Why populism hasn't taken off in Australia

One good thing about taking a break from work is that it gives you time to let your mind wander from all the pressing concerns of our fast-moving world – the preoccupation with this “crisis” and that “crisis” – to less immediate but more important problems. And it helps if you’ve used the time to read a good book or two.

On my recent long break – soon to be followed, I fear, by my summer holiday – I read The Crisis of Democratic Capitalism, by Martin Wolf. Wolf is the chief economics commentator of the Financial Times in London, and the global doyen of my tiny profession of economics editors.

Wolf has two worries. Democracy isn’t working well and neither is capitalism.

He sees many signs that faith in democracy is declining and voters are turning to authoritarian demagogues peddling populist solutions to difficult problems.

You can see that in the election of Donald Trump and the even more remarkable possibility that this self-serving con man could be given another turn at the wheel. You see it in Britain’s self-harming decision to leave the European Union.

And you see the rise of right-wing populism in an ever-growing number of European countries – from Hungary to the Netherlands, not to mention in South America – much of it involving resentment of immigrants, particularly Muslims, and the search for scapegoats.

Turning to capitalism, there is much dissatisfaction with the evident failure of “neoliberalism” – the doctrine that less government and more freedom for business is the path to prosperity.

The privatisation of government-owned businesses has often made things worse rather than better. The contracting of private businesses to provide government services hasn’t helped. Nor has the use of private consultants rather than the public service.

Wolf argues that the poor performance of the economy is the main explanation for the rise of populism in the rich democracies.

The global financial crisis of 2008 led to much disillusionment. Particularly in America, deregulation of the banks left them free to make many bad loans, but when the house of cards collapsed and plunged the advanced economies into the Great Recession, billions of taxpayers’ dollars had to be used to bail out the banks, but the bankers escaped unpunished.

Leaving aside the temporary disruption of the pandemic, the advanced economies have never since returned to healthy growth and rising living standards.

Then there’s globalisation. It has moved much manufacturing activity from America and Europe to China and other Asian countries, to the great benefit of consumers of manufactured goods throughout the rich world.

It lifted many millions of workers out of poverty in Asia, while robbing many American workers of their well-paid jobs in manufacturing.

Governments could easily have used their budgets to require those of us who benefited from cheaper cars, clothing and all the rest to compensate and help those who lost their jobs but, in the era of neoliberalism, they didn’t bother.

It was the decisions of the former blue-collar workers of the rust belt states to move their votes from Democrat to Trump that pushed him across the line in 2016.

Wolf says, “people expect the economy to deliver reasonable levels of prosperity and opportunity to themselves and their children”. When it doesn’t fulfil those expectations “they become frustrated and resentful”.

“Instead ... it has generated soaring inequality, dead-end jobs and [economic] instability.”

Whether you look at politics or the economy you see we’re moving to a plutocracy – government by the rich and powerful. You see powerful – but often harmful – industries buying favourable treatment with generous donations to political parties.

And you see the way our chief executive class has increased its remuneration out of all comparison, while holding down the wages of their fellow employees.

But Wolf’s story applies more fully to America, Britain and Europe than it does to us. While it’s true that living standards in Australia have hardly risen for the past decade, things here haven’t been as bad.

Our one great would-be populist saviour, Pauline Hanson, hasn’t got far. Our two big parties’ problems have been with the Greens and teals.

And while our incomes have become more unequal over the decades, they haven’t worsened much in the past two decades – except at the very top.

Part of that lack of deterioration is owed to our system of regularly – and fairly generously – increasing minimum award wages.

Another saviour has been the Labor governments’ umbilical cord to the union movement, something not matched by America’s Democrats.

Anthony Albanese hasn’t seemed terribly brave on many issues, but last week he pressed on with closing the legal loopholes employers have long been using to chisel their workers, against ferocious opposition from the (big) Business Council, the Mining Council and the employer groups.

According to them, Labor’s changes will destroy many jobs and kill the economy. Don’t stay up waiting for it to happen.

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Labor sets out its alternative to neoliberalism

If, rather than wading through all the things the Albanese government has decided to do, you read what its white paper on employment actually says, you realise a remarkable thing: it reveals a vision of an alternative economy the government wants to take us to.

In recent weeks we’ve seen before our eyes the worst of the economy that several decades of “neoliberalism” – the doctrine that what’s good for big business is best for the rest of us – has brought to us. The rise of the nation’s chief executives as commercial Brahman castes, taking short-cuts to higher profits by chiselling customers and mistreating employees, and seeing themselves as above the law, has left a sour taste.

Treasurer Jim Chalmers and his colleagues want to move from an economy centred on what the bosses want, to one centred on what’s best for the workers. It’s a shift from managing the economy for the few, rather than the many. The great majority of Australia’s households depend on income from wages.

The white paper spells it out from the beginning. “The government’s vision is for a dynamic and inclusive labour market in which everyone has the opportunity for secure, fairly paid work and people, businesses and communities can be beneficiaries of change and thrive. We are working to create more opportunities for more people in more places,” it says.

Our surprise return to our lowest rate of unemployment in almost 50 years – about 3.5 per cent, which we’ve maintained for more than a year – has revived the government’s ambition to pursue a goal we lost sight of in the 1970s, full employment.

The white paper says what the government takes that term to mean in our very different world, and how it will be pursued. Full employment has never meant an unemployment rate of zero. At the very least, there will always be a small proportion of workers moving between jobs or looking for their first job.

The paper announces the government’s definition of the term: it is working to create an economy where “everyone who wants a job is able to find one without having to search for too long”.

That’s a demanding specification. Sometimes unemployment will be high because the economy’s in recession. In normal times, unemployment is high precisely because too many people have gone for months without finding a job.

Some part of unemployment comes from the economy’s ever-changing industry structure, as some industries decline while others expand. This can leave some workers high and dry. They may have skills that some business wants, but that business may be many miles from where they live.

So for the government to commit to people not having to search too long to find a job imposes on it a great responsibility to help those people having problems.

But the government adds an important qualification to the requirement that no one be jobless for long: “These should be decent jobs that are secure and fairly paid.”

All this, it tells us, “is central to a strong economy and a prosperous and inclusive society”.

Just so. The only reason to want a strong economy is for prosperity that’s widely shared among the people who constitute the economy. And a simple truth that was lost in the era of neoliberalism is the value people place on having a job that’s secure.

It’s the peace of mind that comes from knowing that, if you turn up every day, do what you’re told and work hard, you can stop worrying about where your next meal’s coming from.

This can be just as important as how well the job pays, if not more so. But in recent decades we’ve seen the growth of businesses increasing their profits by using casualisation to make jobs less secure and devices such as labour hire and outsourcing to side-step existing wages and conditions.

The white paper says the government’s objective is “sustained and inclusive full employment”.

“Sustained full employment is about minimising volatility in economic cycles and keeping employment as close as possible to the current maximum level consistent with low and stable inflation.

“Inclusive full employment is about broadening opportunities, lowering barriers to work including discrimination, and reducing structural under-utilisation [part-time workers who can’t get as many hours of work as they want] over time to increase the level of employment in our economy.”

The paper says building a strong and skilled workforce “will be fundamental to achieving full employment and productivity growth”. This will require substantial growth in the high-skilled workforce.

“Australia needs an increasingly highly skilled labour force, equipped with the right tools and technology” to maximise gains from the transition to renewable energy, the increased use of artificial intelligence and the growing care economy.

