After the anti-social lockdown comes the anti-jobs recession

Until now, old farts like me have thought it a terrible thing that next to no one under 50 has any experience of how terrible recessions are. Even ABC guru Dr Norman Swan sees the costs of the lockdown as mainly social: the boredom, loneliness, anxiety, depression, suicide and domestic violence. Really? That’s as bad as it gets, eh?

But at least our lack of herd immunity from unrealistic expectations means only us old-timers will be expecting this recession to be pretty much the same as those we experienced in the early 1990s, the early ’80s and the mid-1970s. That’s good because this recession will be markedly different to any of those.

Usually, recessions happen because of governments’ policy error. Their attention wanders while the economy is speeding down the road, but then they realise how high inflation’s getting and they panic. They jam on the interest-rate brakes but hit them too hard for too long, and the economy ends up careering off the road and hitting a tree, with many people losing their jobs.

That’s why former prime minister Paul Keating said our last major recession was “the recession we had to have”. He was trying to conceal the truth that all recessions happen by accident.

Until now. Uniquely, this recession has happened because of a knowing act of government policy. It’s “the recession the medicos said we had to have” as the only way to stop the virus killing people.

As we’re about to discover, it’s a huge price to pay. And a month or two cooped up at home is the least of it. Many of those people who’ve lost their jobs will still be cooped up at home many months after the rest of us have resumed normal lives.

And let me tell you, being unemployed for months on end also has adverse social consequences: feelings of anxiety, inferiority and worthlessness, depression, suicidal thoughts, money worries that lead to marital conflict, breakups and violence.

It’s because this recession is happening by government decree – by the government ordering many industries to cease trading – that it will be so much bigger than usual. Usually, economies slow for months before they stop; this time, most industries stopped on pretty much the same day. (Not to mention that the same thing has happened around the world to the countries that buy our exports.)

This recession will be so big and bad that not even the official always-look-on-the-bright-side brigade is trying to gild the lily. Reserve Bank governor Dr Philip Lowe said last week the recession would be a “once in a lifetime event”.

“Over the first half of 2020, we are likely to experience the biggest contraction in national output and income we have witnessed since [the Great Depression of] the 1930s,” he warned.

More specifically, his best guess was that real gross domestic product would fall by about 10 per cent over the first half of this year, with most of that in June quarter. The unemployment rate is likely to have doubled to about 10 per cent by June, though the total hours worked in the economy is likely to fall by much more than that would suggest: about 20 per cent (because many of those on the JobKeeper payment won’t be working much, but won’t be counted as unemployed).

Preliminary figures from the Australian Bureau of Statistics show that employment fell by about 780,000 people over the three weeks to April 4. And so far, 3.3 million workers are covered by JobKeeper.

This week, Treasury Secretary Dr Steven Kennedy said that whereas unemployment rose to higher levels than this in the Great Depression [to 20 per cent], it did so over the course of a couple of years, compared with just a couple of months this time. “We have never seen an economic shock of this speed, magnitude and shape, reflecting that this is both a significant supply [shock] and demand shock,” he said.

The shock to supply comes from the government closing our borders to foreign tourists and overseas students, and ordering so many industries to cease supplying goods and services to their customers. The shock to demand comes from the loss of wages to workers laid off, the loss of profits to firms unable to sell their products, and the loss of confidence that spending big by households and firms at this time sounds like a good idea.

But the differences between this coronacession and previous recessions don’t stop there. As we’ve seen, recessions are usually preceded by booms. Not this time. Former top econocrat Dr Mike Keating has noted that our economy was performing very poorly for some years before the virus hit.

“Over the three years . . . to December 2019, real GDP growth averaged only 2.3 per cent, business investment was flat, labour productivity did not increase at all and real wages averaged only a 0.4 per cent annual rate of increase,” he says.

One thing this means is that whereas the fall in real incomes caused by a recession usually reverses only some of the strong growth in incomes during the preceding boom, this time the fall in incomes will be a much bigger setback.

Yet another difference this time is that, whereas the Reserve Bank responds to a recession by using its “monetary policy” to slash interest rates and impart a big stimulus to borrowing and spending, this time rates are already so low it’s been able to cut them by a mere 0.25 per cent before reaching its effective zero bound.

