the past couple of decades, though Bureau of Statistics’ figures for the growth in household disposable income over the 16 years to 2019-20 seem pretty unequal to me.

They show the real income of the bottom quintile (20 per cent block) grew by 26 per cent, which wasn’t much less than for the middle three quintiles, but a lot less than the 47 per cent growth for the top quintile.

Two points. One, the top one percentile – the chief executive class – probably had increases far greater than 47 per cent, which pushed up the average increase for the next 19 percentiles.

It’s CEO pay rises that get publicised and leave many people convinced the rich are getting richer – which they are.

The other point is Coates’: if you take real household disposable income after allowing for housing costs, you see a much clearer gradient running from the lowest quintile to the highest.

The increase in the bottom quintile’s income drops from 26 per cent to 12 per cent, whereas the top quintile’s growth drops only from 47 per cent to 43 per cent.

Get it? The rising cost of housing – whether mortgage payments or payments of rent – takes a much bigger bite out of low incomes than high incomes.

“People on low incomes – increasingly, renters – are spending more of their income on housing,” Coates says.

But it’s when you turn from income to wealth that you really see the rich getting richer. Whereas the net wealth of the poorest quintile of households rose by less than 10 per cent, the richest quintile rose by almost 60 per cent.

And here’s the kicker: almost all of that huge increase came from rising property values.

Other figures show that, before the pandemic, the total wealth of all Australian households was $14.9 trillion. Within that, the value of housing accounted for nearly $10 trillion.

Over the past 50 years, average full-time wages have doubled in real terms. But house prices have quadrupled – with most of that growth over the past 25 years.

Be clear on this: research confirms that the huge increases in home prices relative to incomes in advanced economies in the post-World War II period has mainly been driven by rising land values, accounting for about 80 per cent of growth since the 1950s, on average, with construction and replacement costs increasing only at the rate of inflation.

Coates reminds us that, within living memory, Australia was a place where housing costs were manageable, and people of all ages and incomes had a reasonable chance to own a home. These days, plenty of people even on middle incomes can’t manage it.

It’s obvious that the better-off can afford bigger and better homes than the rest of us. Many probably also have an investment property or three.

But it’s worse than that. Coates says the growing divide between those who make it to home ownership and those who don’t risks becoming entrenched as wealth is passed on to the next generation.

An increasing share of our wealth is in the hands of the Baby Boomers and older generations. The swelling of our national household wealth to $14.9 trillion – largely concentrated among older groups – means there's an awfully big pot of wealth to be passed on, he says.

“Big inheritances boost the jackpot from the birth lottery. Richer parents tend to have richer children. Among those who received an inheritance over the past decade, the wealthiest 20 per cent received, on average, three times as much as the poorest 20 per cent.”

In fact, one recent study estimates that 10 per cent of all inheritances will account for as much as half the value of bequests from today’s retirees, he says.

“And inheritances are increasingly coming later in life. As the miracles of modern medicine have extended life expectancy, the age at which children inherit has increased.

“The most common age to receive an inheritance is late-50s or early-60s – much later than the money is needed to ease the mid-life squeeze of housing and children.”

Coates says large intergenerational wealth transfers can change the shape of society. They mean that a person’s economic position can relate more to who their parents are than their own talent or hard work.

Coates argues that the ever-growing unaffordability of housing caused by present policies – which politicians on both sides keep promising to fix, but never do – is not just making our society increasingly divided between rich and poor, it’s also making the economy less efficient.

In modern, service-based and information-dependent economies, “economies of agglomeration” – benefits from firms and people living and working close together – mean productivity, innovation and wages are greatest in big cities.

But if we don’t pack in enough housing, and so cause house prices to go sky high, we don’t get all the benefits. Long commutes make it harder for both parents to work. The economy becomes less “dynamic”, and productivity is slow to improve. Not smart.

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Helping the disadvantaged find jobs is now the Hunger Games

Some injustices get huge publicity, others get little attention from the media because they’re not expected to arouse much sympathy from a hard-hearted public. But I was raised in a strange religious sect whose mission was to care for the down and out.

At a time when the official unemployment rate is down to 3.4 per cent, job vacancies are at a record high and employers are crying out for more immigrant labour, there are still about a million people on unemployment benefits – JobSeeker, to use its latest euphemism – of whom three-quarters have been on benefits for more than a year.

How could this be? Well, one explanation is that the world is full of people who, unlike you and me, prefer not to work for their living. While we’re slaving away at the daily grind, they’re at the beach surfing, or sitting at home with their feet up watching daytime television, living the life of Riley on $46 a day.

Actually, it’s just going up to $48 a day. Think of it. Almost $50 a day for doing precisely nothing. While you and I are struggling with the soaring cost of living, these people don’t have a worry. There are jobs going begging, but they aren’t interested. If only we were as bone idle as them, we too could live life free of care.

That’s one explanation – one many people believe, or want to believe. The world is full of people who prefer taking it easy, so they must be forced back to work by keeping the dole low and penalising them if they don’t even bother to apply for jobs.

An alternative explanation was offered in a little-noticed speech to the jobs summit by Dr Peter Davidson, an adviser to the peak welfare body, the Australian Council of Social Service, and in a recent report by Anglicare.

The alternative explanation is that most of those who stay unemployed for long periods face serious impediments to getting a job. They have health or family problems that make it hard for them to search for a job, or limit the times when they’re available to work.

Or they’re not particularly attractive to employers. They have limited education, skills or experience, they’re too young or too old, or they don’t live where the jobs are.

And here’s the worst of it: they’ve been without a job for so long because they’ve been without a job for so long. It’s a catch-22. The longer it’s taking you to find a job, the less willing an employer is to offer you one.

The good news is that, now we’re so close to full employment – now employers can’t be so choosy – we’ve started making inroads into the backlog of long-term unemployed. But it will take a long time to shift, especially if the businesses that taxpayers pay to help them find jobs find it more profitable to waste their time and trip them up.

We all have our own mental picture of who’s unemployed. Match your picture against what Davidson told the summit: of all the people on unemployment benefits, 57 per cent are 45 or older, 40 per cent have a disability, 20 per cent have what he calls “culturally and linguistically diverse backgrounds”, 13 per cent are First Nations people and 12 per cent are sole parents, mainly women.

One reason there are a lot more long-term unemployed than there were in the old days is the decision that benefit recipients of working age – including widows, many sole parents and the less-than-fully disabled – should be on (the much lower and more tightly regulated) unemployment benefit.

At the time, those transferred to a lower benefit were to be given special help with training and job-finding. But after the Howard government abolished the Commonwealth Employment Service, and the provision of “employment services” was contracted out to charities and, increasingly, for-profit providers, their role became more about policing and punishing.

Davidson says the new Workforce Australia scheme – which is little better than the Jobactive scheme it’s replacing – is “more of an unemployment-payment compliance system than an employment service”.

It sends people out into the labour market and, when they don’t find jobs, tells them to search harder. People are told “it’s not our role to find you a job”.

It locks people into an endless cycle of make-busy activities like Work for the Dole and poor-quality training courses. It reaches less than 10 per cent of employers, and offers them little assistance.

This is confirmed by detailed research by Anglicare Australia. Director Kasy Chambers says they found that “private providers are being paid millions of dollars to punish and breach people”.

“Work for the Dole and Jobactive have repeatedly been shown to fail ... yet the people we spoke to also told us that they want to do activities that matter, and that lead them into work.”

Last word to Davidson: “This is supposed to be an employment services system, not the Hunger Games.”

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Labor's 'plan' to fix the economy has three big bits missing

If you think the jobs summit was stage-managed, you’re right. Anthony Albanese & Co got the tick for policy changes they’d always wanted to make. But the two top-drawer economists who addressed the summit – Professor Ross Garnaut and Danielle Wood, boss of the Grattan Institute – proposed three other vital matters for the government’s to-do list, which it had better get on with if it’s to manage the economy successfully.

Both wanted action on competition policy, immigration policy and fiscal (budget) policy. All of these could play an important role in making the economy less inflation-prone, achieving and retaining full employment, improving our productivity and ensuring workers get their fair share of the proceeds.