Now, I know what you’re thinking. It would be a much better world to live in. But they’re just words ... just aspirations. True. But by setting it all down so formally, the Albanese government is raising our expectations.

It’s setting a standard for us to judge its performance by – a standard much higher than its predecessors ever set. We must hold Albo to it.

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How to make big business deliver for us, not just the fat cats

When we’ve got big business behaving badly, what can we do about it? Most of the answer’s obvious: strengthen the laws against misbehaviour, greatly increase the penalties and then, most obvious of all, police them vigorously until the fat cats get the message.

As the banking royal commission showed, much of the misbehaviour uncovered involved breaking the existing law. And the casinos in Sydney and Melbourne seem to have been breaking the law.

If PwC’s decision to pass on to other clients the information it had been given by the Tax Office after promising to keep it confidential wasn’t illegal, it should have been. And obviously, the many big businesses found to have been paying their workers less than they were legally entitled to were breaking the law.

The High Court has just confirmed that Qantas’ dismissal of 1700 workers was illegal, just as the Federal Court had originally found it to be many months ago. Qantas had appealed against the Federal Court decision but failed, so it took its appeal to the High Court and was again rebuffed.

Think how much shareholders’ money was spent trying to escape what most people would have thought was the company’s legal duty to its employees. And how much the shareholders will now have to pay to compensate the unlawfully dismissed employees.

Now the Australian Competition and Consumer Commission is taking legal action against Qantas, alleging it continued selling fares on flights it had already cancelled. Should the airline lose the case, it will be up for hefty fines.

It’s hard to believe that in all these cases big businesses, with their own legal departments, didn’t know that what they were doing could be found to be against the law. Much easier to believe they thought the chances of being prosecuted were low.

It’s possible some thought that, should they be prosecuted, they could afford the legal firepower to find a way to get them off the hook. But I think the main reason so many big companies have been acting as they have is their confidence that they wouldn’t be prosecuted.

Of course, in competitive markets – even markets like ours, where competition on price isn’t nearly as strong as it’s supposed to be – when one big business is seen to be gaining an advantage by finding neat legal arguments, the temptation for other businesses to do the same is intense. And it’s all too human to assume that the test of what’s ethical behaviour is what you imagine everyone else is doing.

Remember, too, that although many personal crimes are committed in the heat of the moment, big-business lawbreaking is likely to be the result of carefully considered advice.

That’s why penalties for business lawbreaking need to be very high. I think going to jail – even for just a few months – would be a highly effective deterrent. Think what your spouse would say if you got caught.

But why have chief executives been so confident their misdeeds would go undiscovered and unpunished? Because for a long time, it was pretty true.

During the now-ended era of “neoliberalism” – the doctrine that what’s good for business is good for the economy – successive governments used nods and winks to let corporate watchdogs, competition and consumer watchdogs, and wages watchdogs know their job was to look impressive without ever biting anyone.

And, if that wasn’t enough, governments would deny them the funds needed to police adequately the laws they were responsible for. Even the Tax Office wasn’t funded to do as many audits of taxpayers as it should have done – despite those audits bringing in far more revenue than they cost.

But, as I say, the neoliberal era is over, a victim of the manifest failure of much privatisation and outsourcing, and the exposure of big business misconduct by investigative journalists – most of them working for this august organ and the ABC.

And, of course, the crossbenchers are using Senate committees to draw attention to failures the two major parties would prefer to go unnoticed.

Once the public’s attention is aroused, governments have to act, calling royal commissions and being seen enforcing the law.

Now the watchdogs are better funded, and the ACCC is calling for stronger powers. Last week its chair, Gina Cass-Gottlieb, told a parliamentary committee that many unfair trading practices currently fall outside the scope of Australian consumer law, “despite causing considerable harm for consumers, small business [note that; big businesses often mistreat small businesses] and competition”.

She was referring to practices such as making it hard for people to cancel digital subscriptions, online sites with opaque and confusing trading terms for small businesses, manipulative sales practices such as misleading scarcity claims (“Hurry, stocks limited”), or deceptive design patterns such as sites that confuse you into buying things you didn’t actually want.

In the post-neoliberal world, there’s much cleaning up to be done.

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The economy can self-correct, but only up to a point

As you’ve no doubt noticed, the crippling lockdowns in Sydney and Melbourne turn out to have one important side-benefit: NSW and Victoria have the highest rates of vaccination, which offers those states a path out of lockdown.

By contrast, the other states – which sensibly closed their borders to people coming from the two highly infected states – have the advantage of not needing to lock down, but the disadvantage of low rates of vaccination.

The two states that built the highest walls against the coronavirus - Queensland and Western Australia – have the lowest vaccination rates. (Which suggests they may not be feeling quite so superior once the lockdowns end and the virus’s chances of penetrating their borders are greatly increased.)

You don’t need me to tell you the two sides of the coin are connected. The incentive to get vaccinated has been greatest in the most infected states and least in the least infected states.

What you may need me to tell you is that this offsetting outcome is just what an economist is trained to expect. One of the most important and useful insights of economics is that market economies possess an inbuilt self-correction mechanism, a negative feedback loop.

Positive feedback causes a variable that’s going up to keep going up and a variable that’s going down to keep going down, whereas negative feedback causes a variable that’s going up to start going down, and a variable that’s going down to start going up.

Don’t take this the wrong way, but economists love negative feedback. Why? Because it returns a market and, by extension, the whole economy, to “equilibrium”.

Equilibrium means a state where everything’s in balance and thus at rest. There is – until the next “shock” to the system comes a long - no pressure for things to change.

What is it that always pushes markets back to equilibrium? “Market forces”.

This refers to the interaction between the demand from consumers for some product on one side and the willingness to supply that product on the other. What brings demand and supply into balance is the “price mechanism” – the price keeps changing until demand and supply are equal and the price is stable.

Say there’s some shock that causes the quantity demanded to exceed the supply available. This will cause the market price to rise, and the rise will send a “price signal” to both buyers and sellers.

The signal to buyers is: buy less. Be less wasteful in your use of the product, or look for similar products that are cheaper. The signal to sellers is the reverse: sell more. Now the product has become more profitable, produce more of it.

So, the price mechanism has caused a fall in the demand for the product and a rise in its supply. This will push the price back down until demand and supply are equal again. The market will have “cleared,” leaving nothing unsold, and the price will be back to about where it was before the shock. Equilibrium will have been restored.

Simple, eh? Neat, eh? And that’s a big part of the reason the economists’ way of thinking about how markets and market-based economies work hasn’t changed much in 150 years.

You see, too, why economists believe that prices – particularly changes in them – are the great incentive for people to change their behaviour. You want to decarbonise the economy? Put a price on carbon emissions.

Another instance of the equilibrating effect of prices is the existence of “arbitrage”, particularly in the markets for shares and other securities. Any difference in the price of the same security in different markets won’t last because the actions of people seeking to profit by buying in the cheaper market and then selling in the dearer market will soon eliminate the discrepancy. Economists call this “the law of one price”.

Putting all this another way, economists have long understood that markets and market economies are, in the modern idiom, “interactive”. Any new action always leads to a reaction, as the people affected change their behaviour to cope with the new development.

This understanding is why economists don’t worry about some developments as much as normal people do. Normal people say: look what’s just happened - it’s terrible. Economists say: yes, but then what happens? They call this the “second-round effect” and their model is supposed to predict what it will be.

