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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Should we really go forth and multiply?

By MILLIE MUROI, Economics Writer

For most of human history, it’s been a miracle for us to survive long enough, or reproduce vigorously enough to rapidly grow in numbers. But as we’ve gotten better at dodging tigers, killing germs and containing pandemics, we’ve also become increasingly intrigued and hungry to know how many of us there are, how many of us there will be and how it will affect our lives.

Just before Christmas, the federal Centre for Population released its annual population statement, saying the number of people living in Australia reached about 27 million last March – and is expected to reach just over 31 million within the next 10 years.

How did it calculate this? The centre uses data from the Australian Bureau of Statistics as a starting point to determine things such as current population level. It then makes assumptions, analyses data and models the effect of long-term trends on population growth.

Of course, looking into the crystal ball, even when it’s bolstered by lots of data and analysis, is never perfect. But the centre’s work feeds into government policies and debate because population changes can have a huge impact on the direction of our economy and our day-to-day lives.

Population growth is a combination of what we call the “natural” increase – think babies born in Australia minus the number of people who die here over the same period – and net overseas migration: people coming into the country minus all those who decide to move overseas.

To keep our population at the same level “naturally”, we need an average of 2.1 births for every woman. This is called the “replacement rate”: the rate of childbirth needed to make sure there’s someone to replace both parents when mortality catches up to them.

Of course, making 10 per cent of a child is not really viable and would require a great deal of scientific development, focus and time to piece together. But we need a birth rate of more than two children for every woman on average as a buffer because some of us inevitably – and rather annoyingly for those hoping for population growth – bite the dust early.

In 2023, fertility in our country slipped to a record low of 1.5 babies for every woman, or about 291,000 births, compared to 1.6 babies per woman the year before. Like many of our advanced economy siblings, Australia’s fertility rate has been sliding since the early 1960s.

There are both long and shorter-term factors which can dump cold water onto baby fever.

A household might, for example, put off having children when experiencing more financial pain – as we’ve seen during the recent high-inflation period. After all, having a child is one of the most expensive decisions, costing hundreds of thousands of dollars until adulthood.

Kids will always be a dear investment (in multiple senses of the word), but factors tied to the cost of living can reverse as circumstances improve, allowing people to catch up on their ambitions to have kids.

Longer-term factors, however, such as changing cultural norms and better access to employment and education opportunities, can have a more lasting effect on the number of kids we want. Generally, the better educated are less likely to have as many children because they start their families later. Taking various factors into account, the centre expects the fertility rate to settle at about 1.6 births per woman by 2032.

That doesn’t mean Australia’s population will shrink. Why? Partly because we have “population momentum”: a large enough share of women at – or approaching – reproductive age that the potential for growth isn’t falling off a cliff anytime soon.

We have also pursued a long-standing policy of encouraging net overseas migration, which has added to our population and tended to keep it young. Not many grandmas and grandpas decide to uproot their life to move overseas, and governments target younger migrants.

Under its current mortality and migration assumptions, the centre reckons Australia’s fertility rate needs to be only about 1.2 children per woman to keep the population from sliding backwards.

Although fewer people are dying now than when COVID was spreading widely, the number of deaths in 2023-24 was still 13 per cent higher than before the pandemic. Given the ongoing dent in our population from the pandemic, and our low fertility rate, the level of net overseas migration we need (if we want to keep the population growing) is a bit higher compared to pre-pandemic.

Overall, the centre thinks population growth in Australia will continue, driven by migration and rising life expectancy, plus a higher fertility rate than many other advanced economies. But the centre also notes net overseas migration peaked in 2022-23, and that it will probably continue to fall before stabilising over the next few years.

Declining fertility globally is the reason the United Nations gave last year for its forecast of the world’s population peaking at 10.3 billion people in 2084. That is, of course, assuming we don’t encounter aliens keen to settle here in the next few decades.

Population growth isn’t necessarily all a good thing. More people often means worse pressures on the environment as we build more things (and therefore clear more land), release more emissions and suck up more natural resources.

