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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Why bribery is key to boosting our economic prosperity

By MILLIE MUROI, Economics Writer

Of all the incentives in the world, money must be among the most powerful. Since its birth thousands of years ago, dosh – chasing it, saving it, and paying it back – has driven us to ruin but also some remarkable feats. So, it shouldn’t be any different when it comes to the “p” word.

Before your eyes glaze over at the mention of productivity, you should know that had it improved more in recent years, we’d all probably have a lot less to complain about when it comes to issues such as cost of living – and the Reserve Bank wouldn’t be so worried about wage rises feeding into inflation.

What if I told you that boosting our productivity starts with bribing our state governments?

In a speech to the Queensland Economic Society of Australia in Brisbane last week, economist and former corporate watchdog boss Karen Chester identified one of the biggest hurdles to lifting our living standards: a problem called “vertical fiscal imbalance”.

Here’s the issue. Some of our most fundamental needs are taken care of by the state government: education, health, transport, and law and order to name a few. This all requires mountains of cash which the state governments have little ability to raise.

It’s the federal government that has the power to raise a lot of money – mostly through taxation, meaning there’s a mismatch: state governments might be tasked with the big asks, but it’s the federal government that has the cash to splash. As Chester puts it: “The states wear the political pain and the budget loss in doing the right thing.”

Money can’t buy happiness or solve all our problems, but without it, it’s hard to pay for – or incentivise – fixes in some of our biggest sectors, including boosting productivity.

Our productivity improves when we increase the quantity or quality of the goods and services we produce with a given set of resources, such as workers. Making people work longer hours doesn’t count towards improving productivity, but using better technology or other innovations does.

The reason we care so much about productivity is that it’s the main way capitalist economies have kept making us better off – at least materially – over the past few centuries. Innovations from the lightbulb to the assembly line to the internet have made us faster and better at doing our jobs.

Right now, we’re in a productivity slump. Despite a record-breaking increase in hours worked in 2022-23, the amount we’re producing hasn’t been climbing all that much.

Over the long-term, Australia’s productivity has grown by about 1.3 per cent every year. In 2022-23, our labour productivity – the amount of GDP we pump out for each hour we work – actually fell 3.7 per cent.

While pay rises are awesome, there’s a problem when we get them without productivity growth as we’ve had recently: it can feed into inflation. Why? Because it means we push up the cost that goes into providing goods and services without much change in how much we’re actually producing.

So, how do we push up productivity? And how do we fix the vertical fiscal imbalance problem strangling state governments’ ability to take some bold action? Chester says one way is for the federal government to take over chunks of the states’ existing debt which they’ve used for things such as building roads and other public infrastructure.

Why should the federal government scoop up this debt which they aren’t responsible for spending? Because it significantly cuts states’ annual interest bill and boosts their ability to borrow more for new projects. Why is this? Because the federal government can borrow at a lower interest rate than the states – mostly because those who lend to them see a smaller risk of the federal government defaulting, meaning it has a better credit rating.

The total amount being borrowed by the public sector can stay the same but the interest paid on it can be squashed down.

Now, this transfer of debt has to come with some strings attached. Namely, it should be conditional on the states making progress in implementing agreed reforms.

Chester says these reforms should be aimed at resuscitating flat-lined productivity through changes such as tax reform, jack-hammering entrenched disadvantage through measures such as more social housing for people with chronic and debilitating mental health, and relieving structural inflation pressures such as those arising from natural disasters and soaring insurance costs.

Instead of the federal government spending 96 per cent of its natural disaster budget on mopping up the mess, it should give states more money (the amount could also be matched by the states) to spend on mitigation efforts: reducing the risk of future harm from natural disasters such as floods, cyclones and bushfires. This would also put a brake on surging insurance costs.

It’s not the first time we’ve had the idea to give states more headroom to make meaningful reform. In the late 1990s, there were three tranches of payments from the Australian government to states and territories based on their populations – and only if they made satisfactory progress on their reform commitments.

These payments, known as national competition policy payments, cost roughly $1 billion annually (in today’s terms) over six years. But they helped push through reforms such as removing restrictions on retail trading hours, setting up the national electricity market and abolishing price controls on dairy. The Productivity Commission estimates the payments helped lift GDP by at least 2.5 per cent.

By comparison, Treasurer Jim Chalmers last month set up a $900 million fund to prod states and territories into enacting productivity-boosting reforms: a baby step forward – especially, as Chester says, because we confront a much bigger to-do list than we did a few decades ago.

The idea to transfer debt from the states to the Commonwealth government would be a lot cheaper than the old competition policy payments – and it’s a huge opportunity to make big steps forward in improving productivity and wellbeing.

Why do we need this? Because of the sad truth that the vertical fiscal imbalance we’ve talked about has sunken the states into a mentality where they don’t want to make any reforms that the Commonwealth government wants them to make unless they’re bribed into doing so.

Chalmers this week said his government was bold and reforming. But reform needs to take foot in some of our most consequential sectors including health and education. To achieve this, we need states to buy into the vision and, most importantly, act on it.

The good news? Chester says implementing the buyback program is relatively quick. We just need the guts to do it.

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Don't worry, you'll have enough in retirement ... with one big proviso

Sometimes I think I should appoint myself chief ageing reporter for this august organ. Why? Because I’m the only one left around here to know about – and care about – what’s happening to the oldies. But the truth is it’s not a lot more oldies we need to attract to secure this masthead’s future. That’s why we’re training up bright young economists such as Millie Muroi.

But, while we’re having old folks’ day, let me ask you a personal question: are you sure you’ve saved enough to ensure a comfortable retirement? Now, you probably hate being asked that question. Your conscience has long been telling you the answer’s most likely “no”. Ask someone from the superannuation industry, and they’re almost certain to leave you feeling inadequate.

But if you think that’s what I’m on about, you’re wrong. Prompted by an eye-opening article by the Grattan Institute’s super expert Brendan Coates, on my second-favourite website, The Conversation, I’m here to tell you the opposite: the independent experts say the superannuation system will ensure most people retire with enough superannuation to live comfortably and, indeed, many will have more than they need.

It’s only natural to fear you haven’t saved enough, but the sad truth is that the financial market people who earn their living by managing all the money we save via super have gone for many years playing on our fears, giving us a quite exaggerated impression of how much we’ll need.

If you’re trusting enough to ask the Association of Superannuation Funds lobby group how much a couple would need to live at a comfortable standard, it will tell you they’ll need an income of more than $73,000 a year, which would require a super balance of $690,000.

What the lobby group doesn’t tell you is that this “comfortable” standard is higher than what 70 per cent of couples enjoy while they’re working. Nor does it tell you that the only way to have more in retirement is to have less while you’re working.

It makes sense to use super to shift some of your income from your working years to the years when you’re not working. But is it sensible to shift so much you’re denying yourself during your working life so you can have a much higher standard of living in retirement?

Whereas the lobby group represents the interests of the people running super schemes, Super Consumers Australia represents the interests of their members. It calculates that couples who want a “medium” standard of living in retirement – that is, where they’re able to spend more than the bottom half of retired couples – need a super balance of about $370,000 on retirement, which would let them spend $60,000 a year.

Only if a couple wants to be in the top 30 per cent of retirees, able to spend $80,000 a year, would they need to retire with a super balance a bit over $1,000,000.

Do these more honest estimates strike you as too low? That’s probably because people of working age tend to overestimate how much they’ll need in retirement. Coates lists the many savings you make after you retire.

For a start, you don’t have work-related expenses. And retirees have more time to do things for themselves. Don’t forget that most people retire on some combination of super and the age pension. Remember too that, rightly or wrongly (wrongly in my book), the aged pay much less tax on their income than workers do. This makes a big difference to how much you need to live on.

Pensioners get discounts on council rates, electricity, medicines and public transport, and other benefits. These can add up to thousands of dollars a year. And whatever income you need at the start of your retirement, it typically falls as you get older. Coates says retirees tend to spend 15 to 20 per cent less when they’re 90 than they did when they were 70.

I don’t know if you’ve noticed in your own parents – I certainly did in mine – that oldies reach a point where they could afford to go out and spend money (another overseas trip, for instance) but they don’t feel like it. It surprises many that it’s common for oldies to save part of their income, simply because they didn’t have a reason to spend it.

Of course, deteriorating health stops people from spending. But most health and aged care costs are picked up by the taxpayer.

All this says people don’t need to spend as much as you may think in retirement. But everything I’ve said comes with a big proviso: that retirees own their own home. It’s been true for many decades that the great majority of retirees own their homes outright. That’s still true, though less so. These days it’s more common for people to retire still owing money on their mortgage. In coming decades, however, it won’t still be true that most retirees own their homes.

Meanwhile, I’m definitely not saying that people who have to rent in retirement have it easy. Far from it. But when you’re a home owner in retirement your spending on housing is far lower than for people still servicing a mortgage or renting.

The Retirement Income Review conducted in 2020 for the Morrison government judged that anyone with retirement income equivalent to between 65 and 75 per cent of their pre-retirement income would be able to live comfortably. It also found that, by this standard, most retirees will be doing fine.