For example, economists have never been impressed by all those reports warning that, by 2030, there’ll be a massive national shortage of teachers/nurses/other skilled occupation as all the baby boomers retire. No, there won’t. Why not? Because employers will take evasive action and other employees will take advantage of the opportunities presented.

But the notion of equilibrium can be taken too far. The doctrine of “laissez-faire” (leave it alone) – which lurks just below the surface of what lefty academics call neo-liberalism, but I prefer to call market fundamentalism – says that, since market economies have an inherent ability to return themselves to equilibrium after any shock, government intervention to correct the problem will only make things worse.

This is the old case of taking an element of truth and raising it to the status of a magic answer. The economists’ theory of how markets work is grossly oversimplified. In the real world there are lots of problems that can’t be solved just by leaving it to market forces.

Wait for market forces to stop global warming, and you’ll wait forever, decimating the economy in the process.

Or cases where waiting for the market to solve the problem would take too long or extract an unacceptable price in human suffering. Do nothing about the pandemic and waiting for all of us to get the virus and thus achieve herd immunity would cost too many lives.

The econometric models that economists use to forecast the macroeconomy or predict the effects of some policy proposal rely heavily on the assumption that, over the (unspecified) long term, the economy always returns to where it would otherwise have been. Yeah, sure.

The opposing theory to certain return to equilibrium – which comes from the physical sciences - is “path dependence”. That where you end up after equilibrium is disturbed depends on what else happens to the economy while it’s supposed to be on its way back to where it was. It could be knocked off course and never return to the previous path it was following.

The notion of equilibrium contains a lot of truth. Trouble is, so does the notion of path dependence. As always, the whole truth is somewhere in the middle.

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Budget warning: more rent-seeking won't create jobs

While we wait to see next week’s budget, think about this: economists must shoulder much of the blame for past "reforms" that ended up doing more harm than good. But more of the blame should go to the politicians who allowed lobbying by generous industries to subvert reform and turn it into rent-seeking, or worse.

Lefty academics who bang on about the evils of what they love calling "neoliberalism" seem to see it as some kind of conspiracy between the economics profession and big business.

There’s some truth to this – after all, many economic practitioners work for or produce "independent" consultant reports for big business. But the old rule from politics applies: what may look like a conspiracy is more likely to be just a stuff-up.

The term neoliberalism – a pompous, hipster word only a "problematic" academic could love – conceals more truth than it reveals. The words we used in Australia when this way of thinking became dominant in the 1980s were "economic rationalism" in pursuit of "micro-economic reform" – the very thing Productivity Commission boss Michael Brennan advocated a return to in a speech last week.

The more revealing label, however, is the one preferred by two leading British economics professors, Paul Collier and John Kay, in their new and enlightening book, Greed is Dead: "market fundamentalism".

The economic rationalist thinking that drove extensive economic policy change in the ‘80s and ‘90s took the profession’s ubiquitous neo-classical, demand-and-supply model of how markets work and assumed it was all you needed to know about how the economy worked.

It thus overemphasised the role of competition between "self-interested" (selfish, greedy) individuals, but underestimated the role of co-operation and community spirit and the importance of touchy-feely things such as job security, loyalty and our trust in economic and political institutions in making the economy work well.

The simple model’s assumption that all individuals and firms unfailingly act with full foresight of their best interests implies that government intervention is unnecessary and may well make things worse.

So the greatest crime of the rationalists (including, until far too late, yours truly) was naivety. They saw reforms that worked well in theory and assumed they’d work just as well in practice. In many cases they did work well enough, but in too many others they failed badly.

Unintended consequences abounded, the greatest of which was what I call "the sanctification of selfishness". When the econocrats were planning the removal of import protection they confidently predicted a benefit would be to discourage "rent-seeking" – businesses incessantly lobbying the government for favours when they should be getting on with running their businesses more efficiently.

In reality, rent-seeking has become rife. Since the mid-80s, the Canberra-based lobbying industry must surely have been one of our fastest growing and most lucrative. The economists’ greatest naivety has been their assumption that successive governments would faithfully implement their reform plans while resisting the temptation to do favours for generous mates.

Which brings us to next week’s budget. Recent days have seen big business campaigning for tax breaks, a further shift in the industrial relations power balance in favour of employers, and the removal of "burdensome regulations", all to create jobs.

Trouble is, years of bitter experience have taught us to recognise rent-seeking when we see it. Because economic rationalists have left people with the notion that economic progress is driven solely by self-interest, the rich and powerful now see themselves as justified in demanding that the economy be re-organised in ways that facilitate their efforts to get richer and more powerful.

Among the various micro-economic reforms advocated last week by the Productivity Commission’s Brennan as ways of speeding up the recovery were: removing rigidities in the labour market, streamlining the approvals process for new businesses and improving the “culture” of regulators.

I have no doubt there are plenty of anachronistic, pettifogging, cumbersome provisions of industrial relations law that both sides could readily agree to remove. But I doubt that’s what the employers are seeking. They want their quid without any quo.

Equally, I don’t doubt that much could be done to minimise the time-wasting involved in the regulation of business, without compromising other public policy goals. But too often removing "green tape" is code for sacrificing long-term protection of our environmental assets in favour of letting a few developers temporarily create a few hundred jobs while they build some highly automated mining project.

And while the culture of pushing people around at Centrelink or the local council should definitely be corrected, the last time the pollies went down this road they left the banking and corporate regulators with the clear impression that what they wanted was a buddy-buddy culture. The banks concluded that, for them, obeying the law was optional, and we all remember what happened next.

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They should make benefiting you the goal of economics

I was reading yet more about the troubles besetting the rich economies when it struck me: we’d do a lot better if our politicians and their advisers just managed the economy in ways that gave first priority to benefiting the ordinary people who constitute it.

The bleeding obvious, you say? Well, of late, not so you’d notice. Just what we’ve always been doing, the pollies and economists say? Again, not so you’d notice. Too simple? Not if you do it right.

Economics is the study of “the daily business of life” – going to work to earn money, then spending that money. If so, the economy is nothing more than all those who work (paid or unpaid) and consume, which is all of us.

The fact that we are the economy means it’s actually our economy. So all the other players – politicians, economists, even business people – are there to serve our interests. Rather than becoming alienated from the process, we should be holding them to account.

During the past 30 or 40 years of what it’s now fashionable to call neo-liberalism, we were acting on the theory that the best way to benefit all Australians was to reduce the role of government in the daily business of life and give freer rein to businesses.

This indirect approach didn’t work well. We gave our bankers and business people greater freedom from government regulation, but they abused our trust. The lenience of regulators has seen business become remarkably lawless. Too much of the extra income the economy has generated has gone to the very highest income-earners, leaving too little going to middle and lower income-earners.

This era of “economic rationalism” and “microeconomic reform” has ended, leaving Scott Morrison with much damage to clean up. Meanwhile, many voters are disillusioned and distrustful of both main parties, and are turning elsewhere to populists such as Pauline Hanson, who not only have no answers to the problems that bother us, but also seek our support by blaming our troubles on unpopular scapegoats – Muslims, city-slickers etc.

The economic rationalists’ solution to misbehaving businesses, caveat emptor – let the buyer beware – is good advice but, in the modern complex world, it’s impractical. There aren’t enough leisure hours in the day for us to spend most of them checking that all the businesses we deal with aren’t overcharging us or taking advantage of us in some way, and our employer isn’t underpaying us.