The major element in our inflation problem that no one dares to name – certainly not Reserve Bank governor Dr Philip Lowe who, in a long speech about the problem last week, didn’t find time to mention it – is the pricing power that our oligopolised economy gives our big businesses.

Much Treasury research has found that Australia’s businesses lack “dynamism”. To be blunt, they’re fat and lazy. Wood reminds us that lower levels of dynamism and innovation have been linked to a lack of competitive pressure in the economy.

“In competitive markets, excess profits should be dissipated over time as new and innovative competitors enter. But increasingly in Australia and elsewhere, we have seen the biggest and most profitable firms remain largely untroubled by new competitors,” she says.

“While being relaxed and comfortable may be profitable, it is not good for Australia’s long-term economic prospects.”

So, what should Labor do about it? “Making sure that Australia’s competition laws are fit for purpose is part of the response ... The former head of the Australian Competition and Consumer Commission, Rod Sims, has argued that the current merger laws are failing to adequately protect competition. His warnings should prompt serious thought,” Wood says.

Garnaut agrees. He says we have to think about the increasing role of “economic rents” – the ability to earn profits exceeding those needed to keep you in the business. “Productivity is reduced and the profit share of [national] income increased by monopoly and oligopoly,” he says.

The answer? “Rod Sims has drawn attention to the increasing role of oligopoly in the Australian economy, and the competition policy reforms that would reduce it.”

The point for the government to note is that, if it leaves big business’s pricing power unchecked, but restores the unions’ bargaining power, that will be a recipe for a more inflation-prone economy – and a Reserve Bank using high interest rates to keep the economy comatose.

Both Garnaut and Wood gave the highest priority to urging a lasting return to full employment and the many social and economic benefits it would bring, if the jobs market was always about as tight as it is now.

But, as Garnaut says, full employment is hard work for employers. “Many prefer unemployment, with easy recruitment at lower wages.”

Which helps explain why they’re so desperate to get the immigration flood gates reopened and flowing. They talk about shortages of skilled labour but, in truth, they’re just as keen to have less-skilled labour. High immigration is just one of the instruments from their toolbox they’ve been using to keep their labour costs low, including the cost of training workers.

But we can’t keep our gates shut forever, so what should the government do to open up without losing the benefits of full employment (including a strong incentive to train our own youngsters)?

Garnaut says immigration is much more likely to raise, rather than lower, average real wages if it is focused on permanent migration of people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian production, and cannot be provided by training Australians.

Wood says we need to fix “out-dated” skilled migration rules. “Targeting higher-wage migrants directly for both temporary and permanent skilled migration would improve the productivity of the migration system and the Australian workforce,” she says.

Which brings us to the budget. Wood says that although our response to the pandemic may now seem to have stimulated demand more than is helpful, these pressures will dissipate, “especially if the federal government and the central bank work in tandem to address strong demand, and do what is possible to boost supply”.

That’s her nice way of saying that, if the government fails to get its budget deficit down, the Reserve Bank will take interest rates higher than it would have. And she’s right, it will.

The deficit needs to come down despite Labor’s expensive – but welcome – promise to greatly increase the wage rates of the mainly female workers in aged care and other parts of the care economy.

How can this circle be squared? To Garnaut, the answer’s obvious. If the government has to do more and pay more – including on defence – it will just have to tax more.

He reminds us that “in the face of these immense budget challenges, total and federal and state taxation revenue, as a share of gross domestic product, is 5.7 percentage points lower than the developed-country average.”

And when it comes to what more the government could tax, Garnaut has some ideas. Disruption from the Russian invasion of Ukraine has given our fossil fuel companies record profits from higher coal and gas prices, while substantially lowering living standards by greatly increasing electricity prices.

Garnaut says the government shouldn’t kid itself that leaving this disparity unchallenged wouldn’t leave deep wounds in the public’s faith in government.

Introducing a tax on these windfall profits would be one solution, but I suspect he wants something more substantive. He says a significant part of the increase in the profit share of national income in recent years has come from mining.

One response would be for mine workers to get much higher wages. But, he says, miners are already paid much more than workers in other industries. So, the appropriate public policy response is a mineral rent tax – that is, a tax on the mining companies’ excess profits – which would share the benefits with all of us.

Finally, Garnaut rebukes those economists who rely on fancy calculations to tell them how low the unemployment rate can get before we have a problem with inflation. He says this is not an output from an econometric model, it’s “an observed reality”. That is, you have to suck it and see.

“Economics is less amenable than physics to definitive mathematical analysis because it is about people, whose responses to similar phenomena change over time. We build models in our minds or computers that fit observed reality at one point in time, and reality changes. Then we have to think harder about what’s going on.”

Economics is about the behaviour of people! Who knew?

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Consumers and Russians keep the economy roaring - but it can't last

They say never judge a book by its cover. Seems the same goes for GDP. This week’s figures showed super-strong growth in the three months to the end of June. But look under the bonnet and you find the economy’s engine was firing on only two cylinders.

According to the Australian Bureau of Statistics’ “national accounts”, real gross domestic product – the economy’s production of goods and services – grew by 0.9 per cent in the June quarter, and by 3.6 per cent over the year to June.

If that doesn’t impress you, it should. Over the past decade, growth has averaged only 2.3 per cent a year.

The main thing driving that growth was consumer spending. It grew by 2.2 per cent in the quarter and by 6 per cent over the year, as the nation’s households – previously cashed up by government handouts, and by most people keeping their jobs and others finding one, but prevented from spending the cash by intermittent lockdowns and closed state and national borders – kept desperately trying to catch up with all they’d been missing.

The other big contribution to growth during the quarter came from a 5.5 per cent jump in the “volume” (quantity) of our exports. Most of the credit for this goes to that wonderful man Vladimir Putin, whose bloody invasion of Ukraine has greatly disrupted world fossil fuel markets, thus greatly increasing our sales of coal and gas.

(It has also greatly increased the world prices of coal and gas and grains, causing our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – to improve by 4.6 per cent during the quarter, to an all-time high.)

But that’s where the good news stops. The other cylinders driving the economy’s engine have been on the blink. A marked slowdown in the rate at which businesses were building up their inventories of raw materials and finished goods led to a sharp slowdown in goods production.

Government spending took a breather, and an increase in business investment in new plant and equipment was offset by a fall in business investment in buildings and other construction.

And then there’s what happened to home building. Despite a big pipeline of homes waiting to be built, building activity actually declined by 2.9 per cent in the quarter and 4.6 per cent over the year.

Huh? How could that happen? Well, the builders say they couldn’t find enough building materials and tradies. Which hasn’t stopped them using the opportunity to whack up their prices. (I believe this is called “capitalism”.)

So, while we listen to lectures from the economic managers about the evil of inflation and how it leaves them with no choice but to slow everything down by jacking up interest rates, let’s not forget that the big jump in the cost of new homes and renovations has been caused by... them.

They’re the ones who, at the start of the pandemic and the lockdowns, decided it would be a great idea to rev up the housing industry, by offering incentives to people buying new houses, and by cutting the official interest rate to near zero. Well done, guys.

Speaking of higher interest rates being used to slow down the growth in demand for goods and services, the first two of the five rises we’ve had so far would have had little influence on what happened in the economy over the three months to June.

But don’t worry, they’ll have their expected effect in due course. Which is the first reason the strong, consumer-led growth we saw last quarter won’t last, even if we see more of it in the present quarter.

Another reason is that households are running on what a cook would call stored heat. During the first, national lockdown, the proportion of household disposable (after-tax) income that we saved rather than spent leapt to almost 24 per cent.

We’ve been cutting our rate of saving since then, and it’s now down to 8.7 per cent. This isn’t a lot higher than it was before the pandemic. And with the gathering fall in house prices making people feel less wealthy, it wouldn’t surprise me to see people feeling they shouldn’t cut their rate of saving too much further.

And that, of course, is before we get to the other great source of pressure on households’ budgets: consumer prices are rising faster than workers’ wages. This no doubt explains why our households’ real disposable income has actually fallen for three quarters in a row.

With businesses putting up their prices, but not adequately compensating their workers for the higher cost of living, it’s not surprising so many people are taking more interest in what the national accounts tell us about how the nation’s income is being divided between capital and labour, profits and wages.