It can also intensify the fight over scarce resources – which we have seen perhaps most acutely in our housing debate. When we allow strong demand from population growth, but fail to plan for increased supply (of, for example, houses) we tend to ignite price pressures and face shortages in things we want and need.

But there’s also no doubt that we’re in for a rough ride if we want to curb population growth. Within the next 40 years, for example, nearly one-quarter of the population is expected to be aged 65 and over. Ushering in more working-age people to look after an ageing population isn’t the only solution, but the pressure’s on for policymakers and innovators to find other ways to look after them in time.

Australians benefit in many ways from population growth. Migrants tend to help us become more productive by sharing their knowledge and skills, more people usually means faster economic growth and innovation, and catering to higher demand can help us achieve more cost-efficiencies by producing things at a bigger scale.

There’s no easy answer on the right level of population growth, but having an idea of the direction and an understanding of what we can expect is a good starting point.

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How two economists got themselves more say in government policy

By MILLIE MUROI, economics writer

For all the havoc it has wreaked, some good things were born from the pandemic: widespread hybrid working for one. Another was the emergence of e61: a novel name – not for a virus or robot – but for a factory for economic findings.

“What’s new about that?” you might ask. Well, it’s breaking a decades (perhaps centuries) old habit of people sticking to their lanes. Despite the important work done by academics and policymakers, the two rarely join forces.

Part of that is because some of our best academic talent gets sucked overseas to places like the US or UK. It’s also because academics and policymakers don’t tend to go out of their way to engage with one another, and because rigorous research skills and policymaking passion and practice don’t often manifest in a single person.

There are politicians such as federal Labor MP Dr Andrew Charlton with a doctorate in economics from Oxford University, who have put themselves through the wringer of high-level research – but few who are tuned into both the cutting edge of research and the front line of policymaking.

Charlton, who stepped down as director of the non-partisan, not-for-profit think tank when he was preselected to run as a Labor candidate in 2022, teamed up with University of Chicago economics professor Greg Kaplan when the two found themselves back in Australia during the pandemic.

Together, they founded the e61 Institute to attract and develop Australian economists, including those who have lived overseas, and pair academic rigour with a policy focus right here in Australia (hence the “61″ in its name: the number you dial from abroad when calling Australia).

Its economists have released a raft of work in the past three years which has fed into policy decisions and debate. Their approach includes using microdata (anonymised but detailed information about people, households, and businesses from surveys, censuses and administrative systems), to offer insight – not just to policymakers, but to the broader public.

From the way non-compete clauses are slowing down wage growth, to putting a number on the costs of caregiving, and identifying consumer inertia as a barrier to stronger supermarket competition, e61 has shed light on many of the issues facing the country.

Their work has fed into top decision-making processes, appearing in House of Representatives economics committee inquiries, meetings and submissions.

But funded by the Susan McKinnon Foundation, the Macquarie Business School and the Becker Friedman Institute, e61’s work is also freely available to the public. And the things you can learn from them are fascinating – providing insight into how economics applies in the real world – beyond the abstract, and beyond the bookish or theoretical.

Matthew Elias, for example, looked at the role we – as consumers – play in the highly concentrated supermarket sector.

As you know, Coles and Woolworths control about 67 per cent of supermarket retail sales nationally, and they’ve been under the scrutiny of the competition watchdog which is due to release its final supermarket inquiry report this year. While the supermarkets have copped some heat from frustrated consumers convinced that the lack of competition in the sector has led to excessive price growth, Elias found part of the problem was that customers don’t tend to shop around.

Shopping around, and the threat of customers leaving, is an important way to put pressure on businesses to deliver the best prices and quality they can. But looking at consumer shopping data, Elias found even in areas with several providers, shoppers tended to exhibit inertia: that is, they don’t tend to change their shopping habits over time, instead returning to certain supermarket brands – especially Coles and Woolworths.

Why? The answer is unclear, but some possibilities include costs including time spent learning the layout of a different store, the effort needed to compare the costs of various items, proximity to certain stores and brand loyalty promoted by schemes like Flybuys or Everyday Rewards.

Jack Buckley, Ewan Rankin and Dan Andrews meanwhile looked at non-compete clauses: where an employee agrees not to compete with their employer by, for instance, working in a similar industry, for some time even after their job ends.

