The real truth on productivity: the bosses aren't trying hard enough

At last, some sense on the causes of our poor productivity performance. For ages, we’ve been told it’s the government’s fault – maybe even the voters’ fault – for failing to make economic reforms. But last week the econocrats finally set the record straight: the problem is, our businesses have stopped doing the things that make us more productive.

For about a decade, we’ve had little improvement in the economy’s productivity – its ability to produce more goods and services from an unchanged quantity of inputs of labour and capital. That is, to be a bit more efficient this year than we were last year. Most of the other rich economies have the same problem, but ours seems worse than most.

It’s by increasing our productivity that we’ve become so much more prosperous than our great-grandparents. For instance, in 1901 it took 18 minutes of the average worker’s time to afford a loaf of bread, while today it’s just four minutes.

It’s remarkable the way the nation’s economists have stayed silent while vested interests such as the (Big) Business Council have sought to use this problem to press the government for favours that would make them more profitable without having to try any harder.

Until now, and except for former top econocrat Dr Michael Keating, no economist has pointed out how far the politicking over productivity has strayed from Economics 101. To hear the rent-seekers talk, you’d think that one of the main things governments are responsible for is producing and distributing productivity.

Nonsense. Because the private sector produces the great majority of the economy’s goods and services, it’s overwhelmingly the job of businesses – big and small – to gradually increase the productivity of their activities. So, when productivity’s lagging, the first place you look is in businesses’ backyard.

Next, every high school economics student knows that the main way businesses increase the productivity of their workers’ labour is by giving them more and better machines to work with. When they remember to mention it, economists call this “[physical] capital deepening”.

So, how have we been going with increasing business investment in buildings and plant and other equipment over the past decade or so? Short answer: not well.

Really? Really? Business investment has been weak for a decade but, when you preached your last sermon on the need for greater productivity, you didn’t see a need to mention this small fact?

There’s most of the problem right there. The productivity of labour hasn’t increased much because business hasn’t been spending much on labour-saving equipment. Mystery solved.

Almost to a person, economists are great believers in high rates of immigration. Immigration, they keep telling us, is great for economic growth. It’s true. There’s no easier way to grow an economy than to increase the number of people in it.

Businesses love high immigration because it gives them a bigger market to sell to. But whether that kind of economic growth leaves the rest of us better off is a different matter. As all the economists were taught at uni but keep forgetting to mention to the punters, the claim that immigration raises our material standard of living – which is the oft-stated benefit of economic growth – comes with a big proviso.

Which is? Productivity. If you get more people, but fail to provide them with the same capital equipment as the rest of us have – extra machines for the extra workers, extra houses for the extra families, and extra roads, public transport, schools and hospitals for the extra families – everyone’s standard of living goes down, not up.

In economists’ jargon, you have to ensure immigration doesn’t cause a decline in the “capital-to-labour ratio”. As well as the spending on “capital deepening” needed to raise our productivity, you also need spending on “capital widening” merely to stop our productivity worsening.

Guess what? We’ve had years of high immigration without the increased capital spending to go with it. Part of the problem is that the level of government with control over immigration, the feds, is not the level of government with responsibility for ensuring adequate additional investment in public infrastructure, the states.

As for the additional investment in machines to cover the needs of the bigger workforce, that’s down to the nation’s businesses. Guess what? They haven’t bothered. Our ratio of capital to labour is actually a little lower than it was a decade ago.

And surprise, surprise, we’ve had little improvement in productivity over the same period. Who knew? Why didn’t somebody tell me? Well, the business lobby was busy covering its backside by blaming it all on the government. And the economists have been so busy with their maths and models that they’ve got a bit rusty on the economic basics.

But here’s the news: last week, the econocrats got their act together and showered us with much-needed sensible analysis. The Reserve Bank’s Dr Michael Plumb gave the best-written and most informative speech to come out of the Reserve in yonks. He delivered it to a meeting of the Australian Business Economists, and boy did they need the tutorial. It’s required reading.

Plumb blamed the problem on the slow improvement in the amount of (physical) capital available to each worker and, to a lesser extent, little improvement in our firms’ ability to combine labour and capital more efficiently (known to economists as “multi-factor productivity”).

As well, the Productivity Commission issued a more technical paper by Lawson Ashburner and Vincent Wong examining multi-factor productivity, Learning but not always doing. Focusing on businesses, it found that “a creeping inefficiency and failure to push the boundaries of innovation has contributed to Australia’s poor productivity performance”.

So why have our businesses done so little to improve their productivity? Rod Sims, former boss of the Australian Competition and Consumer Commission, answers the last part of the puzzle.

He says that increasing productivity is just one way for a business to increase its profits. I think our guys have found it much easier to increase their profits by using legal loopholes such as casualisation and labour hire to screw down their wage costs.

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Women still being kept in the home, but not by what you think

By MILLIE MUROI, Economics Writer

It’s a topic that, despite its horrific consequences, makes us avert our eyes, close the tab, and turn the page.

Usually, sadly, it’s only when there’s a death that readers – and the click-hungry media – pay attention. But before I lose you, I want to reassure you that it’s not all bad news. And I want you to hear from people who have defied the odds.

We already know domestic violence kills one woman every 11 days in Australia.

But for the first time, Dr Anne Summers, domestic and family violence professor at UTS, has put cold, hard numbers on the effects of domestic violence in Australia on women’s careers and how likely they are to finish their uni degrees.

When you think about it, the effect isn’t surprising. But Summers’ research exposes the gap between women who endure violence and those who don’t: it’s costing not just lives but our economy.

We’ve come a long way in getting women into work and pursuing university degrees. In 2024, three in five women were working or looking for work. Compare that to just one in three 60 years ago.

Similarly, only 8 per cent of young women had walked across the stage at a graduation in 1982. Today, that figure exceeds 50 per cent.

But those numbers should be higher, Summers says.

She looked at women born between 1989 and 1995 and found there was a nearly 15 percentage point difference between women who had experienced domestic violence and those who hadn’t when it came to the proportion who had finished a university degree by the time they hit 27.

For Laura McConnell, getting a degree was especially difficult after enduring family violence. “Even getting through required incredible resilience,” she says. “But I couldn’t afford to fail because I would have to go back to an abusive family.”

McConnell is now a co-founder of the social enterprise GoKindly, which supports women experiencing housing stress, but she left an earlier career at a big four consulting firm after she found they were unable to support her with her complex background.

“The fallout of coming from violence just follows you through your career,” she says.

While McConnell moved away from her abusive family, Summers says it’s also common for abusers, particularly partners, to prevent women from studying or cause them significant stress – a leading reason for dropping out.

“It’s no accident that employment and education, the pathway to better employment, are targeted by perpetrators,” Summers says. It’s a prime way to crush a woman’s ability to be financially self-sufficient and keep her under her partner’s thumb.

More than 280,000 women, or 5 per cent of the female population aged 18 to 64, have had a partner who has controlled or tried to control them from studying through everything from forced pregnancies to destroying school supplies, stalking them or making them feel guilty about their academic efforts.

This can jeopardise a woman’s career and financial future because a university degree increases the odds of landing a job by about two and a half times and boosts lifetime earnings by as much as 41 per cent. Abuse can also leave them saddled with student debt that they may never earn enough to repay, shrinking their borrowing power.

Endurance athlete Amanda Thompson, who runs her own financial planning business, Endurance Financial, has worked with women experiencing abuse but never thought she’d go through it herself.

Thompson endured emotional abuse for some time before an out-of-the-blue display of physical aggression ended with a triple-zero call.

But it was the year after the scars and bruises healed that was worse.

“It was a year from hell trying to run my own business and keep up with clients,” she says. “I was diagnosed with PTSD, which makes you exhausted all the time. Your body goes into spending all its energy on protecting you.”

Thompson said specialist support and counselling were key to her recovery but that there needed to be more funding for these services and more education on exit strategies.

“In my work, I’m actually getting more and more women coming to me confidentially, saying, financially, where do I need to be to leave,” she said.

Women who have endured abuse in the past five years are less likely to be working. About three-quarters were employed compared to more than four in five for women who hadn’t faced an abusive partner.

While younger women tend to pull back on the hours they work, for older women, most of the fall in employment is driven by them leaving the labour force altogether.

With 1.6 million women having experienced economic abuse by a partner since the age of 15, these proportions significantly dent the workforce.

A form of violence called “economic abuse” has an especially destructive effect. The difference in employment rates between women who have experienced it and those who haven’t is nearly 10 percentage points.

Economic abuse is when a person controls their partner through, for example, preventing a partner from going to work, making frequent disruptive phone calls to them at work, and saddling a partner with debt.

It can also include cunning tactics like hiding transport cards or keys, damaging clothing, or changing calendar appointments so that they get a reputation for being unpunctual.

When a woman stops working, it’s harder for her to plan an escape from her violent partner as she’s not likely to have enough individual income.

This leaves the affected partner tired and stressed, embarrassed from constantly being late for work, or unable to concentrate on their work.

Even if the abuse doesn’t push a woman out of work completely, one in three who experience violence while holding down a job take time off work. The likelihood increases if they have dependent children or if the violence is very frequent.

This can lead to job loss, a significant fall (averaging about 9 per cent) in the woman’s income and a lower superannuation balance in retirement.