So why don’t governments cut to the chase and simply make treating us in such ways illegal? And when doing so is already illegal – as it usually is – why don’t they resume adequately policing those laws?

Something almost everyone craves in their lives, but politicians and economists long ago lost sight of, is a high degree of security. We want the security of owning our own homes and we want security in our employment.

And yet we’ve allowed home ownership to become unaffordable to an increasing proportion of young people. Why? Because we’ve put the interests of existing home owners ahead of would-be home owners. We could fix the unaffordability problem if we were prepared to put the interests of the young ahead of the old.

Some degree of flexibility in the job market is a good thing provided it works both ways. Under economic rationalism, the goal was more flexibility for employers without any concern about what this did to the lives of casual workers mucked about by selfish and capricious employers.

It’s good that part-time jobs are now available for those who want one – students, parents of young children, the semi-retired – but we could do more to make part-time jobs permanent rather than casual.

Many young people worry that we’re moving to a “gig economy” in which most jobs are non-jobs: short-lived, for only a few hours a week and badly paid, with few if any benefits.

I don’t believe we are moving to such a dystopia, mainly because I doubt it would suit most employers’ interests to treat most of their employees so shabbily. But, in any case, the way to avoid such a world is obvious: governments should make it illegal to employ people on such an unacceptable basis.

And governments will do that as soon as it’s the case that not to do so would cost them too many votes. That is, we have to make democracy work for the masses, not just the rich and powerful.

Of course, the security many of us would like is to live in a world where nothing changes. Sorry, not possible. Economies, and the mix of industries within them, have always changed and always will – often for reasons that, though they disrupt the lives of some people, end up making most of us better off.

New technologies are a major source of disruptive, but usually beneficial, change. Another source of disruptive change is the realisation that certain activities are bad for our health (smoking, for instance) or for the natural environment (excessive irrigation and land clearing, burning fossil fuels) and must be curtailed.

Adversely affected interest groups will always tempt governments to try to resist such change – at the ultimate expense of the rest of us. The right answer usually is for change to go ahead, but for governments to help the adversely affected adjust. Just what we haven’t been doing.

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Confessions of a pet shop galah: much reform was stuffed up

As someone who, back in the day, did his share of being one of Paul Keating’s pet shop galahs – screeching "more micro reform!" every time they saw a pollie – I don’t cease to be embarrassed by the many supposed reforms that turned into stuff-ups.

My defence is that at least I’ve learnt from those mistakes. One thing I’ve learnt is that too many economists are heavily into confirmation bias – they memorise all the happenings that affirm the wisdom of their theory, but quickly cast from their minds the events that cast doubt on that wisdom.

Well, let me remind them of a few things they’d prefer to forget.

Of course, it’s not the case that everything done in the name of "micro-economic reform" was wrong-headed. The floating of the dollar was an unavoidable recognition that the era of fixed exchange rates was over. And the dollar’s ups and downs have almost always helped to stabilise the economy.

The old regulated banking system wasn’t working well and had to be junked. With the rise of China in a globalising world, persisting with a highly protected manufacturing sector would have been a recipe for getting poorer. Nor could we have persisted with a centralised wage-fixing system or a tax system that failed to tax capital gains, fringe benefits and services – to name just a few worthwhile reforms.

Many privatisations were justified – the government-owned banks, insurance companies and airlines – but the sale of geographic monopolies (ports and airports) and natural monopolies (electricity and telephone networks) was a step backwards, mainly because governments couldn’t resist the temptation to maximise the sale price by preserving the businesses’ pricing power at the expense of consumers.

The conversion of five state monopolies into the national electricity market proved a monumental stuff-up at all three levels: generation, transmission and retail. It quickly devolved into an oligopoly with three big vertically integrated firms happily overcharging consumers at every level, with collateral damage to the use of carbon pricing in reducing greenhouse gas emissions.

We’ve learnt that “markets” artificially created by governments and managed by bureaucrats are – you wouldn’t guess – hugely bureaucratic, with the managers susceptible to “capture” by market players. The gas market has also been an enormous stuff-up, threatening the survival of what remains of Australian manufacturing.

The ill-considered attempt to treat schools and TAFEs and universities as being in some kind of market, where fostering competition between them and paying teachers performance bonuses would spur them to lift their performance, proved an utter dud.

Had the harebrained plan to deregulate uni fees not been stopped, it would have made even worse the chronic disorientation of the nation’s vice chancellors on what universities are meant to do and why they’re doing it. Lesson: trying to turn non-market parts of society into markets, while blithely ignoring all the obvious reasons such "markets" would fail, is a fool’s errand.

Which brings us to the half-baked idea of trying improve the provision of taxpayer-funded services by making their delivery “contestable” by for-profit providers. It's been an expensive failure pretty much everywhere it’s been tried: childcare, employment services, vocational education and training, and aged care (see present royal commission), not to mention privately run prisons and offshore detention centres. How long will it be before we’re having a royal commission into the abuses of the largely outsourced national disability insurance scheme?

Why have so many reform programs ended so badly? Partly because of the naivety of econocrats and other proponents of "economic rationalism". They had no notion of how far the grossly oversimplified neo-classical model of markets they carry in their heads misrepresented the big bad real world.

And many of them, having spent their working lives solely in the public sector, had no idea of how wasteful or bureaucratic the supposedly rational private sector could be. Actually break the law if they thought they wouldn’t get caught because corporate law-breaking wasn’t being policed? Sure. Rip off the government because the bureaucrats wouldn’t notice? Love to.

But there’s another reason so many reforms blew up. Because naive econocrats failed to foresee the way reforms intended to leave consumers or taxpayers better off could be hijacked by Finance Department accountants looking to cut government spending and produce "smaller government" by whatever expediency possible (see uni fee deregulation) and politicians looking to win the approval of big business or to move money and influence from the public sector column (them) to the private sector column (us).

Lesson: if a venal politician can find a way to sabotage micro-economic reform to their own advantage, they will.

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Sensible electricity rules await the next government

You can call it populism or you can call it desperation. In the case of Scott Morrison’s recent problem-solving efforts, desperation fits better. And wouldn’t you be?

Morrison is probably right in concluding it’s too late in the piece to be worried about carefully considered, long-lasting solutions to the many problems contributing to his government’s unpopularity.

We’ll know soon enough whether his flailing efforts to apply quick fixes will be sufficient to secure his government another term in office.

But only after whichever side wins is facing a clear run of years before the next election will we see how our political class responds to the bipartisan – and world-wide – loss of faith in neoliberalism and its use of deregulation and privatisation to pursue the nirvana of Smaller Government.

Only then will it be clear whether flawed ideology has been replaced by unthinking populism as advocated by the shock jocks, or by a more realistic, more nuanced approach to intervention in markets that aren’t serving consumers well.

Meanwhile, Morrison has an election to avoid losing. If Tony Abbott hadn’t greatly compounded the problem by abolishing the carbon tax, you could feel a bit sorry for Morrison. The monumental stuff-up of the move to a national electricity market, with its price blowouts at every level – generation, transmission and distribution, and retail – was decades in the making.

Only with the doubling of retail prices over the past decade has realisation dawned that the federal government can’t escape ultimate political responsibility for a “national” market run by a squabbling committee of state and territory energy ministers.

But Morrison’s announcement last week of a desperate collection of good, bad and indifferent measures to get retail prices down in a hurry – or at least appear to be getting them down – seems no better than a crude attempt to bludgeon some quick retail price cuts out of the three oligopolists that have come to dominate the market.