About one in five of us are tied up in a non-compete clause, and it’s coming at a cost – not just to our economy (people switching to better-suited jobs can help improve innovation and lift productivity), but also to our pay.

The researchers found evidence that the fall in job mobility (people moving between jobs) was linked to lower wage growth for workers with non-compete clauses. On average, they found, people with non-compete clauses earn 4 per cent less than similar workers with just a non-disclosure agreement (aimed just at preventing employees from sharing trade secrets).

Then there’s research by Rachel Lee, Dan Andrews and Jack Buckley which sounded a warning for policymakers looking to tweak their payroll tax settings. When South Australia bumped up the payroll tax-free threshold (which also sharply increased the marginal tax rate for firms over that limits), it led to a phenomenon called “bunching.”

Basically, e61’s analysis of business income tax data found lots of new businesses in South Australia were ending up just below the new payroll tax threshold. Since firms with an annual wage bill of less than $1.5 million could be exempt from payroll tax, there was a jump in the number of firms just under that size – despite a lot of those businesses being productive and growing firms which you’d expect to continue growing.

The conclusion? That little tweak in the payroll tax settings may have stunted the growth of many businesses, which cut back on their workers in an effort to slash their payroll tax. Sure, it benefited some smaller firms which were able to grow within that threshold, but the costs of businesses shrinking their payrolls was bigger.

Kaplan says he wants to see e61 be at the forefront of major policy movements over the next debate: both avoiding bad policy mistakes and guiding good policy. It might take a while for the new kid on the economics block to become a hard-hitter, but linking some of the brightest academic economists with crucial policy problems is helping to inject rigour into our understanding of economics – and that of our policymakers.

e61 supported the reporter’s travel from Canberra to Sydney.

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The many different effects of the fall in our dollar

By MILLIE MUROI, Economics Writer

The Aussie dollar seems to have been slammed by a truck over the past few weeks, but it’s not all bad news. Plenty of people – not just overseas friends paying us a visit or buying our stuff – will be lapping up the benefits.

As we rang in the new year, we rang in two since the Australian dollar could buy more than US70¢. Now, it’s scratching about at US62¢. You’d have to trek back to the early 2010s to find a time when one Aussie dollar was worth more than an American dollar (mostly thanks to higher commodity prices at the time).

So, what’s left the Australian dollar wallowing in foreign exchange market mud? And who are the people likely to be rolling in it?

Let’s start with how we put a price on the dollar. Like most things, there’s a market for Aussie dollars where people buy and sell. You’ve probably participated in this market whenever you go overseas and need foreign currency.

Aussie dollars are bought and sold for other currencies (there’s no point buying our own currency using … our own currency). That’s why the value of the Australian dollar – the exchange rate – is always expressed in terms of some other country’s currency, often the US dollar, because it’s the most widely used in international transactions.

A better measure of the value of our currency, though, is the trade-weighted index, which is the price of the Australian dollar in terms of a basket of foreign currencies based on their share of trade with Australia. The more we trade with a country, the heavier the weighting of their currency in this basket. Changes in the Chinese yuan are the most influential when measuring the Australian dollar’s value in this way – although it’s not often the one you hear quoted in the media.

Our exchange rates are almost always changing – at least on weekdays, when the foreign exchange market is open 24 hours a day. As with most other things we buy and sell, the price we pay depends on how much demand and supply there is for our currency and everyone else’s.

When the amount of Aussie dollars that people want to buy at a particular time exceeds the amount of Aussie dollars that other people want to sell at that time, our exchange rate – the price of the Australian dollar – steps up, which is called an “appreciation”. When supply of Aussie dollars exceeds demand, we see the exchange rate fall: a “depreciation.”

What might push up demand for our currency? Tourists coming to visit us may buy our currency so they can pay for a swish Airbnb in Sydney or coffee in Melbourne. Foreigners might also want to buy other assets priced in Australian dollars such as a business, company shares or Australian government bonds. And Aussie exporters, if they’ve been paid in foreign currency for their goods and services, may want to cash in for currency they can use at home.