ACTU boss Sally McManus complains that workers now have the lowest share of GDP on record. It follows that the profits share of national income is the highest on record.

What doesn’t follow, however, is that any increase in profits must have come at the expense of workers and their wages. Profits are up this quarter mainly because, as we’ve seen, our miners’ export prices are way up, and so are their profits.

No, the better way to judge whether workers are getting their fair share is to look at what’s happened to “real unit labour costs” – employers’ labour costs, after allowing for inflation and the productivity of labour (that’s the per-unit bit).

Turns out that, since the end of 2019, employers’ real unit labour costs have fallen by 8.5 per cent. If workers were getting their fair share, this would have been little changed.

Short-changing households in this way is not how you keep consumer spending – and businesses’ turnover – ever onward and upward.

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Why labour shortages can be good for you - and the economy

In Professor Ross Garnaut’s much-praised speech to last week’s jobs summit, he told a story about politicians desperately seeking workers. At about the time Anthony Albanese was in Fiji talking about recruiting nurses, the West Australian premier was in Ireland, also trying to recruit nurses.

He sought a meeting with the Irish minister for health, but without success. Why? Because the Irish minister was in Perth trying to recruit nurses.

Garnaut’s point was that, when a country underpays its nurses, it’s open to having them pinched by another, better-paying country.

But I drew a different conclusion. It’s all very well for the nation’s employers to go to Canberra complaining about the desperate labour shortage and demanding that the government lift its target for how many visas for permanent immigrants it will issue this year.

Albanese was persuaded to raise the target from 160,000 to 195,000. But when we’re short of skilled labour at the same time many other rich countries are also short, raising the target and achieving the target are two different things.

My guess is that we’ll be hearing complaints about labour shortages for years to come. And I’m not sure that will be a bad thing. Give me a choice between a jobs market that’s “tight” – as it is now – and one that’s “loose”, with high unemployment, and I know which I’d prefer.

Journalists are trained to be sceptical of claims people make. And when economists hear people complaining that they can’t get enough workers, or that there’ll be shortage of X thousand teachers/doctors/chicken sexers by the year Y, they’re more questioning than sympathetic.

For a start, some part of the worker shortages we keep hearing about is caused by people off work because of COVID. This, surely, must be a problem that will ease in coming months. For another thing, while shortages of skilled workers get the most publicity, many of the shortages are actually for relatively unskilled work as a waiter or behind a counter.

When economists hear businesspeople complaining they “can’t get the staff”, their first question is: have you tried offering a higher wage? What employers never say is “with the low wage and bad conditions I’m offering, I can’t get any takers”. Think fruit-picking.

When you hear of bosses so desperate that they’re giving their existing workers a “loyalty bonus” or offering new workers a “sign-on bonus”, remember this: paying any kind of once-off bonus is a way of avoiding granting a proper pay rise.

This means they’re not yet at desperation point. Sometimes I wonder if businesses are delaying improving pay and conditions while they increase pressure on the government to solve their problem the easier and cheaper way, by hastening the post-pandemic inflow of skilled workers on temporary visas, plus backpackers and overseas students.

But though employers have used high levels of immigration to keep wages low and reduce the need for educating and training our own young people, I doubt they’ll be able to return to that lazy, second-rate world.

Garnaut says immigration is much more likely to raise, rather than lower, average real wages if it’s focused on the permanent migration of people with genuinely scarce and valuable skills that are bottlenecks to valuable Australian production, and which cannot be provided by training Australians.

The other much-praised speech at the jobs summit came from the boss of the Grattan Institute, our top independent think tank, Danielle Wood. Garnaut and Wood had the same message: with the unemployment rate down to 3.4 per cent, we must seize this chance to return to the “full employment” Australia hasn’t enjoyed since Garnaut (and I) were growing up in the 1950s, ’60s, and early ’70s.

Wood wants achieving and maintaining full employment to be our “economic lodestar”. Already being so close to it “means that more people who want a job now have one. It means that some people otherwise at the fringes of the labour market – young people looking for their first job, people with a disability, older workers, and the long-term unemployed – are now seeing doors open in ways they haven’t in the past,” she said.

“When unemployment is low, it lowers the cost of leaving a bad job and finding a better one. This is good for productivity.

“Poor-performing businesses that survive, not on the strength of their products or services but off the back of exploiting their workers, are driven out. Investments and workers flow instead to better-run businesses.

“And when workers are harder to find, businesses have an incentive to invest in new equipment and processes, which ultimately boosts productivity and drives higher living standards,” she said.

Garnaut agrees. “Full employment is hard work for employers,” he said. “Many prefer unemployment, with easy recruitment at lower wages. Yet full employment has advantages for many employers. It brings larger and more stable demand for consumer goods and services for businesses selling in the Australian market.

“And for employers who identify as Australians, it brings enjoyment of a more cohesive and successful society.” Sounds good to me.

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Breaking news: unions play a central role, for good and ill

Welcome back to a tripartite world, where Labor has returned to power and its union mates are back inside the tent – and at last week’s jobs summit could be seen moving in their furniture. For those who don’t remember the 1983 glory days of Bob Hawke, Paul Keating, consensus, the Accord, and former ACTU secretary Bill Kelty as an honorary member of the cabinet, it will take some getting used to.

For those who’ve been watching only since the John Howard era, it may even seem unnatural. One of Howard’s first acts upon succeeding Hawke and Keating in 1996 was to delegitimise the unions.

He allowed the tripartite committees to lapse, and didn’t reappoint the ACTU secretary to the board of the Reserve Bank. I doubt if many even informal links between ministers and union leaders continued.

The Libs didn’t know the union bosses, and didn’t want to know ’em. They were the enemy – always had been, always would be. Big business bosses, on the other hand, would be privately consulted and were always welcome to phone up for a quiet word with the minister.

This, by the way, helps explain the Reserve Bank’s pro-business bias. Its board is loaded with business worthies - who are there to help keep the central bankers’ feet on the ground – and its extensive program of regular and formal “liaison” with key firms and industries, doesn’t include asking union leaders what they think’s happening.

If you wonder why Reserve governor Dr Philip Lowe’s remarks about wages can sometimes seem naive – even out of “boomer fantasy land” – it’s because he only ever hears the bosses’ side of the story. And I doubt if they ever shock his neoclassical socks by talking about how they exercise their market power.

It’s easy to justify the Liberals’ delegitimation of the unions by noting that, these days, only about 14 per cent of employees belong to a union. But if you find that argument persuasive, you’re revealing your ignorance of our wage-fixing institutions.

Most workers are subject to an industrial award, and there’s a union (and an employer or employer group) on one end of every award, and almost every enterprise agreement. In the Fair Work Commission’s annual wage review – which sets the wages of about a quarter of all employees – it’s the ACTU that stands against the employer groups arguing that times are tough, and they couldn’t possibly afford a rise of anything much.

So, to say the unions have what economists would call a giant “free-rider” problem – a lot of people happy to receive benefits without paying for them – is not to say they shouldn’t be given a seat at the table.

Liberals, business and their media cheer squad may be appalled by sanctification of the unions, but at least Labor’s making it clear it wants business to keep its seat at the table. It will be consulted. This too is Labor’s inheritance from the Hawke-Keating experience: to the extent possible, keep business on side.

The ACT’s second-biggest industry – lobbying – will be busier than ever. It’s third-biggest – consulting – not so much.

What all agreed at the summit is that Labor has taken over an economy with many structural problems that need fixing. Not the least of these is that the wage-bargaining system is broken.

What we learnt last week, from everything ministers said and from the 14-page “outcomes document” is that, in marked contrast to its predecessor, Labor does intend to fix things.

The whole summit, tripartite business is about giving all the key players a say in how things are fixed, giving them a heads-up on the government’s intentions, and an introduction to the minister. About winning support – or, at least, acquiescence – from as many of the powerful players as possible, to minimise the political risks of making changes.

Under Labor’s tripartism, the three parties aren’t equal. The government will, in the end, do what it decides to do. The unions start well ahead of business, because of their special relationship with a Labor government.

They have a further advantage over business: solidarity. The many unions are used to speaking with one, unified voice through the ACTU, whereas business fractures into big versus small, and rival employer groups. The unions know all about playing one business group off against another.