But that was when compulsory employer contributions to super stood at 9.5 per cent of your wage. By now they’re 11.5 per cent and will rise to 12 per cent in July.

That’s why I say that those retiring in coming years won’t just be comfortable, they’ll be rolling in it.

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Oligopolists gouge power and gas prices, Albanese cops the blame

If, as seems likely, Anthony Albanese and his government lose seats at next year’s federal election, one thing we can be certain of is that the nation’s economists and econocrats won’t be admitting to their not insignificant contribution to Labor’s setback.

Economists have such a limited understanding of how the behaviour of the real-world economy differs from the economy described in their textbooks and measured in their econometric models, and are so woefully bad at predicting where the economy is headed, that their profession has become hugely defensive. And so, like Peter Dutton, they never ever admit to getting anything wrong.

It seems a safe bet that, should Labor’s vote be down, it will be for one overwhelming reason: the voters’ ire at what they call the “cost-of-living crisis” – the sudden surge in retail prices in the aftermath of the pandemic.

Many factors have contributed to that surge, but the Reserve Bank attributes much of the responsibility to the authorities’ excessive stimulus of the economy during the lockdowns. This, by causing the demand for goods and services to outstrip the economy’s ability to supply them, allowed businesses everywhere to get away with whacking up their prices.

Economists regard such price rises as completely normal and unexceptional, part of the God-ordained mechanism by which market forces return the economy to equilibrium. The public, however, sees such rises as utterly opportunistic and illegitimate, condemning them as “price gouging”.

But while the Reserve has frequently offered this “demand-pull” explanation as justification for its protracted increase in interest rates, it’s been much less willing to acknowledge that it was among the “authorities” who stuffed up.

Of course, the retail prices of some goods and services have made a much bigger contribution to the higher inflation rate than others have. And a prominent role has been played by the prices of electricity and gas. Over the three years to June this year, electricity prices rose by 20 per cent and gas prices by more than 30 per cent.

We’ve been told the leap in energy prices has been caused by Russia’s invasion of Ukraine in February 2022. But as new research by the Australia Institute’s David Richardson reveals, that’s just a tiny part of the story.

The truth is that electricity and gas prices have been rising much faster than the overall consumer price index since at least the end of 2007, with prices really shooting up over the past four years.

Richardson has used the latest annual reports of AGL and Origin Energy to derive some astonishing figures for what consumers are paying for electricity and gas. On average, he calculates, AGL’s electricity costs households $377 a megawatt hour, while Origin households pay $343 a MWh.

So what are the costs that cause those electricity prices to be so high? He says the total retail price consists of five components. First is the cost of the generation of electricity by power stations, including the cost of the coal and a bit of gas used to power the generators.

Second are the “network costs” of moving the electricity from the power stations to homes, businesses and offices, first transmitted across the countryside by high-voltage power lines, then distributed by “poles and wires” at the local level.

The third component is an annual allowance for the depreciation of all the equipment, which must eventually be replaced. Fourth is “other costs” incurred by the electricity retail companies – most of it being the cost of advertising – and fifth is the retailers’ profit before interest payments and tax.

Now get this. Richardson calculates that, for every $100 paid by a retail customer of AGL, a mere $12 goes on generating the electricity. So much for the evil Russian invaders being the cause of the problem.

Next come network transmission and distribution costs of $34, $4 for depreciation and $15 for advertising and other retailing costs. Which leaves AGL’s retail company with a profit before interest and tax of a measly $35.

What! About 35 per cent of our bill goes on profit to the retailer? Woolies and Coles eat your heart out. Qantas – you’re not really trying.

According to Richardson’s calculations, Origin’s retail profit share is a bit lower at 29 per cent. Turning from electricity to gas, he puts AGL’s retail profit margin at 36 per cent, and Origin’s probably a bit higher.

Richardson’s conclusion that consumers are being gouged in the electricity market is consistent with the findings of Professor Allan Fels in his report for the ACTU earlier this year. Fels made the economists’ point that every company’s electricity is identical. It’s also something that every home must have.

So why do retailers need to spend so much on advertising, “inappropriate door-to-door marketing activities” and other forms of “obfuscation”, Fels asked.

And Richardson’s figuring reveals something else. The overcharging of household customers of electricity and gas involves requiring them to cross-subsidise AGL and Origin’s business customers. They pay prices for electricity and gas that are about half what household customers pay. And the profit margins extracted from business customers are tiny.

But why should economists and econocrats share the blame for all the inflationary price gouging that’s helped make the Albanese government so unpopular? Because all the malfunctioning we’re seeing has occurred under the National Electricity Market that the econocrats designed and still regulate, and assured us would be a great reform.

The wonder-working NEM has turned five state-government-owned monopolies into a national oligopoly dominated by just three huge operators – AGL, Origin Energy and the foreign-owned and tight-lipped EnergyAustralia. The three are highly “vertically integrated”, meaning they each own big slabs of the market’s three levels: generation, transmission network and retail provision.

The NEM is owned by the five state governments plus the feds – that is, by everyone and no one – and regulated by two separate government authorities using a rule book running to thousands of pages. But it seems to have been captured by the oligopolists.

The economists have done little to stop consumers across the nation from being grossly overcharged for electricity and gas. But not to worry. It’s only some politician that will be left carrying the can.

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Trade deficits don't have to be wicked, unless you believe Trump

By MILLIE MUROI, Economics Writer

While the US president-elect would have you believe a trade deficit is a wicked thing, it’s not a hard and fast rule. In fact, it can actually be good. We’ve become used to the word “deficit” being synonymous with “bad” (think about how many governments highlight when they’ve got a “budget deficit” – not a lot!). But deficits don’t have to be bad.

Since late 2016, Australia has had a run of trade surpluses, meaning the value of all the goods and services we export has been bigger than the value of all those we import. That doesn’t make us any better than countries like the US which have run a trade deficit every year since the 1970s.

Generally, countries are better off when they’re importing things other countries can make more efficiently and cheaply. For Australia, that includes cars, electronics and pharmaceuticals. If we tried to make more of these things ourselves, just to improve our trade balance, we’d be wasting resources we could use to tinker away at other things we’re better at making.

We can always buy, more cheaply, the things we’re worse at making – unless of course we’re trumped by tariffs (which, note to Trump, almost always leaves both countries worse off).

A “current account” deficit is not a bad thing either. Australia had one for more than 40 years, until September 2019. The current account records how much is flowing in and out of Australia when it comes to the value of goods, services and income.

We learnt last week that in the latest September quarter, for instance, the value of our exports ($156 billion) minus the value of our imports ($153 billion) gave us a trade surplus for the quarter of about $3 billion. And the value of interest and dividend payments we were paid by foreigners ($28 billion) minus what we paid them in interest and dividends ($45 billion) gave us a “net income deficit” of about $17 billion.

Combining the net income deficit and the trade surplus leaves us with a deficit on the current account in the September quarter of about $14 billion.

It’s one of the two big parts of what’s called the “balance of payments”: a map of Australia’s economic transactions with the rest of the world.

The balance of payments records the flow of money from everything including exports and imports of goods, services and financial assets (such as shares and bonds) – even transfer payments like foreign aid. Basically: payments to foreigners and payments from foreigners.

Of course, by “Australia’s transactions” we mean those made by Australian residents. Loosely, this means people who live here, businesses operating here, and our governments, which all do deals with the rest of the world.

Now, back to the current account. Why has Australia recorded so many current account deficits?

Historically, we’ve tended to import more than we export, and we’ve paid more in dividends and interest to foreign owners and lenders than they have to us for our foreign shareholdings and loans.

Whenever we import, or pay income (such as dividends) out to people in other countries, it’s recorded as a “debit” in our current account and an equal “credit” in what’s known as the “capital and financial account” – which we’ll come back to. When we export, or receive income from overseas, it’s a “credit” in our current account and an equal “debit” in the other account.

Because of this, the two accounts are, in theory, meant to balance out (because of measurement issues, they usually don’t). When the debits exceed the credits, an account is in deficit. When the credits exceed the debits, it’s in surplus.

The main reason we’ve run so many current account deficits through the years is that we’ve tended to have a heap of investment opportunities (more than we could hope to finance with our own savings).

The inflow of foreign capital meant we were able to grow our economy, paying out dividends and interest to foreign investors for their help. Now, where do we record all this investment?

Enter the capital and financial account. The financial account takes up the lion’s share of the combined bucket. It records any transactions involving assets and liabilities changing hands. This includes things like direct investment (long-term capital investment such as buying machinery or when an investor owns 10 per cent or more of a company through shares), and portfolio investment (smaller purchases of shares in a business, or bonds).

When we sell foreigners shares in an Aussie business, borrow from them or sell them some real estate, that’s a credit in the capital account. When they sell us shares or land or lend us money, that’s recorded as a debit.

The much smaller capital account, meanwhile, captures transactions where nothing tangible is received in return: things such as debt that has been forgiven, foreign aid to build roads, or transactions involving intangible assets (such as trademarks or brand names) or rights to use land.

