Yes, money does buy happiness* *terms and conditions apply

 Years ago, when our kids were young, we used to stay at a guesthouse in the mountains in the same week of January every year, as did various other families. When we met up with people we knew quite well, but hadn’t seen for 12 months, the greeting was always the same: D’ya have a good year?

So, has 2022 been a good year for you? Something similar is asked by the Australian Unity Wellbeing Index. Each year since 2001, researchers from Deakin University ask 2000 people how they’re doing. Are they satisfied with their standard of living, their relationships, purpose in life, community connectedness, safety, health and future security?

The index combines the answers to those questions into a single rating of our “subjective wellbeing”, somewhere between zero and 100. It’s too soon to have results for this year, of course, but the researchers do have them for the first two years of the pandemic – “the worst economic crisis in a generation, and the worst health crisis in a century”.

Guess what? The index actually rose from a low of 74.4 in 2019 to a high of 76.4 in 2020, before falling back a bit to 75.7 in 2021.

But don’t take those tiny changes literally. Allow for sampling error and the best conclusion is: no change. Indeed, in the survey’s 20 years, there’s been only minor variance around an average of about 75.4.

So I can tell you now that our wellbeing in 2022 will have been much the same as it always is, just as almost everyone at the guesthouse gave the same answer every year: “Not bad, not bad”.

The index’s stability from year to year – which is true of similar indexes in other rich countries – confirms a point its founder, Professor Bob Cummins, has been trying to convince me of since I first took an interest in the study of happiness.

Measures of satisfaction with life reflect both biological factors and situational factors. At the biological level, it seems humans have evolved to maintain a relatively optimistic and happy mood. This is controlled by “homeostatic” mechanisms similar to the one that keeps our body temperature stable – unless some situation (such as getting COVID) causes it to go off range.

The researchers say the situational factors most likely to adversely affect a person’s wellbeing equilibrium are insufficient levels of three key resources: money, connection with others, and sense of purpose.

A nationwide average bundles together those people whose wellbeing is reduced by such deficits with a greater number of people who are doing well.

So nothing in this finding denies that many people did it tough during the pandemic, whether monetarily or in their physical or mental health. It’s just that more of us stayed happy enough.

Remember, too, that the media almost always tells us about people with problems, not those doing OK. Similarly, medicos rightly focus on the unwell, not the well. But if you’re not careful, you can get an exaggerated impression of the world’s problems.

And when you look further than the average, you do see the pandemic making its presence felt. The index always shows people living alone, those in share houses and single parents having the least satisfaction with their lot.

But get this: those living alone and single parents enjoyed a big increase in perceived wellbeing. Why? Keep reading.

When the survey divides people according to their work status – unemployed, home duties, study, employed or retired – it always finds the unemployed far less satisfied than everyone else.

In the first year of the pandemic, however, the satisfaction of the unemployed leapt by 9 percentage points. Why? Maybe because the composition of the unemployed had changed a lot. Or maybe because, with many more people becoming unemployed, the stigma of being without a job was reduced.

But a much more obvious explanation is that, early in the pandemic, the rate of the JobSeeker unemployment benefit was temporarily doubled. Suddenly, it went from being below the poverty line to well above it. And wellbeing went up.

Trouble is, when the payment was cut back heavily in the second year, the satisfaction of the unemployed fell below what it was in the first place.

This supports a finding of “behavioural” economics: people suffer from “loss aversion” – we feel losses more deeply than we enjoy gains of the same size.

And it’s borne out by the survey’s finding that the satisfaction of all those people whose household income had fallen was more than 3 percentage points lower than that of those whose income was unchanged.

But. The satisfaction of those people whose income had risen was no higher than that of those whose income didn’t change.

The survey shows that people on the lowest incomes were much less satisfied than those on the next rung up. But it also confirms economists’ belief in “diminishing marginal returns”. The higher incomes rise, the smaller the increase in people’s satisfaction with their lives.

So, unless you’re really poor, don’t kid yourself that more money will make you a lot happier.

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Weak starting point for next year’s threats to the economy

It’s clear the economy’s started slowing, with the strong bounceback from the lockdowns nearing its end. That’s before we’ve felt much drag from the big rise in interest rates. Or the bigger economies pulling us lower, which is in store for next year.

To be sure, the economy’s closer to full employment than we’ve been half a century. But limiting the decline from here on will be a tricky task for Anthony Albanese and, more particularly, Reserve Bank governor Philip Lowe.

The Australian Bureau of Statistics’ “national accounts” for the three months to the end of September, published this week, showed real gross domestic product – the nation’s total production of goods and services – growing by just 0.6 per cent during the quarter, and by 5.9 per cent over the year to September.

Focus on the 0.6 per cent, not the 5.9 per cent – it’s ancient history. Most of it comes from huge growth of 3.8 per cent in the December quarter of last year, which was the biggest part of the bounceback following the end of the second lockdown of NSW, the ACT and Victoria.

Since then, we’ve had quarterly growth of 0.4 per cent, 0.9 per cent and now 0.6 per cent. That’s the slowing. Quarterly growth of 0.6 per cent equals annualised growth of about 2.5 per cent. That’s about the speed the economy was growing at before the pandemic, which we knew was on the weak side.

Dig deeper into the figures, and you see more evidence of slowing. Strong spending by consumers was pretty much the only thing keeping the economy expanding last quarter. Consumption grew by a seemingly healthy 1.1 per cent, which accounted for all the growth in GDP overall of 0.6 per cent. The various other potential contributors to growth – business investment spending, new home building, exports and so forth – cancelled each other out.

But get this: that growth of 1.1 per cent was half what it was in the previous quarter. And what were the main categories of strong spending by consumers? Spending in hotels, cafes and restaurants was up by 5.5 per cent in the quarter.

Spending on “transport services” – mainly domestic and overseas travel – was up almost 14 per cent. And purchase of cars was up 10 per cent.

Anything strike you about that list? It’s consumers still catching up after the end of the lockdowns, when most people were still earning income, but were prevented from spending it. We couldn’t go out to hotels, cafes and restaurants, interstate travel was restricted, and overseas holidays were verboten.

As for buying a new car, an earlier global shortage of silicon chips and container shipping mean few were coming into the country.

Get it? Much of the strong consumer spending that kept the economy moving last quarter was driven by life getting back to normal after the lockdowns and the easing of pandemic-caused supply shortages. It’s a temporary catch-up, that won’t continue for long.

Now let’s look at what the quarterly accounts tell us about the state of households’ finances. Despite their strong consumer spending, their real disposable income actually fell a fraction during the quarter, taking the total fall over the year to September to 2.6 per cent.

Why did households’ income fall? Because prices rose faster than wages did. How did households increase their spending while their income was falling? By cutting the proportion of their incomes they’d been saving rather than spending.

After the first lockdown in 2020, the household saving rate leapt to more than 19 per cent of disposable income. Why? Because people had lots of income they simply couldn’t spend.

But the rate of saving has fallen sharply since then. And in the September quarter it fell from 8.3 per cent of income to 6.9 per cent – almost back to where it was before the pandemic.

As Callam Pickering, of the Indeed jobs site, explains, “households have been relying on their savings, accrued during the pandemic, to maintain their spending in recent quarters”. Lately, however, they’ve “been hit from all angles, with high inflation, falling [house] prices and mortgage repayments all weighing heavily on household budgets”.

“As household saving continues to ease, the ability of households to absorb the impact of higher prices and rising interest rates will also diminish,” he says.

By the end of September, the hit from higher interest rates was just getting started. Of the 3 percentage-point increase in the official interest rate we know has happened, only 0.75 percentage points had yet reached home borrowers.

So, the hit to growth from government monetary policy is only starting. As for the other policy arm, fiscal policy, we know from the October budget it won’t be helping push the economy along. And in the September quarter, falling spending on infrastructure caused total public sector spending to subtract a little from overall growth in GDP.

A similar subtraction came from net exports. Although the volume of exports rose by 2.7 per cent during the quarter, the volume of imports rose by more – 3.9 per cent. A big part of this net subtraction came from the reopening of our international borders. Our earnings from incoming travellers rose by 18.6 per cent, whereas the cost of our own overseas travel jumped by 58 per cent.

Finally, self-righteous business people are always telling us that if we want to real wages to rise rather than fall, there’s an obvious answer: we’ll have to raise our productivity.

Sorry, not so simple, preacher-man. The accounts show that real labour costs to employers per unit of output fell by 2.6 per cent over the year to September.

Meaning that after allowing for the productivity improvement the nation’s employers gained, the increase in wages and other labour costs were a lot less than the increase in the prices they charged.

This suggests business profits are much better placed to weather next year’s hard times than their workers’ and customers’ pockets are. Not a good omen.

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Creative destruction: Even pandemics have their upside

There’s nothing new about pandemics. Over the centuries, they’ve killed millions upon millions. But economic historians are discovering they can also have benefits for those who live to tell the tale. Take the Black Death of the 14th century.

In October 1347, ships arrived in Messina, Sicily, carrying Genoese merchants coming from Kaffa in Crimea. They also carried a deadly new disease. Over the next five years, the Black Death spread across Europe and the Middle East, killing between 30 and 50 per cent of the population.

What happened after that is traced in a recent study, The Economic Impact of the Black Death, by three American academics, Remi Jedwab, Noel Johnson and Mark Koyama, and summarised by Timothy Taylor in his popular blog, the Conversable Economist.