During the global financial crisis in 2008, it cut the official interest rate by 4 percentage points in five months. So the budget – “fiscal policy” - is the only instrument the government has to respond to the recession.

There is, however, one important respect in which this recession will resemble all others: unemployment shoots up a lot faster than it comes back down. I’d be sceptical of any happy talk about the economy bouncing back. Crawling back, more likely.

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Morrison and the medicos must also avoid complacency

They say Australians always respond well to a crisis, and it seems it's true. Even in these days of disposable leaders, Kevin Rudd deftly stopped the global financial crisis from sucking us into the Great Recession, and now Scott Morrison has got on top of the corona crisis in a way few would have expected. His approval rating has soared. But I still wouldn't want to be in his shoes.

Why not? Because, as an old econocrat explained to me long ago, if you dispose of a crisis with too much ease – without a titanic struggle – you get precious little gratitude from the voters. If it was that easy to fix, it can't have been much of a crisis in the first place. Indeed, all that money you spent – well, most of it must have been a waste. That's the very way his political opponents have sought unceasingly to denigrate Rudd's unbelievably skilled performance in 2009.

And now Morrison faces the same risk. Everyone's saying he – along with the premier cats he's been herding – has done surprisingly well in controlling the outbreak. But that's not true. The unvarnished truth is that – if you'll forgive the expression – he hasn't just done well, he's killed it. He set out merely to "flatten the curve" but in fact has driven it down almost to zero. And done so with just 80 or so people losing their lives so far.

In the jargon of the epidemiologists, he and the premiers have succeeded in getting "R" – the average number of other people infected by someone who's contracted it - below 1, meaning it's dying out.

Utterly uncharacteristically for a politician of any stripe, Morrison has sought to play down this achievement. Why? Because the whole world has a year or years to go before the virus is tamed and, in the interim, some mishap on our part could cause the virus inside our borders to become undead.

That's why Morrison and his medico advisers live in fear that any loosening of the lockdown could lead us to become "complacent" and flip to the opposite extreme, stopping all social distancing.

But keeping us locked down as tight as possible for as long as possible offers no solution to Morrison's challenge as our leader. That's because, though we care deeply about saving lives, we also care about saving our livelihoods. Our success in getting on top of the virus has been bought at the cost of shutting down most of the economy, with hundreds of thousands of workers losing their jobs.

Morrison's problem is that, because it was so relatively painless, his remarkable success in driving out the virus will soon be forgotten, whereas the continued dysfunctional state of the economy – the way-high unemployment – will be upmost in people's minds come the election in 2022.

And, even now, his critics – mostly from his own side – are concluding that his measures to deal with the virus grossly overestimated the size of the problem and have decimated the economy for no good reason.

For instance, we were terribly worried about the risk of hospitals being overwhelmed by patients who couldn't get proper treatment to prevent them from dying. We had to delay the virus' spread while we more than doubled the existing number of 2200 intensive care beds. Fine. Last time I looked, there were 43 virus victims in ICU.

But such criticism is just being wise after the event. It forgets that we had to respond quickly and forcefully to a new virus, the characteristics of which we knew next to nothing about. The best we had to go on were numbers from China, which proved much worse than our own experience.

The medicos' original modelling assumed Wuhan's R – reproduction number – of 2.68, whereas their more recent modelling using Australian numbers shows we started with Rs above 1 only in Victoria and NSW, before falling below 1 in all states bar Tasmania.

Morrison's deeper problem is that the longer he keeps the economy locked down, the less there will be left to reopen. So avoiding complacency cuts both ways. You and I must not become complacent about hygiene and social distancing, but Morrison and his medicos must not be complacent about the enormous economic (and social) cost that our success in getting on top of the virus is inflicting on all of us.

The solution is to take advantage of our success in taming the virus by moving quickly to replace the sledgehammer measure of closing down most of the economy with the less economically damaging measures of much more testing, better tracing of people exposed to the virus, and jumping on any local outbreaks ASAP. The new app is a big part of this shift to less invasive cures for the disease.

These are the three things Morrison has been quietly saying we need to get organised before we consider easing the lockdown. But now he needs to move strongly in dismantling much of it while, naturally, retaining our closed borders.