For some time in the past decade, we briefly went into a current account surplus and a financial and capital account deficit. This was partly thanks to rapid industrialisation in China which turbocharged our exports of minerals, energy, education and tourism (remember: credit in the current account, debit in the financial and capital account), but also our increased tendency to save and cut down our local investment spending on new housing, business equipment and public infrastructure. At the same time, the proportion of our savings going into superannuation, which invests partly into shares of foreign companies, had grown.

Recently, we’ve switched back to running a current account deficit. Is this bad? Not necessarily. It’s partly due to a continued fall in commodity prices such as iron ore and coal, for which demand has weakened, which is bad news for our exporters. But we’re also paying more income to non-residents (remember: this is mostly because they’ve been investing or lending to us, usually to help us grow by helping to finance our investment spending).

But the current account deficit is also thanks to factors such as a rise in service imports. We’ve been travelling more, meaning our spending overseas has increased. A bad sign? Hardly.

So, while we have a current account deficit, that doesn’t automatically mean we’re doing badly. Deficits can help us grow and surpluses don’t always leave us better off. Trump should be careful playing his cards.

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We've entered the era of gutless government

Sorry to tell you that I’m finishing this year most unimpressed by Anthony Albanese and his government. I’m still reeling from his last two weeks of parliament, pushing through 45 bills just to show how much he’d achieved and give himself the option of calling an election early next year should he see a break in the clouds.

Some of the measures pushed through at breakneck speed merited much more scrutiny, while some reforms that should have been put through were abandoned. One measure he’d hoped to rush through, fortunately, didn’t make it.

It all left me more conscious of his government’s weak performance, capping off 2 ½ years in which Labor turned its mind to many of the problems left by its Liberal predecessors, did a bit to help, but never nearly enough.

Why not? Because there were powerful interest groups Labor didn’t want to offend. And because it lives in fear of what the Libs might say. The two-party duopoly has painted itself into a corner, with neither side game to do what needs to be done.

Take the greatest threat to our future: climate change. Labor was elected in May 2022 partly because it seemed to be genuine in its determination to see Australia play its part in reducing greenhouse gas emissions, whereas the Coalition seemed only to be pretending to care.

In government, Labor kept its promise to legislate its target of reducing emissions by 43 per cent by 2030. It strengthened its predecessors’ “safeguard mechanism”, limiting emissions by major industries. It made speeches about how nice it would be for Australia to become a world superpower, using clean electricity to manufacture green iron, green aluminium and other things, then export them to Asian countries with far less sun and wind than we have.

So clearly, we’ve now accepted that our industries exporting coal and natural gas will start to phase down and out. What? Gosh no. No, no, if the coal industry wants to extend its mines, that’s fine. If the West Australians want assurance of the need for offshore gas beyond net zero emissions in 2050, that’s fine.

Under the shiny new slogan of Nature Positive, Labor had promised to end further degradation of our natural environment, including by setting up a federal environment protection authority. This was opposed by the Coalition, proudly proclaiming itself to be the mining industry’s great friend, but the necessary legislation could go through thanks to a deal Environment Minister Tanya Plibersek had reached with the Greens.

But then the WA premier phoned Albanese to advise that the state’s miners were most unhappy about further efforts to protect the environment, so the deal was squashed. But not to worry. Should Albo decide against an early election, the bill would be back on the drawing board when parliament resumed for a short sitting in February.

In his timidity, Albanese has introduced to politics the each-way bet. Strong support for the move to renewables? Of course. Continuing support for the use and export of fossil fuels? Of course. Welcome to the era of gutless government.

From the greatest threat to our future on this planet to the greatest example of populist cynicism. To great applause from voters – and with the whole world watching this Aussie reform, up there with the secret ballot – Albanese rushed through his bill banning children under 16 from using social media.

Had he figured out a foolproof way of enforcing the ban? Could the kids soon find ways around it? Would we all be forced to provide trustworthy tech giants such as Facebook and TikTok with documentary proof of our age? No. Let’s just push the bill through and worry about such details later. And never mind the experts saying what’s needed is to train our young people how to detect misinformation and disinformation.

This is politicians acting on their cynical maxim that “the appearance is the reality”. They don’t need actually to fix a problem, just create the appearance of fixing it. Just do something the unthinking punters, and the shock jocks who lead them on, happily imagine will fix things.

The promised measures that were dropped from Albanese’s frenetic bill-passing included action to curb the advertising of sports gambling and the plan – announced in February last year – to raise the tax on superannuation balances over $3 million (a needed reform despite what it would have cost a poor battler such as me).

One bit of good news was the disappearance of Labor’s bill to reform election fundraising. Although it included various valuable changes, its claim to be taking “big money” out of politics was a thinly disguised plot to knock out Clive Palmer and the teals’ funding from Climate 200 while ignoring the political duopoly’s funding from the unions and big business.

Fortunately, the duopolists couldn’t agree to push it through.

The sad part of Albanese’s unimpressive performance is that there’s little reason to believe the Peter Dutton-led Coalition would do any better at fixing the many problems the Morrison government left for Labor to deal with. One of which, of course, was the cause of what soon unfolded after the May 2022 election to become the “cost-of-living crisis”. Much of the surge in prices came from overseas disruptions to supply. The rest, according to the Reserve Bank’s reasoning, came from the stimulus applied by the Morrison and state governments that turned out to be far more than needed.

Albanese and Treasurer Jim Chalmers have done a good job in managing the unfinished return to low inflation, but they have no control over when the Reserve will decide to start cutting interest rates. If, as seems likely, Labor loses seats at next year’s election, that will be voters punishing it for the cost of living, over which it had little control, not for its weak performance in so many other areas.

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The Australian economy is behaving strangely

By MILLIE MUROI, Economics Writer

Australian consumers are usually the engine room of the economy. Every extra dollar we spend drives economic growth higher – and there’s so many of us that we’re usually a force to be reckoned with. In the three months to September, though, something strange happened.

We had more income to splurge but shied away from spending much of the extra cash according to national accounts data from our number-crunchers at the Australian Bureau of Statistics this week. Instead, a bigger share of our pay made its way into piggy banks, mattresses and bank vaults.

Households, while still accounting for nearly half the economy, took a back seat. So, how did the Australian economy still manage to step up?

The size of our economy can be measured in three ways: output (the amount of goods and services we pump out), income (the amount of profit pocketed by businesses and pay that has flowed into households) or by looking at all the spending that happens.

That last one includes money spent by the government, businesses, foreigners (buying up our exports) and our heavy lifters: households. Since the mid-2000s, household consumption has accounted for at least half the size of our economy. It’s only this September quarter that household spending dropped to less than half of gross domestic product (GDP).

Does that mean households are struggling? Well, it depends on how you look at it.

If people’s shopping receipts are any indication of their living standards, you could argue things are looking pretty stagnant. Household spending came in flat at 0 per cent growth.

And, in fact, if we look at spending per household, we’re grinding backwards. Why? Because our population has been boosted by migration. While overall household spending has stayed flat in the September quarter, we’re individually spending less than we were earlier in the year. And that’s after we saw total household spending growth turn negative the previous quarter.

Growth for the wider economy has also been slipping into reverse when we account for population growth. Looking at economic growth per person, we’ve been sliding backwards for nearly two years.

Back to households, though. It’s not all bad news. We actually spent a touch more on discretionary goods and services – things we may not need but are nice to have, such as new clothing and recreation. Spending on essentials, meanwhile, fell. We spent more on things such as rent and staying healthy, but dished out far less on electricity and gas thanks to a warmer-than-expected winter, and partly thanks to the government’s energy bill relief that took the heat out of our energy bills.

Household disposable income – the amount we have left over to spend or save after paying our taxes – also grew. Not only did our income (at least collectively) grow by 1.3 per cent, mainly thanks to pay rises, many of us also had our taxes slashed, too. Stage 3 tax cuts came into play in July, pushing down the income tax we paid during the quarter by 3.8 per cent. Those who had money stashed in the bank also got a boost from interest rates on deposits.

But we didn’t do what a lot of economists (and the Reserve Bank) expected us to do – or at least not to the degree they thought we would. Instead of going on a spending spree with our extra cash, we squirrelled a lot of it away. It’s common for people, especially when they’re worried about their finances, to take a while to work out how they are going to spend their extra money.

The household ratio of saving to income – which tells us how much of our disposable income we stowed away for a rainy day – grew from 2.4 per cent last quarter to 3.2 per cent. Since our incomes grew, but we weren’t spending any more than we were in the June quarter, the slice of our pay going towards savings increased.

The saving-to-income ratio is still much lower than the 10 to 20 per cent we were at during the pandemic when the rivers of stimulus payments gushed in, and our spending options were locked down, but it has been climbing back from a low of 1.5 per cent in March last year.

Of course, the money we save ends up sitting idle – at least while it stays in our coffers. We don’t spend it, so it doesn’t flow back into businesses, and doesn’t stimulate the economy to grow.

But our decision to save a lot of the money we got to keep thanks to tax cuts doesn’t explain the slow – but positive – upward crawl of the economy. If households didn’t spend any more than they did in the previous three months, then how did the economy still manage to expand?