The immediate consequences of all the deaths were severe disruptions of agriculture and trade between cities. There were shortages of goods and shortages of workers, so those who did survive had to be paid well. This will ring a bell: with shortages of supply but strong demand, inflation took off.

In England, the Statute of Labourers, passed in 1349, imposed caps on wages. It was highly effective during the 1350s, but less so after that. Similar restrictions were imposed elsewhere in Europe.

Over the next few decades, after economies had adjusted to the worst of the disruptions, the continuing shortage of workers resulted in many rural labourers moving to the cities, which had vacant houses as well as jobs. Farmers had to pay a lot to keep their workers, so real wages had grown substantially by the end of the century.

Since many noblemen had died, the distribution of income became less unequal. Ordinary people could afford better clothing. So, many countries passed “sumptuary” laws under which only the nobility were allowed to wear silk, gold buttons or certain colours. Nor could the punters serve two meat courses at dinner.

Sumptuary laws were an attempt by elites to repress status competition from below.

The authors say the economic effects of the Black Death interacted with changes in social and cultural institutions – accepted beliefs about how people should behave. Serfdom went into decline in Western Europe because of the fewer labourers available.

People became even more inclined to marry later and so have fewer children. Stronger, more cohesive states emerged and the political power of the church was weakened.

It’s widely believed that all these developments played a role in the economic rise of Europe, particularly north-western Europe.

Taylor notes that one of the great puzzles of world economic history is the Great Divergence - the way the economies of Europe began to grow significantly faster than the economies of Asia and the Middle East, which had previously been the world leaders.

This divergence began soon after the Black Death.

“Of course, many factors were at work. But ironically, one contributor seems to have been the disruptions in economic, social and political patterns caused by the Black Death,” he concludes.

Fortunately, advances in medical science mean our pandemic has cost the lives of a much smaller proportion of the population. And believe it or not, advances in economic understanding mean governments have known what to do to limit the economic fallout – even if we didn’t see the inflation coming.

Governments knew to spare no taxpayer expense in funding drug companies to develop effective vaccines and medicines in record time.

One consequence of our greater understanding of what to do may be that this pandemic won’t alter the course of world economic history the way the Black Death did.

Even so, it’s still far too soon to be sure what the wider economic consequences will be. Changing China’s economic future is one possibility. Come back in 50 years and whoever’s doing my job will tell you.

Even at this early stage, however, it’s clear the pandemic has led to changes in our behaviour. Necessity’s been the mother of invention. Or rather, it’s obliged us to get on with exploiting benefits from the digital revolution we’d been hesitating over.

Who knew it was so easy and so attractive for people to work from home – with a fair bit of the saving in commuting time going into working longer. And these days many more of us know the convenience of shopping online – and the downside of sending back clothes that don’t fit.

Doctors were holding back on exploiting the benefits of telehealth, but no more. Prescriptions are now just another thing on your phone. And I doubt if the number of business flights between Sydney and Melbourne will ever recover.

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Why prime ministers do have to hold a hose (and much else)

If we don’t have another setback on the COVID front between now and May, it seems likely Scott Morrison will escape having his various fumbles in handling the pandemic loom large in the federal election campaign. Even so, the coronavirus was a stark reminder of how much the running of this nation is down to the premiers, not the Prime Minister.

The premiers took full advantage of this opportunity to raise their political profiles. And they’re likely to stay more assertive for years to come.

We’ve all lived all our lives with Australia’s federal system of government. We all know it doesn’t work so well. We long ago tired of the eternal bickering, buck-passing, duck-shoving and cost-shifting between the two levels of government. But just as we’re “learning to live with COVID”, so we long ago got used to living with a dysfunctional federation.

Does a nation of 25 million people really need one federal, six state and two territory governments? Well, if you were starting with a clean sheet of paper, you wouldn’t design it that way.

But we’ve never had a clean sheet. Back in the 1890s, we began with six self-governing colonies. They would never have agreed to dissolve themselves in to one national government. And, today, it’s not just that all those premiers and state parliamentarians wouldn’t want to give up their well-paid jobs.

The Australian mainland is such a big island, and its people are so widely spread around its coastal edge, I doubt if voters in any state would choose to be ruled henceforth solely from distant Canberra.

But the states being immovable, efforts by various prime ministers to make the system work better have had little success.

The pandemic has reminded us that our constitution grants to the states, not the feds, ultimate responsibility for most of the things we expect governments to do for us: healthcare, education, transport, law and order, housing, community services and the environment. Only the states and territories had the constitutional power to order lockdowns or close state borders.

But the problem isn’t just constitutional. It’s also economic. It’s what economists call “vertical fiscal imbalance”. Over the years – and with much help from rulings of the High Court – the feds have accreted to themselves most of the power to levy taxes.

See the problem? The feds raise most of the tax revenue, whereas the states have most of the responsibility for spending it.

Economists think the federation would work better if there was a closer alignment between each level’s spending responsibilities and its tax-raising capacity. But prime ministers haven’t been keen to hand over their taxing powers.

The bigger problem with VFI, as the aficionados call it, isn’t economic, it’s political: the feds cop the blame for levying nasty taxes; the states get the credit for lots of lovely spending. The states love it, the feds hate it.

Related to this is a truth that seems to come as a shock to prime ministers. The feds run defence and foreign affairs and customs and trade. Apart from that, they raise taxes and write cheques – to the premiers, universities, chemists and bulk-billing doctors, pensioners and people on unemployment benefits.

What the feds don’t do much of is deliver programs on the ground, whereas that’s the main thing the states do. Run hospitals and schools, build highways, fight bushfires and clean up after floods.

Turns out that when the feds do try to deliver programs on the ground – put pink batts in ceilings; roll out vaccines across the land – they stuff it up.

In all this you have the hidden explanation for some of Morrison’s coronafumbles.

Despite him setting up the national cabinet – and doing most of the on-camera talking after each meeting – it turned out that most of the credit for our success in handling the pandemic went to the premiers, not him. “What? Even though the feds were picking up almost all the tab?”

Apart from the feds’ failure to order enough vaccines early enough, it seems clear Morrison decided to deliver them through an essentially federal distribution chain of GPs and pharmacists, in the hope this would yield him more of the credit.

That’s how the rollout became a stroll out. It was slow and unfamiliar. Only when the feds admitted defeat and started distributing vaccines through the experts – the states’ public hospitals and mass-vaccination hubs – did things speed up.

I suspect other hold-ups – in replacing JobKeeper; in distributing rapid antigen test kits – came because the feds and states fell to arguing over how the bill should be divvied up. “Why am I paying when you’ll be getting all the credit?”

Morrison said what he did about hoses because bushfires are a state responsibility. Constitutionally, correct; politically, incorrect. He’s had to learn the hard way that if a state problem affects more than one state – or just gets too big for the state to cope with – it becomes a federal problem in the minds of voters.

If you can’t hold a hose, just bring your chequebook.

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This isn't America, so please stop acting like a Yank

If there’s one thing that annoyed me about 2021, it’s the way people have been aping all things American. Our financial markets copped a bad dose of it, the media got carried away, we looked to the Yanks – the smart ones and the crazies - to know what we should think and do about the coronavirus, and many on the Right of politics took their lead from Trump’s Republicans.

One on one, I like the Americans I know. But put them together as a nation, and they seem to have lost their way. We’ve long imagined the US to be the wellspring of everything new and better, but these days it seems to be racing headlong towards dystopia.

Who’d want to be an American? Who’d want to live there?

There’s nothing new, of course, about American cultural imperialism. You’ve long been able to buy a Coke in almost any country. Or, these days, a Big Mac or KFC.

But globalisation has hugely increased America’s influence in the world. Wall Street dominates the world’s now highly integrated financial markets. What’s less well appreciated is the way advances in telecommunications and information processing have globalised the news media. Call it the internet.

These days, news of a major occurrence in any part of the world spreads almost in real time. One thing this means is that you can read the latest from The Age or The Sydney Morning Herald in almost any country.

But another thing is that we get saturation coverage of all things America. These days, America’s greatest export is “intellectual property” – patents and copyright covering machines, medicines and software, but also books, films, TV shows, videos and recorded music, and news and commentary from all of America’s great “mastheads”.

Of course, the little sister syndrome applies. Just as Kiwis know more about us than we know about them, so we and people in every other country know more about the Americans than they know about us. Just ask John Fraser, Malcolm Trumble and “that fella from Down Under”.

And remember this: when you’re as big and as rich as America, you’re the best in the world at most things – but also the worst in the world. These guys win the Nobel Prize in economics almost every year but, no doubt, have the biggest and best Flat Earth Society. They have loads of the super-smart, but even more of the really dumb.

Back to this year’s Yankophile annoyances, as soon as Wall Street decided America had an inflation problem and would soon be putting up interest rates, our local geniuses decided we’d soon be doing the same.

Small problem – we don’t have a problem with inflation. Our money market dealers know more about the US economy than they know about their own. To them, we’re just a smaller, carbon copy of America. If you’ve seen America, you’ve seen ’em all.

The Americans have a lot of people withdrawing from the workforce – leaving jobs and not looking for another – which they’re calling the Great Resignation. Wow. Great new story. So, some people in our media are seizing any example they can find to show we have our own Great Resignation.

Small problem. Ain’t true. Following the rebound from the first, nationwide lockdown in 2020, our “participation rate” – the proportion of the working-age population participating in the labour force by having a job or actively looking for one – hit a record high. With the rebound from this year’s lockdowns well under way, the rate’s almost back to the peak.