What business has to decide is whether it wants to stay in the government’s tent or walk out. Because, in business, pragmatism usually trumps idealism, my guess is that business will play ball for as long as Labor looks like staying in office.

After the summit ended, the ACTU’s statement said it had always “been clear that we need to get wages moving and increase skills and training for local workers in order for unions to support lifting skilled migration levels. We welcome that this summit has delivered those commitments.”

It was all a talk fest? No, a deal was done and that quote reveals just what the deal was. However, a big part of the business side didn’t support fixing the wage-bargaining system by returning to “multi-employer” bargaining.

What’s clear is that the government will be pressing on with some form of multi-employer bargaining. What isn’t yet clear is what that form will be. Until it’s finalised, business will be busy inside the tent pushing for whatever modifications it can get.

With Labor back in power and the unions back walking the halls of power, it’s important to understand the relationship between the two arms of the “labour movement”. Whereas the relationship between the Libs and business is quite informal, the relationship between Labor and the unions is highly formal. They’re not mates, they’re close rellos.

Historically, the unions set up the Labor Party to be their political arm. To this day, those unions that pay dues to the Labor Party still wield considerable influence over it and the members of the federal parliamentary caucus.

Labor parliamentarians are affiliated with particular unions, which gives some of the bigger unions considerable influence over preselections, on who gets to stay leader of the party, and on certain policy matters.

When Labor is in government, businesses in certain industries use their unions to get to the government. This explains why Labor governments haven’t done as much as they should to tighten up our competition law.

And whereas Howard left the Libs with a visceral hatred of industry super funds, Labor’s links with the unions – and the unions’ links with the ticket-clippers of the super industry – mean it can’t always be trusted to favour the interests of super members over super managers.

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Look up, we're on the verge of employment greatness

“Visionary” and “inspirational” aren’t words normally used about economists, but they certainly apply to Professor Ross Garnaut, of the University of Melbourne, and to his Thursday dinner speech to the jobs and skills summit. His message to Anthony Albanese is that he’s taken the helm at the worst of times. But, if he can rise to the challenge, he can lead us to the best of times.

Garnaut’s message is in two parts. First, we must stop kidding ourselves about the state of the economy and the budget. Second, we can make the seemingly impossible changes needed to gain all the material and social advantages of economic success.

First, we are kidding ourselves about how well our economy has been performing. It’s true our economy bounced back more quickly from the COVID-19 pandemic recession than did most developed economies - because our stimulus from the budget was bigger and faster.

Since then, however, Garnaut says, “we have looked ordinary in a troubled developed world”.

“We can’t turn the economy back to before the pandemic,” he says. “Even if we could, pre-pandemic conditions aren’t good enough. That’s high unemployment and underemployment and stagnant living standards.”

Recently, our problems have been compounded by the invasion of Ukraine and its disruption of global energy markets. But, unlike the Europeans and most other rich countries, Australian energy companies benefit when gas and coal prices rise.

“We are kidding ourselves if we think no deep wounds will be left in our polity from high coal and gas – and therefore electricity - prices bringing record profits for companies, and substantially lower living standards to most Australians,” he warns.

And “we have to stop kidding ourselves about the budget”. We need unquestionably strong public finances to have low cost of capital, private and public, for our transformation from fossil-fuel loser to Superpower exporter of clean energy and minerals, and to shield us from a disturbed international economy and geo-polity.

We’ve emerged from the pandemic with eye-watering public debt and large budget deficits, when high commodity prices should be driving budget surpluses.

“We talk about [the need for] much higher defence expenditure, but not about higher taxes to pay for it.

“We say we are underproviding for care and underpaying nurses, and underproviding for education and failing to adequately reward our teachers.”

The latest Intergenerational Report tells us that the ratio of over-65s to people of working age will rise by half over the next four decades, bringing higher costs and fewer workers to carry them, he says.

But, “in the face of these immense budget challenges, total federal and state taxation revenue as a share of gross domestic product is 5.7 percentage points lower than the developed-country average”.

Get it? Yet another economics professor telling us taxes must go up – not down.

The budget update issued at the start of this year’s election campaign predicted real wages would decline by 3 per cent over the two years to next June. Treasurer Jim Chalmers’ update three months later increased the decline to 7 per cent.

So, says Garnaut, “the facts have changed, and we should be ready to change our minds”. When we stop kidding ourselves, we’ll recognise the need for policies we now think impossible. That’s Garnaut’s second, more inspiring point.

“Australians accepted change that had been impossible on two earlier occasions when we faced deep problems, and responded with policy reforms that set us up for long periods of prosperity, national confidence and achievement.”

The most recent was the reform era starting in 1983. The first was postwar reconstruction of the economy in the 1940s, which was followed by a quarter of a century of full employment and rising incomes.

Back then, the Curtin and Chifley governments were determined Australians would not return to the high unemployment and economic insecurity of the interwar years.

“The 1945 white paper on full employment was premised on the radical idea that governments should accept responsibility for stimulating spending on goods and services to the extent necessary to sustain full employment ...

“This would achieve the highest possible standards of living for ordinary Australians.”

The Menzies Liberal government’s political success – it stayed in power for 23 years – “was built on full employment, helped by Menzies insulating policy from the influence of political donations to an extent that is shocking today”.

Garnaut says he grew up in a Menzies world of full employment. (So did I, as it happens.)

The authors of the white paper wondered how low the rate of unemployment could fall before it caused high or accelerating inflation. They were surprised to find it fell to below 2 per cent, and stayed there for two decades without a problem.

It’s tempting to think that, with all the problems of controlling inflation and decarbonising the economy, this brush with our glorious past will soon disappear, and we’ll be back to the 5 to 6 per cent unemployment we’ve learnt to think is the best we can do.

But Garnaut’s inspiring vision is that, with the right, seemingly impossible policy changes, we can complete the return to a fully employed economy and stay there, reaping its many material and social benefits.

In the world he and I grew up in, “workers could leave jobs that didn’t suit them and quickly find others – often moving from lower- to higher-productivity firms. Employers put large efforts into training and retraining workers.

“Labour income was secure and could support a loan to buy a house. Businesses that could not afford rising wages closed and released their workers into more productive employment.”

Steadily rising real wages encouraged firms to economise in their use of labour, which lifted productivity.

Sounds worth striving for, to me.

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Summit consensus: everyone wins some, loses some

In the consensus spirit of dear departed Bob Hawke, Anthony Albanese is hoping it will be all sweetness and light at this week’s jobs and skills summit. And, to give them their due, the industrial parties have been doing their best, looking to realise John Howard’s maxim: “the things that unite us are greater than the things that divide us”.

The ACTU has issued a joint statement with the peak small business organisation expressing their agreement to “come together to explore ways to simplify and reduce complexity within the industrial relations system”.

The ACTU has also issued a joint statement with the Business Council – representing the nation’s biggest companies – and the two biggest employer groups. They all agree that federal and state governments should try harder and spend a lot more money fixing the almighty mess they’ve made of what they call “vocational education and training” but is actually what’s left of TAFE.

And the ACTU and the Business Council have issued a joint statement with the peak community welfare organisation, the Australian Council of Social Service, agreeing that the guiding framework of the summit should be “achieving and sustaining full employment”.

The Hawke government’s consensus summit succeeded because it sought a comprehensive, grand bargain in which each side gained something it wanted, while giving up things the others wanted.

Of course, no one knew more about hammering out a deal between warring parties than Hawke. I hope Albanese can rise to the occasion because, underneath all the smiling goodwill, the parties’ objectives in attending the summit seem diametrically opposed.

The main thing the unions want is a return to industry-wide, or at least multi-employer, wage bargaining because, under enterprise-level bargaining, they’ve lacked the industrial muscle to achieve decent pay rises. In contrast, the Business Council is desperate for a surge in migration to fill the present record number of job vacancies. Why? So big business doesn’t have to pay higher wages to attract the workers they need.

The council agrees that enterprise bargaining is broken, but what it means is that its members are finding it too hard to use the bargaining system to get their workers to agree to changes in the work they do in return for a pay rise.

Almost to a person, the nation’s economists are strong supporters of high levels of immigration. But the Economic Society of Australia’s recent survey of 50 top economists suggests their support has become more qualified.