These consequences can affect their decision to stay or leave a violent relationship. Fear of ending up in poverty is a major roadblock to women leaving violent relationships, and women who have experienced domestic violence report much higher rates of financial distress, with 44 per cent facing a household cash flow issue.

When a woman stops working, it’s harder for her to plan an escape from her violent partner as she’s not likely to have enough individual income. Working is also a safeguard against domestic violence because it offers women support networks at work.

The most recent comprehensive estimate of the costs of domestic violence, prepared by KPMG, puts the dollar figure at up to $26 billion a year, including the cost of pain, suffering, premature death, reduced productivity and increased demand on the justice system.

There’s plenty that could be done to fight against domestic violence, but ANU research fellow Kristin Sobeck, who worked on the report with Summers, says it starts with collecting more data.

“It’s really been a struggle to quantify the impact of domestic violence on women’s lives because there’s a dearth of data,” she says. “The first thing that shows you care about something is that you measure it.”

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To make Medicare healthy again, the pollies must fix its symptoms

I don’t know if you noticed, but the federal election campaign began on Sunday. The date of the election has yet to be announced – it may be mid-April or mid-May – but hostilities have begun. And they began with an issue that’s been big in election campaigns for 50 years: Medicare.

On Sunday, Anthony Albanese revealed his election masterpiece, the knockout punch that would send Peter Dutton reeling, something Albo has had up his sleeve since December. You know how hard it’s getting to find a doctor who bulk-bills?

Well, Labor will fix that. Remember Bob Hawke’s famous election promise that “by 1990, no Australian child will be living in poverty”? Albo’s topped that. He’s promising that, by 2030, nine out of 10 GP visits will be bulk-billed. And all that for a mere $8.5 billion over four years in extra spending.

Politically, it was brilliant. Health is important to Australians, and they love being able to see a doctor without coughing up, so to speak. Poll after poll shows that when in comes to healthcare, Labor’s the party voters trust. And fixing bulk-billing ticks another box: cost of living.

It gets better. Dutton has form on bulk-billing. Do you remember when Tony Abbott won government in 2013? He’d promised not to cut various classes of government spending, but in his first budget he was making savings everywhere. He was going to introduce a “patient co-payment” of $7 a pop on visits to GPs.

There was so much public uproar and opposition in the Senate that most of the planned nasties were dropped. Guess who was minister for health at the time?

What a fabulous political tactician Albo is. A whole election campaign discussing the need to restore bulk-billing. Sorry, great move – not gonna fly. Within a few hours, Dutton had matched Labor’s offer “dollar for dollar”. The man who told us the Albanese government was “spending like a drunken sailor” said “see you, and raise you”. He’d be spending $9 billion over four years, thanks to $500 million for an already announced improvement in mental health.

Dutton had no time to consider the detail of Labor’s proposal, nor how he’d pay for it. By the way, how would he pay for it? Don’t worry, he’ll tell you later. How much later? Didn’t say.

Remember all those election campaigns when we agonised over debt and deficit? Where the media kept count of the cost of all the promises, and parties struggled to find ways to pay for it all?

Not this time. Neither man has an accountant’s streak. If Albanese keeps producing measures to help with the cost of living, and Dutton keeps matching him, this will be a costly campaign.

And now that the question of Medicare and bulk-billing has been neutralised, I doubt we’ll hear much about them again. So, since they matter far more to our lives than the incessant politicking, let’s take a closer look while we can.

Medicare – first introduced as Medibank by the Whitlam government in 1975 – is Australia’s first system of universal health care, in which everyone who needs help gets it, regardless of their ability to pay. Every rich country has a universal system, except the United States.

Under Medicare, the federal government pays about half the cost of the states’ public hospitals. In principle, bulk-billing ensures everyone can see a doctor when they need one. If in practice that’s too expensive, you can always wait in a public hospital’s emergency department.

Trouble is, universal health care is expensive and getting more so, which is a problem when politicians like appearing to cut taxes, and never increase them or introduce new ones. However, the government’s accountants know there’s more than one way to skin a budget.

When the $7 patient co-payment got rejected, the feds solved the problem by freezing the Medicare rebates to GPs rather than adjusting them for inflation. As Australia’s leading health economist Professor Stephen Duckett explains, this slowly forced GPs to abandon bulk-billing and introduce their own patient co-payments as their practice costs increased but their rebates didn’t.

It’s said that by the time Labor returned to office in 2022, bulk-billing was in freefall. Labor restored the indexation of Medicare rebates, then tripled the special incentive for GPs to bulk-bill pensioners and holders of healthcare cards, children and people in rural and remote areas.

This helped, but the increased payments weren’t enough to eliminate the gap between the rebate and the fees GPs were charging in metropolitan areas. The present average out-of-pocket payment is $46 a pop. (Bit more than $7, eh?)

At present, less than half of people are “always” bulk-billed when they see a GP. A further quarter of patients are “usually” bulk-billed.

Co-payments hit poor people harder than the rest of us, and I think they can be a false economy. The medical problems of people who don’t see the doctor because they can’t afford it can get a lot worse, which is both tough on them and tough on the taxpayer when they have to be rushed to hospital for operations and a long stay.

Albanese’s new promise is to further increase the incentives for GPs to bulk-bill, as well as to extend those incentive payments to cover all patients, not just pensioners, children and the others. His third change is to introduce an additional 12.5 per cent “practice payment” to those medical practices that bulk-bill all their patients. The changes would take effect from November 1.

Of course, Medicare has more problems than just out-of-pocket payments. The standard fee-for-service way of paying GPs makes sense for people with acute problems, but not the growing number with multiple chronic conditions (like a certain ageing journo).

Fortunately, Duckett thinks the promised changes could “start the necessary transition” away from fee-for-service in general practice.

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RBA is lost in the frightening territory of full employment

The Reserve Bank’s behaviour last week can only be described as bizarre. It’s a sign that it’s lost its bearings and isn’t sure what’s happening in the economy or where it’s headed. What has caused its befuddlement? Our unexpected return to near full employment. Sheesh. Whadda we do now?

The way “monetary policy” – the Reserve’s manipulation of interest rates – normally works is that, when the rate of price inflation gets too high, it raises interest rates to discourage borrowing and spending. Then, when the demand for goods and services has weakened and the rate of inflation has started slowing, the Reserve starts cutting interest rates back to their normal level.

But that’s not what began last week. After raising the official interest rate by 4.25 percentage points to 4.35 per cent and keeping it there for 15 months, the Reserve cut by 0.25 points, but made it clear it wasn’t sure it should have cut, and warned us not to assume further cuts would follow.

It would wait and see what happened. It didn’t say so, but it left open the possibility that, should inflation start going back up, it would resume raising the official rate.

Huh? What on Earth are these guys playing at? Are rates coming down or aren’t they? It was a case of bureaucratic arse-covering. Hosts of people – those with mortgages, the financial markets and many economists – were demanding a rate cut, and the Reserve didn’t want to get the blame should Anthony Albanese get tossed out at the looming election.

So it sent a signal that rates were coming down, then said it wasn’t a signal. It’s obvious the government was desperate for a rate cut, but note this: at all times Albanese and Treasurer Jim Chalmers have stuck to the agreed etiquette of never publicly expressing any opinion on what the Reserve should or shouldn’t do.

It’s not the first time the Reserve has engaged in arse-covering. Governor Michele Bullock admitted last week that the central bank waited too long before starting to raise rates in 2022. But it made sure it got the first increase in before the May 2022 election, at which the Morrison government got tossed out.

Had it waited until after the election, it would have been criticised for doing the Liberals a favour and, in the process, letting people think the inflation problem arose under Labor.

The point many otherworldly economists don’t get is that just because a central bank is independent of the elected government doesn’t mean it can escape politics. Why not? Because we live in a democracy.

The great contradiction of central bank independence is that, for the bank, it’s all care but no responsibility. If it stuffs up the economy, the governor doesn’t lose her job, the prime minister does. And that’s when the pollies – on both sides – tend to get vengeful.

When a central bank lacks independence, it can leave the politics to the pollies. But if it is independent, it has to do its own politics, which is what Bullock was doing last week.

But why is the Reserve so anxious about cutting rates when underlying inflation is heading down, isn’t far above the 2 to 3 per cent target range, and most economists think monetary policy should be eased? Short answer: because its boffins aren’t old enough to have lived in an economy that’s close to full employment.

Thanks to the excessive monetary and budgetary stimulus applied during the pandemic, the economy boomed and, just after the change of government, unemployment fell to 3.5 per cent, its lowest in almost 50 years. After more than two years of higher interest rates, it’s still only up to 4.1 per cent.

After the review of the Reserve Bank, it was decided to have the longstanding lip-service goal of full employment raised to equal status with the Reserve’s inflation target.

For the past five decades, we and the other rich economies have used a mathematical calculation called the “non-accelerating inflation” rate of unemployment, NAIRU, to give achieving low inflation priority over low unemployment.

This made it easy to get inflation down. You used interest rates to give the economy an almighty hit on the head, causing unemployment to shoot up and the rate of inflation to fall rapidly. Only small problem: you never got back to low unemployment.

This time, however, the Reserve sought to avoid a great worsening in unemployment by not hitting the economy too hard. The consequence has been a slower and less certain return to low inflation. And the jobs market has kept happily steaming along.