By the same token, some of our Aussie business owners might want to import goods and services, or inputs such as equipment, which are priced in, say, US dollars. Aussies may also want to invest in overseas companies or buy US government bonds. Or we may just need overseas currency to take with us when we jump on a plane to our next exotic destination.

Because our exports are so dependent on the mining industry, commodity prices also greatly affect our exchange rate. When the price of minerals such as iron ore heads north, so does the value of the Australian dollar because our overseas buyers need more Aussie dollars to buy it from us.

Demand for Australian dollars – and therefore the exchange rate – is also affected by things like the difference in interest rates between Australia and the rest of the world. When our interest rates are higher relative to overseas, the value of our currency increases because investors become more attracted to the idea of depositing cash here – for which they’ll need Australian dollars. Even hints at where our interest rates might sit, relative to those overseas in the future, can sway the exchange rate by shifting people’s expectations and therefore what currencies they want to hold more of.

Interest rates are still a touch higher in the US than here, but when the US Federal Reserve said last month that it expected fewer rate cuts in 2025, it signalled interest rates there might stay higher than most people had been expecting. That made the prospect of depositing cash here, in Australia, less attractive than before, and reduced demand for our currency.

At the same time, China, our biggest trade partner, is growing its economy at a crawl – especially when compared to recent decades. While we’ve relied on them purchasing vast amounts of our exports in recent years, many are expecting a continued slowdown, which means demand for the Aussie dollar is likely to stay low, reducing its value.

A sustained fall in the value of the Aussie dollar is bad news for our importers, who will have to pay more for the things they buy, as well as Australians travelling overseas. But it’s good news for our exporters, who will earn more Aussie dollars from selling Australian-made goods and services abroad, as well as Australian businesses competing with imports for customers in the domestic market (as imports become relatively more expensive, Aussie customers are more likely to opt for Australian goods and services). This all reverses when there’s a sustained rise in the value of the Australian dollar.

Basically, a fall in the Australian dollar improves the price competitiveness of our export industries, as well as those industries where Aussie businesses are competing heavily with imported substitutes. This has an expansionary effect on our economic activity as demand for our goods and services increases.

But a fall in the Aussie dollar can also be inflationary for us because it pushes up the cost of imported goods and services. We’re now having to pay more for the things we import, such as cars, electronics and many medicines. A rise in the Australian dollar can, on the other hand, dampen inflation.

While the recent fall in the value of the Australian dollar might catch the Reserve Bank’s attention, it’s not likely to affect their decisions greatly. That’s partly because it’s impossible to predict where the dollar will go next. Up and down movements are pretty common and, like most things in life, these changes have both costs and benefits.

The long-term effect of a weak dollar is also generally positive, with more jobs and spending by foreigners in our export sectors giving the economy a bit of a tailwind. Not everyone will be better off, but a weaker Aussie dollar is far from the disaster it’s often made out to be.

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The secret to better health and less obesity is a tax

By MILLIE MUROI, Economics Writer

If you’re like me, chances are that during the silly season you indulged in a bit more of the guilty pleasures than usual. I would make a bet though (and hit bingo about 90 per cent of the time) that it wasn’t tobacco that you reached for, but sugary treats – and maybe a bit of alcohol.

The rates at which we tax tobacco might have you thinking that smoking is among the biggest health risks we face. But with the daily smoking rate down to about one in 10 people, it’s things like obesity and diabetes that have grown to become our biggest health problems.

Obesity has tripled in Australia since 1980, and so has diabetes over the past 25 years. In 2022, one in three Australian adults was obese and another one in three overweight, while about one in 20 had diabetes.

And as Grattan Institute health program director Peter Breadon and senior associate Jessica Geraghty have highlighted, one of the heftiest reasons we have such high rates of obesity and type 2 diabetes – which makes up more than 85 per cent of diabetes cases – is that we consume far too much sugar.

You might not realise it, but on average, Australians consume half a kilogram of sugar each week – much of it invisible. That lolly snake or biscuit you reach for in the afternoon might be obvious culprits, but large quantities of sugar also swim around in soft drinks and even savoury products such as pasta sauces and pre-made soups. “Popular drinks such as Solo and Coke have as much as 10 teaspoons of sugar in just one 375-millilitre can,” Breadon says.