A big driver of our economic growth was spending – not by households or businesses – but by the government. It contributed 0.6 percentage points to growth in the three months to September. Part of this was thanks to a pick-up in public investment by state and local governments on infrastructure projects such as roads and renewable projects.

But a big chunk of the government spending was on cost-of-living relief, such as the energy rebates, which basically just shifted what would have been paid by consumers to cook and heat their homes, to the government’s shopping list. It meant overall government spending hit a near-record-high share of the economy at more than 28 per cent.

Since overall economic growth only came in at 0.3 per cent (notably lower than the 0.5 per cent economists had been expecting), government spending made the difference between our economy shrinking and treading water.

There were also other factors with a smaller impact on growth, including a slight uptick in the construction of new homes, which pushed up private investment spending. There was also a fall in inventories (generally stock held by companies) and net overseas trade – as imports fell and exports grew – which contributed 0.1 percentage points to GDP.

Although the economy’s usual star player – households – spent less than expected in the September quarter, there are signs things will pick up in the final three months of the year. For one thing, retail trade picked up 0.6 per cent in October, even before all the major discounts started kicking in last month, coaxing customers (and their wallets) out for Black Friday and Cyber Monday.

So, how does this position the Reserve Bank?

While economic growth and household spending growth are running below its forecasts, the bank has previously said the level of demand – how much we’re spending now as opposed to how fast our spending appetites are growing – is still too high unless we improve how much (or how efficiently) we can produce things.

It’ll take more weakness in spending, or more progress on slamming a lid on inflation, for the Reserve Bank to start cutting rates. So far, Australian households – and their spending – seem stuck in the holding pen.

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How Albanese is tighten up on tax-dodging multinational companies

By MILLIE MUROI, Economics Writer

Earlier this week, a crucial piece of legislation made its way through parliament. It didn’t receive a lot of fanfare, but it’s a long-overdue tweak to our tax system.

You probably know companies such as Amazon, Apple and Microsoft. They’re multinational corporations that make hundreds of billions of dollars in profit every year, some of it right here in Australia – and probably from you as a customer.

Yet, the taxes they pay are not always proportional to the profit they’re pocketing. That’s something laws passed earlier this week seek to change.

Apple raked in an income of more than $12 billion in the 2022-23 period, according to the government’s transparency report. But it only paid 1 per cent tax on that income. How is that possible?

While the company tax rate in Australia is 30 per cent for most businesses with a turnover of $50 million or more, firms can reduce their taxable income and, therefore, the amount of tax they pay.

Some deductions are fair and reasonable: for example, claiming deductions for day-to-day business expenses including materials you need to supply a good or service. Other strategies are … questionable.

A business like Apple may not be breaking the law, but it can take advantage of different tax rates across the world.

Australia’s company tax is among the highest in the world. According to the Organisation for Economic Co-operation and Development, we were only trumped by one country: Colombia, where companies paid about one-third of their income in tax.

By contrast, countries such as Hong Kong, Singapore and the United Arab Emirates have much smaller company tax rates, making them attractive tax havens. Companies can sneakily shift their income to these countries or use cunning tactics to play the system to their favour.

Former economics professor turned Assistant Minister for Competition, Charities and Treasury Dr Andrew Leigh says the share of multinational companies’ profits passing through tax havens has soared. Back in the 1970s, virtually no multinational profits went through tax havens, he says. “Now it’s up to about 40 per cent.”

Stronger reporting requirements and wider availability of data have made it easier to spot when a company is skirting the rules, acting as a deterrent for businesses hoping to fly under the radar with sneaky tactics.

And in 2017, the Australian Taxation Office found itself in a legal battle in the ongoing crusade against companies paying less tax through loopholes in the system, coming out on top against resource giant Chevron.

The Federal Court ruled against Chevron’s use of an arrangement called related-party finance – commonly used by multinationals to reduce the tax they have to pay in Australia.

It’s where the local entity of a multinational firm borrows funds from its offshore counterpart, which sets much higher interest rates than would usually be reasonable. That interest flows back to the offshore part of that company and allows the Australian branch to claim higher tax deductions because interest payments can be a tax-deductible expense.

Chevron’s Australian subsidiary had taken a $4 billion loan from its US parent company to develop Western Australian gas reserves. This added to the local subsidiary’s debt pile, but allowed it to sidestep Australia’s 30 per cent company tax rate, with those interest payments instead being taxed in the US where the corporate tax rate was lower. In 2017, Chevron had paid no company tax in five of the previous seven financial years.

The Federal Court eventually ruled Chevron’s Australian subsidiary should not be allowed to claim interest on its borrowings from the rest of Chevron Group as if they were two standalone companies. In the 2022-23 period, Chevron paid more than $4 billion in tax.

However, Mark Zirnsak, secretariat for the Tax Justice Network, says that ruling has not closed the loophole entirely. Instead, he says Chevron got too greedy. “It’s still legal to claim the interest rate payment to yourself like Chevron did,” he says. “What the ATO contested was the rate of interest.”

Get it? If Chevron had just charged itself a standard rate of interest – similar to a bank – there would have been no issues.

Related party finance is just one of the many tricks multinationals use to dodge the Aussie taxman.

There’s also something called “transfer pricing” which companies such as mining giant BHP have been penalised for. For years, BHP was selling Australian iron ore and coal to its Singapore operation. Now, there’s nothing wrong with that – except that BHP was then selling these commodities for much more from its Singapore marketing hub to other nations.

Since Singapore has a much lower corporate tax rate, BHP was reducing its tax bill despite the coal and iron ore originally coming from Australia.

This week, the Australian government finally joined the growing army of countries – more than 135 so far – that have agreed to a global minimum tax of 15 per cent: A company with more than $1.2 billion in global revenue must pay at least 15 per cent tax across its global operations. Otherwise, the countries they’re doing business in can now get a bite of its untaxed profits.

This is supposed to deter companies from creating artificial structures in low or no-tax territories, such as the Cayman Islands, in a bid to avoid paying taxes in places where they actually do their business.

It’s also supposed to prevent a “race to the bottom” where countries compete for the lowest company tax rates to attract businesses. How? Because if countries charge company tax rates below 15 per cent, then other countries can impose “top-up” taxes.

Australia, for example, can now apply a “top-up tax” on a multinational operating in Australia if that multinational pays less than a 15 per cent tax rate wherever it does business globally.

Zirnsak says the 15 per cent rate is too low, but a positive change for now.

“The Biden administration would have liked to push it higher, and the Europeans were pushing for it to be lower, so at the end of the day, 15 per cent was a compromise,” he says.

“It’s no longer going to be a game where you can simply try and cheat the governments of the countries you’re actually doing business in through your artificial legal structures and working with governments that are happy to assist you in tax avoidance and profit.”

Leigh says the next step for the government is to crack down on tech giants, which have been more difficult to pin down. That’s partly because of the virtual nature of their services which has made taxing them properly an elusive exercise globally.

Of course, it’s a long-overdue change, and there’s lots left to do. But shifty multinational taxation tactics are being squeezed out.

It’s not just the big guys playing sneaky games. But as Leigh says, the local cafe you bought your coffee from today probably doesn’t pay an accountant exorbitant amounts to figure out how to minimise their tax.

“They don’t sit down at their weekly planning meeting and decide which country they want to pay tax in to minimise their tax.”

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Playing a major role in saving the planet could make us rich

If you’ve ever been tempted by the thought that Australia forging our future by becoming a global “superpower” is a nice idea but probably not a realistic one, I have big news. New evidence shows it’s the smart way to fund our future.

Last week, while we were engaged in a stupid argument over whether the Future Fund should continue growing forever and earning top dollar by being invested in other countries’ futures rather than our own, few people noticed a report much more germane to our future.

The Superpower Institute – set up by the man who first had the idea, Professor Ross Garnaut, with former competition watchdog Rod Sims – put its money where its mouth was and produced hard evidence that the idea could work.

It employed Dr Reuben Finighan to test and extend Garnaut’s argument with a detailed analysis of the future energy supply and demand in five potential importing countries, which together account for more than half of annual global greenhouse gas emissions: China, Japan, South Korea, India and Germany.

Finighan’s report, The New Energy Trade, provides world-first analysis of likely international trade in clean energy and finds Australia could contribute up to 10 per cent of the world’s emissions reductions while generating six to eight times larger revenues than those typical from our fossil fuel exports.

He demonstrates that, though Australia’s present comparative advantage in producing fossil fuels – coal and natural gas – for export will lose its value as the world moves to net zero carbon emissions, it can be replaced by a new and much more valuable comparative advantage in exporting energy-intensive iron and steel, aluminium and urea, plus green fuels for shipping, aviation and road freight, with our renewable energy from solar and wind embedded in them.

Unusually, Finighan’s focus is on the role that international trade will need to play in helping the world reach net zero emissions at minimum cost to the economy. He reminds us that the world’s present high standard of living could not have been achieved without the use of fossil fuels, which required extensive trade between the countries that didn’t have enough oil, coal and gas of their own, and those countries that had far more than they needed for their own use.