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How would Jesus treat people on the dole?

Since it’s Easter, let me tell you about something that’s long puzzled me: how can an out-and-proud Pentecostalist such as Prime Minister Scott Morrison be leading the most un-Christian government I can remember? Fortunately, however, the virus crisis seems to be bringing out his more caring side.

Many people think being a Christian means being obsessed with sexual matters - abortion, homosexuality and same-sex marriage – plus, these days, their human right to discriminate against people who don’t share their sexual taboos.

But if you read the four gospels recording what Jesus did and said, one message you get is one rarely emphasised by his modern-day, generally better-off followers. Jesus was always on about the plight of the poor, and was surprisingly tough on the rich.

Jesus gave his followers a new commandment, that they love one another. “By this everyone will know that you are my disciples.” Asked who was the neighbour we should love as our self, he told the parable of a despised Samaritan, who rescued a man bleeding in a ditch while two upright church-goers “passed by on the other side”.

Jesus said he came to “proclaim the good news to the poor”. “Blessed are you who are poor, for yours is the kingdom of God. Blessed are you who hunger now, for you will be satisfied. . . But woe to you who are rich, for you have already received your comfort.”

To the rich he advised: “When you give a banquet, invite the poor, the crippled, the lame, the blind, and you will be blessed.”

Jesus blessed those who had been kind to others: “I was hungry and you gave me food, I was thirsty and you gave me something to drink, I was a stranger and you welcomed me, I was naked and you gave me clothing, I was sick and you took care of me, I was in prison and you visited me.”

When a young man asked Jesus what he must do to inherit eternal life, he said: “Go, sell what you own, and give the money to the poor, and you will have treasure in heaven; then come, follow me.” But the young man “was shocked, and went away grieving, for he had many possessions”.

All this compares badly with the actions of the Coalition government, in which Morrison has always played a senior role. As minister for immigration, he was more ruthless than Labor in turning away strangers who came by boat seeking asylum. Those who did make it were treated harshly, to ensure any further strangers got the message about how unwelcome they’d be.

A lot of people like to divide the poor between the deserving and the undeserving. Like Labor before it, the Coalition has pandered to this un-Christian attitude. It favours “lifters” over “leaners”. Morrison himself introduced the ethical code that only those judged to have “had a go” will “get a go”.

The deserving poor are people on the age pension; the undeserving are the unemployed, single parents and probably most of those claiming the disability support pension. I went out and found a job; what’s stopping them doing the same except their own laziness?

Labor always pandered to the widespread “downward envy” of the jobless, but the Coalition has doubled down, reintroducing work for the dole despite all the reports saying it does nothing to improve people’s employability, making people run down their savings and wait longer to be eligible for the dole, making people prove they’ve approached an unreasonable number of employers each fortnight and suspending their payment if they fail, or miss an appointment for any reason. Not to mention the "robo-debt" scandal.

The Coalition wants to control how people spend the dole by paying them by card rather than cash. It wants regular drug testing of those on the dole. And it has steadfastly resisted widespread public pressure to increase the paltry amount of the dole, even though Labor has finally been shamed into abandoning its own longstanding hardheartedness.

But now, however, having adopted the slogan “we’re all in this together” – one beloved of my co-religionists in the Salvos - in his battle against the virus, Morrison seems to have had a change of heart. Whereas Kevin Rudd studiously avoided including the unemployed in his two cash splashes, Morrison has included them with other welfare recipients in his two $750 payments.

His temporary “coronavirus supplement” effectively doubles the rate of unemployment benefits to about $550 a week. He must know that returning the dole to $40 a day after six months won’t be politically possible. Meanwhile, his temporary JobKeeper payment of a flat $750 a week undercompensates higher wage earners while overcompensating lower wage earners, including many casuals.

In all, a Christlike turn for the good.

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Some major contagions have nothing to do with you-know-what

It’s a long weekend so, though we’re barred from enjoying it in the usual way, let’s at least forget the V-word. How about a quiz?

Let’s say the government is preparing for the outbreak of an unusual disease (no, not that kind of disease) that, should we take no action, is expected to kill 600 people. The government could act to combat the disease in either of two ways.