A lot of America’s problems arise from the “hyperpolarisation” of its politics. Its two political tribes have become more tribal, more us-versus-them, more you’re-for-us-or-against-us. The two have come to hate each other, are less willing to compromise for the greater good, and more willing to damage the nation rather than give the other side a win. More willing to throw aside long-held conventions; more winner-takes-all.

The people who see themselves as the world’s great beacon of democracy are realising they are in the process of destroying their democracy, brick by brick – fiddling with electoral boundaries and voting arrangements, and stacking the Supreme Court with social conservatives.

Donald Trump continues to claim the presidential election was rigged, and many Republicans are still supporting him.

It’s not nearly that bad in Australia, but there are some on the Right trying to learn from the Republicans’ authoritarian populism playbook.

When your Prime Minister starts wearing a baseball cap it’s not hard to guess where the idea came from. Or when the government wants to require people to show ID before they can vote, or starts stacking the Fair Work Commission with people from the employers’ side only. Enough.

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A quick economic rebound seems assured - but then what?

The good news in this week’s “national accounts” for the three months to end-September is that the Delta-induced contraction in the economy was a lot less than feared – not just by the financial market economists (whose guesses are usually wrong) but by the far more high-powered econocrats in Treasury and the Reserve Bank. So now it’s onward and upward.

According to figures from the Australian Bureau of Statistics, real gross domestic product – the economy’s total production of goods and services – fell by 1.9 per cent in September quarter, thanks to the lockdowns in Sydney, Melbourne and Canberra.

This contraction of 1.9 per cent compares with the fall of 6.8 per cent in the June quarter of last year, caused by the initial, nationwide lockdown. We know that, as soon as that lockdown ended, the economy rebounded strongly in the second half of last year, and kept growing in the first half of this year – until the Delta variant came along and upset our plans.

So we have every reason to be confident the economy will rebound just as strongly in the present December quarter now the latest lockdowns have ended. We’ve yet to assess and respond to the latest, Omicron variant but, now so many of us are vaccinated, it shouldn’t require anything as drastic as further lockdowns.

We can be confident of another rebound not just because we now understand that the contractions caused by temporary, government-ordered, health-related lockdowns bear little relationship to ordinary recessions, but also because the early indicators we’ve seen for October and November – including those for what matters most, jobs – tell us the rebound’s already started.

In ordinary recessions, it can take the government months to realise there is a recession and start trying to pump the economy back up. With a government-ordered lockdown, the government knows what this will do to reduce economic activity so, from the outset, it acts to make up for the loss of income to workers and businesses.

As with all contractions, most people keep their jobs and their incomes and so keep spending. In a lockdown, however, they’re prevented from doing much spending by being told to stay at home.

This means everyone has plenty they could spend – even people whose employment has been disrupted. So their savings and bank balances build up, waiting until they’re allowed to start consuming again. When the lockdown ends, the floodgates open and they spend big.

After last year’s lockdown, the proportion of their income being saved by the nation’s households leapt to more than 23 per cent, up from less than 10 per cent. Over the following four quarters, it fell to less than 12 per cent.

What we learnt this week is that, following the latest lockdown, the household saving ratio jumped back to almost 20 per cent. So there’s no doubt households are cashed up and ready to spend.

The main drop during the September quarter was in consumer spending (down 4.8 per cent), with business investment spending down 1.1 per cent, and housing investment treading water. Even so, earlier government support measures mean the outlook for business and housing investment spending remains good.

Why was the blow from the latest lockdown so much smaller than that from last year’s? Mainly because it only applied to about half the economy. The other states grew by a very healthy 1.6 per cent during the quarter.

But the main reason this year’s contraction proved smaller than economists were expecting seems to be that businesses and households have “learnt to live with” lockdowns. We now know they’re temporary and we’ve found ways to get on with things as much as possible.

Businesses have thought twice about parting with staff, only to have trouble getting them back. Businesses have become better at using the internet to keep selling stuff and consumers better at using the net to keep buying.

The volume (quantity) of our exports rose during the quarter and the volume of our imports fell sharply, meaning that “net exports” (exports minus imports) made a positive contribution to growth during the quarter of 1 percentage point.

However, this was more than countered by a fall in the level of business inventories, which subtracted 1.3 percentage points from growth. The two seem connected.

The fall in imports seems mainly explained by temporary pandemic-related constraints in supply. And inventory levels are down mainly for the same reason. Seems cars are the chief offender.

Our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – improved a little during the quarter to give a 23 per cent improvement since September last year.

Both the improvement in our terms of trade and the improvement in net exports help explain some news we got earlier in the week: the current account on our balance of payments (a summary record of all the financial transactions between Australia and the rest of the world) rose by $1 billion to a record $23.9 billion surplus during the quarter.

The surplus on our trade in goods and services rose to almost $39 billion and, while our “net income deficit” (the interest and dividends we paid to foreigners minus the interest and dividends they paid us) rose to more than $14 billion, that was a lot less than it used to be.

If you think that sounds like good news, you have more economics to learn. We’ve run current account deficits for almost all the years since white settlement because, until recent years, we’ve been a “capital-importing country”.

The sad truth is, in recent years we’ve been saving more than we’ve needed to fund investment in the expansion of our economy, so we’ve been investing more in other people’s economies than they’ve been investing in ours.

But that’s because we haven’t had much investment of our own. The rebound to a growing economy seems assured, but returning to the old normal isn’t looking like being all that flash.

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Problems abound, but we could yet emerge as winners

As we begin to lift our heads and look beyond the lockdown, it’s easy to see the many other problems we face. It’s possible to view those problems with fear and disheartenment – and it suits the interests of many groups to play on our fears.

But it’s almost as easy to see Australia as still a lucky country, with a populace that’s confident, resourceful, committed to the “fair go” and capable of co-operating to convert our problems into opportunities to flourish.

The keys to making life in Australia better rather than worse are to face up to all the change being forced upon us, and to unite in finding solutions that share both the costs and the benefits as fairly as possible.

Ideally, we’d have a political leader who offered us a more united, optimistic and confident vision of the path to a better world, but the sad truth is the two main parties are locked in a race to the bottom that we can’t even be sure they’d like to escape.

In reviewing our problems, let’s start with the pandemic. There’s a risk that we’ve opened up too soon, that our hospitals are overwhelmed and death rates rise unacceptably, forcing the premiers to backtrack.

But it’s only a risk and, assuming it doesn’t happen, I think we can be confident the economy will bounce back strongly and quickly, as it did last year. It won’t be quite as strong as last year because the feds haven’t splashed around nearly as much money as last time.

Even so, most households have saved a lot of their incomes and, as we saw last year, will spend much of the increase over coming months.

At a global level, the risk is that the pandemic continues for years more, as long delays in vaccinating everyone in the poor countries allow new variants to emerge. That the rich countries, having hogged all the vaccines, then lose interest in the topic.

Our first post-pandemic problem is that the economy will rebound only to the plodding rate of growth we were achieving before the plague arrived. Like the other rich countries, our rate of improvement in productivity – production per worker – is anaemic.

Our business people are going through a phase where the only way they can think of to increase profits is to use every tactic to keep wage rises as low as possible. The penny is yet to drop that, since wages are their customers’ chief source of income, this is not a winning formula.

Other problems abound: ever-rising house prices that can’t keep rising forever; adjusting to the ageing of the population and the growing demand for aged care; continuing digital disruption, with all its benefits to users but upheaval in affected industries; handling the growing assertiveness of China, while still taking advantage of being part of the global economy’s fastest-growing region; and the less tangible but no less worrying problem of the breakdown of trust in Australian and global institutions and relationships.

All that’s before we get to our biggest problem – responding to climate change – which, with the Glasgow conference starting in less than two weeks, is also our most pressing challenge.

No issue better illustrates the lesson that, if we want to be on top of our problems rather than crushed by them, we must face up to inevitable changes being forced on us by forces we don’t control.

We must stand up to powerful interests – our coal, oil and gas industries, in this case – hoping to stave off the evil hour as long as possible. They’ll protect their own interests at our expense for as long as we let them. We must be suspicious of political parties accepting donations from these urgers.

We must resist the blandishments of populist politicians – yes you, Tony Abbott – promising to save us from sky-high power costs (we got them anyway) because we can just let the whole thing slide.

Now we have the farmers-turned-miners National Party holding themselves out as champions of the put-upon regions and using their veto over adoption of the net zero emissions target to extort money from the Liberals.

People in the regions, we’re told, bitterly resent Liberal city slickers sitting pretty while imposing all the costs of adjustment on the bush.

This conveniently ignores two points. First, farmers are the biggest losers from climate change and the biggest winners from successful global action to limit further global warming.

Second, as Scott Morrison rightly says, coal mining jobs in NSW and Queensland will decline as other countries reduce their own emissions by ceasing to buy our coal and gas. But acting to get on with making Australia a renewable energy superpower – including by exporting hydrogen, clean steel and clean aluminium – will create many new skilled manufacturing jobs – all of them in the regions.

But only if we stop thinking and acting like losers, and do what it takes to be winners in the new, decarbonised world.

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Budget wisdom: keep options open and don't cry over sunk costs

The nation’s economists are realising that what we need is not smaller government but better government – government that delivers value for money. That means stopping the waste of taxpayers’ money. But identifying genuine waste is harder than you may think.

As former top econocrat Dr Mike Keating has argued in a revealing article on the Pearls and Irritations website, the Coalition preaches that smaller government is best, but has failed to deliver it. Even before the pandemic, federal government spending had risen as a percentage of gross domestic product.