Asked which of the policies likely to be discussed at the summit they considered to be of most benefit to Australians, only about a third picked “migration”, whereas almost two-thirds picked “education and skills”.

Independent economist Saul Eslake said he was “absolutely not an advocate of reducing our immigration intake” but he “didn’t think we should revert to being as reliant on it as a substitute for doing a better job of equipping those who are already here with the skills which will be required to obtain secure employment and decent wages in the years ahead”.

“Australia’s education system – at all levels – is increasingly failing to equip Australians with the skills required for the jobs of both today and the future,” he said. “As a result of the shortcomings in our education and training systems, we have become increasingly reliant on immigration to deliver skilled workers.”

Well, that’s one way to look at it. I think businesses have tolerated governments’ dismantling of higher education because, as part of their mania for lowering labour costs, they’ve found it easier and cheaper to import the already-trained labour they need.

Professor Sue Richardson, of Flinders University, said she thought that “judicious migration is very beneficial to the economic and social life of Australia”.

But we’ve “relied much too heavily on migration as a solution to any labour supply problem”. This “enables employers and our skills-development system to avoid a close examination of why we do not generate the skills that we need, and what needs to be done to ensure that we do”.

It seems the government is working towards increasing our immigration targets to please business and ease labour shortages, but in return for greater business support for technical training. And for higher wage rates for skilled workers on temporary visas, to limit the scope for undercutting the wages of local workers.

But Eslake suspects immigration may not return to pre-pandemic levels, at least not as quickly as widely assumed. I do too.

As for the wage-fixing arrangements, I think that’s what the ACTU will take away from the summit. Something has to be done to reduce the power imbalance between employers and employees, if the economy is to thrive.

It turns out enterprise bargaining suits big business, but not small business. The unions and the small business peak body have already agreed to explore a move to multi-employer bargaining.

With industry bargaining, firms don’t have to worry about agreeing to higher wages than their competitors are paying. You’d think that, in time, the nation’s big businesses would also see this advantage.

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Jobs summit: shut up those playing the productivity three-card trick

Anthony Albanese and his ministers are keen to ensure this week’s jobs and skills summit doesn’t degenerate into the talk fest the opposition is predicting it will be. Well, one way to avoid much hot air is to shut up people playing the usual three-card trick on productivity.

The truth is there’s a lot of muddled and dishonest talk about the relationship between wages and productivity. Much of this comes from the employer lobby groups, which will spout any pseudo-economic nonsense that suits their goal of keeping wage growth as low as possible.

But they get too much comfort from econocrats who think that if you know what economics 101 teaches about how demand and supply interact, you know all you need to know about how all markets work, including the labour market.

As former top econocrat Dr Michael Keating, an economist specialising in the labour market, has explained, “the authorities’ model, which assumes perfect competition, constant returns to scale and neutral technological progress, implies that real wages can be expected to grow at the same rate as [labour] productivity, neither more nor less, making it look as if the collapse in productivity growth explains the collapse in wages growth”.

So when workers complain about the lack of growth in real wages, the employers’ professional apologists reply that real wages haven’t grown because the productivity of labour hasn’t improved. If only the unions would co-operate in efforts to improve productivity, wages would grow, as sure as night follows day.

But the supposed magical mechanism by which productivity improvement flows inexorably to real wages is refuted by the summary statistics quoted in Treasury’s issues paper for the summit. We’re told that, though productivity improvement has slowed, we’ve still achieved growth averaging 1 per cent a year since 2004.

But we’re also told that “real wages have grown by only 0.1 per cent a year over the past decade, and have declined substantially over the past year”. Not much automatic flow-through there.

Which brings us to another thing that’s being fudged in the present debate. You sometimes hear spruikers for the employers implying you need productivity improvement to justify even a rise in nominal wages.

But productivity is a “real” – after-inflation – concept. For the benefit from national productivity improvement to be shared fairly between capital and labour – employers and employees – it has to increase wages over and above inflation.

Here, however, is where we strike another difficulty. There used to be tripartite consensus – business, workers and government – that wages should always keep up with prices. Cuts in real wages were needed only to correct a period where real wage growth had been excessive – that is, exceeding productivity improvement.

Right now, however, the opposite is the case. Real wages were long falling short of what productivity improvement we were achieving before the present surge in prices left wage rates far behind. Even with the labour market so tight, workers simply haven’t had the industrial muscle to achieve wage rises commensurate with the leap in prices.

And now, while businesses show little restraint in passing their higher imported input costs through to higher retail prices, while adding a bit for luck, the great and good – read business and the econocrats – have agreed that the quickest and easiest way to get inflation down is for the nation’s households to pay the price.

A big fall in real wages squares the circle. Business has passed on its costs – and then some – and the economic managers have redeemed their reputations and got the inflation rate falling back. What’s not to like?

Well, we’ve solved the problem by allowing a big cut in real household income. It’s likely businesses will feel adverse effects as households see no choice but to tighten their belts. And I imagine some workers, consumers and voters will be pretty upset, concluding that the economy certainly isn’t being run for their benefit.

In effect, Treasury’s issues paper says forget the present disaster and look to the future. We can get real wages growing again – an election promise - as soon as we get productivity up.

Well, no we can’t. The paper’s claiming that, contrary to the experience of the past decade, improved productivity automatically flows through to real wages. And even if that were true, it assumes workers are innumerate, and won’t know that future real gains in wages must first make up for previous real losses. It’s the productivity three-card trick.

Meanwhile, business and the econocrats’ self-serving expedience, in deciding that the punters should pay for a problem they did nothing to cause, has created the climate for radical reform of the wage-fixing system: a return to industry bargaining.

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Don't expect great productivity if we give business an easy ride

An unwritten rule in the economic debate is that you can say whatever you like about the failures of governments – Labor or Liberal; federal or state – but you must never, ever criticise the performance of business. Maybe that’s one reason we’re getting so little productivity improvement these days.

One reason it’s unwise to criticise big business is that it’s got a lot of power and money. It can well defend itself but, in any case, but there’s never any shortage of experts happy to fly to its defence, in hope of a reward.

But the other reason is the pro-business bias built into the standard demand-and-supply, “neoclassical” model burnt into the brains of economists. It rests on the assumption that market economies are self-correcting – “equilibrating” - and so work best when you follow the maxim “laissez-faire” – leave things alone.

So if markets don’t seem to be going well, the likeliest explanation is that intervention by governments has stuffed them up. Business people always respond rationally to the incentives that governments create, so if what business is doing isn’t helpful, it must be the government’s fault.

In theory, economists know about the possibility of “market failure”, but many believe that, in practice, such failures are rare, or of little consequence.

All this explains why almost all discussion of our poor productivity performance assumes it must be something the government’s doing wrong, which needs “reforming”. You’ll see this mentality on display at next week’s jobs and skills summit.

Which is surprising when you remember that, for the most part, productivity improvement – producing more outputs of goods and services from the same or fewer inputs of raw materials, labour and physical capital – occurs inside the premises of businesses, big or small.

Fortunately, one person who understands this is the new assistant treasurer, Dr Andrew Leigh, a former economics professor, who this week used the Fred Gruen lecture at the Australian National University to outline recent Treasury research on the “dynamism” of Australian businesses – how good they are at improving their performance over time.

The news is not encouraging. One indicator of dynamism is job mobility. When workers switch from low-productivity to high-productivity firms, they earn a higher wage and make the economy more efficient.

The proportion of workers who started a new job in the past quarter fell from 8.7 per cent in the early 2000s to 7.3 per cent in the decade to the end of 2019.

Another indicator of dynamism is the “start-up rate” – the number of new companies being set up each year. It’s gone from 13 per cent in 2006 to 11 per cent in 2019.

Over the same period, the number of old companies closing fell from 10 per cent to 8 per cent. So our firms are living longer and getting older.

The neoclassical model assumes a high degree of competition between firms. It’s the pressure from competition that encourages firms to improve the quality of their products and offer an attractive price. It spurs firms to develop new products.

Competition encourages firms to think of new ways to produce their products, run their businesses and use their staff more effectively, Leigh says.

“In competitive industries, companies are forced to ask themselves what they need to do to win market share from their rivals. That might lead to more research and development, the importation of good ideas from overseas, or adopting clever approaches from other industries.