Despite flat consumer spending and weak business investment in capital equipment, employment’s still growing strongly and unemployment has risen only a little. The proportion of people with jobs is higher than ever, showing that supply has had no trouble keeping up with demand.

But this is scaring the pants off the Reserve’s boffins. With the labour market so “tight”, surely wages could take off at any moment, halting the fall in inflation – or worse, sending it back up. What’s unnerving them is an old ’70s-model NAIRU machine in the corner, with its red lights flashing and siren blaring. Panic stations. Assume the brace position.

This explains last week’s signal that the Reserve was cutting rates and not cutting them at the same time. When it says what it does next will depend on the data, it means “we’re not really sure what the hell’s going on”.

Trouble is, the world has changed a lot since the invention of the NAIRU machine in the 1970s. The unions used to be able to force excessive pay rises on their bosses, but globalisation, deregulation and the collapse in union membership have changed all that.

The Reserve’s boffins, however, have been so busy with their maths and modelling that they haven’t noticed how much the world has changed. They don’t even seem to have noticed that their regular forecasts of wage growth have been way too high for more than a decade.

No wonder they’re so worried. And until they get the memo, the Reserve will go on punishing everyone impertinent enough to have a mortgage.

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Why did profit-hungry banks act so quickly to cut interest rates

By MILLIE MUROI, Economics Writer

Like dominoes, the country’s big four banks moved briskly on Tuesday, pledging to knock down their interest rates – some within minutes of the Reserve Bank’s decision to cut the cash rate for the first time in more than four years.

The country’s oldest bank was the first to jump, one minute after the Reserve Bank’s rate cut. From March 4, Westpac’s variable home loan rates will fall by 0.25 of a percentage point, reducing the monthly repayment on an average $600,000 mortgage by about $100. Sixty seconds later, National Australia Bank said it would cut its variable home loan rates by the same amount – effective a week earlier, on February 28. Commonwealth Bank and, later in the day, ANZ followed.

The banks aren’t always so quick. In fact, they tend to jump at the chance to raise their rates (which fattens up their profits), but drag their feet when it comes to passing on decreases in the official interest rate. And this series of moves will eat into their profits. So, what made them move so quickly?

Treasurer Jim Chalmers says he picked up the phone to the big four bank bosses shortly after the Reserve Bank’s decision on Tuesday to talk about their pricing. But it wasn’t Chalmers who sealed the deal. The four major banks were already well on their way to passing on the rate cuts in full, he said.

Instead, Chalmers’ chats with the bosses were a clear-as-day signal of what the banks had already factored in: the political pressure they would face if they didn’t cut rates (not to mention the potential media storm and backlash from mortgage holders pushed to their limits in recent months).

The rate cut was a scenario all of them had considered well in advance of the decision.

It’s no secret that those with mortgages have been squeezed after 13 rate rises in three years. So the first rate cut was always going to be an attention-grabber.

As AMP chief economist Shane Oliver points out, there’s an especially strong focus on interest rates in Australia because of the large proportion of home owners with variable rate loans (in which the interest rate tends to move in line with the cash rate rather than being fixed at a set rate), and the increasing level of debt we tend to carry.

“It’s become a lot harder for banks to dilly-dally and take time with their decisions,” he says.

Then there’s the state of the home loan market, in which banks are still competing quite hard to attract and retain customers. This level of competition probably also put a flame under the backsides of banks when deciding whether to cut their interest rates.

The rapid movements were also partly a reflection of the banks’ size. Australia’s banking sector has had some new smaller and digital banks enter the equation, but it’s still what’s called an “oligopoly”: a handful of businesses with control over rather large slices of the market.

They’re not supposed to be able to collude (for example, by all agreeing to move prices by the same amount) because our competition laws prohibit that. But as John Storey, head of Australian bank research at UBS, points out, the nearly simultaneous movement is indicative of a fairly cosy oligopoly, where once one business breaks from the pack, others tend to follow quite quickly.

In a more competitive market (with more banks), Storey says, it’s possible the banks would act more independently. They might be more incentivised to break further away from their peers by, for example, cutting their rates by a deeper amount.

But in a market with only a few big competitors, each business closely watches the others, and their pricing decisions heavily influence the actions of competitors. A bank cutting its rates too much, for instance, might be met with retaliatory price cuts that just lead to lower profits for everyone.

As Morningstar banking analyst Nathan Zaia puts it, banks don’t want to unnecessarily drive down profit margins for the entire industry.

So, while there was pressure from consumers (and politicians) to pass on the full interest rate cut from the Reserve Bank, and all four banks quickly fell into line, there wasn’t as much incentive to slash rates any further.

There is bad news for savers. The banks will also almost certainly try to minimise lost profit by making similar cuts to interest rates on deposits. That means that although mortgage holders will be breathing a sigh of relief, savers will probably see a fall in interest they earn on their bank balances.

Finally, it’s worth understanding what exactly the “cash rate” targeted by the Reserve Bank is. It’s essentially the interest rate for banks borrowing from – and lending to – each other overnight. You might ask, what’s this mysterious nocturnal activity?

Basically, banks need enough cash every day to serve their customers – and a bit extra (called the “reserve requirement”) in case they suddenly face a wave of withdrawals they weren’t expecting. Depending on the amount of lending, depositing and withdrawing their customers do on any given day, banks might end up with more (or less) cash than they need.

So, at the end of every business day, the banks with more money than they need lend to banks facing a shortage. The Reserve Bank pushes banks to lend and borrow to each other at (or very close to) its cash rate target. How does it do this? By being a bank for the banks.

Basically, the Reserve Bank can hold onto deposits from the banks (called “exchange settlement balances”). The interest rate that banks can earn on these deposits is a bit lower than the cash rate target. That makes banks a lot keener to lend to each other, rather than depositing their extra cash with the Reserve Bank.

Meanwhile, borrowing from the Reserve Bank costs banks a bit more than the cash rate. So any banks needing money are much keener to borrow from their banking peers, which, remember, would rather lend their money out than leave it with the Reserve Bank.

By putting these parameters into place, the Reserve Bank basically creates a narrow “corridor” around the cash rate that determines the cost of banks moving their money around. These costs are then typically passed on to consumers. A lower cash rate for banks usually means lower interest rates for consumers, and vice versa.

The rapid response from the banks this week is certainly no promise of what we’ll see following future Reserve Bank decisions. What seems like a dent to the banks’ profits, and a win for customers, was almost certainly a calculated decision by the banks. They just weighed up the political, social and economic costs of dilly-dallying.

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Sorry, this isn't the day we stop feeling sorry for ourselves

I’m sorry to be the one to break it to you, but I very much doubt that this small cut in interest rates will be the circuit breaker everyone from Treasurer Jim Chalmers down has been hoping for. After our many months of longing for this moment, such a modest saving can only be an anticlimax.

I doubt this will be the reason the economy begins to recover as we all go out and shop. Nor will it be the sea change that secures another term in office for Prime Minister Anthony Albanese.

Consumers and voters are in a sullen, sour mood and have been for a year or two. We’re feeling so sorry for ourselves it will take a lot to lighten us up and make us forget our obsession with the cost of living. Even if things improve, our negativity may lift only slowly over many months.

Normally, a change of government would help a lot. New leaders get a honeymoon in which hope springs eternal. The taller and better-looking the new guy is, the better their chance of making a good impression.

But it’s hard to see a man whose specialty is making us feel angry or afraid being the bloke to cheer us all up.

For someone with a mortgage of $600,000, a rate cut of 0.25 percentage points is worth about $23 a week.

Do you remember Chalmers’ tax cuts last July? No one was terribly excited about them. But they were worth $34 a week for someone on $84,000 a year, and $54 week for someone on $122,000 a year.

There may be more cuts to come this year, of course, even a possible two more before an election held in mid-May. But from what the Reserve Bank is saying, I doubt it’s in a tearing hurry to keep cutting.

And though the Reserve raised interest rates by 4.25 percentage points over the 18 months to November 2023, I don’t expect it to cut rates by more than about 1 percentage point, leaving the official interest rate at about 3.35 per cent.

Why? Because its 4.25-point increase brought the rate up from its crisis level of almost zero during the pandemic and its lockdowns. Now the Reserve will be getting the rate back to normal, not crisis territory.

And while we’re all feeling so sorry for ourselves, don’t forget this. Normally, by the time the Reserve starts cutting interest rates the economy is in recession and unemployment is way up.

Our economy is becalmed, but in nothing like a recession. Right now, we have a higher proportion of the working-age population in jobs than ever before. At 4 per cent, our rate of unemployment is lower than it’s been in most of the past 50 years. Sound terrible to you?

Indeed, it’s the remarkable strength of our jobs market that’s the main reason the Reserve has been so reluctant to cut interest rates until now, and remains “cautious” about cutting them further.

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When does bipartisanship happen? When there's mutual self-interest

If you think Labor and the Liberals are always at each other’s throats and never agree on anything, you haven’t been watching closely enough. Sometimes – last week, for instance – they do deals with each other they hope we won’t notice.

When they’ve reached an agreement they don’t want seen, it’s because they’ve colluded to do something that advances their interests at the expense of the voters.

It reminds me of economist Adam Smith’s observation that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public”.