Why? Because as it realised after the debacle of its first budget in 2014, the government lacks the voters’ support for big cuts in major spending programs. So it’s been reduced to cutting a narrow range of spending that lacks public support and, otherwise, just trying to keep a lid on other spending.

As economics professors Richard Holden and Steven Hamilton have argued, this penny-pinching has led to many “false economies” – cost cuts that end up costing you more than you’ve saved.

The prevalence of false economy shows that avoiding waste is trickier than many suppose. Take the decision to dump our $90 billion contract for French submarines in favour of US or British nuclear subs as part of the new AUKUS security pact.

This involves walking away from initial payments to the French of, reportedly, $2 billion. Is this a huge waste of taxpayers’ money?

Well, yes and no. We’ve had a lot of second thoughts about the contract since the Turnbull government decided on it. It’s been plagued by disputes, delays and massive cost blowouts. If Scott Morrison is right in believing the move to nuclear subs and a stronger alliance with the Brits and Americans offers us markedly better security arrangements for the future then, no, writing off $2 billion isn’t a waste of money.

Of course, if you want to say the original decision to accept the French proposal was a mistake and a waste of money, you can. But you’ll be relying on the wisdom of hindsight – on you knowing today what Malcolm Turnbull & Co couldn’t have known with any certainty in 2016.

The wisdom economists have to tell us is that past decisions to spend money are “sunk costs”. Whether they turned out to be good decisions or bad, they can’t be undone. So we should ignore them when making decisions today about what we think may happen in the future.

Today, all that matters is deciding what’s the best thing to do to improve our future prospects. If, for reasons of face, we stick with a bad deal rather than moving to a better one, we’re throwing good money after bad. And that would be a waste.

But Holden and Hamilton point to another case where deciding what is or isn’t waste is tricky. Last year, various pharmaceutical companies and university groups around the world were rushing to develop effective vaccines against the coronavirus. At the time, governments couldn’t know which projects would make it through all the trials.

They had to make deals then that would allow them to vaccinate their populations as effectively and rapidly as possible once it was known which potential vaccines had survived the testing.

But Morrison decided to save money by signing up for just two of the possible vaccines: AstraZeneca and one that scientists at Queensland University were working on.

Holden believes Morrison put our money on just those two because they could be manufactured locally, as “a back-door industry policy”. This goal seemed to overshadow the primary goal of ensuring that, whichever vaccines lasted the distance, we’d have all the vaccine we needed ASAP.

But Morrison got caught. The Queensland candidate fell over and AstraZeneca was tripped up by the ill-considered announcements of ATAGI, the Australian Technical Advisory Group on Immunisation.

Holden and Hamilton’s point is that Morrison’s decision to bet on only two of the horses in the vaccine race was false economy, caused by his failure to understand the wisdom of “option value”.

As sharemarket players know, an option is a financial derivative that gives the buyer the right – but not the obligation — to buy (or to sell) the relevant shares at a stated price within a specified period. You have to pay a modest fee for an option contract, but it keeps your options open and minimises the risk of being caught out. It’s a kind of insurance policy.

Morrison should have used the equivalent of options to back every horse in the vaccine race. The cost of buying all those options would have been more than covered by the saving we’d have made by being able to get everyone vaccinated early and thus reduce the massive cost of the present extended lockdowns. False economy strikes again.

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Timing the economy to fit a pandemic election is a tricky business

So, with Scott Morrison pulling the new AUKUS pact out of his hat, will we be off to a khaki election? It would hardly be the first election conservative governments have won by promising to save us from the threat to our north.

But that’s why I doubt it. For an issue to dominate an election campaign, it has to be in contention. National security is an issue that always favours the conservatives, so Labor won’t be offering any objection to AUKUS or nuclear subs.

Similarly, an issue that should figure large in the campaign is whether the Coalition is too conflicted over climate change to be worthy of re-election. But that issue naturally favours Labor, so Morrison won’t want to take up that fight.

Which leaves? The economy, stupid. Until the end of June, the economy was looking in great shape, better than it had been even before the pandemic. But the arrival of the Delta variant means that, right now, more than half the national economy is back in lockdown, and looking mighty sick.

Does it surprise you that Morrison’s so keen to see the south-eastern mainland states out of lockdown and the others opening their borders, and is pressing the premiers accordingly? He desperately needs the economy back looking trim and terrific by March – May at the latest.

Add to this the business community’s pressure to get back to business – “don’t bother me with all the COVID details” – and the public’s impatience to get life back to normal. Sydneysiders have had enough of lockdowns; Melburnians have had more than enough – something even “Dictator” Dan Andrews can see.

So Gladys Berejiklian and Andrews have added their separate modelling by the Burnet Institute to Morrison’s National Plan modelling by the Doherty Institute – not to mention the independent modelling by the Kirby Institute – and announced their “road maps” for opening up their economies progressively once vaccination rates have reached 70 per cent and 80 per cent of the eligible population, expected in mid-to-late October and early November.

NSW is projected to be only about a week ahead of Victoria, and the gap between 70 and 80 per cent only about two weeks.

Everyone’s so pleased to be getting on with it that we risk losing sight of the high risks the two premiers are running. If all goes to plan, we’ll be back to a new (still-masked) normal by early next year, and the economy will be humming in time for a March election.

But models, based on a host of unmentioned explicit and implicit assumptions, inevitably give politicians and punters a false sense of certainty. No model can accurately predict something as mercurial as human behaviour. And, as we’ve learnt, a new coronavirus knows nothing of models and is a law unto itself.

The risk Andrews and Berejiklian face is that so many unvaccinated people contract the virus that our hospital system is overwhelmed, with people dying because they were turned away, leading to a number of deaths the public finds unacceptable. Whether they press on or turn back, the premiers would be in deep trouble.

The first risk comes from an ambulance and hospital system that, 18 months after the crisis began, is already at full stretch. The premiers tell us our wonderful health workers are coping; the message from ambos, doctors and nurses on the ground says they’re close to collapse.

The next risk comes from the inconvenient truth that our vaccination targets of 70 and 80 per cent of people 16 and older turn out to be just 56 and 64 per cent of the full population. That’s a huge proportion of unvaccinated friends and relations.

Remember, too, that these are statewide averages. They conceal less-vaccinated pockets of particularly vulnerable groups – the disabled, the Indigenous, for instance – and a city-country gap that leaves many rural towns hugely exposed, together with their limited hospital capacity.

Even the decision to move as soon as the 70 and 80 per cent targets are reached, rather than wait another fortnight for vaccines to become fully effective, carries a risk of higher infection.

Both the Burnet and revised Doherty modelling say starting to open up at 70 per cent rather than 80 per cent is likely to involve significantly higher infections, hospitalisations and deaths. Why take that risk just to avoid waiting another fortnight or so?

Morrison’s national plan called for all states to open up together once all had reached the 70 and 80 per cent targets, but now NSW and Victoria are going first. This increases the risk that, despite the other states’ closed borders, the virus will spread to them – where the lesser threat of catching the virus has caused vaccination rates to be much lower.

The risk for Berejiklian and Andrews is that they could be moving the Delta outbreak from the city to the country. The risk for Morrison is that, by pressing those two to open up early, he could be moving the outbreak from one half of the economy to the other.

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When judging recessions, depth matters more than length

With the publication this week of the latest “national accounts”, our situation is now clear: we’re not in recession, yet we are – but, in a sense, not really.

Confused? It’s simple when you know. One thing we do know is that the economy – as measured by real gross domestic product – will have contracted significantly in the present quarter, covering the three months to the end of September.

At this stage, the smart money is predicting a contraction – a fall in the production and purchase of goods and services – of “two-point-something” per cent, although there are business economists who think the fall could be as much as 4 per cent.

Recessions are periods when people cut their spending sharply, causing businesses to cut their production of goods and services and lay off workers. It’s mainly because so many people lose their jobs that recessions are something to be feared. But also, a lot of businesses go broke.

This means no one should need economists to tell them if we are or aren’t in recession. If you can’t tell it from all the newly closed shops as you walk down the main street, you should know from what’s happening to the employment of yourself, your family and friends. Failing that, you should know it from all the gloomy stories you see and hear on the media.

Have you heard, by chance, that NSW, Victoria and now Canberra are back in lockdown, leaving some workers with no work to do, and the rest of us unable to spend nearly as much as usual because we’re confined to our homes? You have? Then you know we’re in recession.

When the first, national lockdown began in late March last year, real GDP contracted by 7 per cent in the June quarter. That was the deepest recession we’ve had since the Great Depression of the 1930s.

But it was also the shortest recession we’ve had because, once the lockdown was lifted, the economy – both consumer spending and employment - immediately began bouncing back. As the Australian Bureau of Statistics revealed this week, the bounce-back continued in the June quarter of this year, which saw real GDP growing by a strong 0.7 per cent, leaving the level of GDP up 1.6 per cent on its pre-pandemic level.

All clear so far? The confusion arises only in the minds of those people silly enough to let the media convince them that, despite all the walking and looking and quacking they see before their eyes, a recession’s not a recession unless you have two consecutive quarters of contraction in GDP.

The size of the contraction is of no consequence, apparently, nor would be two or more quarters of contraction that weren’t consecutive. This is nonsense.

As my colleague Jessica Irvine has explained, this “rule” is repeated ad nauseam by the media, but has no status in economics. It’s a crude rule of thumb that’s frequently misleading. It’s in no way the “official” definition of recession.