“Customers benefit from this, but so too does the whole economy. Competition creates the incentive for companies to boost productivity,” he says.

As Leigh notes, the opposite to competition, monopoly, is far less attractive. “Monopolists tend to charge higher prices and offer worse products and services. They might opt to cut back on research, preferring to invest in ‘moats’ to keep the competition out.

“If they have plenty of cash on hand, they might figure that, if a rival does emerge, they can simply buy them out and maintain their market dominance. Monopoly [economic] rents lead to higher profits – and higher prices.”

Taken literally, “monopoly” means just one seller, but economists use the word more broadly to refer to just a few big firms - “duopoly” or, more commonly, “oligopoly”.

One indicator of the degree of “market power” – aka pricing power – is how much of a market is controlled by a few big firms. At the start of this century, the market share of the largest four firms in an industry averaged 41 per cent. By 2018-19, it had risen to 43 per cent. So across the economy, from baby food to beer, the top four firms hold a high and growing share of the market.

And the problem’s even greater when you remember that the rival firms often have large shareholders in common. For instance, the largest shareholders of the Commonwealth Bank are Vanguard and Blackrock, which are also the largest shareholders of the three other big banks.

But the strongest sign of lack of competition is the size of a company’s “mark-up” – the price it charges for its product, relative to its marginal cost of production. In the textbook, these mark-ups are wafer thin.

Treasury estimates that the average mark-up increased by about 6 per cent over the 13 years to 2016-17. This fits with the trend in other rich economies. And the increase in mark-ups has occurred across entire industries, not just the market leaders.

It seems that rising market power has reduced the rate at which labour flows to its most productive use, which in turn has lowered the rate of growth in the productivity of labour by 0.1 percentage points a year, according to Leigh’s rough calculations.

If so, this would explain about a fifth of the slowdown in productivity improvement since 2012. Lax regulation of mergers and takeovers has allowed too many of our big businesses to get fat and lazy, even while raising their prices and profits. But don’t tell anyone I said so.

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Welcome to the job, Treasurer. Rather you than me

Very occasionally, some poor misguided letter-writer suggests to my boss that I’d make a better treasurer than the incumbent. I’m flattered, of course, but it’s never been a job I’ve lusted after. Nor do I delude myself I’d be much good at it. And that goes double for the present incumbent, Jim Chalmers.

I wouldn’t want to be in his shoes (especially not with people like that grumpy old bugger Gittins offering a critique of my every move).

When, within days of taking up the job, Chalmers declared the budget situation was “dire”, people thought he was just softening us up. But I suspect it had finally dawned on him (with a little help from his new treasury advisers) just what an unhygienic sandwich he’d promised to eat: the more so because he’d played his own part in making such a meal of it.

Chalmers’ problem comes in two parts. First, he inherited an almighty mess from Scott Morrison and Josh Frydenberg. They hadn’t exactly tidied the place up before leaving.

Justifiably, they’d racked up huge additional government debt to tide us through the worst of the pandemic, and now the economy was growing strongly. But they were still looking at a decade or more of budget deficits continuing to increase the debt.

It was a problem they’d think about when and if they were re-elected. Meanwhile, nothing mattered more that avoiding doing anything that could cost them votes.

All this we knew before the election. What was less obvious were the many stopgap measures they’d used to hold back the growth in government spending, building up a dam that would inevitably burst.

The stopgaps included making oldies wait many months for a homecare package, making people wait months for a visa, keeping the unemployed below the poverty line and thinking of excuses to suspend their payments.

And that’s before you get to the various, hugely expensive problems with the National Disability Insurance Scheme – problems that can’t be solved by telling the disabled to like it or lump it.

The Morrison government’s projections of continuing budget deficits assume those dams will never overflow. Much of the deficit is explained by the continuing cost of the Morrison government’s already legislated stage-three tax cut in July 2024, which the Parliamentary Budget Office now estimates will have added almost a quarter of a trillion dollars to our deficit and debt by 2032-33.

The second element of Chalmers’ budget problem is that, as part of its small-target strategy for finally winning an election, Labor promised never to do anything anyone anywhere would ever dislike.

When it came to the budget, while banging on about our trillion-dollar debt, they painted themselves into a corner by promising not to do what they’d need to do to stop adding to it. Not to rescind the stage-three tax cut, nor do anything else to increase taxes apart from a tax on multinational companies. (Talk about pie in the sky: make the wicked foreigners pay their fair whack and all our problems are solved without any pain.)

In theory, eliminating the budget deficit is easy. Just slash government spending to fit. All you’d have to do is, say, suspend indexation of the age pension, or cut grants to the states’ public hospitals and schools (while taking care not to touch private hospitals and schools).

In practice, making cuts sufficient to fill the gap is politically impossible. It’s true the government is busy reviewing all their predecessor’s spending, looking for waste and extravagance. But all that’s likely to achieve is to make room for their own new spending promises.

As several former top econocrats have told me, what’s needed to eliminate the deficit is to increase tax collections by about 4 per cent of gross domestic product – about $90 billion a year. See what I mean about Labor boxing itself in?

One thing that wasn’t clear before the election was the full extent of our problem with inflation, even though the Reserve Bank did increase interest rates a fraction during the campaign.

It’s made the need to reduce the budget deficit more pressing because the more the government reduces its own stimulus of the economy, the less the Reserve has to increase interest rates to get inflation down.

And the less rates rise, the less the risk that – as has happened so often in the past – the Reserve’s efforts to reduce inflation send us into recession. One of the side-effects of recession would be to increase deficit and debt greatly.

After his “dire” remark, I expected to see Chalmers edging quietly towards a door marked Sorry About That, and preparing a Keynes-like speech about how “when the facts change, I change my promises”.

But so far, he seems still to be painting himself into the corner. Apparently, keeping promises, no matter how ill-judged and overtaken by events, is more important to Labor than managing the economy well or even avoiding becoming a one-term government.

I’d never seen Chalmers and his boss as martyrs to the cause of Unbroken Promises.

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Housing own goal worsens our inflation problem

A key part of the economic response to the pandemic was to rev up the housing industry. It’s boomed and now it’s busting. What’s been achieved? Mainly, a big, self-inflicted addition to our inflation problem.

That, and a lot of recent first-home buyers now getting their fingers burnt. Well done, guys.

It’s not a crime to be wise after the event. Indeed, it’s a crime not to be. As we all know, you learn more from your mistakes than your successes.

We have much to learn from our mishandling of the economic aspects of the pandemic. Because we had no experience of pandemics, our mistake was to treat the lockdowns as though they were just another recession. Turned out they’re very different.

Because downturns in home building and house prices often lead the economy into recession, then a recovery in home building leads it out, the managers of the macroeconomy assumed it would be the same this time.

The federal government offered HomeBuilder grants to people ordering new homes or major alterations. The state governments offered stamp duty concessions to first-home buyers, provided they were buying new homes.

But the doozy was the Reserve Bank’s decisions to cut the official interest rate from 0.75 per cent to 0.1 per cent, and then cut the base rate for 3- and 5-year fixed-rate mortgages.

By the end of last year, according to the Bureau of Statistics, the median house price in Sydney and Melbourne had jumped by more than 40 per cent. In the following quarter, it fell by 7 per cent in Sydney and 10 per cent in Melbourne. By all accounts, it has a lot further to fall.

Turning to building activity, we’ve seen a surge in the number of new private houses commenced per quarter, which jumped by two-thirds over the nine months to June 2021. Then it crashed over the following nine months, to be up only 14 per cent on where it was before the pandemic.

It’s no surprise commencements peaked in June 2021. Applications for the HomeBuilder grant closed 14 days into the quarter.

But to commence building a house is not necessarily to complete it a few months later. The real value of work done on new private houses per quarter rose by just 15 per cent over the nine months to June 2021. Nine months later, it was up 12 per cent on where it was before the pandemic.

For the most part, the home building industry kept working through the two big lockdowns. It seems that, between them, the nation’s macro managers took an industry that was plugging along well enough, revved it up enormously, but didn’t get it building all that many more houses, nor employing many more workers.