What do we want from our politicians? That they get on with fixing our many problems. When we discover the present lot isn’t doing that, we toss ’em out. In practice, however, it’s not that simple. We’ve long had a system of two-party government, which means that when one side’s no good, we turn to the other one. But what happens when it too proves to be no good? We have no alternative but to return to the first side, which we already know isn’t up to snuff.

That’s the position we’re in now. We tossed out Scott Morrison and replaced him with Anthony Albanese, only to discover he’s not game to do what it takes. So, does Peter Dutton strike you as the good leader we’re looking for? You’d have to be a terribly rusted-on Lib to think so. What now?

Actually, our loss of faith in the political duopoly isn’t new. It’s become clear that the two sides have just about fought themselves to a standstill. Neither side is game to do anything much, for fear of the scare campaign the other side would run.

This explains why voters have been groping towards plan B. In the 2022 federal election, almost a third of voters – a record proportion – gave their first-preference vote to candidates other than from the two majors. Many Labor voters have turned to the Greens, while the growing number of independents was boosted by the six teal independents taking over seats in the Liberals’ heartland. What’s the single biggest source of discontent with the duopolists? Their reluctance to get on with fighting climate change.

We’ve already come close to having a minority government, and there’s high chance we’ll get one at this year’s election. This gives the smaller parties and independents the balance of power, allowing them to achieve braver policies in return for keeping the minority government in power. Not such a bad arrangement.

But this is where last week’s passing of the electoral reform bill comes in. After doing a deal with the Coalition, Labor got it through the Senate despite the vehement opposition of the Greens and, particularly, the teal independents.

As Labor claims, the act involves the most comprehensive changes to the electoral system in four decades. And many of the changes are genuine reforms, limiting how much individuals can donate to candidates or parties, and tightening up rules on disclosing the identity of donors and the timeliness of that disclosure.

Labor claims its reforms will take the “big money” out of election campaigns. Don’t you believe it. It’s true it will stop the Clive Palmers from giving millions to a party, but that was never a big worry. Various loopholes will allow Labor to continue getting big bucks from the unions and the Libs getting much moolah from business and the secret funds in which money has been stashed.

In any case, the act makes up for any loss of donations by greatly increasing the money the parties and independent candidates get from the taxpayer. After an election, candidates who get more than 4 per cent of the votes get about $3.50 per vote. That will be increased to $5 – which you can double because we each cast two votes, for the House and the Senate.

And that’s before you get to a new payment to cover “administration costs” of $90,000 per election for members of the lower house, and half that for senators.

The point is, these old and new payments go to incumbents, giving them a huge financial head start over new people trying to get in. Even before you think of all the expensive advertising you’d like, setting up an office, staffing it, and paying for printing and stationery ain’t cheap.

But sitting members get an electoral office and a staff of five, plus transport and a generous printing budget they use to get themselves re-elected. So, would-be independents have to raise and spend a lot of money to have any chance against an incumbent member.

Which is where the act’s new limit on spending of $800,000 per candidate puts incumbents way ahead of newcomers. What’s more, political parties are allowed to spend $90 million each on advertising, which they can direct away from their safe seats to their marginals.

Get it? The two major parties have cooked up “reforms” that benefit them by stacking the rules against new independents. The Greens aren’t greatly disadvantaged because they’re a party and have incumbents. The existing independents don’t get the extra benefits going to a party, but do now have the advantage of incumbency.

But future independents – including further teals – will find it a lot harder to win seats than before. Why has Albanese done a deal that mainly benefits the Liberals, his supposed lifelong enemies? Because if independents can do over the Libs, next they can do over Labor.

When the chips are down, the duopolists must stick together and put their mutual interests ahead of the voters’ right to choose. If you want proof that our politicians put their own careers way ahead of their duty to the people who vote for them, this is it. I’ve never felt more disillusioned.

But note this: these changes won’t apply to this year’s election. This will be our last chance to register our disapproval.

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We may be short of leaders, but we're not short of false prophets

With this year’s federal budget supposedly brought forward to March 25, the seasonal peak in business bulldust has come early. Last week Canberra kicked off an annual ritual little noticed in real-world Australia, the call for “pre-budget” submissions on what the government should do in its budget.

I’ve never known any of that free advice to be acted on but, as all the participants in the ritual understand, that’s not the point. The point is that it’s a day out for Canberra’s second-biggest industry, the small army of business and industry lobby groups.

It’s an opportunity for them to send a signal to their fee-paying members back in the real world of Melbourne, Sydney and the other state capitals that they’re working their butt off, representing the industry’s interests, whispering in the politicians’ and econocrats’ ears trying to tone down any measures the industry doesn’t like, and rent-seeking as hard as they can go.

In their pre-budget submissions, you see the lobbyists demonstrating their greatest skill: taking their clients’ rent-seeking and repackaging it to make it look as though they want to fix the economy for us all. Consider last week’s first cab off the rank, from the Business Council.

It made five key points, the first of which was that the budget should “get government spending under control”. “High spending levels are contributing to higher inflation, including business costs, and the spending is unsustainable,” we’re told.

Translation: stop wasting money on the “care economy” – care of the disabled, aged care and childcare – including stopping the wages paid to the women who work in these mainly privately owned businesses being so low they can’t get enough workers. Why stop? So you can afford to cut business taxes.

Second, the budget must “cut red tape”. “We must be more aggressive in pursuing a deregulation agenda” like Donald Trump is doing.

Translation: business wants to be free to maximise its profits in any way it sees fit. Any government measures intended to stop business harming its workers, customers or bystanders is “red tape” which can be blamed for business’ failure to do all the wonderful things it keeps claiming it does.

And remember, any time the absence of regulation allows business to blow itself up – as in the global financial crisis – big business wants governments immediately on the job bailing us out at taxpayer expense. We must be allowed to be too big to fail. That is, we must be given a bet we can’t lose.

Third, the budget must “end the energy wars” caused by the “ongoing politicisation of energy”.

Translation: please forget the way business cheered when prime minister Tony Abbott abolished Labor’s carbon tax in 2014 and kicked off a decade of inaction. Similarly, please don’t mention how muted has been our criticism of Peter Dutton’s plan to abandon renewables and switch to Plan B, a government-owned nuclear system, which will take only a decade or two to get going.

Fourth, the budget should “fix our broken industrial relations system” which has “shifted the pendulum too far against employers, making it far less attractive to hire and grow”.

Translation: business liked it much better when the pendulum was too far against the workers and their unions. Everything was going fine in the economy until 2022, when Anthony Albanese began trying to even things up. This is why real wages began falling from June 2020 and the productivity of labour hasn’t improved for a decade.

Finally, the budget should “address our uncompetitive tax system” which is uncompetitive internationally and likely to become more so. This is “a major deterrent to attracting new investment”. We must have a tax system that “helps us rather than hinders us in bringing investment to our shores”.

Did I mention that a lot of the Business Council’s member companies are big foreign multinationals, including producers of fossil fuels? Our mining industry is about three-quarters foreign-owned.

So their local chief executives may speak with an Aussie accent but, on foreign investment and the wonders it will do for our economy, they’re batting for the other side.

The main reform the Business Council has long wanted is a cut in the rate of company tax, paid for by a hike in the rate of the goods and services tax. This, we’re told, would do wonders for the wellbeing of Australia’s punters.

The Business Council would never admit it, but the thing its members hate is our uncommon system of “dividend imputation and franking credits” designed to ensure that company shareholders don’t pay company tax.

Why do the chief executives hate it? Because only local shareholders get franking credits. Foreign shareholders don’t. Why not? Because we want to make sure that, when we allow foreign multinationals to make big profits from mining our minerals or whatever, we Aussies get our fair share of the spoils, including via the company tax they pay.

(That’s assuming they don’t use profit-shifting and other accounting tricks to minimise the company tax they pay. I remember when BHP’s marketing people kept reminding us it was The Big Australian. Their accountants told the Australian taxman it was The Big Singaporean. In truth, BHP is roughly three-quarters foreign-owned, mainly by Americans.)

When Paul Keating introduced dividend imputation in 1987 it was all the rage in other rich economies. But it fell out of fashion, allowing the big economies to follow a different fashion: cutting the rate of company tax to gain an advantage over the others.

The Business Council has gone on for years trying to con our government into joining this race to the bottom. It’s had no success, however, and isn’t likely to. Why? Because our Treasury isn’t that dumb. And because franking credits mean local shareholders (and voters) have nothing to gain from cutting the company tax rate.

And I can tell you this: should some future government be mad enough to do it, no one would ever bother to come back a few years later to see if, as promised, foreign investment had surged. No one’s ever game to audit the arguments for this or that tax “reform”. Why not? The letters BS come to mind.

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Maths or no maths? Ross Gittins and Richard Holden have it wrong

By MILLIE MUROI, Economics Writer

We’ve heard the old(er) boys argue over the optimal level of maths in economics, but they’ve delivered some imperfect information. Don’t know what I’m talking about?

Seven years after sitting my final high school economics exam, four years after farewelling university economics, and three years since exiting the economics profession (almost) entirely, I’ve been reflecting.

The reason? A clash between our economics editor Ross Gittins and UNSW economics professor Richard Holden. In the words of Dr Ray Da Silva Rosa, finance professor at the University of Western Australia, it’s the academic equivalent of the “beef” between rappers Drake and Kendrick.