But the consecutive-quarter rule is so deeply ingrained that it causes needless debate and uncertainty. Some business economists convinced themselves that this week’s figure for growth in the June quarter could be a small negative.

Oh, gosh! Since we know the present quarter will be a negative, that means we could be in another recession. Quick, get out the R-word posters.

But no. June quarter growth proved stronger than expected. Treasurer Josh Frydenberg couldn’t resist the temptation to declare there’d been no “double-dip recession”. Thank God!

But wait. The lockdowns could easily continue beyond the end of this month and into the December quarter. So we could have a second negative quarter on the way. Quick, bring back the posters and start writing the double-dip speech.

Sorry, this is not only silly, it’s got the arithmetic wrong. When the economy goes from growth to lockdown, you get a negative. But when, in the follow quarter, the economy merely stays in lockdown you get zero growth, not another fall.

The present lockdowns apply to a bit over half the economy. So, if the other half continues to grow, we will get a positive change in GDP during the quarter.

What’s more, if the lockdowns end sometime before the end of December, we’ll get a bounce-back in growth in that half of the economy, as everyone rushes out to start buying the things they were prevented from buying during the lockdown.

That’s what happened last time the lockdown ended; it’s safe to happen this time too. So it’s hard to see how we could get a second quarter of “negative growth” in the three months to New Year’s Eve.

We’ll learn what the figure was in early March, in good time for the federal election. Stand by for Frydenberg’s triumphant declaration that we’ve avoided a double-dip recession for a second time. He’ll turn the media’s consecutive-quarters bulldust back on them, and spin a story of great success.

But this will literally be non-sense. He’ll take a contraction in the September quarter of, say, 2 to 4 per cent – as big as the contractions that caused the recessions of the mid-1970s, the early 1980s and the early 1990s – and pretend it doesn’t count, simply because that massive contraction was concentrated in one quarter rather than spread over two.

He’ll con us into accepting that the depth of a slump doesn’t matter, just its length. More nonsense.

But there remains a respect in which, like the first dip, the second isn’t really a recession. What we had last year and are in the middle of right now aren’t recessions in the normal sense.

They’re artificial recessions deliberately brought about by governments to minimise the loss of life from the pandemic. They thus involve a degree of monetary assistance to workers and businesses unknown to normal recessions. This means they don’t take years to go away, but disappear in six months or so because of the speed with which the economy bounces back when the lockdown ends.

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Smaller Government push explains much of our pandemic fumbling

It’s right for our elected leaders to be held responsible for the failures that have led to the loss of lives and livelihoods in our struggle against the coronavirus. But let’s not fail to see the systemic failures that have led our governments – federal and state; Liberal and Labor – to fall short.

If you’re not looking for it – or don’t want to find it – it’s easy to overlook the inconvenient truth that decades of pursuit of Smaller Government have contributed greatly to the difficulty we’ve had controlling the spread of the virus and hastening the rollout of the vaccine.

Earlier this month, two economics professors, Steven Hamilton and Richard Holden, used two articles in the Australian Financial Review to lay much of the blame for delay in the rollout and in rapid COVID testing at the feet of the “medical regulatory complex”.

They criticised our TGA - Therapeutic Goods Administration – for being “persistently behind the curve – lagging months behind foreign regulators” in approving the various vaccines. The medicos should hardly need economists to remind them of the point they themselves dinned into the rest of us: the spread of pandemics is exponential, so a delay of just six weeks really matters.

So, if medical bureaucracies overseas can approve new drugs with expedition, why can’t we? And they can approve in-home rapid tests, but we can’t?

Because our standards are so much higher than theirs? Doubt it. More likely because we weren’t trying hard enough. Maybe the TGA was short-staffed or the government hadn’t approved enough overtime. As for the reservations about rapid testing, you wonder if it wasn’t a case of doctors trying to make work for doctors, not nurses or pharmacists.

Then there was all the chopping and changing over who should get the AstraZenica vaccine by ATAGI – the Australian Technical Advisory Group. It was narrow, inappropriate advice that failed to take account all the relevant considerations and did much damage to the rollout.

Maybe the government asked the wrong bunch of specialists, or gave them the wrong terms of reference. I’ve seen it suggested that a more appropriate committee had been abolished in cost-cutting by the Abbott government.

The Morrison government’s delay in acquiring sufficient vaccines seems to have arisen from a desire to limit the cost of the exercise, combined with an ill-fated preference for having the vaccine manufactured locally.

Much of our difficulty preventing leakages from hotel quarantine has arisen from cost saving: using ill-suited empty hotels would be much cheaper than purpose-building out-of-town cabin-style facilities, especially when you remember we won’t get another pandemic for decades. Maybe.

Similarly, outsourcing quarantine security to private contractors using casual, low-paid and untrained workers, who probably work at several facilities to make ends meet, saves money. The same way we use outsourcing to cut the cost (and quality) of so many public services these days.

At state level, stockpiles of personal protective equipment recommended by a committee charged with getting us ready for a pandemic were cut as a cost-cutting measure.

Wherever responsibility is shared between federal and state – which is most areas - you get cost-cutting, cost-shifting, game-playing and duck-shoving. The feds had huge success at shifting the blame for Victoria’s second lockdown to Dictator Dan, even though the great majority of deaths occurred in federally regulated aged-care homes.

As the royal commission found, the unending string of scandals in aged care arises from decades of trying to hold down the cost of care to the federal government. Knowing they’re not spending enough to fund decent care, the feds don’t dare to properly regulate the sector’s mainly for-profit providers.

But, since businesses are entitled to a reasonable return on their capital, turning the sector over to private providers adds another layer of cost. There’s little reason to hope their profit margins are covered by their greater efficiency in running institutions. They make room for their profit by cutting other costs.

Cost cutting is just one aspect in which the Smaller Government push has hindered our efforts to respond to the pandemic. Another is the longstanding rundown in the capability of the public service, especially its ability to give policy advice.

Who needs advice from public servants when, if the minister doesn’t know what to do, the politically ambitious young punks in the minister’s office will have plenty of ideas? Failing that, you can always commission a report from one of the big four accounting firms which, you can be sure, will tell you only what you want to hear. I doubt the health departments are immune from these weaknesses.

Of course, our pandemic problems are just the latest, most acute demonstration of the failure of the Smaller Government project, but that wider story’s a topic for another day.

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It's the rich wot get to complain and the poor wot get infected

If you’re anything like me, you’re getting mighty tired of lockdowns. I miss being able get out of the house whenever I choose, I miss going to restaurants and – my favourite vice – going to movies. That bad, huh? You’re right, I don’t have much to complain about. I don’t envy those having to school their kids while working at home – although I do miss seeing my grandkids in the flesh.

If you think I need reminding of how easy I’m doing it compared with a lot of others, you’re probably right. But I suspect that’s true of many of us, even those of us doing it just a tiny bit tougher than me.

Apart from those with kids to mind, the first hardship dividing line is between those of us easily able to work from home and those not. This probably means those still on their usual pay and those reliant on some kind of government support.

Even those unable to work from home but “fortunate” to work in an essential industry probably pay the price of running a much higher risk of getting the virus. And that without anyone doing enough to help them get jabbed.

Another divide would be between those in secure employment, with proper annual and sick leave entitlements, and the third of workers in “precarious” employment, most of whom are casuals rather than in the “gig economy”.

Having so many workers without entitlement to sick leave has been a burden for those involved and for the rest of us, namely an increased risk of being infected by someone who, needing the money, keeps working when they shouldn’t.

But though the dividing lines are different in a pandemic, the greatest divide of all is unchanged. As the old song says, it’s the same the whole world over, it’s the rich wot gets the pleasure, it’s the poor wot gets the blame.

Any amount of research confirms what the medicos call “the social gradient” – the well-off tend to be in much better health than those near the bottom. They’re less likely to be overweight (I must be an exception) and less likely to smoke.

The Mitchell Institute at Victoria University has just issued the second edition of its “health tracker by socio-economic status”. It finds that the 10 million Australians living in the 40 per cent of communities with lower and lowest socio-economic status have much higher rates of preventable cardio-vascular diseases, cancer, diabetes or chronic respiratory diseases than others in the population.

Why then should we be surprised to learn that, though Sydney’s outbreak of the Delta variant seems to have started in the better-off eastern suburbs, it soon migrated to the outer south west, where it finds a lot more business?

Last week the welfare peak body, the Australian Council of Social Service, issued a joint research report on Work, Income and Health Inequality, with academics at the University of NSW.

ACOSS boss Dr Cassandra Goldie says “the pandemic has exposed the stark inequalities that impact our health across the country. People on the lowest incomes, and with insecure work and housing, have been at greatest risk throughout the COVID crisis. Now, they are the same people who are at risk of missing out in the vaccine rollout”.

Then there’s the question of trust. Social trust works through social norms of behaviour, such as willingness to co-operate with strangers and willingness to follow government rules. As in other rich countries, our trust in governments has declined over the years. Last year it seemed to lift, as many of us believed we could trust our leaders – particularly the premiers – to save us from the pandemic.

Whether that confidence survives this year’s missteps we’ll have to see. But the economic historian Dr Tony Ward, of Melbourne University, reminds us of a significant finding in this year’s World Happiness Report: in general, the higher a country’s level of social trust, the lower its COVID-19 death rate.