Our participation in this trade, of course, explains much of our success in becoming a rich country. It will be the same story in the net-zero world, with much trade in renewable energy between those countries that can’t produce enough of their own at reasonable cost, and those countries with abundant ability to produce solar and wind power at low cost.

Again, we have the potential to be a low-cost producer of renewable energy, exporting most of it to the world and earning a good living from it. Finighan says countries with the most abundant and thus cheapest renewable energy available for export are those whose solar and wind resources are more intense, less seasonal and that have abundant land relative to the size of their population and economy.

Those few countries include us. Garnaut says we’re the country with by far the largest capacity to export to the densely populated, highly developed countries of the northern hemisphere. Finighan finds we can produce “essentially limitless low-cost green electricity”.

The required solar and wind farms would occupy about 0.6 per cent of our land mass. Include the space between the wind turbines and that rises to a shocking 1.1 per cent.

To put this in the sign language of economists, on a diagram plotting what would happen to our cost of supply as (world) demand increased, the curve would start very low and stay relatively flat.

But, Finighan points out, there’s one big difference between the old trade in dirty energy and the new trade in clean energy. Whereas fossil fuels are cheap to transport, shipping clean energy is prohibitively expensive.

Remember that a key strategy in the global move to net-zero is to produce electricity only from renewable sources, then use it to replace as many uses of fossil fuels as possible, including gas in households and industry, and petrol in cars.

You can’t export electricity, but transforming it into hydrogen or ammonia requires huge amounts of electricity, thus involving much loss of energy and increased cost. So it’s cheaper to use locally made electricity to produce energy-intensive products such as iron, aluminium, urea and so forth locally, before exporting them.

That is, the world trade in clean energy will mainly involve that energy being embedded in “green” products. This means, for the first time ever, making certain classes of manufacturing part of our comparative advantage.

Finighan finds that, by ignoring the role trade will play in the process of decarbonisation, and thus the need for countries with limited capacity to produce their own renewables to import them in embedded form, earlier studies, including those by the International Energy Agency, have underestimated how much more electricity production the world will need.

In examining the likely energy needs of the five large economies – four in Asia and one in Europe – he projects large shortfalls in their local supply of electricity. By mid-century, Japan, South Korea and Germany will have shortfalls of between 37 and 66 per cent. Because of their later targets for reaching net-zero, China’s greatest shortfall won’t occur until 2060, and India’s until 2070.

These calculations take full account of the role of nuclear energy. It’s one of the most expensive means of generating clean energy. Unlike renewable technology, it’s become much more costly over time, not only in the rich economies but also in those such as India.

Nuclear will play a minor role even in countries where heavy government subsidies render it competitive, such as China. Even if China triples its recent rate of building nuclear, it may contribute only 7 per cent of electricity supply by 2060.

In those shortfalls, of course, lies a massive potential market for Australia’s exports of green manufactures. So, to mix metaphors, the dream of us becoming a superpower turns out to have legs. All the Labor government and the Coalition opposition have to do now is extract the digit.

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Our politicians aren't acting their age. That's a good thing

By MILLIE MUROI, Economics Writer

If I told you someone, especially a politician, wasn’t acting their age, you might safely assume that’s a bad thing. What childish behaviour have they indulged in this time, you might ask.

But this week, it’s a compliment. The fountain of youth still evades us, and there’s no great anti-ageing commission – AAC, not to be confused with the ACCC – on the way. But the focus in Canberra has switched, at least for a minute, to something that’s flown under the radar for too long.

Treasurer Jim Chalmers on Thursday – at last – said something a lot of us, especially young people, have lived and known well: “there is an element of intergenerational unfairness in our economy”.

The culprit? A three-letter word that sends most of us to sleep, but here it is: tax. No one really likes it, but there’s a collective understanding – served with a hearty side of grumbling – that it’s a necessary part of our economy.

A good tax system, however, is supposed to be fair. And it’s meant to make our country fairer, too.

Tax as it stands now stacks the cards against young people: the very people we need to be supporting to become the backbone of our economy – including hospitals, aged care homes, and schools – as the rest of the country ages.

What’s unfair about our tax system? Didn’t generations before us get put through the same wringer? Well, not really.

If our economy is a board game, the rules have changed. So has the starting point for our newest players.

Young people today graduate from university or TAFE with bigger study debts than their parents had, face house prices more than 16 times the average household income (rather than nine times the average household income 25 years ago) and wages that have only started clawing back losses from inflation in the past year.

To then have a tax system that pulls the ladder out-of-reach of young people is bad – for all of us.

Grattan Institute chief executive Aruna Sathanapally, in a speech last week, put it like this: “Intergenerational equity is not a zero-sum game.”

We may never have it perfect, but it needs to be fair. Who wants to play or work hard in a game where your winnings are constantly whisked away?

But that’s what’s happening. Our tax and spending policies are leading to “unprecedented transfers from younger households to older households”, Sathanapally says.

Analysis from Grattan in 2019 showed a working-age household earning $100,000 would pay about 2½ times as much tax as a household over 65 earning the same amount.

While households over 65 have grown their income, they’ve also been shielded from paying their fair share of tax. That’s thanks to a bunch of policies that have ground down taxes for some types of income but not others.

If you’ve held an asset – such as an investment property – for at least a year, you could sell it and get 50 per cent off the tax you pay on its capital gains. If you bought the property before 1985, you’d pay no tax at all on your (probably very handsome) profit.

And if you’re drawing down on your super, it’s tax-free to withdraw after the age of 60 (after being taxed at a concessional rate of 15 per cent while you’ve been contributing to it).

But most young people don’t own a property they can sell – or even live in – and would have missed out on the windfall gains of the past few decades that have seen house prices shoot through the roof. And withdrawing from super isn’t really an option.

A bulk of young people’s income comes from wages that attract no tax discounts. And as our population ages, our reliance on taxing wages will probably worsen.

Why can’t young people just work their way up to things such as home ownership? Well, it’s a tough ask to save for a deposit when, on top of income tax, young people are paying off huge study loans and facing rents that have risen much faster than inflation or wage growth.

Income taxes have ballooned as a share of our economy – from about 8 per cent of gross domestic product (GDP) in the early 1960s to 14 per cent in the 1980s, and more than 18 per cent in 2023. And while in the 1950s, income from “personal exertion” – or wages – was subject to lower tax rates than income from investments, there’s now no such distinction.

In fact, those who invest in housing can be negatively geared, meaning if they make a loss on their investment property because the rent they earn on it is less than the costs of owning the property (including interest they pay on their mortgage), they can reduce their taxable income. That’s even if the property is quietly growing in value.

At the same time, zoning rules are pushing young people to the edges of our cities, further away from their work and study, and pushing up house prices in leafy suburbs.

The upshot of all this is that young people are having a harder time than older generations – so much so that the generation born in the 1990s, aged between 25 and 34 today, are the first not to enjoy higher incomes than their predecessors.

And according to Grattan, the wealth disparity between older and younger Australians has worsened. In 1994, those aged 65 to 74 had about three times the wealth of those aged 25 to 34. By 2020, that gap had increased to nearly five times.

While not all older Australians are wealthy, it was mostly older, wealthier households that continued saving and spending on discretionary items as inflation and interest rates spiked in the past few years. Younger Australians mostly cut back on spending and drained their savings.

It’s only recently that politicians have paid more attention to the plight of young people. That’s probably because, despite nearly 40 per cent of our population being aged under 40, fewer than 10 per cent of our federal MPs fit that bill.

Independent MP Allegra Spender this week launched her green paper on tax, pointing out that younger Australians were being left behind, unable to grow their financial security in line with other generations. “This creates a society of haves and have-nots, where your family wealth, and access to the bank of mum and dad, is essential to get ahead,” she said.

If we want a society that gives everyone the chance to work hard and get ahead, and move away from a game determined by a roll of the dice on who our parents are and how much wealth they can pass on to us, we need to shake up our tax settings.

It’s been a long time coming, but if our policymakers can step into the shoes of younger Australians and speak for their interests – as they’ve started to do – we’ll all be better off.O

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How climate-denier Trump may leave China to save the planet

To a sensible person, the most worrying aspect of the re-election of Donald Trump is his refusal to take climate change seriously. He says it’s a hoax and a scam.

There’s no denying that Trump’s decision to again withdraw America from the 2015 Paris Agreement to reduce greenhouse gas emissions and limit the global average temperature increase to below 2 degrees is a setback.

It could tempt many other countries to give up their own efforts to reduce emissions. If the mighty United States has stopped trying, why should we bother? It could dishearten the rest of us, but I doubt it will.

On the contrary, it could prompt us step up our own efforts – something we needed to do even without the US government’s withdrawal. It will certainly stiffen the resolve of the Chinese, who’ve just been handed the vacant position of moral leadership of the world on climate action.

Which is funny when you remember the Yanks’ bipartisan obsession with stopping China usurping their place as the world’s top dog. Will they really take this lying down?

The more I think about it, the more convinced I become that our shift to clean energy is now unstoppable. For a start, as each day passes, we see more evidence around us that climate change is already upon us, not something that may or may not happen sometime in the future.