If program A is adopted, 200 people will be saved. If program B is adopted, there’s a one-third chance that 600 people will be saved, and a two-thirds chance that no one will be saved. Which one would you choose?

If you chose A, congradulations. You’re in good company. When this psychology experiment is run, about 72 per cent of subjects favour A and only 28 per cent favour B.

But then the government consults the epidemiologists. Their advice is: forget A and B, and consider program C or program D. If C is adopted, 400 people will die. If program D is adopted, there’s a one-third chance no one will die and a two-thirds chance that 600 will die. Which one would you choose?

If you chose D, more applause. In laboratory experiments, that’s what 78 per cent of subjects choose, leaving only 22 per cent choosing C.

But if you look at the four options again you find that program A and program C are the same. Under A, 200 out of 600 are saved; under C, 400 out of 600 die. It’s just that A highlights the positive, whereas C highlights the negative.

That 72 per cent of subjects favoured A, but only 22 per cent favoured C tells that most of us instinctively favour the safer, more certain outcome. Program B, remember, contained a two-thirds chance that no one would be saved. This instinctive preference confirms economists’ conventional assumption that most people are “risk-averse”.

But a closer look also reveals that program B and program D are the same. Program B offers a one-third chance that 600 people will be saved and a two-thirds chance that no one will be saved, whereas program D offers a one-third chance no one will die and a two-thirds chance that 600 will die.

(If you can’t see that, remember that, in probability theory, the expected outcome is the possible outcome multiplied by the probability of it happening. So B is ⅓(600) + ⅔(0) = 200. And D is ⅓(600) + ⅔(0) = 200.)

But if options B and D are the same thing expressed in different ways, how come the experiments show only 28 per cent of subjects choosing B, but 78 per cent choosing D? It’s because, relative to option C, which offered only the certainty that 400 people would die, option D offered a one-third chance that no one would die, and most subjects thought that was a risk worth taking.

This shows that, while it’s generally true that most people are risk-averse, as conventional economics assumes, a more powerful human characteristic – which conventional economics ignores – is that most of us are “loss-averse”.

A key insight of behavioural economics is that we hate losing something much more than we love gaining something of the same value. So much so that, surprisingly, we’re willing to run risks to avoid any loss.

If you hadn’t noticed, when you look closely you see that all four options offered the same “expected value”: 200 people saved, 400 lost. If everyone had realised this at the time, they should have been equally divided between the options.

Why were we so sure that A and C were much more attractive that B and D? Well, one possibility is that most of us aren’t much good at maths. But the more important explanation is that we are heavily influenced by the way a proposition is presented to us – by the way it’s “framed”, as psychologists say. The same proposition can be packaged in a way we find attractive or repellent.

This, too, is a truth that conventional economics knows nothing of, but behavioural economics – the school of economic thought that uses psychology to throw light on economic issues – has brought to economists’ attention.

Putting it differently, the choices we make are heavily influenced by the context in which we make them. This is one of the key arguments advanced by Robert Frank, an economics professor at Cornell University, is his new book, Under the Influence.

Frank notes that standard economic theory says the spending decisions we make depend only on our incomes and relative prices. People’s assessments of their needs and wants are assumed to be completely independent of the spending decisions of others around them.

But this too is where the assumptions of standard theory are unrealistic. In real life, the things we buy and do are often heavily influenced by the “context” of what our friends are buying and doing.

We wear the clothes we think are fashionable, and we judge what’s fashionable by what our friends are wearing. The best way to predict whether a young person will take up smoking is whether their friends smoke.

We have an impulse to conform – which is stronger than we often realise. That’s why we can’t resist buying toilet paper when others are grabbing it, or selling our shares when others are quitting the market.

Psychologists call this phenomenon “behavioural contagion” – our tendency to mimic the behaviour of others. When some things start to become popular, they often become very popular. Same if they start becoming unpopular.

Frank notes that our tendency to copy what others are doing can have positive consequences (as when people exercise more because their friends are doing it) or negative consequences (as when we drink heavily because the people we live with are).

He argues that economists ought to be more conscious of behavioural contagion because of the opportunities they present for governments to use taxation to encourage us to make better choices.