Stay with me. An experiment by the American behavioural economist Alain Cohn and colleagues in Switzerland involved “losing” 17,000 wallets in 355 cities across 40 countries and seeing how many of them were returned to their supposed owners.

The rate of wallet return was about 80 per cent in the Scandinavian countries and New Zealand, just under 70 per cent in Australia, less than 60 per cent in the US and less than 30 per cent in Mexico.

Ward did his own study and found that two-thirds of the difference between countries could be explained by their degree of inequality of income. The greater the inequality, the less trust. When he added survey data on people’s perceptions of corruption, his apparent ability to explain the differences in trust rose from 68 per cent to 82 per cent.

Premier Gladys Berejiklian and her minions tell us the virus is raging in certain “LGAs of concern” because people aren’t doing as they’ve been asked. Maybe their lack of co-operation reflects a lack of trust in the benevolence of those higher up the income ladder. Inequality doesn’t come problem-free.

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Blame the lockdown on business urgers trying to wish the virus away

I’ve yet to see any of the perpetrators – Liberal tribal mythmakers, industry lobby groups and business’ media cheer squad – admit to their part in the humbling of that “gold standard” virus fighter, NSW premier Gladys Berejiklian (a woman I quite like).

All those business people feeling the pain of NSW’s protracted lockdown – which seems not to be getting anywhere, with no end in sight – have no one to blame but the short-sighted, self-centred urgers on their own side.

The great “learning” from our earlier struggles to control the coronavirus – particularly Victorian premier Daniel Andrews’ struggles this time last year – was the wisdom of the medicos’ advice that the exponential nature of pandemics meant the best strategy was to go early, go hard.

The economic modelling Treasury did to accompany the Doherty Institute’s epidemiological modelling confirmed this wisdom. “Continuing to minimise the number of COVID-19 cases, by taking early and strong action in response to outbreaks of the Delta variant, is consistently more [economically] cost-effective than allowing higher levels of community transmission, which ultimately requires longer and more costly lockdowns,” Treasury concluded.

Another relevant “learning” – drawn by Treasury from economic studies overseas – is that, should governments not impose lockdowns, many anxious people will significantly curtail their economic activity of their own accord. The assumption that it’s the government’s lockdown, not the virus’s threat to people’s health, that does all the economic damage is fallacious.

Yet going early and strong is just what Berejiklian failed to do. Why? Because of all the pressure she was under from her own side to be a true Liberal and control the problem without resorting to lockdowns or border closures.

That pressure started at the top with Scott Morrison and his ministers, but was eagerly pursued by the business lobbies and business’ media cheer squad. In his efforts to score points off Andrews, no one worked harder than Treasurer Josh Frydenberg to propagate the mythology that only Labor premiers were so dictatorial and disregarding of business wellbeing as to lockdown and close state borders at the first sneeze, whereas Liberal premiers knew how to get results with superior testing and contact tracing.

To be fair, it’s clear Labor’s Mark McGowan in Western Australia and Annastacia Palaszczuk in Queensland, both with state elections coming up, were well aware of the votes to be reaped by gratifying their locals’ xenophobic tendencies towards possibly plague-ridden people from “over East” or “down South”.

But the fact remains that with Sydney and Melbourne being the country’s two main international gateways, it’s been eminently sensible for the other premiers to protect their states from infection by closing their borders. Yet they’ve been subject to continuing abuse from the national press.

And in view of the medical experts’ consistent advice, the pressure to which all the premiers have been subjected over lockdowns and borders amounts to trying to wish the virus away. “Don’t worry about contagion, just keep business open and making money.”

This is hardly enlightened self-interest. It’s short-termism at its worst. It’s wilfully disregarding the greater good. “Ignore the interests of other ‘stakeholders’ – even the consumers I hope will still be able to buy my product in the months ahead – I’m just gunna keep pushing my own self-interest.”

The nation’s business people don’t need me to tell them our politicians – including those purporting to represent the business side - can be trusted to favour their own survival at the next election over the prospects for businesses long beyond the election.

But I do wonder whether business people understand the potential for conflict between their interests and those of others anxious to take up the cudgels on their behalf – for the small fee.

The industry lobby groups work in the national capital representing the interests of member businesses around the country. No doubt much of what they do isn’t highly visible and doesn’t lead to spectacular results.

Much of their communication with members would be via the media, where they need to be seen as tireless champions of their members’ interests, shouting louder than rival interest groups. Just to be noticed by the media they’d need to be hardline.

An ability to see the other side’s viewpoint – or the government’s difficulty in balancing conflicting objectives - wouldn’t be career-enhancing. Like the pollies themselves, they’d worry more about appearances and impressions than about making all things work together for the ultimate good of their members.

The self-appointed media business cheer squad is operating on a business model that sees telling people what they want to hear as more rewarding than telling them what they need to know. Commercially, they may be right. But, as you may have gathered, it’s not the way I do business.

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Our leaders would do better if their followers were thinking harder

Much has been said about the failures of Scott Morrison, Daniel Andrews and Gladys Berejiklian in our never-ending struggle to keep on top of the coronavirus. But just this once, let’s shift the spotlight from our fallible leaders to the performance of those they lead. I think we ourselves could be doing a better job of it.

There is, after all, much truth in the saying that we get the politicians we deserve. When we think we’re entitled to have good government served up to us on a plate, we’ve lost sight of the truth that well-functioning democracies require diligent citizens, not just honest and smart politicians.

Perhaps our biggest complaint has been that our leaders and experts keep changing their tune. Why can’t we be told simply and clearly what’s required of us? Why can’t the pollies decide what they want and stick to it?

It’s as though they’re making it up as they go along, chopping and changing when they realise they’ve taken another wrong turn. Hopeless.

Let me tell you the shocking truth: they are making it up. But if you were thinking harder you’d realise that’s all they can do. As Morrison rightly says, a new virus doesn’t come with an instruction manual.

Our political leaders are relying heavily on epidemiologists and other medical experts because pollies have so little knowledge and experience of pandemics. The medicos know a lot about viruses, epidemics, vaccination and immunology, but at the start they knew little about the characteristics of this particular virus.

They were forced to make assumptions about those characteristics but, as they’ve realised those assumptions were wrong, they’ve changed them.

At the start they thought the virus was spread in big droplets landing on surfaces within one or two metres, whereas now they think it’s more like smoke. Without strong ventilation, it builds up in the air. This explains much of the early uncertainty about whether masks were a good idea.

The medicos have relied on the findings of the limited studies available, but when bigger and better studies have come along with different findings, they’ve updated their views.

As I don’t think Keynes actually said, “When the facts change, I change my mind. What do you do, sir?” Or, as he did say, “It is better to be roughly right than precisely wrong.”

Those people carrying on about how confusing it all is and how incompetent our leaders are reveal their own intellectual laziness: their reluctance to think through complex, nuanced, ever-changing problems when they’d prefer to be back watching carefully choreographed “reality” television. And their ignorance of how science works, slowly groping towards an ever-changing best guess at the truth.

The media’s new-found interest in public health means formerly obscure academics have become TV stars and any boffin who disagrees with what the government’s doing about X gets an op-ed article to air their dissent.

You could say this is adding to the confusion, but it’s science proceeding the way science does. It’s academics doing what academics do – eternally arguing among themselves.

It’s tempting to tell them “not in front of the children”, but when you remember how lacking our leaders are in competence, openness and accountability, the last thing our democracy needs is for experts to keep their critique of government policies to themselves.

You might have thought that a bunch of media-innocent scientists and a news media devoted to highlighting the exceptional over the typical, seeking out controversy and not always untempted by the sensational, would make an explosive combination.

But for the most part, the media have been on their best behaviour, favouring their audience’s need for accurate, trustworthy information. That brings us to the Australian Technical Advisory Group on Immunisation, and its ever-changing recommendation on who should be receiving the AstraZeneca vaccine now it’s been found to carry a very rare risk of blood clotting.

The advice has changed partly because circumstances have changed, but mainly because the original advice led to considerable vaccine hesitancy at a time when the vaccine rollout is way behind, we have Greater Sydney in lockdown and loads of AstraZeneca is going begging while little of the alternative Pfizer vaccine is available.

The advisory group has been criticised, but I think it was a narrowly constituted group, which gave narrow advice when what the government needed – and should have sought from elsewhere – was advice taking account of a broader range of factors.

The public’s huge reaction against the vaccine is unwarranted and unfortunate at such a time. AstraZeneca is less risky than taking aspirin. But when the media gave such attention to the clotting risk, the overreaction wasn’t surprising.

Responsible reporters can say “very rare” as many times as they like but, as our science reporter Liam Mannix has explained, humans are notoriously bad at giving minuscule probabilities the weight they deserve.

The saver may be that, as highly social animals, when people see so many of their friends lining up to “bare their arms”, their hesitancy may evaporate. It’s a strange, messy world we live in.

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Don’t be surprised if the economy surprises on the downside

The economy has been on a roller-coaster since the virus arrived early last year, dipping one minute, soaring the next. Now, with the Delta variant putting Sydney and Melbourne back in lockdown, we’re in the middle of another dip. But as you hang on, remember this: what goes down must come up.

When governments order many businesses to close their doors, and us to leave our homes as little as possible, it’s hardly surprising that economic activity takes a dive. What did surprise us was the way the economy bounced back up the moment the lockdown was eased.

We rushed out of our houses and started spending like mad. Not that we weren’t spending whatever we could while locked down. Another surprise was the way the presence of the internet changed what would otherwise have happened.