Gittins last week ruffled some feathers when he said economists had lost the plot, becoming obsessed with maths and driving students away from the discipline. Holden’s response? “Shocker …even legends [like Gittins] can be wrong.” Maths, he said, is crucial to economics – and students shouldn’t be intimidated by it.

But let’s go back to why we’re talking about this in the first place: a proposed change to the NSW economics syllabus which would increase to about 35 the number of calculations a student is required to be able to perform.

And more importantly, Reserve Bank research by economist Emma Chow laying out the benefits and ways of boosting the size and diversity of the economics student population, which has plunged since the early 1990s.

Holden doesn’t think the size part is much of an issue (or at least not at crisis levels yet).

And Da Silva Rosa says it’s probably not: “Oddly, as experts who study markets, neither [Gittins nor Holden] considers that we may have about the right number of economists.” It is, he argues, simply a matter of the market allocating the optimal number through the incentive we know of as price: finance and commerce jobs tend to pay better.

But markets are far from perfect. We know – from economic theory – that prices aren’t always a good reflection of the value a good or service might provide to the wider community. That’s why, for example, the government subsidises things such as education and vaccinations (things which economics students might recognise as a “positive externality”).

Similarly, having greater economic literacy across the population comes with big benefits for society more broadly. We may not all become economists (or, in my case, stay one), but having a population with better understanding of economics leads to better policy debates and day-to-day decision-making.

There’s some merit, then, as to why we might want to boost economics student enrolments – just as we have for STEM (science, technology, engineering, maths) subjects in recent years.

I also have some doubts that financial prospects are as big a driver for students’ desire to study certain subjects in high school compared to university. In school, the focus tends to be on maximising marks or choosing the subjects that are easier or more enjoyable.

I don’t completely accept Holden’s view that students shouldn’t be intimidated by maths, either. It’s easy to say, but not always the reality. To his credit, he doesn’t necessarily think there should be more maths mixed into the high school economics curriculum.

The thing that drew me to economics for so many years – despite my lukewarm enthusiasm for maths – is just how relevant it can be to daily life (sunk cost fallacy, anyone?) and understanding the world around us (a certain US president could do with a refresher on tariffs).

Don’t get me wrong. Basic maths is a must-have for understanding economics. And I don’t buy Gittins’ argument that maths-obsessed academic economists have little regard for – or understanding of – how the economy works. As Holden points out, there’s been plenty of great research built on mathematical rigour.

But whether we need dozens of additional equations at a high school level is less certain. For me, being spared from memorising more complex formulas until second year university (and getting the choice at that point to focus more on the less maths-heavy units that interested me) kept me motivated and allowed me to specialise in areas I cared about and was good at.

And my fellow economics students who revelled in maths? They went further down the econometrics path. Economics is one of those disciplines where everyone from mathematicians to philosophers and historians can and do play a crucial role.

Would more maths in the high school economics curriculum have turned me off completely? Well, it certainly wouldn’t have had me jumping for joy.

And here’s something crucial neither Gittins nor Holden touched on. One of the key drivers of the fall in economics enrolments is the drop-off in female enrolments. I’ve spoken about why this is important last year: women economists think differently, and diverse teams simply perform better.

Maybe the quality of the economics discipline – often dismissed as the dismal science – is determined less by how much maths there is, and more by the people and perspectives missing from it. But we can’t separate that completely from the debate on the role of maths in economics.

Given the Reserve Bank’s observation that female high school economics students (who are under-represented in university economics enrolments and in the economics profession) tend to go on to preference disciplines like arts, health and law in university, there’s an argument that a heavier maths focus in high school could push more women away.

Women perform well in maths, yet tend to study it at lower rates than men. The bank suggests advocacy to females could emphasise that economists work on a breadth of social problems that are also seen in arts and social science.

One of the things I loved most was when my arts subjects would intertwine with my business ones. We can integrate economics with other disciplines, not just the obvious ones like finance, tying it more to those subjects that women have tended to favour.

Still think there should be more maths in economics? Why not turn the tables and include more economic principles in the maths curriculum?

Then there’s the need to continue to make economics – both as a career pathway and a discipline – more concrete. Among the biggest threats to high school economics enrolments is not “more maths versus less”, but the rise of business studies, which has increasingly eaten into the pool of possible economics students.

Why? The Reserve Bank says it’s partly the perception that business studies is easier to learn and teach than economics, has a lower workload and has clearer career pathways.

We need to better link economic theories, existing equations and the economics curriculum to the real world: current policy debates, trade wars and day-to-day life. Simply adding more maths at high school level risks plunging the discipline further into abstraction.

There also needs to be more connection between students and those using economics in their professional life. Through high school (and most of university) I had virtually no contact with the mythical creature I now know to be “the economist”.

Breaking down that barrier would bolster the confidence of could-be economists, inspire them to consider a career in economics, and keep economists in touch with younger generations which are often bursting with novel ideas.

I’m no longer an economist, but the things I’ve learnt – and continue to learn – have been invaluable. I’m hopeful we can find better ways to revive the discipline and attract the diversity needed to make it better. More maths wouldn’t have excited a younger me, but more connection to the real world – and to other disciplines – certainly would have.

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The nation is finally coming to grips with home affordability

Right now, the prospect of much improvement in being able to afford a home of your own isn’t bright. We don’t look like solving the problem any time soon. But I’ve been watching and writing about the steady worsening in housing affordability for the best part of 50 years, and I’m more optimistic today than I’ve ever been.

Why? Not because we’ve got the problem licked – and certainly not because mortgage interest rates will soon be coming down – but because it’s become so bad no one can go on ignoring it. At every level, from governments at the top to mums and dads and angry young people at the bottom, we’re realising that house prices just can’t be allowed to keep going up and up forever.

For the first time in my experience – and probably the first time since the housing crisis immediately after World War II – all of us are realising something must be done to turn things around. Politicians, treasuries, economists and parents are coming to grips with the problem. We’ve begun thinking hard about all the factors contributing to the problem and the many things that will need to change.

Until now, people have focused on fixing this favourite factor or that one. Now we’ve finally realised the problem is multi-faceted and needs to be attacked at every level from every angle. There’s no magic bullet.

Although affordability has been worsening for decades, the disruptions of the pandemic and its lockdowns – closing our border then reopening and having people flock in – have made the problem acute as well as chronic. It’s the same in other rich countries, but I bet ours is worse.

For many years, politicians on both sides and at both levels of government expressed sympathy for “first home buyers” but didn’t really care. That’s because voters who own their home far outnumber those who don’t, and home owners love seeing the value of their home going higher and higher.

But now home owners are joining the dots and realising their growing wealth comes with a major drawback. Their kids can’t afford a home without big withdrawals from the bank of mum and dad. Why is this a smart way to run the country?

People complaining about housing affordability tend to blame the federal government. In fact, it’s the state governments that have most influence over how many new homes are built, where they’re located and whether there’s enough higher-density housing in the parts of cities where people most want to live.

That’s why the Albanese government’s National Housing Accord with the states is a big advance. That’s true even though their agreement to deliver 1.2 million new dwellings over the five years to mid-2029 is running well behind schedule and may not be achieved.

The accord is important because it represents both levels of government accepting responsibility for housing affordability and being willing to co-operate in making progress. The time-honoured way to get the states pulling their weight is for the feds to pull out their chequebook. Which they have.

You don’t need an economics degree to see that if house prices keep rising it must be because the demand for homes is growing faster than their supply. That’s true, but it’s not that simple. For one thing, if all the extra houses are on the city’s fringe, people who want to live closer in will still be bidding up the prices of the better-located houses and units.

That’s why a big part of the deal with the states is for them to permit more better-located higher-density apartments. This switch of emphasis from doing things to reduce the demand for housing (by ending the tax breaks that help investors outbid first home buyers) to increasing the supply of well-located homes is a big step forward in the thinking of politicians, econocrats and economists.

But we’ll probably need to reduce demand as well as increase supply – so don’t think you’ve heard the last on “negative gearing”.

And don’t assume that if the NIMBYs have been beaten back and permission given for more middle-ring high-rise, they’ll start springing up in a few months’ time. Now the experts have their minds focused on housing, we’ve realised our home-building industry isn’t in tip-top shape. When demand surges, the businesses are much better at whacking up their prices than at building a lot more homes.

Right now, the industry’s discovered it can’t get the tradespeople it needs to expand its production. That’s why, at present, it’s building fewer homes than usual when it should be going flat-chat. We’re told it has lost a lot of its tradespeople to the construction of transport and other infrastructure for … the state governments.

Well, maybe. But my guess is the industry long ago gave up ensuring it was training lots of apprentices because they’d be needed in the next building boom. Similarly, the bureaucrats issuing visas to skilled immigrants don’t seem to have worried much about how their decisions would affect the building industry.

In the post-war years, state governments built and owned thousands of homes rented to people in need. But that went out of fashion decades ago, and now they own little social housing. Changing that will be another part of what’s needed to get housing affordability under control.

Finally, the Reserve Bank. The modest falls in mortgage interest rates we’ll see this year and next are unlikely to do anything lasting to improve housing affordability. When you’ve got a shortage of homes, making it a bit cheaper to borrow just allows someone to win the auction by paying more than the other bidders.

The Reserve has always denied that its use of the interest rate lever to keep inflation low has any lasting effect on housing affordability. But this assumes its ups and downs never cause borrowers to do crazy things for fear of missing out. Maybe the Reserve will need to change too.