As was powerfully demonstrated by the events leading to the overthrow of Malcolm Turnbull, no government whose members can’t agree that the threat of climate change is real is capable of achieving a policy regime that restores a stable future for the energy industry.

Don’t be fooled, however, by the industry apologists claiming the only real problem is the uncertainty about future governments imposing a price on carbon emissions, and the rises in the wholesale price this is now causing as coal-fired power stations die of old age without adequate replacement.

That relatively new problem accounts for little of the retail price doubling over the past decade – which is the underlying reason for the public’s anger over the cost of electricity.

Putting the blame on the inability of the two federal political sides to agree on a response to global warming sweeps under the carpet the oligopolists’ gaming of the wholesale market, the distribution industry’s gaming of its price-setting formula, and the blowout in retail margins following the state governments’ deregulation of retail prices.

Companies at the distribution and retail levels are earning rates of profit far higher than they need to cover their cost of capital and risk-bearing.

The public has every right to be up in arms, and the federal government every right to step into the mess in search of ways to reduce profitability and prices at the retail level. Particularly because what the feds would be doing is correcting years of misregulation by dysfunctional state governments.

It’s not a question of deregulation versus regulation. Electricity has always been more highly regulated than other industries and always will be. The national electricity market is, after all, a creation of government, which from day one has been (not very well) regulated by public authorities.

Rather, it’s a question of how and why you intervene to correct the mess. Whether you act carefully and reasonably to get the industry moving towards a future that’s sustainable financially and environmentally.

Any changes need to be fair, although in this the balance should err in favour of fairness to consumers (and business users) who’ve been overcharged for years. The industry can’t be allowed to use the trade union argument that their present rates of profitability are “hard-won gains” that must remain sacrosanct.

When something shouldn’t have been allowed to happen in the first place, it’s no crime to belatedly reverse it. Talk of “sovereign risk” is self-interested bulldust. You can’t have a democracy in which governments are forbidden to change course.

But none of this seems to describe Morrison’s motivations. He want price cuts, he wants them now, and he doesn’t much care what stick he waves to get them.

A word of free advice, Scott: claiming to have achieved bigger price cuts than the punters see in their quarterly bills will only make them angrier.

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How we could revive faith in democracy

How much is our disillusionment with politicians, governments and even democracy the result of our pollies’ 30-year love affair with that newly recognised mega-evil “neoliberalism”?

To a considerable extent, according to Dr Richard Denniss, of the Australia Institute, in the latest Quarterly Essay, Dead Right.

I’m not sure I’m fully convinced by his argument, but it’s a thought-provoking thesis that’s worth exploring.

Like “globalisation” in the 1990s, neoliberalism has become the all-purpose political swearword of the 2010s. Anything economic that you don’t approve of can be condemned as neoliberalism.

But Denniss provides some more specific attributes. “The intellectual core of neoliberalism is the idea that the profit motive of companies, combined with consumers’ ability to choose the product that suits them best, will result in the best possible social and economic outcomes,” he says.

Implicit in this is the belief that government intervention in markets is always suspect and should be reduced to a minimum, just as taxation is an onerous “burden” which must be reduced if we are to prosper.

Dennis argues that neoliberalism hasn’t just involved much deregulation, privatisation, outsourcing of government services and cuts in government spending, it’s also changed our culture – the way we think about politics and political issues.

Its focus on the individual has sanctified selfishness, releasing people from the restraints of solidarity with the rest of the community and legitimating the lobbying mentality. We’re all free to press our own interests on the government, and if that means I extract more than you do, that just proves I worked harder than you.

But the greatest cultural change, according to Denniss, is the belief that economic issues outweigh all other considerations. “The trick of neoliberalism was to convince the public that it is the economic dimension of big issues that we must focus on,” he says.

“Past generations . . . did not see the need to delay all significant debates about the shape and direction of their society until tax and industrial relations policies were optimised according to specific principles understood by a tiny proportion of the population.”

Denniss says we no longer talk about the inherent value of educating our children, but of the increase in skills and productivity that their education will bring to the economy.

A big part of this is the obsession with maximising the growth of the economy – or, in Malcolm Turnbull’s more enticing packaging, Jobs and Growth.

“After 27 years of continuous economic growth, it is inconceivable that the thing Australia needs most is to ‘grow our economy’ some more.

“What we really need is to rebuild trust in our institutions and confidence in our country. We need to debate far more specific and important national goals, and then show ourselves that when we work together we can make things better. We have done it before and other countries are doing it right now.”

What if Australian parliaments stopped trying to fix the industrial relations system or the tax system for a few years, and focused instead on things that Australians really care about?

“For 30 years Australians have been told that what is good for gross domestic product is good for the economy, and hence for the country. But that is like saying that the more money a family earns, the happier the children will be.

“It is the shape of our economy that determines our wellbeing, not its size. Spending $1 billion subsidising the Adani coalmine will create economic activity [and jobs], but so will spending that money promoting Australian tourism or improving Sydney’s pubic transport.

“The important question isn’t whether a project will ‘create activity’, but whether a project will make Australia a better place or not.”

Like waiters in a restaurant, says Denniss, politicians and bureaucrats are not there to tell us what we must order, but to show us the menu and explain the specials.

So one of his proposals is to replace the Productivity Commission with a national interest commission, to provide both governments and the public with broad advice on the advantages (as opposed to benefits) and disadvantages (as opposed to costs) that, say, a major project or a universal basic income, might entail.

The opposite of the narrow economic agenda of neoliberalism isn’t a progressive economic reform agenda, Denniss says, it’s the re-establishment of a broad debate about the national interest.

“After 30 years of hearing that politicians, government and taxes are the things that ruin the economy, it is time for the public to hear and see that politicians, government and taxes are the foundations on which prosperous democratic nations are built.”

There are dozens of popular things that state and federal governments could get on with that would make Australians happy, make Australia a nicer place to live and, most importantly, show the Australian public that the decisions made by parliament do make a difference.

Such as? “Bans on political donations, the establishment of strong anti-corruption watchdogs, reform to parliamentary entitlements, higher taxes on annual incomes over $1 million, closing loopholes that allow companies to pay billions in dividends and nothing in tax, legalising marijuana, banning poker machines, and preserving all existing parks from property development.”

The world is full of alternatives and choices, Denniss concludes. “Neoliberalism’s real power came from convincing us that we had none. We do, and making them is the democratic role of citizens – not the technocratic role of economists, nor that of any self-serving elite."

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We should rescue economics from the folly of neoliberalism

There's no swear word in politics today worse than "neoliberalism". It's badly on the nose, and the reaction against it has a long way to run. But what is it, exactly? Where does mainstream economics stop and neoliberalism begin?

The term means different things to different people. Professor Dani Rodrik, of Harvard, says in the Boston Review the term is used as a catchall for anything that smacks of deregulation, liberalisation, privatisation or fiscal (budgetary) austerity.

I've always thought of it as a fundamentalist, oversimplified, dogmatic version of conventional economics, one from an elementary textbook, not a third-year text that adds the complications of market power, externalities​ (costs or benefits not captured in market prices), economies of scale, incomplete and asymmetric (lop-sided) information, and irrational behaviour.

Rodrik's conception of the term isn't very different. He thinks mainstream economics needs to be rescued from neoliberalism because, as people heap scorn on it, we risk throwing out some of economics' useful ideas.