Our high sugar consumption puts us at higher risk of diabetes: a disease that contributes to one in 10 Australian deaths, leaves thousands of us sick or with a disability, and costs billions of dollars a year to taxpayers. In 2018, obesity alone was estimated to cost nearly $12 billion in direct health and indirect community costs.

So, what can we do to curb our sweet tooth? Make it more costly. In an ideal world, we could factor in all the health risks and cut back our consumption without the need for additional incentives – or disincentives.

But sugar sneaks around under a bunch of aliases – high fructose corn syrup, glucose or molasses to name a few – making it hard to spot for those hoping to squeeze some of it out of their diet. And it’s easy for us to reach for a sugar hit, sometimes without realising it, kicking the can down the road when it comes to considering the longer-term consequences.

That’s unless we put an upfront price on the damage – a tax on sugary drinks would be a good start. Why? Because sugary drinks make up nearly one-quarter of our daily added-sugar intake – more than any other major types of food. Sugary drinks are also especially harmful because they’re often sunk quickly, cause rapid spikes in blood glucose and insulin, and don’t do much to make people feel full.

Breadon suggests a tiered tax in which drinks with the most sugar would be slugged 60¢ per litre, while low-sugar drinks would face no tax – along with one year’s notice to give manufacturers time to change their recipes.

It’s not an immediate fix for our health problems, but there are promising signs already. More than 100 countries, including Britain, France and Portugal, have sugary drink taxes in place – and they are working.

They make people less thirsty for sugary drinks and they prod manufacturers to pour less sugar into their drinks. Four years after Britain introduced a sugary drinks tax, just one in 12 products had more than eight grams of sugar in every 100 millilitres of liquid – down from one in three before the tax. There have also been studies that show sugary drinks taxes have trimmed obesity among girls, reduced dental decay and cut the number of children having teeth taken out in hospital.

Breadon and his colleagues at Grattan estimate their proposed tax for Australia would reduce the amount of sugary drinks we consume by about 275 million litres a year – enough to fill 110 Olympic swimming pools.

It would mean Australians would ingest nearly three-quarters of a kilogram less sugar each year thanks to manufacturers cutting down their sugar use and consumers opting for the cheaper option: low or no sugar drinks.

Disadvantaged Australians, who are the hardest hit by obesity, would be the biggest winners, Breadon says. And the financial drain on households and the wider industry, including sugar farmers, would be fairly small given about 85 per cent of Australia’s raw sugar is exported.

While the main goal of a sugary drinks tax would be to improve our health, it would also benefit the government’s bottom line (which has suffered in recent years as tax revenue from tobacco has plummeted). If introduced today, Grattan estimates, the sugary drinks tax would raise nearly $500 million in the first year, while also generating savings by reducing the demand for healthcare.

While the government has been helping Australians living with diabetes, including through listing new insulin injections, such as Fiasp, on the Pharmaceutical Benefits Scheme, Health Minister Mark Butler has no plans for a sugar tax.

Shadow Health Minister Anne Ruston has said the Coalition also doesn’t support a sugar tax, saying there were better ways to encourage healthy eating and preventive health, without hurting the hip pockets of families.

While there needs to be other preventive measures in place, such as stronger labelling regulations, a tax on sugary drinks is the cheapest and easiest to implement. The government’s new year resolutions should include the boldness to consider a sugar tax, rather than kicking the drink can down the road.

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What's happened to the cost of living is trickier than you think

It’s been a year of wearying in the fight against inflation. But if you think you know what it all proves, you’re probably kidding yourself. The first mistake is to subject it to too much rational analysis.

While voters in Oz complain incessantly about “the cost of living”, the mug punters who put Donald Trump back in the White House were said to be on about “inflation”. Aren’t they the same thing? Well, maybe, maybe not.

A penny dropped for me when I heard some woman in America justify voting for Trump by saying that the prices went up and they never came back down. What? Since when does inflation go away because retail prices have come back down?