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Everyone hates government spending - until someone tries to cut it

It seems government spending will be an issue we hear a lot of in this year’s federal election campaign. But remember this: much of what’s said will be influenced by partisanship, ideology, self-interest and populism.

Peter Dutton is making wild claims that need fact-checking. The business press is saying things that aren’t a lot better. And the debate will proceed according to an eternal political truth: while voters never mind you bad-mouthing government spending in general, as soon as you get specific, they start fighting back.

“I’ve always thought the money the government’s giving you was a great waste, but the money – and the tax breaks – I’m getting are vital to the economy.”

It’s obvious that some part of the $730 billion the federal government spends each year must be wasteful, just as some of the 365,000 people it employs must be in excess. But how much is some – at lot or a little? No one’s ever bothered to find out. Much easier to stick to unsubstantiated claims and exploiting voters’ prejudices.

Dutton has been laying it on thick. When he made Senator Jacinta Nampijinpa Price shadow minister for “government efficiency”, he claimed the Albanese government “has spent money like drunken sailors”.

So what spending would he cut? He’ll tell us later. We do know, however, that Albanese & Co have increased the number of federal public servants (not the same thing as total federal employees) by 36,000.

This addition of “Canberra public servants”, Dutton has said, was “wasteful” and meant the public service was now “bloated and inefficient”. It’s an example of “wasteful spending that is out of control”. “We’re not having 36,000 additional public servants in Canberra”.

So is he going to sack them all? He’d be happy for you to think so, but he hasn’t actually promised he would. What he has said is he’d get rid of diversity and inclusion positions, along with “change managers” and “internal communication specialists”.

Whether that would be a good or bad thing, the saving would be chicken feed.

Dutton has tried hard to give the impression all the extra workers are in Canberra. Not true. The proportion of all federal public servants in Canberra has actually fallen to 37 per cent. Most of the extra people are working in frontline services around the states, helping people using the national disability scheme, visiting Centrelink and so forth.

Andrew Podger, a former top Canberra bureaucrat, notes that, at less than 0.7 per cent, the federal public service is now smaller than it was in 2008 as a proportion of the population, with its share of the total Australian workforce having fallen to less than 1.4 per cent.

Dr Michael Keating, a former topmost bureaucrat, says there’s plenty of evidence that the previous Coalition government was underfunding many services. Hospital waiting lists blew out, public schools didn’t get the resources needed to do their job adequately according to the Gonski standards, waiting times for welfare payments and for veterans’ compensation were far too long, and delays in processing visa applications led to more unauthorised immigrants.

Ending or reducing these policy-caused delays explains most of Albanese’s increased government spending. Sound like waste to you?

Keating notes that, according to the latest official estimates, federal government spending this financial year will be almost the same as it was in the Morrison government’s last year, when measured as a proportion of gross domestic product. Sound profligate to you?

He further notes that, when you take total spending by all levels of government as proportion of GDP, Australia is actually the lowest among the 38 members of the Organisation for Economic Co-operation and Development, save for Ireland, South Korea and Switzerland.

And get this: as a proportion of national income (GDP), our spending by all levels of government is more than 4 percentage points lower than the average for all OECD countries. Remind you of a drunken sailor, does it?

According to the opposition’s shadow minister for the public service Jane Hume, “you don’t grow the economy by growing the size of government. Every public-sector job has to be paid for by a private-sector worker”.

I hope Hume is smart enough to know she’s talking nonsense and is just trying to mislead those people silly enough to believe her. This is a defence of private-good/public-bad ideology that makes no sense. Apart from her inference that people who work for the government don’t have to pay taxes, it’s as silly as saying Woolies and Coles don’t add to the economy because every cent they earn comes from their customers’ pockets.

If we left health, education, law and order and all the rest completely to the private sector, do you reckon we’d have an economy that was bigger or smaller than we have today?

Back to Dutton. He says “a major cause of homegrown inflation is rapid and unrestrained government spending”. If it’s the huge spending by federal and state governments during the pandemic he’s referring to, that’s no more than the economists’ conventional wisdom.

But I guess he’s referring to the more recent spending by Albanese & Co. And get this: ignore the wild exaggeration and the business press has been saying much the same thing for months.

Although the argument has been disavowed by Reserve Bank governor Michele Bullock, the business press has been arguing that the government’s spending, especially that intended to ease cost-of-living pressure by subsidising electricity prices and increasing rent assistance for pensioners, is causing consumer demand to be stronger than otherwise and keeping the jobs market stronger than otherwise, so has allowed businesses to keep increasing their prices.

Fundamentally, the business press is right. The way to get inflation down faster would have been to hit the economy harder, with higher interest rates and zero discretionary spending by the government. Instead, the Reserve and the government took the compromise position by aiming for a soft landing and a consequent slower return to low inflation.

I get why the press hasn’t wanted to spell out more clearly its preference for the tougher choice. What I don’t get is why it thinks its business customers would have preferred a full-blown recession.

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Economists find social media harms young people's mental health

By MILLIE MUROI, Economics Writer

If the latest research is anything to go by, my risk of developing a mental health disorder is rather high compared to much of the population. I’m in my mid-20s, female, and I can’t remember a day in the past decade that I’ve gone without social media.

My first year of high school was the first year I dipped my toe into the space. Until I was about 12, communicating with anyone outside of family, and beyond school hours, was limited to play dates, after-school activities and rookie email chains when I finally got my turn on the family computer.

I grew up alongside social media, working my way through high school as Facebook and Instagram morphed from clunky, teenage versions of themselves, to more seamless, somewhat creepily curated “grown-up” platforms.

Perhaps it’s fitting, then, that from December, social media platforms will be limited to those aged 16 or older – in a world-first – right here in Australia. There’s been plenty of fair and reasonable criticism against the policy, but there’s solid evidence a social media ban for teens could be a worthwhile pursuit.

Dr Andrew Leigh – former economics professor and now assistant minister for competition and treasury – and health economist Dr Stephen Robson recently documented a “substantial worsening” in the mental health of Australians aged 15 to 24 over the past few decades, suggesting smartphones and social media might be the killer bullet ripping through their mental wellbeing.

It’s not a new theory that social media is, at least partly, to blame for the rise in self-harm hospitalisations and suicide deaths. But Leigh and Robson’s study steps through the data and existing body of research, laying out why the link between social media and the tumble in young peoples’ mental health is causal rather than just correlative.

There are various signs that, when it comes to youth mental health, the proliferation of social media has been a driving force – and not in a good way.

So, how do we know what’s causing what?

Between the 2007-10 and 2019-22 periods, there was a 50 per cent surge in the share of young people reporting a mental health disorder, a 35 per cent climb in self-harm hospitalisations among young people, and a 34 per cent jump in the suicide rate among – you guessed it – young people.

It’s little coincidence that the share of children aged six to 13 with mobile phones went from virtually none in 2006 (the first iPhone was released in 2007) to 33 per cent in 2020, with screen time also shooting up over the same period. Major social media platforms also emerged around the same time: Facebook and Twitter (now X) in 2006, Tumblr in 2007, and Instagram and Snapchat in 2010.

As Leigh points out, many studies have shown the damaging effects of screen time on mental health – including depression, anxiety, body image issues and eating disorders. And it’s young women who are suffering the most, because they’re more likely than young men to be invested in social media over other activities like gaming.

Rates of young men experiencing a mental disorder were 40 per cent higher in the 2019-22 period compared to the 2007-10 period, and 60 per cent higher for young women. The gaps in self-harm hospitalisations and suicide deaths between young men and women are even wider.

Now, there’s little doubt the housing crisis and soaring cost-of-living pressures have taken a toll on the mental health of young people, who tend to be among the hardest hit by economic insecurity. But Leigh says the data shows the worsening in mental health pre-dates COVID-19 and the recent spurt of inflation, with a significant drop-off in young people’s wellbeing – especially that of women – from about 2010.

So, how do we know social media is actually leading to worse mental health, rather than just being statistically linked to it?

First, an Australian survey of kids aged 11 to 17 shows the more hours spent online on a typical weekend day, the higher their levels of psychological distress tended to be.

Second, the fact that young women’s mental health has dropped off more significantly than that of young men bolsters the idea that social media may be to blame, since they tend to use social media more heavily.

Leigh says we can also look at what young people think. When asked why they think mental health has worsened, the top answer – ranked ahead of cost of living, drugs and alcohol, and climate change – is the increased use of social media.

Fourth, we can look at a “natural experiment”, where no one has intentionally designed conditions to test and observe a theory, but a situation occurs in the real world that allows researchers to examine the impact of something. A relevant one is the rollout of Facebook across US universities. As students were granted access at various universities, there was a parallel worsening in mental health and increased use of campus mental-health services.

Fifth, in randomised experiments, those who were asked to reduce their use of social media for three weeks became less lonely and depressed.

And finally, Leigh says social media companies themselves see a link between use of their products and adverse mental health outcomes in young people.

Of course, even with all this evidence, it’s not as easy as saying social media is evil – or that an age-based ban is the best solution.

Indeed, I think the social media ban has its issues. It cuts off kids (who may already be isolated from those around them) from online peers who may be their main source of company, comfort and friendship; it reduces the ability of kids to share ideas and form connections with people across international borders; and there are questions about how they will learn to navigate the social media landscape once they turn 16.