Who can forget the footage of Spain’s flooding? All those nice cars washed up in a muddy heap at the end of the street. An entire year’s rainfall in eastern Spain in less than 24 hours, leaving more than 200 people dead.

Our TV news is now dominated by stories of extreme weather events of every kind: cyclones, bushfires, floods, deadly heatwaves and droughts. How long before we see regular footage of houses falling into the sea? Not to worry, it’s all a scam. They fake the photos.

For another thing, the switch to clean energy is well under way in most countries, and it’s too late to stop it. In some developing countries – China, for instance – the move away from dirty fossil fuels, particularly coal, is being propelled by a popular revolt against air pollution.

Elsewhere, it’s being driven by straight economics: the rapidly declining prices of solar panels, wind turbines and electric vehicles. Why would anyone ever build another coal-fired power station?

Anyone who opens a new coal mine is taking a bet that it won’t become a worthless “stranded asset” long before it reaches the end of its useful life. I read that, had it not been for Russia’s attack on Ukraine, the world prices for oil and gas would have begun falling as demand for them declined.

Note, too, that there are limits to a US president’s ability to stop the move to renewables and efforts to reduce emissions. Emissions reduction is mainly a matter for the state governments. Some of them – including huge California – will persevere with their reduction schemes.

President Joe Biden’s dishonestly named Inflation Reduction Act of 2022 actually provides billions of dollars in subsidies for the manufacture of solar panels, wind turbines and batteries in America. Trump plans to abolish it, but a lot of money has already been spent and – whether by accident or design – it’s largely being invested in Republican states and congressional districts. He may not be allowed to cut it off.

And all that’s before we get to China – the great villain and hero of climate change. Although the vast mass of greenhouse gases in our atmosphere was put there by America and the other rich countries burning fossil fuels for the past century or two, when you come to the annual addition to the stock of harmful gases it’s a different story.

Although the Americans still fancy themselves as having the world’s biggest economy (actually, if you measure it more accurately, they’ve already been overtaken by China), and although their emissions per person are still far higher than China’s, they only come second in the comp to add the most to emissions.

Because China’s population is four times the size of America’s, and its economy has been growing much faster than America’s, China accounts for 30 per cent of the world’s annual emissions, compared with America’s 11 per cent. (Then comes India with 8 per cent, and the 27 countries of the European Union with 6 per cent.)

So what China does matters far more than what the US does. And China is big on both sides of the ledger. According to The Economist, its emissions rose by about 6 per cent last year. About half that comes from its power sector, mainly burning coal. Another third comes from factories, particularly steel foundries. Then come emissions from cars and lorries.

But although China is still building new coal-fired power stations, it has installed more renewable power than any other country, and is using big subsidies to encourage the trend. Chinese companies make 90 per cent of the world’s solar cells, used to make solar panels, 60 per cent of the world’s lithium-ion batteries and more than half of the world’s electric vehicles, The Economist tells us.

It’s because of China’s massive production of these things – for its own use and for export – that the move to renewables has become so much cheaper in other countries.

The rapid increase in China’s production of renewable energy makes it likely its emissions will soon stop rising, even before the government’s 2030 target date. So the next step is for it to start reducing annual emissions in pursuit of its pledge to eliminate net carbon emissions by 2060.

That won’t be easy, of course. But my guess is the Chinese will take great delight in showing the world how decadent the US has become.

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Memo to RBA: If wages growth isn't the problem, what is?

 I can’t help wondering if the Reserve Bank isn’t misreading the economy. And it seems I’m not alone.

When you’re seeking to manage the economy through its ups and downs, it’s critically important to diagnose its problems correctly. If you’ve misread the symptoms, you can make things worse rather than better. Or, for instance, you can single out citizens who had the temerity to borrow heavily to buy their home and subject them to needless punishment.

Last week, several things made me start wondering if the Reserve needs a rethink. The first was a paper by America’s highly regarded Brookings Institution, that I should have got onto in August.

The world’s central banks – including ours – have concluded that this unexpected burst of inflation is explained partly by temporary disruption to the supply of goods caused by the pandemic (and Russia’s attack on Ukraine), and partly by excessive demand following the authorities’ excessive economic stimulus to counter the lockdowns.

Sorry, not true says the Brookings study, which looked at new data.

“The vast majority of the COVID-19 inflation surge is accounted for by supply-linked factors, especially a rise in company [profit] margins that followed severe delivery delays at the height of the pandemic. Demand-linked factors, notably indicators of labour market overheating, play almost no role.

“As a result, the argument that policy stimulus was excessive is weak,” the study says. And, since company profit margins have yet to return to their previous level, this suggests the inflation rate has yet to fall as the effects of the pandemic continue to unwind. If so, the US Federal Reserve may have overtightened.

Now, all that refers to the US economy and may not apply to ours. May not, but I doubt it.

Despite four successive quarters in which the economy’s rate of growth in “aggregate demand” has been very weak, our Reserve is delaying a reduction in interest rates because, it says, the level of demand is still higher than the level of supply. If so, the rate of inflation may not keep falling, or may even start rising.

How does the Reserve know the level of supply is too low? Mainly by looking at the measure of idle capacity in the jobs market – aka the rate of unemployment.

So, when we saw the figures for October last week, and they showed unemployment still stuck at an exceptionally low 4.1 per cent, no higher than it was in January, it wasn’t surprising that many concluded the Reserve wasn’t likely to start cutting the official interest rate until May next year.

But hang on. One good measure of the job market’s ability to supply more labour as required is the “participation rate” – the proportion of the working-age population willing to participate in the paid labour force by either having a job or actively seeking one.

Now, the econocrats have been predicting that the ageing of the population would cause the “part rate” to start falling for at least the past 20 years. But in that time, it has kept going up rather than down, and is now higher than ever. Last week’s figures show it’s risen by a strong 0.5 percentage points to 67.2 per cent over just the past year.

So where’s the evidence the economy’s reached the end of its capacity to supply more workers?

My guess is that all the Reserve’s unaccustomed talk about the level of supply being too low relative to demand is just a way for it to avoid admitting that its judgment about when to start cutting interest rates is still – as it has been for all macroeconomists for the past 40 years – heavily reliant on its calculation of the present NAIRU: the “non-accelerating-inflation rate of unemployment”, which is the lowest the unemployment rate can fall before shortages of labour cause wage inflation to start going back up.

I think the Reserve’s reluctance to cut is driven by its (undisclosed) calculation that the NAIRU is well above 4.1 per cent. But earlier this month, Treasury secretary Dr Steven Kennedy told a parliamentary committee that, though such calculations are “uncertain”, Treasury estimates that the NAIRU is “around 4.25 per cent, close to the current rate of unemployment”.

Another thing we learnt last week was that a key measure of the rate at which wages are rising, the wage price index, rose by 0.8 per cent during the September quarter, causing the annual rate to fall from 4.1 per cent to 3.5 per cent.

According to Adam Boyton and other economists at the ANZ Bank, this caused the six-month annualised rate of wages growth to be unchanged at 3.2 per cent. “Wages growth has slowed across awards, enterprise bargaining agreements and individual agreements, pointing to a broad-based slowdown,” they said.

This – combined with the lack of increase in the rate of unemployment over the past year, and allowing for the delay before what’s happening to unemployment affects wage rates – has led these economists to conclude the NAIRU is closer to 3.75 per cent.

Finally, Westpac chief economist Dr Luci Ellis noted last week that another measure of wages pressure, the cost of labour per unit (which takes account of changes in the productivity of workers), has fallen from an annualised rate of 7 per cent to 3.5 per cent in just the six months to September.

She said that even if the annual improvement in the productivity of labour averages a touch below 1 per cent, which would be worse than our recent performance, annual wages growth averaging 3.2 per cent – as it has for the past three quarters – is “well and truly consistent with inflation averaging 2.5 per cent or below”.

Get what all this says? Ever since the Reserve began raising interest rates in May 2022, it has worried about the possibility of excessive growth in wages keeping inflation above the Reserve’s target zone. In all that time, and particularly now, it’s shown absolutely no sign of doing so. Neither shortages of labour nor the (much reduced) power of the unions has caused a problem.

The Reserve needs to lose its hang-up about wages and think harder about the need to ease the pain on innocent bystanders.

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How can jobs and joblessness both be going up?

By MILLIE MUROI, Economics Writer

Despite more than two years of higher interest rates, meant to slow down spending and activity in the economy, unemployment in Australia remains unusually low.

The nation’s chief number-crunchers, the Australian Bureau of Statistics (ABS), said there were 16,000 more people employed in October, while the number of unemployed climbed by 8000. The unemployment rate stayed at 4.1 per cent for the third month in a row – still very low by the standards of the past 50 years as well as earlier slowdowns.

You might think when employment rises, unemployment has to fall by the same amount – and vice versa. But here’s the thing: they can both rise or fall at the same time.

How is this possible? Because there’s a third factor: the proportion of people who choose to be in the labour force – either by having a job or actively looking for one. If someone is looking for work and doesn’t have any, it means they’re unemployed, but they’re still counted as part of the labour force.