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For this to work, we must really be 'all in this together'

There are two ways Scott Morrison can play this coronacession: he can spread the pain as fairly as possible, or he can yield to all his political instincts and play favourites. You know: lifters get looked after, leaners take their chances. Those my tribe judge to be not "having a go" won’t be given a go.

Fortunately, Sunday’s second, $66-billion assistance package suggests Morrison’s trying hard to overcome his instincts, be more statesman-like and not exclude unpopular groups from assistance. He’s got further to go, however.

The poor are the biggest losers in every recession and that will be just as true in the coronacession. Those who are able to keep working will be the least affected; those who lose their jobs will be the most affected.

The strongest reason for Morrison to take steps to spread the pain more fairly is that it’s the right – you could almost say the Christian – thing to do. But he has extra, more pragmatic reasons for doing so. One is that it's easier to get everyone to cop their share of the burden – and to pull their weight – if they believe the burden’s being shared fairly. If they know that "we’re all in this together" is more than an empty slogan.

A special reason in this virus-induced recession is that if you leave the poor – the unemployed, the casual workers, the sick and the homeless – feeling ignored and excluded, you rob them of both the motivation and the financial and physical ability to play their part in not spreading the virus to others. If you’re not caring, they become the weak link in your efforts to lower the infection rate.

One fairness principle Morrison adopted from the start is to avoid assisting big business (with the exception of the airlines), but rather ask them to do the right thing by their employees and customers.

Despite the cheap money the banks are getting from the Reserve Bank, it’s clear they’ve gone further with their concessions to small business borrowers, people with mortgages and even term-depositors.

Their profits and shareholders will take a big hit – the first big hit since the recession of the early 1990s - which raises a broader fairness question: if you can’t afford to keep paying your workers, how can you afford to keep paying dividends?

For big businesses, including banks and energy retailers, to move against customers who get behind on their payments in the normal way would make this recession even deeper, and help no one – as the government seems to be making clear to them in private.

The same principle holds for landlords, even though these are mainly what you’d class as small businesses. Evicting tenants at a time like this gets you nowhere. No one gave landlords a guarantee that negatively geared property was one-way bet.

The second package has used a temporary "coronavirus supplement" to effectively double the Newstart allowance for six months. Good move. It’s also a tacit acknowledgement of the truth of the almost universal criticism that the present dole is impossible to live on.

At first the government thought to pay the higher allowance to newly unemployed people but not the existing jobless, but fortunately has thought better of the idea. Now it needs to make sure the infamous Centrelink (since renamed Services Australia – irony, I presume) understands its political masters no long require it to hassle people more than help them.

It would also help to avoid saying that those newly on the dole were there "through no fault of their own", thus implying that those already on it were there through some fault of their own.

The new package’s doubled cash-flow support payments to small and medium businesses should help keep more employees in jobs, though the use of payments based on employers’ remittances of their employees’ pay-as-you-go tax instalments (intended to prevent firms from taking the payment but dismissing the staff) is biased in favour of firms with highly paid (and taxed) employees and against those with poorly paid employees, including casuals.

Many firms will fall back on the new $20,000-over-six-months minimum rebate, which is unlikely to stop many low-paid and casual workers being let go.

A quarter of all employees are casuals, and adding the pseudo self-employed (including those in the "gig economy") takes to 37 per cent the proportion of workers who have no paid sick leave. The second package’s failure to improve on the earlier arrangement for those people to be eligible to apply for the little-used "sickness allowance" will leave many still tempted to keep working when they should be at home in bed.

And the failure of either package to do anything to help the homeless leaves a gaping hole in our efforts to protect their lives from the virus, or to slow its spread.

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It's the coronacession: closing down on doctors' orders

It’s now clear that we – like most countries – are already in a recession that promises to be long and severe. It will be a recession unlike any we’ve previously experienced. Why? Because it’s happening under doctors’ orders. So it deserves a unique name: the coronacession.

It’s taken a few weeks for this to become obvious, mainly because economists don’t know much about epidemiology and it’s taken the nation’s medical experts until now to make clear that their preferred response to the virus will take months to work and involve closing down much of the economy.