Apart from allowing most people with desk jobs to work from home, and talk face to face to people in other cities without getting on a plane, it allowed us to keep spending: ordering groceries and takeaways online, consulting doctors over the phone – I thought receptionists were there to stop you getting through to the great personage – buying exercise equipment and stuff to get on with fixing up the back bedroom.

As I keep having to remind myself, only God knows what the future holds – and He’s not letting on. But it’s part of the human condition to be insatiably desperate to know what happens next. We keep searching the world for the one person who might be able to tell us.

Since even the experts can’t be sure what will happen, they base their predictions on the hope that what happens this time will be much the same as what usually happens. Experts are people who remember last time better than we do.

But that way of predicting the future hasn’t worked this time. The epidemiologists – and all the related -ologists we hardly knew existed – know a lot about viruses but, at the start, little about the particular characteristics of this one. Their predictions have kept changing as they’ve had more to go on.

Last year’s recession was the fifth of my career (counting the global financial crisis, which I do). I thought that knowledge put me so far ahead of the game I was an expert expert. Wrong.

Ordinary recessions happen because the people managing the economy stuff up. The economy takes well over a year to unravel, then three or four years to wind back up. But this recession was completely different, having been knowingly brought about by governments, for health reasons. When at last they let us go back to business, however, that’s just what we did.

The initial, nationwide lockdown caused the economy’s production of goods and services (gross domestic product) to dive by an unprecedented 7 per cent in just the three months to the end of June last year. But then the economy bounced back by 3.5 per cent in the September quarter and a further 3.2 per cent in the December quarter after Victoria’s delayed release from lockdown.

In the period before the Delta strain sent Sydney back into humbling lockdown, GDP was ahead of what it was at the end of 2019. Total employment was also ahead, while the rate of unemployment was actually a little lower.

Since the present September quarter has two months left to run, and Sydney’s lockdown rolls on even though Melbourne’s has ended, it’s too early to be confident by how much GDP will fall but, depending on how long Sydney’s drags on, it’s likely to be a fall of less than 1 per cent or somewhat more than 1 per cent. However bad, a lot less than last time.

As for the December quarter – and barring some new outbreak, say a new letter in the Greek alphabet – it’s likely to show expansion rather than contraction. Victoria will be growing, NSW will be in bounce-back mode as soon as the lockdown ends, and the rest of Australia will be doing its normal thing.

So all those silly people desperate for a chance to repeat the R-word aren’t likely to get the excuse they imagine they need.

Another major respect in which coronacessions differ from normal recessions is that politicians can’t consciously decide to stop the economy without at the same time providing generous assistance to all the workers and businesses this will harm. Normally, the assistance comes much later and is less generous.

Despite cries for the return of JobKeeper, the arrangements Scott Morrison has hammered out with Gladys Berejiklian and Dan Andrews are, by and large, a good substitute for the measures used the first time around.

The other thing to remember is that the economy is in much better shape now than at the end of 2019. Households have more money in the bank, the housing market is booming, profits are up and businesses are complaining about staff shortages.

Not such a bad time to cope with a setback. It won’t be the end of the world.

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The economy’s job is to serve our good health

What a tough, tricky world we live in. There we were, starting to think the pandemic – for us, at least – was pretty much over bar the jabbing, when along came a new and more contagious variant and knocked our confident complacency for six. It’s now clearer that getting free of the virus will be messier, more expensive and take longer than we’d hoped.

It’s natural to be impatient to see the end of this terrible episode in the nation’s life, but no one’s been more impatient to see the end of restrictions than Scott Morrison and the business lobby groups.

We should worry less about any continuing small risks and more about getting the economy working normally again, we were told. Why do those appalling premiers keep closing state borders? Don’t they understand how it disrupts businesses?

One theory that’s been blown away is the tribal notion that continuing problems keeping a lid on the virus were limited to dictatorial Labor states, not “gold standard” Liberal states. We’ve been reminded of what pride so often causes us to forget: success is invariably a combination of competence and luck.

Luck was running against Victoria, now it’s NSW’s turn. NSW did do better on contact tracing, but along came a variant that could spread faster than the best contact-tracing system could keep up with.

The nation’s macro-economists learnt some years ago that the best response to a recession is to “go early, go hard”. That’s something the exponential spread of viruses means epidemiologists have long understood.

The sad truth is, no matter how long NSW’s present lockdown needs to last before the virus is back under control, Premier Gladys Berejiklian’s critics are certain to say she waited too long and didn’t go hard enough.

And they’ll be right. If there’s ever a possibility of starting even a day earlier, it’s always right.

Is it a bad thing to want to limit the economic disruption caused by our fight against the virus? Of course not. But it’s a tricky choice. You don’t want to act unnecessarily, but the longer you take to realise you must act, the more disruption you end up causing.

Berejiklian’s problem is that she was being held up as the national pin-up girl of governments’ ability to cope with the crisis while minimising economic disruption.

The economy is merely a means – a vital means – to the end of human wellbeing. Health is also a means to achieving human wellbeing. But good health is so big a part of wellbeing it’s almost an end in itself. And prosperity isn’t much good to you if you’re dead.

So, as surveys show, most economists get what it seems many business people (and certainly, their lobby groups and media cheer squad) don’t get: in any seeming conflict, health trumps economics.

It’s also a matter of solving problems in the best order. Just as a war takes priority over material living standards, so does a major threat to our health. Fix the health problem, then get back to worrying about the economy.

To put it yet another way, “the economy” exists to serve the interests of the people who make it up; we don’t exist to serve the economy.

The people who want to exalt “the economy” tend to be those using “the economy” to disguise their pursuit of their own immediate interests, not the interests of everyone. “Keep my business going; if that means a few people die, well, I’m pretty sure I won’t be among ’em.”

Some economists estimate that the NSW lockdown will cost the economy (gross domestic product) about $1 billion a week. But don’t take that back-of-an-envelope figure too seriously. For a start, it’s not huge in a national economy producing goods and services worth about $2000 billion a year.

In any case, it’s misleading for two reasons. First, can you imagine what would be happening in the economy had St Gladys (or, before her, Dictator Dan) done nothing while the virus raged about us, getting ever worse?

Most of us would be in what Professor Richard Holden of the University of NSW calls “self-lockdown”. Which would itself be a great cost to the economy – not to mention the angst over the lack of leadership.

So don’t confuse the cost of the virus with the cost of the government’s efforts to limit its spread by doing the lockdown properly.

Second, remember that the economy rebounded remarkably quickly and strongly after the earlier lockdowns, making up much of the lost ground. Of course, the exceptional degree of income support for workers and businesses provided by the federal government does much to account for the strength of the rebound.

Which is why it’s good to see the federal-state assistance package announced on Tuesday, even though its cut-price version of JobKeeper, while being better than was provided to Victoria recently, isn’t as generous as it should have been.

Like Berejiklian, Morrison is still adjusting to his newly reduced circumstances.

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Smaller Government is dogging our efforts to beat the pandemic

It surprises me that, though the nation’s been watching anxiously for more than a year as our politicians struggle with the repeated failures of hotel quarantine and the consequent lockdowns, big and small, and now the delay in rolling out the vaccine, so few of us have managed to join the dots.

Some have been tempted to explain it in terms of Labor getting it wrong and the Libs getting it right – or vice versa – but that doesn’t work. Nor does thinking the states always get it right and the feds get it wrong – or vice versa.

The media love conflict, so we’ve been given an overdose of Labor versus Liberal and premiers versus Morrison & Co. But though we can use this to gratify our tribal allegiances, it doesn’t explain why both parties and both levels of government have had their failures.

No, to me what stands out as the underlying cause of our difficulties – apart from human fallibility – is the way both sides of politics at both levels of government have spent the past few decades following the fashion for Smaller Government.

Both sides of politics have been pursuing the quest for smaller government ever since we let Ronald Reagan convince us that “government is not the solution to our problems; government is the problem”.

The smaller government project has had much success. We’ve privatised almost every formerly federal and state government-owned business. We’ve also managed to “outsource” the delivery of many government services formerly performed by public sector workers.

But the smaller government project has been less successful in reducing government spending. The best the pollies have done is contain the growth in spending by unceasing behind-the-scenes penny-pinching.

And here’s the thing: pandemics and smaller government are a bad fit.

The urgent threat to life and limb presented by a pandemic isn’t something you can leave market forces to fix. The response must come from government, using all the powers we have conferred on it – to lead, spend vast sums and, if necessary, compel our co-operation.

In a pandemic, governments aren’t the problem, they’re the answer. Pretty much the only answer. Only governments can close borders, insist people go into quarantine, order businesses to close and specify the limited circumstances in which we may leave our homes.

Only governments can afford to mobilise the health system, massively assist businesses and workers to keep alive while the economy’s in lockdown, pay for mass testing and tracing, and flash so much money that the world’s drug companies do what seemed impossible and come up with several safe and effective vaccines in just months.

But when you examine the glitches – the repeated failures of hotel quarantine, the need for more lockdowns, the delay in stopping community spread, and now the slowness of the rollout of vaccines – what you see is governments, federal and state, with a now deeply entrenched culture of doing everything on the cheap, of sacrificing quality, not quite able to rise to the occasion.

As we’ve learnt, a pandemic demands quick and effective action. But when you’ve spent years running down the capabilities of the public service – telling bureaucrats you don’t need their advice on policy, just their obedience – quick and effective is what you don’t get.