Usually, more people start seeking a job if the economy and the jobs market are both thriving. Why? Because they believe there’s a better chance of finding a job. By the same logic, if the economy is slowing and the jobs market is worsening, people are less likely to even try searching for a job. The labour force can also grow if the population blossoms, but generally, the better the economy and jobs market, the more people will choose to “participate” in the labour force, helping to fatten it up.

So if the Reserve Bank has pumped the brakes on the economy, and consumer spending is still weak, how has the participation rate increased?

Partly, it’s because overall spending in the economy – including spending by the government – is fuelling demand and keeping it above the level the economy can supply without pushing its limited resources, and therefore price pressures. It’s a good thing that people who want a job still have a good chance of finding one, but the relatively low unemployment rate will discourage the bank from starting to cut interest rates too soon.

That’s because a low unemployment rate is one of the signs of an economy running hot, and therefore at risk of facing inflationary pressures. The bank will be worried demand for goods and services hasn’t weakened enough, and that it might even start soaring. That would throw a spanner in the works for their crusade against inflation.

But what exactly is unemployment? It’s measured as the proportion of unemployed people in the labour force. Or, put another way: the proportion of unemployed people out of all the employed and unemployed people in the economy.

Then there’s the participation rate, which we can calculate by looking at all our “working age” people (in Australia, this is everyone over the age of 15 – including those who, really, are probably too old to work) and the proportion who are in the labour force (working or looking for a job). In most other places, working age is defined as those aged 15 to 64.

If more working-age people decide to start looking for work, it’s possible to have both more people unemployed (the jobseekers who don’t find a job) and more people employed (those who do), as well as a higher participation rate: more working age people, well, working – or looking for a job.

We can also look at the split between full-time and part-time workers. If there are more full-time workers, that’s a sign of a strong labour market. A growing share of part-time workers, meanwhile, is usually a warning that the market for labour is weakening. Over the past year, the share of part-time workers has fallen from about 42 per cent to 31 per cent. More people, and a greater proportion, are working full-time than they were a year ago.

Part-time jobs aren’t necessarily worse than full-time jobs. For some people – such as students, semi-retired people and parents of young children – a part-time job aligns perfectly with their life stage or preferences. It’s only a problem for those who want a full-time job but can only find a part-time one.

Anyone who does at least an hour of work every week is counted as employed. That’s been the case for decades and conforms with the international statistics conventions set down by the United Nations' International Labour Organisation in Geneva.

But it does mean we tend to understate the full extent of joblessness. Our measure of unemployment ignores the people who have had to settle for a part-time job when they’d much rather have a full-time job. This is especially the case as part-time employment has risen since the 1960s.

It’s why the bureau has, in recent decades, been calculating the rate of under-employment: the proportion of people in the labour force who have been working, but would have preferred to work more hours a week than they were able to find.

By adding together the underemployment rate and the unemployment rate, we get the underutilisation rate. This gives us a broader measure of unemployment and the health of our labour market. In October, the underutilisation rate was 10.4 per cent: a touch higher than at the same time last year.

How do we know all these numbers? The ABS conducts a monthly survey. It has a very big sample of households across Australia – usually about 26,000 – and someone from each of these households is asked about the labour force status of each person over the age of 15 under their roof.

The survey sample is split into eight groups, with each group staying in the survey for eight months. One group rotates out every month and is replaced by a new group rotating in. The ABS collects the information through trained interviewers who survey households either face to face or over the phone, and sometimes via an online self-completion form, asking about 70 questions.

While these measures aren’t perfect, and can be confusing, they act as a thermometer for our jobs market. There’s no doubt the pulse is weakening, but so far, there’s enough sign of strength to keep most of us from getting worked up.

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Education is leading the two sides of politics to change sides

A strange thing is happening in politics. People who in earlier times could have been expected to vote for the right-wing party are now more likely to be supporting the party on the left, while those who would have voted for the left in times past are now more inclined vote for the right.

This is something the insiders – the political scientists, pollsters and party professionals – know all about, but the politicians prefer not to admit. So it’s news to the rest of us.

You could see it alluded to in all the learned explanations of why Donald Trump romped home in the presidential election that was too close to call. But you can also see it in our own elections. Indeed, it’s a “secular” (long-term) trend occurring in the politics of most rich countries.

Did you see some commentator saying the Republicans were now the party of the working class? What! It’s truer than it sounds. Our own Farrah Tomazin wrote that the election saw “the realignment of the Republicans as a party that appeals to the working class while the Democrats have increasingly become the party of college-educated, upper-income suburban voters, especially women”.

A distinguished American professor of anthropology added that “Trump voters trend older, white, rural, religious and less educated”. It seems most “voters of colour” still voted Democrat, but enough Latinos and others defected to Trump to give him an easy win.

And, as I say, you see a similar role reversal going on here in Oz. Professor Ian McAllister of the Australian National University, who oversees its Australian Election Study, a large sample survey of voters following every federal election, says we’ve been gradually moving the same way since the 1990s.

His study, following the federal election in May 2022, found it showed a continuation of “major sociodemographic shifts in voting patterns based on gender, generation and social class, with significant implications for the future of the major parties”.

Historically, the two big parties represented the rival interests of voters playing different roles in the economy. Labor looked after the workers supplying their labour, while the Liberals looked after those small and big businesspeople supplying their capital.

The standard division between the working, middle and upper classes was based on people’s occupational status: blue-collar, white-collar, owners and managers.

But that economy-based division is being replaced by more people voting according to their social values and identity. McAllister says this shift is being driven by rising levels of education. Whether someone has a university education is now the best single predictor of how they vote.

As a general rule, those people with a university degree end up with values and preferences that are quite different from those of people who don’t have a degree, or left school early.

So, just as college-educated Americans are more likely to vote Democrat, Australians with a degree are more likely to vote Labor. People without tertiary education are more likely to vote Republican, Liberal or National Party.

It follows – again as a broad generalisation – that the more highly educated are more likely to live nearer the centre of big cities, where the better-paid jobs tend to be, while the less highly educated are more likely to be found in the outer suburbs and the regions.

Over the 34 years to 2023, the proportion of adults with a university degree has risen from 8 per cent to almost one-third. Each year, more than half of students completing high school go on to uni.

So, as each year passes, people in the oldest generation, who are less likely to be graduates, die, while the youngsters taking their place in the electorate are more likely to be graduates.

In his report on the 2022 federal election, McAllister found that Labor still attracted more working-class votes, although its share of them had fallen to just 38 per cent. The Coalition lost votes from university-educated voters, high-income voters and home owners – groups that, in the previous election, were more likely to have supported it.

A much higher proportion of girls are going on to uni these days, which helps explain why more women vote Labor than for the Coalition. And higher education does much to explain why Labor’s support is much stronger among younger voters.

McAllister has found that, as the Millennials get older – some are now in their early 40s – they’re less likely to drift to the right the way earlier generations did as they aged.

You might see the Liberals’ loss of six heartland seats to the teals as a clear example of the secular trend we’re discussing: Liberal voters who cared about climate change, a federal anti-corruption commission and more women in parliament, switching their vote to the teals.

But McAllister found it was more complicated than that. Only about one-fifth of former Liberal voters changed their vote. What got the teals across the line was strategic voting by those seats’ minority Labor and Greens voters. Knowing their party was never going to win, they threw their weight behind the teals, who did have a chance of winning.

As voters around the rich world become less likely to vote according to their economic class and more likely to vote according to their social and cultural values, political scientists have developed a fancy new theory that characterises parties on the left as GAL and parties on the right as TAN.

GAL stands for green, alternative (relaxed about gender fluidity, for instance) and libertarian (“my body, my choice”). TAN stands for traditional (“I liked it the way it was” and “the world should be run by men”), authoritarian (“we need strong leadership”) and nationalist (“why are they letting in all those strange immigrants?”).

So when, in coming months, you see Peter Dutton banging on about inflation, all those terrible immigrants and all the crime on the streets, and campaigning hard in the outer suburbs and regions, the media will tell you he’s borrowing from the Trump playbook. But now you’ll know there’s a lot more to it.

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Will Trump be disastrous for our economy? I doubt it

When, in its wisdom, the American electorate does something really stupid, it’s tempting to predict death and disaster for the whole world, including us.

But though the Yanks are embarking on a bout of serious self-harm – and this will have costs for the rest of the world economy – let’s not kid ourselves that we’ll be prominent in the firing line.

Leaving aside Donald Trump’s climate change denial – a topic I’ll get to another day – his most damaging stated economic policy is to make America great again by imposing a tariff (import duty) of 10 to 20 per cent on all America’s imports except imports from China, which will cop 60 per cent.

This is rampant populism – it sounds like a great idea to those who understand nothing about how economies work but it will make the US economy worse rather than better. Trump claimed this new tax would be paid by the foreign suppliers but, in reality, it will be paid by those American consumers and businesses that continue to buy imported items.

So the man who got elected because the punters hate inflation will be acting to worsen inflation. This isn’t likely to do much to increase the demand for locally made manufactures but, to the extent that it does, automation and digitisation will mean it does little to create more jobs in manufacturing.

Another reason protectionism doesn’t work is that America’s major trading partners – particularly China and Europe – are likely to retaliate by imposing tariffs on their imports from America. We know from history that trade wars end up leaving both sides worse off.