We already know that real gross domestic product is likely to contract in the present March quarter and it’s now clear that last week’s $17.6 billion stimulus package is unlikely to fully counteract the fall in economic activity – production and consumption – during the imminent June quarter, brought about by the government’s measures to impose “social distancing” and encourage “self-isolation”.

Since the medical authorities are only now suggesting that these efforts to slow the spread of the virus may need to continue for six months – which, considering their bedside-manner efforts to break it to us gently, may well prove an underestimate – it won’t be surprising if the economy also contracts in September quarter.

Of course, Sunday’s further stimulus package has been designed to offset the loss of wages and profits that will arise from pretty much closing the economy down, but I’m sure the government and its econocrats realise we’re long past the stage of pretending that avoiding two successive quarters of “negative growth” means avoiding recession.

As Finance Minister Mathias Cormann now readily concedes, “businesses will close and Australians will lose their jobs”.

It’s the business closures, falling employment and rising unemployment and underemployment that characterise a recession – and are the reason why, in normal times, governments and central bankers try so hard to prevent them, not bring them about.

Once these developments fill the headlines, what happens to GDP each quarter will be of only academic interest.

To fill out Cormann’s cryptic description of what is coming, many businesses will close their doors – some temporarily, some for good - partly because the government has cut off their access to customers (the airlines, inbound tourism, sporting, arts and entertainment events) and also because it has encouraged people to stay at home, minimising travel, trips to supermarkets and shopping centres and visits to restaurants, pubs, cafes and coffee shops.

The many people working or studying from home can be expected to spend less than they normally would.

The nation’s income from exports will fall, particularly because of the government’s bans on the entry of foreign tourists and students. The recessions in other countries will reduce their demand for many of our other exports.

Of course, our recession will reduce our demand for imported goods and services (we won’t be taking overseas holidays for the foreseeable, for instance) and, in some cases, parts and goods we need to import won’t be available until Chinese factories are fully back to work and have caught up with their backlog.

As businesses find they have few or no customers, they will seek to wind back their activities, leading many to stand down staff or make them redundant. Casual workers will discover there are a lot fewer or no shifts for which their services are required.

So, fewer sales of goods and services lead to less production of goods and services, which leads to less work done, jobs lost and less income earned by workers, who then have less to spend, even on essentials such as rent and utility bills.

You see from all this that - although the virus came to us from overseas, and although so many other countries are in the same position as us that there’s a world recession - it’s not the rest of the world that’s dragging us down. No, it’s our decision to seek to minimise the number of deaths from the virus by slowing down its spread through the population, and doing so by closing down much of our economy for months on end.

As is their practice, our medicos have focused on saving lives and protecting our health, and haven’t worried too much about what their medicine would cost, or who’d be paying for it.

You and I will be paying the cost – with those who lose their jobs paying a mighty lot more than the rest of us – and it will be the responsibility of the government, advised by its econocrats, to do everything it can to minimise that cost and spread the burden fairly.

How? By spending big. How big? Not last week’s $17.6 billion, more like $176 billion. The second stimulus package we see on Sunday will be just another instalment.

This will blow the federal budget out of the water. It will be hit in two ways: not just by the extra spending and tax cuts the government chooses to make, but also by the simple fact that businesses and individuals who earn less income pay less income tax. Workers who lose their jobs not only cease paying any income tax, they have to be paid unemployment benefits.

But here’s the trick: the more the government skimps on the cost of cushioning the effects of its own decision to shut down much of the economy, the deeper and more protracted the recession will be and the longer it will take to get the economy back to running normally once the threat from the virus has passed.

Paradoxically, that means the more you skimp on the cost to the budget, the bigger the deficit you end up with, and the further off into the future the return to surplus becomes.

The measures announced on Thursday by the Reserve Bank, particularly the cheap funding to banks for loans to small businesses, will help a little, but the game is pretty much over for the Reserve and its “monetary policy”. From now on, everything turns on what Scott Morrison does with his budget.

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At last we’ve been shown the virus game plan. Boring

I grew up in the Great Depression. Well, not really, but there were times when it certainly felt like it. The Depression was my father’s favourite topic of breakfast conversation and I got to hear a lot about it, particularly the questionable behaviour of someone called Jack Lang.