As an avid social media user myself, I can see both the positive and negative impacts these platforms have had on my life. I’ve learned to curate my content (mostly) to people and things that spark joy (hello, digital Marie Condo), or inspire me to become a better person. But I think in the current digital environment, being shielded from social media for a few extra years would do more good than harm.

There’s also a compelling case – when mental health is deteriorating among young people – as to why, even if we don’t have all the information or the perfect solution, we need to act fast. And being the first in the world to have a social media ban means we’ll be helping the world get closer to identifying the wrong solutions and finding the right ones.

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In 50 years, Trump will be remembered as just a puzzling footnote

I know I’m a bit late, but welcome to 2025. Before we get on with a year of absolutely gratuitous economic angst courtesy of a great American conman’s second coming, let’s take a breath and realise we’re already a quarter of the way through what many still think of as the “new” century.

How time flies while you’re preoccupied with one crisis – one damn thing – after another. I hate to undercut the media’s business model, but old age has taught me that most of the things we find so momentous at the time don’t leave much of a mark on the course of history.

In the heat of battle, we imagine the distant future having been irreversibly shaped by the latest unexpected excitement. A global trade war, for instance. Sorry, a beginner’s error.

Late last year I learnt that, in 1975, “15 leading Australians” had produced a book titled Australia 2025, which examined “the changing face of their country 50 years from now”. It was published by Electrolux, maker of vacuum cleaners.

What a great way to kick off another year of columns, I thought as I asked our library to disinter this gem from the archives. To be honest, I expected it would be great fun. All those fearless predictions about how, by 2025, we’d be flying to work in our spaceships. Or maybe by then computers would mean everyone was working from home.

Wrong. The chapter on the economy was written by someone I dimly remember, BHP’s chief economist at the time, John Brunner. He was far too smart to get caught making fanciful predictions about spaceships or anything else much. He devoted most of his 10 pages to explaining why anything he predicted was likely to be wrong.

He listed all the country’s recent problems, which many more impetuous observers could be tempted to foresee changing our future, while then expressing his doubts. For example, at that time, and still under the Whitlam government, we had a big problem with double-digit inflation. Would this problem be with us for another 50 years?

Brunner recorded all the reasons for thinking it might: “the increasing power of the unions, more generous unemployment benefits, vulnerability of capital-intensive industry to strikes” and “perhaps most potent of all, the commitment of governments to full employment”.

Even so, Brunner doubted it. And he was right. “What?” you say. “We’ve had a problem with high inflation in just the past few years.”

True. But much of the reason we’ve found it so disconcerting is that we’ve become so unused to high inflation. This latest, pandemic-caused surge in prices ended a period of about 30 years in which inflation stayed low, in Australia and all other rich countries.

Why is it so rare for the problem of the moment to be the thing that shapes the next 50 years? Because, as Brunner well understood, when big problems emerge, ordinary businesses and consumers look for ways around them, while governments look for ways to fix them. Action leads inevitably to reaction. And market economies like ours are adept at finding solutions to problems.

Consider Brunner’s list of reasons for predicting eternal high inflation. Powerful unions? Globalisation stopped that. So did the deregulation of wage-fixing. Generous unemployment benefits? Tell that to the Australian Council of Social Service. These days, every sensible person thinks the dole is too low.

As for “the commitment of governments to full employment”, it became a commitment in name only just a few years after Brunner was writing. Overseas economists invented an escape clause they called the “non-accelerating inflation” rate of unemployment, or NAIRU, and naturally, our government and its econocrats jumped at it.

For about the first 30 years after World War II, our rate of unemployment rarely got above 2 per cent. Allow for the workers who happened to be between jobs at any given time and that really was full employment.

But by 1975, inflation was in double digits and the unemployment rate had jumped to 4.6 per cent. The governments of the rich economies dumped the full-employment objective and turned every effort towards getting inflation down.

Thanks mainly to all the extra money the Morrison government spent during the pandemic, our unemployment rate fell to 3.5 per cent early in the Albanese government’s term. As I hope you remember hearing, this was the lowest unemployment had fallen to “in about 50 years”.

Quite accidentally, we’d got back to something like full employment. But get this. If you wonder why the Reserve Bank is so reluctant to cut interest rates, it’s because its battered old NAIRU machine keeps telling it unemployment is still too low.

This brings me to a bit of Brunner wisdom worth repeating 50 years later. “One of the superstitions to which modern man is particularly susceptible is the idea that what comes out of the computer must represent the law and the prophets [the Old Testament].”

“But of course what comes out of a computer depends on what goes into it and if you feed in neo-Malthusian assumptions you will get gloomy answers.” (Thomas Malthus was a notoriously pessimistic English economist from the 18th century.)

Finally, this: “Probably no profession spends more time contemplating the future than the economics profession and yet few are worse equipped for the task. For whatever facility they may have for manipulating economic variables, economists really know very little indeed about what determines economic magnitudes, particularly in the long run.

“The long-term rate of economic growth, for instance, will be determined by a host of political, technological and cultural factors which no economist has any special claims to be able to predict.”

Ah. They don’t make business economists like him any more.

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Want more economics students? Drop the obsession with maths

The Reserve Bank is worried. The number of students wanting to study economics has been falling over the years, and it’s worried this will lead to a fall in the electorate’s economic literacy, which could end up worsening government policy.

And the Reserve, being by far our biggest single employer of economists, may be worried its choice of potential recruits will deteriorate.

An article by the Reserve’s Emma Chow, published last week, told us a truth the nation’s academic economists have often been loath to admit: the main recruiting sergeant for university economics degrees is high school economics.

Because it’s based so heavily on current affairs – “be sure you watch the treasurer delivering the budget speech on TV tonight, kids” – high school economics gives students the impression economics is interesting and important. Only after they’ve signed up at uni do they discover that, in the hands of a lecturer who’d rather be doing research, it can be deadly dull.

But the proportion of students studying economics at high school has fallen markedly since the early 1990s, mainly because of the introduction of business studies, a more descriptive course that requires much less intellectual effort for both students and teachers.

Now, however, Chow tells us that not only are fewer students studying economics at high school, few of those who do go on to a dedicated economics course at uni. Most prefer to major in commerce or finance.

The limitations of her data allow Chow to tell us little about why economics has become so unpopular. It certainly can’t be because the management of our economy has become so boringly smooth and uneventful.

But I think I know the biggest reason: the economists have lost the plot. Since not long after the end of World War II, academic economists have been engaged in an all-consuming quest to make their discipline more intellectually “rigorous” by making it more mathematical.

Their concepts of how the economy works must be expressed in algebraic equations, not diagrams of demand and supply curves nor – heaven forfend – mere words.

They must build ever-more “elegant” econometric models of the economy which could at last spit out reliable forecasts of where the economy was headed. Except they’ve proved just as unreliable as economists’ predictions have always been.

When some kid tells me proudly that they’ll be doing economics at uni, I warn them they’d better like maths. If they talk to a friend who’s already doing the uni course, they’re told the same thing. I reckon too many young people are getting the message that uni economics ain’t much fun.

It’s true that when you express propositions as equations, any logical faults in your reasoning are exposed. But this greater “rigor” comes with a big proviso: the reasoning is completely logical given the assumptions on which it’s based.

If your assumptions are hopelessly unrealistic, however, your fancy mathematics is logical but sadly astray. Whether your prediction came off the top or your head or from a model whose maths is beyond the comprehension of almost all of us, it’s still a case of garbage in, garbage out.

The remarkable thing is that the failure of mathematisation to improve the economists’ understanding of how the economy works has done nothing to dampen their enthusiasm for more maths.

Once, when I reminded a well-known academic economist of some finding of behavioural economics that contradicted the conventional model, he replied: “You maybe right, Ross, but unless you can get it into an equation, I’m not interested.”

Get it? The academics are now doing maths for its own sake. They stick with their stick-men model of the economy because anything more sophisticated can’t be mathematised. These days, you can’t work in a uni economics department unless you’re a whizz at maths. Nor can you get promoted.

Academic economics is becoming a branch of applied mathematics. It’s dominated by people who got where they are because they’re good at maths, not because they know a lot, or care a lot, about how the economy really works.

But if the Reserve Bank bosses are worried now, I have more bad news: the NSW Education Department’s draft revised economics syllabus shows the maths disease is spreading to high schools.

The syllabus – which would be little different from that for the Victorian Certificate of Education – is already absurdly overcrowded. You take a 17-year-old and, in two years, while they’re studying various other subjects, expect them to get their head around everything a professional economist understands about what their profession thinks it knows about the workings of the economy.

If they really did understand all that, why would they need to go to uni and learn it all again? But, to give high school economics greater rigor, the proposed new syllabus seeks to – you guessed it – make it more mathematical. It increases to about 35 the number of calculations a student is required to be able to perform.

Can you imagine how much students’ time that should be spent thinking about how it all hangs together would be devoted to memorising formulas and practising sums? Don’t think about how oligopolies work and why market power harms consumers, just learn to calculate the Herfindahl-Hirschman industry concentration index.

Or, how about using Laffer curves to calculate optimal tax rates? (I’m not making this up.) To make room for all these new calculations, the new syllabus would drop such minor matters the case study of the Chinese economy and the impacts of globalisation on the world.