Perhaps it soon hit supply constraints – shortages of building materials and suitable labour. I don’t know if the industry was lobbying governments privately for special assistance, or whether it didn’t have to. Maybe pollies, federal and state, just instinctively rushed to its aid.

But I wonder if the builders didn’t particularly want to get much bigger. There are few industries more cyclical than home building. Builders are used to building activity going up and down and prices doing the same.

When demand is weak, they try to keep their team of workers and subbies together by cutting their prices, maybe even to below cost. Then, when demand is strong, they make up for it by charging all the market will bear.

It’s the height of neoclassical naivety to think it never crosses the mind of a “firm” existing outside the pages of a textbook that manipulating supply might be a profitable idea.

So maybe the builders found the thought of increasing their prices more attractive than the thought of building a bigger business to accommodate a temporary, policy-caused surge in demand.

They may have taken a lesson from those property developers with large holdings of undeveloped land on the fringes of big cities. Dr Cameron Murray, a research fellow in the Henry Halloran Trust at Sydney University, has demonstrated that the private land-bankers limit the regular release of land for development in a way that ensures the market’s never flooded and prices just keep rising.

So, back to our inflation problem. Whenever people say the recent huge surge in prices is caused largely by overseas disruptions to supply, which can’t be influenced by anything we do, and will eventually go away, the econocrats always reply that some price rises are the consequence of strong domestic demand.

That’s true. As I wrote last week, it seems clear many of our businesses – big and small – have used the cover of the big rises in the cost of their imported inputs to add a bit for luck as they pass them on to consumers.

But I saved for today the great sore thumb of excess demand adding to the price surge: the price of building a new home (excluding the cost of the land) or major renovations. This accounted for almost a third of the rise in the consumer price index in the June quarter, and jumped by more than 20 per cent over the year to June.

The price of newly built homes has a huge weight of almost 9 per cent in the CPI’s basket of goods and services, making it the highest-weighted single item in the basket. This implies that new house costs have added almost 2 percentage points of the total rise of 6.1 per cent.

When the econocrats worry about the domestic contribution to the price surge, they never admit how much of that problem has been caused by their own mishandling of the pandemic.

Indeed, when people argued that the main thing further cutting interest rates would achieve would be to increase house prices, the Reserve was unrepentant, arguing that raising house prices and demand for housing was one of the main “channels” through which lower rates lead to increased demand.

But the crazy thing is, this strange way of using the cost of a new dwelling to measure the cost of housing for home-buyers – which, I seem to recall, was introduced in 1998 after pressure from the Reserve – exaggerates the true cost for people with mortgages, especially at times like these.

Few people ever buy a new dwelling and, even if they do, rarely pay for it in cash rather borrowing the cost. This is one reason the bureau doesn’t regard the CPI as a good measure of the cost of living, but does publish separate living-cost indexes for certain types of households.

Ben Phillips, of the Centre for Economic Policy Research at the Australian National University, has used the bureau’s living-cost indexes to calculate that about 80 per cent of households had a living cost increase below the CPI’s rise of 6.1 per cent. The median (typical) increase over the past year was 4.7 per cent.

What trouble the econocrats get us into when they use housing as a macro managers’ plaything.

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Good news: why our low unemployment rate will last

Nobody’s noticed, but something really good has come out of the upheaval of the pandemic: more than 100,000 people who’d spent ages searching for a job without success, finally found one. The benefit to them – and the economy – will last a long time.

When I say nobody noticed, I mean no economist or econocrat. The person first to notice was a former economics writer for this august organ, now economics editor for The Conversation website, Peter Martin.

Because no one had experienced a pandemic, and because it was feared initially that the disruption to the economy would be much greater than it proved, both the Reserve Bank, with its cuts to interest rates, and the government, with its spending and tax cuts, responded to the need for lockdowns by giving a huge boost to demand.

The authorities responded as though the lockdowns were an ordinary recession, not something much more short-term and limited to particular parts of the economy. The economy bounced back strongly after each of the two lockdowns.

So, the surge in demand for goods and services led to a surge in demand for workers to produce them. Adding to the demand for workers were the high levels of absenteeism caused by the virus.

Normally, much of this increased demand for workers would have been satisfied by bringing in workers from abroad. This time, however, our borders were closed. Worse, we’d sent home many overseas students and backpackers.

So what happened? If they wanted more staff, employers were obliged to be less choosy about the workers they hired.

Some people in the pool of unemployment get to find a job and escape the pool after only a few weeks. Others take a lot longer. And the harsh truth is that the longer it takes you to find a job, the less likely an employer is to want you.

Employers think, “if no other employers have wanted you, why should I risk it?” It’s as though the longer you stay in the pool, the further down you sink until eventually, you get stuck in the mud at the bottom.

The Bureau of Statistics defines “long-term” unemployment as having been jobless for a year or more. The number of long-term unemployed always rises greatly in the years following a normal recession.

That’s because the normal pattern is for unemployment to shoot up at the start of the recession, but then take six or seven years to come back down.

Among the greatest victims of recessions are students who have the misfortune to be leaving education at the time. Economists say such unfortunates get “scarred” by the long delay in finding an appropriate job. Research shows it can take them up to 10 years to get their careers going properly.

But though Treasury economists feared the pandemic would leave many young people scarred, it didn’t happen because the “coronacession” proved so short and sharp.

Martin is the first person to shout that, over the year to June, the number of long-term unemployed fell from 218,200 to 130,100. And then to join the dots.

Over the 14 months to June, the fall’s even bigger: 125,000 – almost 1 per cent of the labour force.

This week, we learnt that the unemployment rate has fallen to 3.4 per cent, its lowest in almost 50 years. For the sceptics who think this a fudge, at 6 per cent the rate of underemployment is its lowest in more than 30 years.

This isn’t surprising since 98 per cent of all the extra jobs created since March 2020 have been full-time – suggesting the labour shortage has prompted employers to turn many part-time jobs into full-time.

Since March 2020, the rate of youth unemployment (people aged 15 to 24) has fallen from 11.6 per cent to 7 per cent. And you’d expect the labour shortage to have increased the labour-force participation of older workers, as employers encouraged them keep working or switch to part-time rather than retire.

All this is more than just good news for the people who’ve finally been able to find jobs, move from part-time to full-time, or keep working despite getting older.

It has important implications for the economy’s prospects, and for its ability to achieve lower rates of unemployment before this causes wage inflation to take off. By changing so many people’s category from unemployable to actually employed, it’s increased the effective supply of homegrown labour.

By getting 125,000 long-term unemployed back into the working world, it’s lowered the floor under the unemployment rate by about 1 percentage point. So even if the economy turns down in coming months or years, the unemployment peak, however high, is likely to be about 1 percentage point lower than it otherwise would have been.

It gets us closer to a level of full employment that makes more sense to an ordinary person who thinks full employment surely must mean unemployment close to zero.

It means a rare conjunction of circumstances – strong demand while the economy was closed to imported labour - has brought about a structural change in our labour market that makes nonsense of economists’ conventional estimates of our NAIRU - the “non-accelerating-inflation” rate of unemployment.

When the Morrison government decided to spend big in the 2021 budget to improve its political chances, the econocrats decided to make a virtue of necessity by moving to what I call Plan B: keep stimulating demand to get unemployment so low that employers would have to bid wages up to get all the workers they needed.

This week’s news that wage growth over the year to June has soared to the frightening rate of 2.6 per cent suggests that Plan B hasn’t been a roaring success, and certainly isn’t a reason to worry that labour shortages will lead to wage growth that threatens our return to low inflation.

But the econocrats could claim credit for an unintended consequence of Plan B: it’s helped bring about a long-term reduction in the rate of unemployment.

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I foresee a world where workers gain the upper hand

Former NSW premier Neville Wran was the first politician – but far from the last – to say the election would be about “jobs, jobs, jobs”. That line captured perfectly one of the great economic certainties of our age: you can never, ever have enough jobs to go around.

That’s what most of us think, and the reason we think it is that it’s been true for the past 50 years. That’s how long it’s been since we had a rate of unemployment so low no one worried much about it.

But, as my colleague Jessica Irvine reminded us only yesterday, at 3.5 per cent, unemployment is at its lowest in almost 50 years.