Well, only in economics textbooks. In the real world, inflation is the rate of increase in prices, and you fix it not by reducing the level of prices, but by reducing the rate at which they continue rising.

So what was that woman on about? Don’t ask an economist. Ask a psychologist, however, and they’ll tell you that the reason people give you for doing something – buying this house rather than that one; voting for Trump rather than Joe Biden – isn’t necessarily the real reason. Indeed, the person may not actually know why they jumped the way they did.

Their subconscious mind made a snap decision to favour A rather than B and then, when asked why, their conscious mind came up with a reason they thought would sound plausible. The woman’s subconscious may simply have liked the look of Trump rather than Biden. Or maybe a lot of the people she knew were voting for Trump, so she did too.

Biden and his supporters – plus many rational economists – couldn’t see why everyone was so upset about inflation. The rate of inflation had come back a long way, wages were growing solidly and all without unemployment worsening much. Pretty good job, I’d say. What’s the problem?

Ah, said the smarties, you don’t understand that people care far more about inflation than about unemployment. Inflation hits everyone, whereas unemployment affects only a few.

Is that what you think? If so, you’re probably too young to know what happens in a real recession. When unemployment is soaring and the evening news shows pictures of more workers getting the sack every night, believe me, the punters get terribly frightened they may lose their own job.

It’s a Top 40 effect. No matter how few tunes are selling, there’s always one that’s selling a fraction more copies than the others. That’s what’s topping the pops this week. If people aren’t worried about their jobs, they can afford to be worried about high prices. When they are worried about their jobs, they stop banging on about prices.

This means the managers of the economy – and the government of the day – are often in the gun. Whatever dimension of the economy, and people’s lives, isn’t travelling well at the time is what the punters will be complaining about.

But also, it’s worth remembering that whenever pollsters ask Aussies what’s worrying them, “the cost living” always rates highly – even at times when economists can’t see there’s a problem. Why? Ask a psychologist. It’s because retail prices have “salience” – they stick out in the minds of people who shop at the supermarket every week.

The one thing voters know is that prices keep rising. And they’ve never liked it. They don’t like it whether prices are rising by 2 per cent or 10 per cent – and the highly selective consumer price index they carry in their heads always tells them it’s nearer 10 per cent than 2.

Why? Salience. They remember every big price rise indelibly, but soon forget any falls in prices. And get this: in their mental CPI, all the prices that don’t change get a weighting of zero.

When Australian voters complain about the “cost of living” and American voters complain about “inflation”, are they talking about the same thing? Logically, they shouldn’t be, but actually, they are.

To a rational economist, determining what’s happening to the cost of living involves comparing what’s happening to prices on the one hand with what’s happening to wages and other income on the other. Strictly, the comparison should be with after-tax income.

But that’s not how voters in either country see it. They keep prices in one mental box, but wages in another. The pay rises they get are taken for granted as something they’ve earned by their own hard effort. But then, when I got to the supermarket, I discovered the cheating bastards had whacked up all their prices. I’ve been robbed!

Does this mean workers don’t mind if their take-home pay isn’t keeping with prices? Of course not. They feel the loss; they’re just confused about what’s causing it. I think that, for many people, what matters, and sticks in their mind, is how often they run out of money before their next payday.

My theory is that, because wages rose a bit faster than prices for so many years, many people have developed the unconscious habit of spending a little more each year. But when wages stop rising a little faster than prices – as they have done since March 2021 – people do feel it. They look around for someone to blame and the first thing they see is Woolies and Coles.

But there’s one factor causing pain that’s so well concealed that few people – even few economists – have noticed. One reason take-home pay has fallen well behind prices – a reason the unions and Labor thought was a great thing, and the Morrison government was too weak-kneed to stop – was the mandatory rises in employers’ contributions to their workers’ superannuation savings, which have lifted it from 9.5 per cent of your wage in 2021 to 11.5 per cent in July this year, and will take it to 12 per cent in July next year.

To the naked eye, it’s the employers who’re paying for this. But there’s strong evidence that the bosses reduce their ordinary pay rises to fit. If so, this will be a pain wage earners are feeling without knowing who to blame.

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