Of course, the move to greater rigor would have its advantages. Much more of the exam would involve asking questions with answers that could be exactly right or wrong. This makes exam papers much easier and cheaper to mark. It could be done by a machine, not a teacher on overtime at the marking centre.

I reckon that if each state reformed their syllabus in this way, they’d end all the Reserve’s worries about the declining popularity of high school economics. Few if any kids would want to do the course. Problem solved.

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Think the measurement of inflation's a bit off? You're probably right

By MILLIE MUROI, Economics Writer

If you’ve ever looked at the latest inflation figures and thought to yourself it doesn’t really reflect the ballooning or shrinking prices you’ve been paying, you’re probably right.

Like most measures of our economy’s health, the consumer price index (CPI) – our main inflation gauge – is only a rough estimate of what’s happening to prices. It tracks changes in the costs of a vast range of things but also skips over some key items we spend on.

This week, we learned prices at the end of last year were climbing at the slowest annual rate since March 2021 at 2.4 per cent (a much more reassuring figure than the 7.8 per cent we were seeing two years ago). But if you feel like the prices you’re paying are moving to a different tune, they probably are.

The index, measured by the Australian Bureau of Statistics, basically tracks the change in the price of a typical “basket” of goods and services that we, as households, consume. Think: a big shopping trolley that carries a lot more than what you’d find in a supermarket. Sure, it includes eggs and fruit, but it also includes things like school fees, specialist visits and subscriptions to your favourite streaming platform.

Of course, you probably don’t spend on the exact same things, or buy the exact same amount, as people on the other side of the country – or even your neighbours – which is why the inflation measure isn’t a perfect fit for specific households.

The CPI is based on the average spending habits of everyone (well, at least those living in the capital cities). Then, based on this data, the bureau gives different “weightings” – a measure of an item’s relative importance in the total basket – to different items and categories. Things we spend a lot of our money on – like housing costs and food – get a bigger weighting in the index, meaning any changes in prices in those categories will shift the dial more when it comes to the final inflation figure.

Since the things we tend to spend on change over time, the bureau frequently updates these weightings.

The first ever “basket” in 1948, for example, put the proportion of our spending on food and non-alcoholic beverages at nearly one third, with dairy products alone taking up nearly a quarter of our food budget. Women’s clothing, meanwhile, accounted for about 10 per cent of our total spending. Combined with spending on men’s attire at nearly 5 per cent, our total spending on clothing back then took a bigger bite out of our budget than the 12 per cent we used to spend on housing!

Today, food and non-alcoholic drinks account for 17 per cent of the typical household’s spending, and both dairy products and women’s clothing just 1 per cent each – the latter being largely thanks to the rise of mass-produced and cheap imported garments. It’s perhaps little surprise that the biggest share of our spending is now on housing at more than 20 per cent, while transport, including our spending on cars, burns about 11 per cent (transport spending was measured through fares – such as the price of train tickets – which took up about 6 per cent of the typical household budget in 1948 before cars became widespread).

So, how does the bureau know what we’re spending on?

One way is through the household expenditure survey, which is conducted roughly every five years and gives the bureau an indication of how much we’re spending on different goods and services. It’s the reason why, for many years, the CPI weightings – only changed about every five years. Now, as collecting information has become easier and more digital, the weightings are updated every year and rely on various sources including retail trade and transaction data.

The bureau gets its pricing data by monitoring the prices of thousands of products. It looks for this information through everything from websites, to supermarket and department store data, as well as pricing data it receives from government authorities, energy providers and real estate agents.

Combining the pricing and weighting data gives us the consumer price index which is released in its complete form every three months. Since September 2022, the bureau has also published a monthly CPI reading, although the goods and services measured each month tend to alternate, giving us an incomplete picture of what’s going on.

As we’ve talked about, the CPI isn’t an accurate measure of our cost of living, although we all assume it is.

A better measure is the bureau’s “selected living-cost indexes” which break down changes in the cost of living for different types of households. Working households, for example, saw their annual living costs rise by 4.7 per cent last September quarter, while self-funded retirees only experienced a 2.8 per cent increase.

That’s mostly because different household types tend to splash cash on different things. Self-funded retirees and age pensioners might, for instance, spend slightly more on health, meaning any price changes there may bump their cost of living more than it would for working households.

But by far the biggest reason for the difference between working households and older cohorts is that working households are more likely to have a mortgage they are paying off. This means changes in interest rates – which are included in the selected living cost indexes but not the CPI – have a bigger impact on their overall cost of living.

It’s also one of the biggest shortcomings of the CPI. In the early 1990s, the Reserve Bank started using interest rates to target inflation: a practice that’s now become very familiar to us all. But later that decade, the bank asked the bureau to remove interest rates from the consumer price index. Why? Because the bank didn’t want the instrument it was using to control the rise in prices — interest rates — to be included among the price rises being measured. Your instrument should be separate from your target.

Instead, since 1998, the CPI has measured housing prices through changes in components such as rents, the cost of building new homes, and the cost of maintenance and repairs. But that means for the roughly one third of Australian households with a mortgage, the CPI is not a very good measure of the price pressures they are facing.

While the CPI is a rough estimate of the cost of living pressures we’re facing, if you feel like the pinch you’re feeling is harder or softer than the latest figures suggest, you’re probably right.

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Why we'd be mugs to focus on the cost of living at the election

It’s a good thing I’m not a pessimist because I have forebodings about this year’s federal election. I fear we’ll waste it on expressing our dissatisfaction and resentment rather than carefully choosing the major party likely to do the least-worst job of fixing our many problems.

Rather than doing some hard thinking, we’ll just release some negative emotion. We’ll kick against the pricks – in both senses of the word.

We face a choice between a weak leader in Anthony Albanese (someone who knows what needs to be done, but lacks the courage to do much of it) and Peter Dutton (someone who doesn’t care what needs to be done, but thinks he can use division to snaffle the top job).

By far the most important problem we face – the one that does most to threaten our future – is climate change. We’re reminded frequently of that truth – the terrible Los Angeles fires; last year being the world’s hottest on record – but the problem’s been with us for so long and is so hard to fix that we’re always tempted to put it aside while we focus on some lesser but newer irritant.

Such as? The cost of living. All the polling shows it’s the biggest thing on voters’ minds, with climate change – and our children’s future – running well behind.

Trouble is, kicking Albanese for being the man in charge during this worldwide development may give us some momentary satisfaction, but it will do nothing to ease the pain. Is Dutton proposing some measure that would provide immediate relief? Nope.

Why not? Because no such measure exists. There are flashy things you could do – another big tax cut, for instance – but they’d soon backfire, prompting the Reserve Bank to delay its plans to cut interest rates, or even push them a bit higher.

We risk acting like an upset kid, kicking out to show our frustration without thinking about whether that will help or hinder their cause.

Rather than finding someone to kick, voters need to understand what caused consumer prices to surge, and what “the authorities” – in this case, Reserve Bank governor Michele Bullock and the board, not Albanese – are doing to stop prices rising so rapidly.

The surge was caused by temporary global effects of the pandemic – which have since largely gone away – plus what proved to be the authorities’ excessive response to the pandemic, which is taking longer to fix.

It’s primarily the Reserve Bank that’s fixing the cost of living, and doing it the only way it knows: using higher mortgage interest rates to squeeze inflation out of the system. But doesn’t that hurt people with mortgages? You bet it does.

What many voters don’t seem to realise is that, by now, the pain they’re continuing to feel is coming not from the disease but the cure. Not from further big price rises but from their much higher mortgage payments.

So it’s the unelected central bank that will decide when the present cost-of-living pain is eased by lowering interest rates, not Albanese or Dutton. A protest vote on the cost of living will achieve little. Of course, if you think it would put the frighteners on governor Bullock, go right ahead. She doesn’t look easily frightened to me.

But there’s another point that voters should get. When people complain about the cost of living, they’re focusing on rising prices (including the price of a home loan). What matters, however, is not just what’s happening to the prices they pay, but what’s happening to the wages they use to do the paying.

When wages are rising as fast as prices – or usually, a little faster – most people have little trouble coping with the cost of living. But until last year, wages rose for several years at rates well below the rise in prices. Get it? What’s really causing people to feel cost-of-living pain is not so much continuing big price rises or even high mortgage payments, but several years of weak wage growth.

Why does this different way of joining the dots matter? Because, when it comes to wages, there is a big difference between Albanese and Dutton.

Since returning to government in 2022, Labor has consistently urged the Fair Work Commission to grant generous annual increases in the minimum award pay rates applying to the bottom fifth of wage earners.

This will have helped higher-paid workers negotiate bigger rises – as would Labor’s various changes to industrial relations law. Indeed, this is why wages last year returned to growing a fraction faster than prices.

These efforts to increase wage rates are in marked distinction to the actions of the former Coalition government. So kicking Albanese for presiding over a cost-of-living crisis risks returning to power the party of lower wages.

But here’s the trick: it also risks us taking a backward step on climate change. The party that isn’t trying hard enough could be replaced by a Coalition that wants to stop trying for another decade, while it thinks about switching from renewables to nuclear energy.

From the perspective of our children and grandchildren, the best election outcome would be a minority government dependent on the support of the pollies who do get the urgency of climate action: the Greens and teal independents.

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