So the United States will suffer most, although all countries that trade with it will suffer to some extent. But get this: the US is not one of our major trading partners. It takes only about 5 per cent of our exports. Our big partners are China, Japan and South Korea.

Like many ignorant Americans, Trump believes any country that runs a bilateral trade surplus with the US must be doing so because they’re cheating in some way. Not a problem for us: we import more from the Yanks than we export to them. It’s China and the Europeans Trump will be going after, not us.

To the extent that Trump hurts the Chinese economy – as part of the Americans’ bipartisan obsession with trying to prevent China usurping their place as the world’s top dog – that will have an adverse flow-on to us.

But the Chinese have their own ways of fighting back. In any case, the greatest risk to our economy is not from what the Yanks do to the Chinese but from what the Chinese stuff up on their own account.

While it’s clear Trump is well placed politically to press on with implementing the crazy policies he has promised, that doesn’t mean he’ll do everything he’s said he’ll do to the full extent that he’s said. For instance, why would he tax all imports of goods and services when it’s manufactures he’s really on about? Also, not everything he tries to do will be done in next to no time.

We know the man. He’s nothing if not capricious. Dead keen one minute, moved on the next. And as someone who sees himself as the great dealmaker, he’s highly transactional. A 20 per cent tariff may be just the list price before the bargaining starts. ANZ Bank economists say the average tariff on Chinese goods will go from 13 per cent to 22 per cent, not 60 per cent.

The truth is that we’re too small to figure largely in Trump’s thinking. And why kick the US lapdog we’ve made ourselves?

Trump has made much of his promise to deport the many millions of undocumented immigrants. Most of these people are doing jobs Americans don’t want to do. Getting rid of them would reduce the size of the economy while increasing inflation as employers offer higher wages to attract other people to unattractive jobs.

But not to worry. It’s hard to see just how he’d round up all these people without calling out the military. It’s much easier to see him limiting himself to trying harder to stop more people crossing the Mexican border. In this case, the reduction in the economy and the rise in costs would be smaller.

So far, his policies on tariffs and immigration seem likely to increase America’s rate of inflation while reducing its economic activity. Great idea. But then we come to his promises for big tax cuts.

He says he wants to cut the rate of company tax and “extend” his 2017 personal income tax cuts, which greatly favoured the high-income earners more likely to have been too smart to have voted for him.

In principle, you’d expect tax cuts to be expansionary and thus possibly inflationary. But note this: according to a strange American custom, the personal tax cuts enacted in 2017 are due to expire at the end of next year.

So extending them means not that everyone gets a tax cut, but everyone avoids a tax increase. The troops’ after-tax income is unchanged. But, of course, the budget deficit is now worse than previously projected.

One thing we can be sure of is that Trump’s not a man to worry about deficits and debt. Republican congresspeople do have a history of worrying about such matters – but only when those irresponsible Democrats are in charge.

The Yanks do have many of the smartest academic economists in the world and, as the US government’s annual interest payments get to be bigger than its spending on defence, they’re starting to wonder how long America’s fiscal insouciance can continue before something goes wrong. But the reckoning is unlikely to come in the next four years.

All told, it does seem that Trump’s policies will cause America’s inflation and interest rates to be higher than they would have been had Kamala Harris won the presidency. But what doesn’t follow is that this will have much effect on our inflation and interest rates, and on our Reserve Bank’s decision about when to start cutting rates to prevent us having an accidental recession.

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How we measure recessions is wrong. There's a better way to do it

By MILLIE MUROI, Economics Writer

Of all the scary words in economics, recession is probably among the worst. Not just because of the bad times we link it with, but because of the way it’s measured.

What if I told you the way we measure recession is wrong? Or at least that we need to give it a rethink?

The widely used rule for a recession is “two consecutive quarters of negative economic growth”. That means two sets of back-to-back periods (of three months each) where gross domestic product – or GDP: the amount of goods and services that we’re producing and selling – shrinks.

Under that definition, Australia has been in a recession only once since 1991, and that was shortly after the pandemic and its lockdowns hit.

The idea is this: if we’re making and buying less, that must mean we’re having a hard time. And if it happens for six months, that must mean we’re becoming really worse off!

Here’s the thing, though. GDP is already a flawed measure at the best of times. Sure, it can give us an indication of how much we’re pumping out on the assembly line or purchasing at the checkout. But that doesn’t tell us anything about other measures of our wellbeing: environmental damage, our health or education outcomes.

It also doesn’t tell us how growth is shared: an expanding economy doesn’t mean everyone is getting better off. All or most of it could just be flowing to the already well-off.

Right now, as much as a lot of us feel worse off, we’re technically not in a recession. Looking purely at GDP, the Australian economy has managed to tread water.

In the September quarter (and the one before that, and the one before that), GDP grew by a tiny 0.2 per cent – but it was still above zero: close to a recession, but no cigar.

It helps if we split that figure up by population. When we consider the boom in our population over the past couple of years, we have, indeed, gone backwards. For the past year and a half, GDP growth per person has consistently fallen every quarter.

But to better measure and identify recessions, which we tend to see as a signal for economic pain, we should look to the labour market.

Why? Because that’s where most of the impact of a recession is felt: think about job losses and how hard it is to find a job when the economy is tanking, as well as the impact our jobs have on our lives.

Over the past year, our biggest banks have said our strong labour market has helped people muddle through the cost-of-living crisis. We can change our spending habits to keep up with mortgage repayments or work extra hours to keep up with our rent. It’s not fun, but it’s possible.

Lose your job, though, and life is much harder. It can put people under serious financial stress and damage their mental health.

Enter American economist Dr Claudia Sahm. The tool she developed – called the “Sahm rule” – helps to warn when an economy is entering a recession. It has missed the mark only twice in the past 11 US recessions.

The Sahm formula looks at monthly unemployment data to track how quickly the national unemployment rate has risen compared to the past year. Specifically, it compares the current three-month moving average of the national unemployment rate with the lowest value it has hit in the previous 12 months.

If the current rate is at least 0.5 percentage points higher than the lowest point in the previous year, it means we’re in the early stages of a recession. Measures such as the Sahm rule help us identify weaknesses in our economy and the risk of a recession early. That’s because jobs data is more frequently reported than GDP.

Sahm says changes in the labour market are crucial in understanding the state of the economy.

“If you were put on a desert island and could only have one variable to say what’s going on in the US economy, unemployment is the one you want,” she says. “It really says a lot about whether we’re in good times or bad.”

Sahm’s formula came about in 2019 while she was searching for a better way to fight the next recession. “I had just watched for a decade how hard the Great Recession was on families,” she says. “The goal was to have something people could understand that was very simple, easy to track and really accurate. Your best shot at fighting a recession is to move quickly.”

According to Sahm’s rule, Australia has been in the early stages of a recession for at least one month this year (although the Reserve Bank has argued the Sahm rule should be triggered at 0.75 per cent rather than 0.5 per cent).

When developing the rule, Sahm says she knew from the beginning that examining unemployment would be key. “I already knew, just from my work experience, even small increases in the unemployment rate are a bad sign,” she says.

Australia’s labour market has been remarkably resilient, with the most recent unemployment rate in September coming in at a historically low 4.1 per cent. But we’ve been in – or close to – the danger zone for the past few months.

Why does this matter? Getting on the front foot is important, especially for policymakers such as the government and central banks, to limit the fallout from an economic slowdown.

Independent economist Saul Eslake has long believed the common definition of a recession is flawed. He points to the two consecutive quarters of negative GDP growth in Australia in 1977: “Nobody thinks that was a recession,” he says.

On the other hand, Australia didn’t see two consecutive quarters of negative GDP growth during either the global financial crisis or the tech wreck in the early 2000s. But Eslake says Australia arguably faced minor recessions during both those periods.

His own metric for a recession, like Sahm’s, focuses on the labour market. He says a recession should be when unemployment rises by more than 1.5 percentage points in 12 months.

“The biggest impact of a recession is on those who lose their jobs or take a long time to find them,” he says.

“There’s evidence that people who lose their jobs during a recession, or enter the workforce as school-leavers or university graduates during a recession, take longer than normal to find a job.”

This then has a “scarring” effect. Those who lose their jobs or have difficulty finding one tend to end up earning less over the rest of their working lives.

The better we are at identifying a recession, the better we can be at protecting jobs and longer-term livelihoods.

Of course, it may not be as simple as just monitoring the jobs market. In the US, for example, the National Bureau of Economic Research (NBER) considers a range of measures beyond GDP – including personal income, employment, wholesale and retail sales – when deciding whether to declare a US recession.

And even Sahm says her rule has limitations, especially as we’ve seen big changes in the supply of labour across many countries.

“This particular economic cycle has challenged simplicity in a way that means these simple rules need some kind of extra check,” she says.

But whether we go with a measure that is simpler than the NBER gauge, more complex than the Sahm rule, or timelier than GDP, it’s clear the focus needs to be more on jobs.

If there’s one job our economic leaders have, it’s to keep us, as much as possible, in ours.

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