Which are? That the efficiency with which an economy's resources are allocated is a critical determinant of its performance. That efficiency, in turn, requires aligning the incentives of households and businesses with "social" costs and benefits (so as to internalise the externalities).


That the incentives faced by entrepreneurs, investors and producers are particularly important when it comes to economic growth. Growth needs a system of property rights and contract enforcement that will ensure those who invest can retain the returns on their investments.

And that the economy must be open to ideas and innovations from the rest of the world. Of course, economies also need the macro-economic stability produced by sound monetary policy (low inflation) and budgetary sustainability (manageable levels of public debt).

Does all that smack more of neoliberalism than mainstream economics to you? If it does it's because mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions.

"A proper understanding of the economics that lies behind neoliberalism would allow us to identify – and to reject – ideology when it masquerades as economic science. Most importantly, it would help us develop the institutional imagination we badly need to redesign capitalism for the 21st century."

There's nothing wrong with markets, private entrepreneurship, or incentives, Rodrik says, provided they're deployed appropriately. Their creative use lies behind the most significant economic achievements of our time.

The central conceit and fatal flaw of neoliberalism is "the belief that first-order economic principles map onto a unique set of policies, approximated by a Thatcher-Reagan-style agenda" – also known as the "Washington consensus".

Take intellectual property rights. They're good when they protect innovators from free-riders, but bad when they protect them from competition (as they often do when the US Congress has finished with 'em).

Consider China's phenomenal economic success. It's largely due to its orthodoxy-defying tinkering with economic institutions. "China turned to markets, but did not copy Western practices in property rights. Its reforms produced market-based incentives through a series of unusual institutional arrangements that were better adapted to local context," Rodrik says.

Some may say China's institutional innovations are purely transitional. Soon enough it will have to converge on Western-style institutions if it's to maintain its economic progress. Well, maybe, maybe not.

What neoliberal proponents of the single route to economic prosperity keep forgetting is that none of the economic miracles that preceded China's – in South Korea, Taiwan and Japan – followed the Western formula. And each did it differently.

Even among the rich countries we see much variance from the neoliberal cookie cutter. The size of the public sector, for instance, varies from a third of the economy in Korea, to nearly 60 per cent in Finland.

In Iceland, 86 per cent of workers are in a trade union; in Switzerland it's 16 per cent. In America firms can fire workers almost at will; in France they must jump through many hoops.

Rodrik repeats an old economists' saying, one forgotten by the neoliberal oversimplifiers. "Good economists know that the correct answer to any question in economics is: it depends."

It depends on the particular circumstances, on how well your economic "institutions" (laws, official bodies, norms of behaviour) fit with those the model assumes to exist, on what you're trying to achieve, on your priorities, and on the political constraints you face.

As the Chief Scientist, Dr Alan Finkel, said when asked if he preferred his own emissions intensity scheme to Malcolm Turnbull's national energy guarantee: "There are a lot of ways to skin a cat."

Economics has many useful insights to offer the community. It must be rescued from neoliberalism because neoliberalism is simply bad economics.

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Economic rationalists regroup under populist attack

Reading the Productivity Commission's grand plan to "shift the dial" on micro-economic reform gives me a feeling of deja vu all over again.

When I started in this business in the mid-1970s, macro-economics had become a pitched battle between Keynesians and monetarists. It took years for a resolution of that conflict to emerge.

The monetarists didn't win the war, but they did win a lot of battles, and management of the macro economy was changed forever.

Today's great conflict in economics comes in the aftermath of the global financial crisis, as politicians in all the advanced economies abandon the "neoliberal consensus" under pressure from the populist revolt against privatisation, deregulation, austerity and all the rest.

You could say the global rethink of economics began immediately after the crisis, but it's just in the Productivity Commission's latest report proposing a "new policy model" for future change that we see our local "thought leaders" among economic rationalists shifting to an agenda that responds to the criticism of the old approach and proposes a new set of reforms aimed at improving productivity while giving voters far less cause to object.

Why so few commentators have perceived the significance of this "dial shift" is hard to fathom.

Read the report and it sticks out like organ stops. For some years since the crisis, the bosses of the International Monetary Fund, the Organisation for Economic Co-operation and Development, and even the Bank of England have said we need economic growth to be more "inclusive".

Now the Productivity Commission agrees and has reshaped its reform agenda accordingly.

The old agenda accepted the conventional wisdom that economic efficiency and equity (fairness) were in conflict. Since the crisis, however, economists at the fund and the OECD have been producing evidence that increasing inequality inhibits economic growth.

Now our commission agrees, arguing that its proposed shift in the reform dial will avoid "too great a dispersion in incomes, given evidence that this can, in its own right, adversely affect productivity growth".

In shifting reform priorities from changing tax incentives, moving the balance of wage-setting power in favour of employers, deregulating and privatising, to reforming healthcare, education and cities, the commission is attempting to humanise reform.

In setting its main priorities as improving the quality of services delivered to patients, students and commuters, the commission has made ordinary punters the main beneficiaries. What's that if it's not more "inclusive"?

Low and middle-income earners would be the chief winners because the better-off are better able to buy their way out of bad medical treatment, bad teaching and long commutes.

And get this: more efficient and effective healthcare, teaching and cities bring intrinsic benefits to the lives of ordinary people, whether or not they ever "shift the dial" of the measures of productivity that the commission takes so literally (which they quite possibly won't).

The commission's "new policy model" is far better fitted to an economy ever-more oriented to the services sector, and to an economy where the value of knowledge becomes more apparent as each year passes.

What seems to have bamboozled the commentators is the notion that nothing on the commission's new reform agenda is particularly new.

True, but silly. In economics, there's not much that's new under the sun. Sure economists have been rabbiting on for years about the need to reform healthcare and education and – much more recently – "urban economics".

What's new is not the topics but the priority and emphasis they've been given. What's new is sorting through a list of old potential reform topics to find those that tick the efficiency box and the fairness box.

Another uncomprehending reaction has been that many of the specific reforms the commission advocates – road-use charging, for instance – would be politically difficult, and most unlikely to be taken up by the Turnbull government.

True, but beside the point. What's significant is the radical change in thinking about the nature and direction of economic reform, not how long it will take for those reforms to be made.

I've been around long enough to see plenty of politically impossible reforms come to pass.

A more perceptive critique of the "new policy model" is that it takes us straight into territory where the states have as much say as the feds, if not more. No easy country.

And while it's true ordinary voters have much to gain from the new agenda, it's equally true that vested interests in the health, education and city industries have much to lose.

One further lesson from economic rationalism's poor record in recent times is that if you're not game to take on powerful rent-seekers, you won't get far.

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Econocrats’ job to minimise damage from lurch to populism

With the collapse of the "neoliberal consensus" between both sides of politics, which is reversing politicians' attitudes to intervention in markets, we're in danger of lurching from one extreme to the other.

My Financial Review colleague Alan Mitchell likes to say that one of the econocrats' primary contributions to good government is to "keep the crazy decisions to a minimum". Never was that truer.

The challenge for Treasury, the Productivity Commission and the rest is to be less doctrinal – less true to the one true economic rationalist faith - and more practical in giving advice that satisfies the pollies' ever-present need to "do something" without the something they do causing a lot of harm, maybe even some good.

To put that into econospeak: econocrats should stop proposing first-best solutions and propose more politically palatable second- or even third-best solutions than have been properly thought through.

Why should they compromise? Because if they go on strike, get the sulks or just let themselves be dealt out of the policy decision process, we'll all be lumbered with a lot of decisions that make things worse rather than better.