To put it more positively, at more than 64 per cent, the proportion of the working-age population with a job is higher than it’s ever been. If you don’t find that gratifying news, there’s something wrong with you.

At present, we have a record number of unfilled job vacancies, about as many as we have unemployed workers. (Of course, not all the jobless have the right training – or live in the right part of the country – to fill those vacancies.)

Now, you can argue this happy outcome is just a temporary consequence of the pandemic. For two years, the official interest rate was almost zero, and governments – federal and state – were spending like wounded bulls.

So we had a huge increase in the demand for labour, but at a time when there was a two-year ban on imported workers. Little wonder employment grew strongly, vacancies shot up and employers complain incessantly about skill shortages.

You can also argue that, now our borders have reopened, our normal high inflow of foreign students, backpackers and skilled workers on temporary visas will resume, and the jobs market won’t stay nearly so tight.

Then you can argue that it only needs Reserve Bank governor Dr Philip Lowe to step too hard on the interest-rate brakes and we – as with many other developed economies – will be plunged into recession and rising unemployment.

You can argue all that. But I think these short-term factors are hiding deeper, longer-term trends that have brought us to a turning point. We’re going from never having enough jobs available for people to fill, to never having enough people available to fill all the jobs.

And here’s the bonus: if I’m right, we’ll be going from insecure jobs and stagnant wages to much higher wages and bosses falling over themselves to attract and retain the workers they need.

Business people are nothing if not opportunistic. When workers are plentiful, they pick and choose and make demands. But when workers are hard to find, they become wonderful people whose only concern is their workers’ welfare.

The first factor that’s working to turn the tables is the ageing of the population: more oldies leaving the workforce than youngsters joining it. Fertility has fallen below the replacement rate of 2.1 kids per woman.

For many years we’ve sought to slow population ageing by maintaining one of the advanced economies’ highest rates of immigration, with an emphasis on young, skilled workers.

Skilled immigration is also used to keep downward pressure on wage rates. With the pandemic receding, big business is desperate for high immigration to resume ASAP. And the Albanese government is likely to oblige.

But setting high immigration targets is one thing; attaining them is another. These days, migrants come mainly from developing countries. But all the other rich countries have an ageing problem, so we’ll be competing against them for takers.

China’s population is also ageing rapidly. Our intake of foreign students – some of whom are allowed to stay on – has been reduced by our falling out with China, but has always been a temporary play while Asia’s emerging economies get their universities going.

The final factor that will keep the demand for workers growing faster than the supply is the way the rich economies are becoming service economies, much of which represents the growth of the “care economy”.

Australia has already reached the point where 80 per cent of our production and 90 per cent of our employment is from the services sector. The thing about services is that they’re mainly delivered by people. As the Productivity Commission has noted, it’s much easier to use machines to replace people in farming, mining and manufacturing than it is in the services sector.

As people become old, they need more services – from doctors, nurses, paramedics and age care workers. All these people require education and training – by more services-sector workers.

Have you noticed all the stories lately about shortages of teachers, GPs, hospital workers and, before that, aged care and childcare workers? We’re going to get them all from overseas? I doubt it.

I noticed a tweet from an economics professor: “‘skill shortage’ = wages too low to attract workers”.

Get it? If we want all these people, we’ll have to pay them a lot more than we do now – and treat them a lot better.

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Inflation psychology: firms charge what they can get away with

Economists think inflation is all about economics. What they don’t know is that it’s also about psychology. But Reserve Bank governor Dr Philip Lowe shows a glimmer of understanding when he refers not to “inflation expectations” but to “inflation psychology”.

Notorious for their “physics envy” – where the world works according to known and unchanging laws, so everything can be reduced to mathematical calculation – economists think changes in prices are determined by the interaction of the “laws” of supply and demand.

This is true, but far from the whole truth. Especially for the prices set in the jobs market – aka wages – where this simple “neoclassical” analysis almost always gives wrong answers.

Economists’ first attempt at a less mechanical approach to the relatively modern problem of inflation – a continuing rise in the general level of prices – came from Milton Friedman and another Nobel laureate’s realisation of the important role played by people’s expectations about what will happen to the inflation rate.

If it worsens significantly and this leads enough people to expect it to stay high or go higher, their expectations may lead to the higher rate becoming entrenched via a “wage-price spiral”.

That is, expectations of higher inflation tend to be self-fulfilling because people act on their expectations. If businesses expect higher price rises generally, they adjust their own prices accordingly. And workers and their unions adjust their own wage demands accordingly.

When last the rich world had a big inflation problem, in the second half of the 1970s and much of the ’80s, this theory seemed to work well, though it took years for expectations to worsen. Then it took years of keeping interest rates high and demand weak, and getting actual inflation down below 3 per cent, before expected inflation came back down.

The inflation target, of 2 to 3 per cent on average, was set in the mid-90s to help “anchor” expectations at an acceptable level.

All this is why the latest leap in inflation has led some economists to worry that, if expectations become “unanchored”, inflation may become entrenched at a much higher level.

This fear explains why many are anxious to use higher interest rates to get actual inflation back down ASAP. If falling real wages help to speed the process, so much the better.

Two small problems with this. For a start, there’s little evidence – either here or in the other rich economies – that expectations have moved up. Sensibly, everyone expects that, before too long, the inflation rate will go back to being a lot lower.

In the real world of price-setting by firms and workers, it takes a lot longer for expectations to shift prices than it does for prices in share and other financial markets to bounce around.

But the deeper reason worries about worsening expectations are misplaced is that, since this theory became so influential in the ’70s, the mechanism by which the expected inflation rate becomes the actual rate has broken down.

Businesses retain the ability to raise their prices when they decide to – and to discount those prices should they discover they’ve pushed it too far and are losing sales - but organised workers have largely lost their ability to force employers to grant higher pay rises.

If you doubt that, ask yourself why the number of days lost to strikes is now the tiniest fraction of what it was in the ’70s. We’ve seen a little strike action lately, but it’s coming almost wholly from workers in the public sector – the main part of the workforce that’s still heavily unionised.

But the breakdown of the inflation-expectations theory and the “wage-price spiral” as explanations of the relatively modern phenomenon of inflation – a continuing rise in the general level of prices – leaves us looking elsewhere for explanations.

A big part of it is the message those economists who specialise in studying competition have to give financial economists such as Lowe: you don’t seem to realise that our modern oligopolised economy gives many big businesses a lot of power over the prices they’re able to charge.

Oligopoly is about the few huge firms dominating a particular market reaching a tacit agreement to keep prices high and stable, and limit their competition for market-share to non-price areas such as product differentiation and marketing.

As former competition czar Rod Sims has pointed out, this greatly reduces the ability of higher interest rates to influence prices in many big slabs of the economy.

But if many big businesses can improve their profitability by deciding to raise their prices, why did they wait until only a year ago to decide to start whacking up them up? Because it ain’t that simple.

All firms would like to raise their prices all the time. What stops them is the knowledge that they can’t charge more than “what the market will bear”. They worry about two things: what will my competitors do? And what will my customers do?

When there’s a big rise in input costs, the knowledge that all my competitors are facing the same cost increase gives me confidence we’ll all be passing it through to the customer at the same time.

That’s why it was the sudden, large and widespread increase in the cost of imported inputs caused by the pandemic and the Ukraine war that started the latest bout of prices rises at the retail level.

But, as Lowe keeps saying, the supply chain cost increases don’t explain all the rise in retail prices. He makes the obvious point that firms find it easier to raise their prices at a time when demand is strong and people are spending. His interest-rate rises are intended to stop demand being so strong and conducive to price rises.

But the less obvious point – especially to people mesmerised by the neoclassical way of thinking – is the role of psychology. I’ve got a great justification for increasing my prices, but no one’s counting. If my costs have risen by 5 per cent, but I increase my prices by 6 per cent, who’s to know?

Sims reminds us that this is just the way firms with pricing power behave. They raise their prices and profits in ways that aren’t easy for their customers to notice.

That covers big business. In the main, small businesses don’t have much pricing power. But “what the market will bear” is greater when the media has spent months softening up their customers with incessant talk about inflation and how high prices will go.

Lowe can’t say it, but it’s not uncooperative workers that are his problem, it’s businesses using the chance to slip in a little extra for themselves.

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