The feds have lost what little capacity they ever had to deliver programs on the ground. They have primary responsibility for quarantine and vaccination, but must rely on the states for execution. Then, since both sides are obsessed by cost-cutting, they argue about who’ll pay – and end up not spending enough to do the job properly.

It took the feds far too long to realise that hotel quarantine was cheap but leaky. Every leak had the states closing borders against each other. The feds didn’t spend enough securing supplies of vaccines, then took too long to realise a rapid rollout wasn’t possible without help from the states.

Without thinking, Victoria initially staffed its hotel quarantine the usual way, with untrained, low-paid casual staff. It had run down its contact-tracing capacity and took too long to build it up – still without a decent QR code app. NSW let a host of infected people get off a cruise ship and spread the virus all over Australia.

The report of the royal commission laid much of blame for the aged care scandals on the feds’ efforts to limit their spending on aged care. They couldn’t demand providers meet decent standards because they weren’t paying enough to make decent standards possible.

One of the main ways providers make do is by employing too few, unskilled, casual, part-time staff, who often need to do shifts at multiple sites. Do you think this has no connection with the sad truth that the great majority of deaths during Victoria’s second lockdown occurred in aged care?

And now we discover the feds have failed to get the vaccine rollout well advanced even to aged care residents and staff.

Spend enough time denigrating and minimising government and you discover it isn’t working properly when you really need it.

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Coronacession: great initial rebound, but recovery yet to come

If you’re not careful, you could get the impression from this week’s national accounts that, after huge budgetary stimulus, the economy is recovering strongly and, at this rate, it won’t be long before our troubles are behind us.

The Australian Bureau of Statistics issued figures on Wednesday showing that the economy – real gross domestic product – grew by 3.1 per cent over just the last three months of 2020. This followed growth of 3.4 per cent in the September quarter.

When you remember that, before the virus arrived, the economy’s average rate of growth was only a bit more than 2 per cent a year, that makes it look as though the economy’s taken off like a stimulus-fuelled rocket.

Even the weather is helping. The drought has broken and we’ve had a big wheat harvest. We keep hearing about the Chinese blocking some of our exports, but much less about them going back to paying top dollar for our iron ore. This represents a massive transfer of income from China to our mining companies and the federal and West Australian governments.

So much so that our “terms of trade” – the prices we get for our exports compared with the prices we pay for our imports – improved by 4.7 per cent in the December quarter, and by 7.4 per cent over the year.

Sorry. It certainly is good, but it's not as good as it looks. The trick is that you can’t judge what’s happening as though this is just another recession. It’s called the coronacession because it’s unique – sui generis; one of a kind.

Normal recessions happen because the economy overheats and the central bank hits the interest-rate brakes to slow things down. But it overdoes it, so households and businesses get frightened and go back into their shell. The fear and gloom feed on each other and unemployment shoots up. (If you’ve heard of poets’ license, economists have a licence to mangle metaphors.)

This time, the economy was chugging along slowly, with the Reserve Bank using low interest rates to try to speed things up, when a pandemic arrived. Some people were so worried they stopped going to restaurants and pubs. But to stop the virus spreading, the government ordered many businesses to close and the whole nation to stay at home.

(To translate this into econospeak: normal recessions are caused by “deficient demand”; this one was caused by “deficient supply” - on government orders.)

Knowing this would cause much loss and hardship, governments spent huge sums to support individuals and firms, including the JobKeeper wage subsidy (intended to discourage idle firms from sacking their workers), the temporary JobSeeker supplement (to help those workers who were sacked), help business cash flows and much else.

The politicians and their econocrats assured us this would be sufficient to hold most of the economy intact until they’d be able to lift the lockdown. Despite much scepticism (including from me), this week’s figures offer further proof they were right.

The national lockdown was imposed in March, and caused GDP to contract by a previously unimaginable 7 per cent in just the June quarter. The national lockdown was lifted early in the September quarter, when most of that 7 per cent should have returned.

If it had, it would have been easier to see what it was: not the start of a “recovery”, but just the rebound when businesses are allowed to reopen and consumers to go out and shop.

But the need of our second biggest state, Victoria, to impose a second lockdown – which wasn’t lifted until November - has seen the rebound spread over two quarters, with a bit more to come in the present, March quarter.

When you study the figures, you see that most of the collapse in growth and rebound in the following two quarters is explained by just the thing you’d expect: the downs and ups in consumer spending. It dived by 12.3 per cent in the June quarter, then rebounded by 7.9 per cent in the following quarter and a further 4.3 per cent in the latest quarter.

Consumer spending grew strongly in the December quarter, even though the wind-back of federal support measures caused household disposable income to fall by 3.1 per cent. How could this be? It was possible because households cut their outsized rate of saving.

At the end of 2019, households were saving only 5 per cent of their disposable income. By the end of June, however, they were saving a massive 22 per cent. But by the end of last year this had fallen back to 12 per cent. This suggests people were saving less because they were worried about their future employment and more because they just couldn’t get out to shop.

Note that, by the end of December, the level of real GDP was still 1.1 per cent below what it was a year earlier. Economists figure we’ve rebounded to about 85 per cent of where we were. But what happens when, after the present quarter or next, we’re back to 100 per cent?

Will we keep growing at the rate of 3 per cent a quarter? Hardly. The easy part – the rebound – will be over, most of the budgetary stimulus will have been spent, and it will be back to the economy growing for all the usual reasons it grows.

Will it be back to growing at the 10-year average rate of 2.1 per cent a year recorded before the virus interrupted? If so, we’ll still have high unemployment – and no reason to fear rising inflation or higher interest rates.

But it’s hard to be sure we’ll be growing even that fast. On the Morrison government’s present intentions, there’ll be no more stimulus, little growth in the population, a weak world economy, an uncompetitive exchange rate thanks to our high export prices and, worst of all, yet more years of weak real growth in income from wages. The “recovery” could take an eternity.

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The economy doesn’t work well without good public servants

You’d hope that one of the big things Scott Morrison learnt in 2020 was to have more respect and trust in his public servants. After all, they must get much of the credit for helping him – and the premiers – respond to the pandemic far more successfully than most other rich countries. What Morrison did right was take their advice.

Morrison began his time as Prime Minister by making his disrespect and distrust of public servants crystal clear. He was blunt in telling them he didn’t need their advice on policy matters, just their full cooperation in faithfully implementing the decisions he and the Cabinet made.

The Coalition has continued its Labor predecessor’s practice of imposing annual “efficiency dividends” – fixed percentage cuts in the money allocated to pay public servants’ wages and admin costs – which by now amount to annual rounds of redundancies, with those more senior public servants with policy experience being the ones most likely to get the heave-ho.

This has robbed the public service – and its political masters – of much benefit from its institutional memory of what works and what doesn’t. The government prefers to get its advice from the young people with political ambitions employed to help in ministers’ offices.

These young punks act as intermediaries between the minister and his department. Their great attraction is their loyalty to the party. They tend to be a lot stronger on political tactics than policy detail.

In a quite wasteful way, when the government has felt the need for advice on tricky policy matters it now pays top dollar for a report from one of the big four accounting firms busy turning themselves into management consultants (which is more lucrative).

Where does a bunch of auditors and tax agents find the expertise to advise on quite specialised issues of public policy? They hire – at much higher salaries - some of the redundant public servants who know all there is to know on particular topics.

Despite the expense to taxpayers, one reason the government likes to pay outsiders for advice is that, like all profit-making businesses, the consultants make sure they tell their paying customers what they want to hear, not necessarily what they need to be told.

By now, most big businesses have learnt it’s smarter to keep their core functions and expertise in-house, but the Liberals prefer to pay outsiders because they neither trust public servants nor like them. They don’t like them because they see them as members of the Labor “public” tribe, not their own Liberal “private” tribe. Private good; public bad.

The Libs don’t trust public servants for same reason: how could supporters of their rival tribe give them honest, helpful advice? Plus a bit of paranoia. Whenever Labor’s in office, the Libs sit fuming in opposition, watching the public servants working hard to help the government pursue its policy preferences and keep it out of trouble, and conclude the shiny-bums are doing it because of their partisan sympathies.

The Libs’ paranoid tribalism blinds them to the plain truth that the public service takes professional pride in wholeheartedly supporting the government of the day, while suppressing their personal political preferences.

In recent times, much of the Libs’ hostility towards public servants stems from John Howard. It was Howard – aped by Tony Abbott – who instituted the practice of beginning their term in office by sacking a bunch of department heads considered to be Labor-sympathisers (or in Abbott’s case, to be so hopeless they actually believed all that Labor bulldust about climate change).

This was retaliation, but also a knowing attempt to “encourage the others”. And it’s worked well in discouraging senior bureaucrats from giving ministers advice they don’t want to hear. But in a leader, surrounding yourself with yes-persons is a sign of weakness. If such a minister stuffs up, don’t be surprised.

You couldn’t have picked a crisis more likely to bust the Libs out of their I-don’t-need-any-advice hang-up than the pandemic. There’s no recent precedent and it’s full of technicalities. Anyway, who thinks they’re smart enough to tell a doctor they’re wrong?

By contrast, every Liberal pollie thinks they know at least as much, and probably more, about the economy as any economist. Economics is much more mixed up with politics than are the principles of human health.

But get this: Morrison wouldn’t have dared to accept the medicos’ advice to lock down the economy without Treasury’s assurance that it could throw together the measures – particularly JobKeeper and the JobSeeker supplement – that would hold most of the show together until the economy could be unlocked. As has happened. Treasury is back in the good books.

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