That's particularly so now ministers' offices are loaded with pushy young punks at the start of their lifetime careers in politics, who think they know a lot about what's good for the minister and the government but, unfortunately, haven't had the time or inclination to learn much about policy: what works and what doesn't.

Leave a policy vacuum and these chancers will happily fill it. They'll fill it with whatever will get a cheer from the all-indignation-and-no-responsibility radio shock jocks and tabloid loudmouths.

Those reptiles will cheer for what's showy and prejudice-satisfying, not for less spectacular policies the experts know are more likely actually to improve things.

The point is that with the populist reaction against what it's now fashionable for the often-uncomprehending left to call "neoliberalism", we're moving from 30 years of presumption against intervention in markets to a new era of presumption in favour of intervention.

That presumption against intervention came from the 1980s shift to a more fundamentalist approach to neo-classical economics, with its confidence that markets are essentially self-correcting, so intervening in them is more likely to derail this process than assist it.

This involved playing down the significance of "market failure" – factors that stop real-world markets from acting in the perfect way economics textbooks predict they will – or arguing that government interventions to correct market failure usually result in "government failure" – they make the problem worse rather than better.

The rationalists were wrong to play down market failure – it's ubiquitous – and wrong to denigrate government rule-setting for markets as "intervention", as though it's some kind of unnatural act. But they were on to far more than they realised in worrying about government failure.

What ended up discrediting their program of "micro-economic reform" was the way so many privatisations and attempts to make the provision of government services "contestable" were utterly stuffed up by governments that didn't know what they were doing, or were swinging one for their business mates.

Though it's true people have traded with each other since primitive times, it's historical ignorance to imagine that markets in the modern economy are anything other than the creation of governments, regulated and policed under laws of private property, contract, bankruptcy, limited liability, accounting standards and a host of other "interventions" and "regulations".

So there isn't and never has been such an animal as a "free market". What's in question is the degree of regulation and the specifics of what's regulated and how. Presuming against regulation (further or existing) was always an arbitrary and extreme position that would end in tears.

The era of deregulation has discredited itself, with inadequately regulated American and European banks causing the pain and destruction of the global financial crisis, declining standards of business behaviour much in evidence among our own banks, and mounting evidence of business lawlessness.

But for politicians to react to all this with a massive increase in ill-considered regulation would hardly be an improvement.

The real point is regulation is neither intrinsically good nor bad. What it is is very, very tricky. Very hard to get right; easy to get wrong. Bedevilled by "unintended consequences".

Why? Because of the terrible power of "market forces" – actually, profit-seeking firms and self-interested consumers.

There are two mistakes you can make when it comes to regulation: one is to believe market forces are infallible, the other is to believe they're of little consequence and incapable of utterly frustrating the regulators' good intentions.

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The era of neoliberalism is ending and reversing

If there's some trend in the world that we don't much like but has been happening for ages, there's a human tendency to assume it will keep on forever and just get worse. Occasionally, however, this moment signals it won't be long before it starts going away.

I'm a great believer in the pendulum theory of history: trends in human activity go on and on until they reach an unacceptable extreme, and then one day they turn and start going back the way they came.

That's certainly the way fashions in economics and government policy work. Consider the story since the end of World War II, using Britain as our guide.

There was a great reforming spirit after the war, and much that needed fixing. The economy wasn't working well and ordinary people – who'd done their duty so selflessly during the war – weren't getting a fair share of the economic rewards.

So the Brits set about installing the welfare state – comprehensive social security payments and a national health service in which most doctors became government employees – and "nationalising" many troublesome but important industries.

This new trend of nationalisation was copied in other countries including, to an extent, Oz.

But as the years rolled by it became clear that Britain's economy wasn't working well. Eventually, a new Boudica rose up, name of Maggie Thatcher, to set things right.

The problem was obvious: too much of the economy owned and run by the government and all those civil servants. Too many rules and regulations. The economy was inflexible and unresponsive. The unions had too much power and were abusing it, always on strike until they got their way.

The answer was to "privatise" most of the nationalised industries and get the unions back in their box.

We need to unshackle the power of the market, with its much greater ability to respond to changing times, greater desire to satisfy customers' needs and motivation to root out inefficiency.

This new trend of privatisation and deregulation – also pushed by Ronald Reagan in the US – has been copied in many developed economies, not least here.

By the early 1980s our economy wasn't working all that well. In a world of floating currencies, we were still trying to fix our exchange rate, battling speculators who always won.

Our banks were a joke, never able to lend enough for a home loan, so you went to a building society or they fitted you up with an expensive second mortgage from their finance company.

We'd been trying to cut ourselves off from the world with high barriers against imports, but been left with an economy that was highly inflation-prone, with much higher unemployment to boot.

Paul Keating and Bob Hawke set about modernising the economy, opening it up to a rapidly globalising world. They didn't ape Thatcher so much as start listening to the advice Treasury had been giving governments for years.

You've detected history's pendulum at work, I trust. Look at it over the decades and you see the fashion in management of the economy swinging from one extreme to the other.

Why does it swing so far? Because the truth – the happy medium – is somewhere in the middle but, because it's some combination of market forces and government management, is devilishly hard to find.

Much easier and more satisfying to champion one extreme or the other.

Why bring this up now? Because, if you hadn't noticed, this particular pendulum has just started swinging back.

As no less an authority than The Economist magazine has judged, the "neoliberal consensus" has collapsed.

For almost 40 years in the English-speaking economies, both sides of politics have accepted that businesses and individuals should be allowed to go about their affairs with as little restriction as possible.

But now both sides are stepping back from that attitude, doing so under pressure from voters growing increasingly unhappy about the state of the economy – in Oz, low wage growth, high energy costs, a seeming epidemic of business lawlessness and a lengthening list of government outsourcing stuff-ups – and the special treatment accorded to business.

You can see it overseas in the electoral popularity of Bernie Sanders and Jeremy Corbyn, and the anti-establishment revolts in the Brexit vote and the election of Donald Trump.

It didn't do her any good, but you see it in Theresa May's Conservative Party election manifesto: "We do not believe in untrammelled free markets. We reject the cult of selfish individualism. We abhor social division, injustice, unfairness and inequality."

Here, you see it in Malcolm Turnbull's reaction to the failed reform of the national electricity market, with his willingness to impose export restrictions on gas companies, buy Snowy Mountains hydro back from the states and contemplate federal construction of new coal-fired power stations.

You see it in Bill Shorten's policy of curbing negative gearing and the capital gains tax discount, his opposition to cuts in the company tax rate and willingness to legislate to restore and protect weekend penalty rates.

I reckon there's a lot more government assertiveness to come. You don't fancy a lifetime of precarious employment in the "gig economy" for yourself or your kids?

Don't worry, before long governments will legislate to protect employees rights at work – just as they used to in the old days.

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How Treasury lost its way on economic reform

From the almost stony silence of the nation's economists, you'd never know that Malcolm Turnbull's successful move to needs-based funding of schools is the most significant economic reform in many a long year.

It's notable, too, that this reform seems to have been achieved with little or no involvement by the high priests of economics at Treasury and the Productivity Commission.

Only a few economic reform projects are more important than raising the efficiency and effectiveness of federal and state spending on primary and secondary education.

Allocating that spending according to student need is the necessary first step towards the ultimate goal of reducing the shockingly high proportion of students who leave school without an education sufficient to go on to further study – in a trade course, for instance – or even to a life in which the normal state is employment, not recurring periods of unemployment.

The Australian economics profession's slowness to see the economic – not just the equity – significance of "Gonski" is a sign it's yet to learnt the lessons leading economists in America and Britain are drawing from the populist revolt against the way developed countries' economies have been managed during the era of "neo-liberalism" – better called economic fundamentalism.

Consider how well needs-based funding fits with former US Fed chairman Ben Bernanke's list of the economic managers' "errors of omission" in recent decades:

They failed "to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase the access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction and other means; and to address serious social ills through addiction programs, criminal justice reform and the like."

It needs to be said that the first decade or so of "micro-economic reform" in Oz – floating the dollar, financial deregulation, eliminating protection, reforming the tax system, decentralising wage-fixing and reducing intervention in a host of highly regulated industries – was necessary, often unavoidable given what was happening in the rest of the world, and on balance, of great benefit to the populace.

It's impossible to imagine returning to the bad old pre-reform economy. Treasury and the Productivity Commission's predecessor body must be given most of the credit for promoting and designing these reforms.

But it's equally impossible to avoid the thought that, sometime been then and now, Treasury lost the plot, allowing the reform push to degenerate and be captured by business rent-seekers, politicians with ulterior motives and other government departments that didn't understand what they were doing.

To a fair extent the present populist revolt is explained by Bernanke's errors of omission: governments' failure to help the victims of the structural change their policies promoted and to ensure most of the cost of that assistance was borne by the winners from the change.

How could Treasury forget such an obvious way to minimise popular resistance and resentment of government-promoted change in the structure of industry?

Because it was misled by the mistaken notion that economic efficiency and distributional fairness are always at daggers drawn, and by the dubious ethic that economists should stick to promoting efficiency in the allocation of resources and leave fairness for others to worry about.

But also because Treasury allowed itself to be seduced away from strictly economic objectives to the essentially political objective of "smaller government".

We've got an economy heavily affected by multiple forms of market failure – including huge areas with public goods characteristics – but our overriding goal must be less government intervention in markets, less government spending and lower taxes, particularly on high income-earners.

There's little empirical evidence that economies with large public sectors perform worse than those with small ones, and no evidence that high marginal tax rates do much to discourage economic activity among high-paid full-time workers.

But Treasury's embrace of the smaller government objective does much to explain the Abbott-Turnbull government's loss of interest in budget repair (because cutting government spending turns out to be politically impossible), the neglect of measures to assist the losers from structural change (because they would add to government spending) and the lack of interest in reform of spending on education (because the need to go easy on the losers from spending reallocation means greater spending during the transition to more rational, cost-effective arrangements).

In the new era of populist backlash against the mounting evidence of stuff-ups in the later years of micro-economic reform, Treasury will continue to flounder and its influence wane until it switches its goal from smaller government to more effective government.

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How economic neglect has fed the populist revolt

Recent political shocks – Brexit, Trump and the failure of Theresa May – are prompting much soul-searching and rethinking among the world's leading economists.

Last week, for instance, Ben Bernanke, former chairman of the US Federal Reserve, gave a speech to a forum of the European Central Bank in which he admitted that "recent political events" had "cast a bright light on some disturbing economic and social trends in the United States".

"Unfortunately, policymakers in recent decades have been slow to address or even to recognise these trends, an error of omission that has helped fuel the voters' backlash," he said.

"If the populist surge we are seeing today has an upside, it is to refocus attention on both the moral necessity and practical benefits of helping people cope with the economic disruptions that accompany growth."

It's true that the American economy's cyclical recovery has entered its ninth year and appears to have room to run, Bernanke says.

Although the Great Recession was exceptionally deep and the recovery was slow, real gross domestic product is now up about 12.5 per cent from its pre-crisis peak and real disposable income is up more than 13 per cent.

Since the trough in employment in early 2010, more than 16 million new jobs have been created – compared with a workforce of about 160 million – bringing the rate of unemployment down from 10 per cent to 4.3 per cent, its lowest since 2001.

Fine. But Bernanke's new insight is in the title of his speech, "When growth is not enough".

Americans seem exceptionally dissatisfied with the economy and have been for some time, he says. Those who tell pollsters that the economy is "on the wrong track" consistently outnumber those who believe that America is moving "in the right direction" by about two to one.

Bernanke highlights four "worrying trends" that help explain the sour mood. First, stagnant earnings for the median worker.

"Since 1979, real output per person in the US has expanded by a cumulative 80 per cent, and yet during that time, median weekly earnings of full-time workers have grown by only about 7 per cent in real terms."

And almost all of that tiny growth is explained by higher wages and working hours for women. For male workers, real median weekly earnings have actually declined since 1979.

So despite economic growth, the middle class is struggling to maintain its standard of living.

Second, declining economic and social mobility. One of the pillars of America's self-image is the idea of the American Dream, that anyone can rise to the top based on determination and hard work.

But upward economic mobility in the US appears to have declined notably since World War II. One study of census figures found that 90 per cent of Americans born in the 1940s would eventually earn more than their parents did, but only about 50 per cent of those born in the 1980s would do so.

The trend to increased inequality of income and wealth is worse in the US than other advanced economies. This tends to impede economic mobility by increasing the relative educational and social advantages of people in the upper percentiles.

Third, increasing social dysfunction in economically distressed areas and demographic groups. Studies show that rates of midlife mortality among white working-class Americans (those with only a high-school education) have worsened sharply relative to other groups.

These are often "deaths of despair" because of their association with declines in indicators of economic and social wellbeing and the important role played by factors such as opioid addiction, alcoholism and suicide.

Indeed, in 2015, more Americans died of drug overdoses than died from car accidents and firearms-related accidents and crimes combined.

Among the most worrying economic trends is the decline in labour force participation among prime-age men – 25 to 54 – from 97 per cent in 1960 to 88 per cent today. The fall has occurred across demographic groups (an American euphemism for racial groups).

Studies suggest most of these men are idle – neither looking for work nor caring for family members. One part of the explanation is that America's high rate of incarceration leaves many men, particularly African-Americans, with prison records, which hurts their employment opportunities for many years.

Fourth, greater political alienation and distrust of institutions, both public and private. Americans generally have little confidence in the ability of government, especially the federal government, to fairly represent their interests, let alone solve their problems.

"Stagnant median wages, limited upward mobility, social dysfunction and political alienation are a toxic mix indeed. The sources of these adverse trends are complex and interrelated. But at a fifty-thousand-foot level, they appear to be the product of some broad global developments ... together with the US policy response (or lack thereof) to those developments," Bernanke says.

Missing from the response was a comprehensive set of policies aimed at helping individuals and localities adjust to the difficult combination of slower growth and rapid economic change.

Whatever the reason for this failure, "it's clear in retrospect that a great deal more could have been done, for example, to expand job training and re-training opportunities, especially for the less educated; to provide transition assistance for displaced workers, including support for internal migration; to mitigate residential and educational segregation and increase to access of those left behind to employment and educational opportunities; to promote community redevelopment, through grants, infrastructure construction and other means; and to address serious social ills through addiction programs, criminal justice reform and the like".

Bernanke concludes that "the credibility of economists has been damaged by our insufficient attention, over the years, to the problems of economic adjustment and by our proclivity towards top-down, rather than bottom-up, policies.

"Nevertheless, as a profession we have expertise that can help make the policy response more effective, and I think we have a responsibility to contribute where we can."

That's putting it mildly.

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