It wasn’t until long after my father had been "promoted to Glory", as the Salvos say, I learnt from my sisters that the Depression had been his finest hour. In those terrible times, a generous government made thousands of unemployed men trudge from town to town to be eligible for "the susso" – a woefully inadequate sustenance allowance, often paid in kind.

Men moving around the backblocks of Queensland soon learnt to come to the back door of my father’s Salvation Army quarters, where the captain would go to quite extraordinary lengths to help them along their way.

Now, I’m not for a moment implying that what we’re about to go through as we cope with the coronavirus bears any comparison with the Depression, which lasted for most of the 1930s and drove the rate of unemployment to reach 20 or 30 per cent.

No, I’m just saying this crisis will turn our lives on their head for so much of this year that we’ll remember it for the rest of our lives and won’t fail to tell our kids about it in years to come.

It’s clear that, after a few weeks of unthinking panic and silliness, we’ve reached the business end of the epidemic as "community transmission" – spreading of the disease between people who had no known contact with a confirmed case or who had arrived from a badly affected country – begins in earnest and the authorities get progressively tougher in imposing "social distancing" – slowing the spread of the virus by keeping people apart.

This is a steep learning curve for everyone: politicians, medical experts and even all-knowing journalists. But the road map of where we’re headed, what it involves and roughly how long it will last – say, six months – is now apparent.

The authorities faced a choice between letting the contagion rip – getting it over quickly, but with an overwhelmed health system, serious cases going untreated and too many oldies and medically compromised people dying – or trying to slow the spread so the health system copes and deaths are minimised.

Unsurprisingly, they chose to "flatten the curve", using self-quarantine of people who may have the disease or do have a mild case, self-isolation (staying at home to avoid contact with others) and social distancing – banning large gatherings, restricting travel, maybe closing schools, encouraging people to work from home, and urging people to minimise their contact with others.

While slowing the spread reduces the number of deaths, it’s by no means certain it will reduce the number of people contracting the disease. The big price to be paid is prolonging the disruption to people’s daily lives and, hence, to the economy. Less paid work will be done, many will earn less income, less money will be spent, and unemployment and underemployment will rise.

A less obvious price is that the extraordinary lengths we will be going to to limit deaths will leave many people fearing the virus is a much greater risk to their health than it is. The great majority of people who get it will suffer no worse than a bout of flu. But the fear may be a good thing if it makes the hale and hearty more diligent in their hand-washing and avoidance of social contact.

Have you realised what this means for most of us? We’re about to go though a period of weeks or months of staying at home and rarely going out. This is obvious for the elderly and health-impaired, but will also apply to those who have to work from home, those casual workers whose shifts are cancelled, school and uni students attending classes online, and parents who can’t work because they have kids to mind (and shouldn’t be asking old grandparents to help out).

As I contemplate it for myself (I’ll soon be off on five weeks’ staycation), a word springs to mind, starting with b and ending in -ing. Social work academics are writing papers about "cabin fever" – fever in more ways than one.

It won’t be lost on a lot of people that the arrival of pandemics – this may be the worst, but it’s not the first and won’t be the last – is an unwelcome consequence of the globalisation of the world economy.

Against that, however, the digital revolution has made it easier for many screen-based workers to work from home and for students to view lectures. Teleconferencing is a reasonable substitute for face-to-face meetings and interstate business trips. The range of home entertainment is a lot wider and of better quality since the advent of such things as streaming video. You may not be able to attend football matches, but you can still watch them on telly.

Mobile phones make it much easier to co-ordinate with family members, and Facebook lets you keep up with friends. And not forgetting that e-commerce lets you keep spending. Which will be nice. But it doesn’t change the fact that "social distancing" is contrary to all our instincts as social animals.

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Avoiding the R-word won't be as easy as boosting June quarter

Sorry to be blunt, but anyone who thinks avoiding a second quarter of decline in real gross domestic product means avoiding recession needs a lesson in economics.

It’s clear that Scott Morrison’s $17.6 billion stimulus package – what you might call Kevin Rudd with Liberal characteristics – was aimed primarily at boosting economic activity in the June quarter. Fully $11 billion of the $17.6 billion will be spent or rebated from the budget during the quarter.

Half of that will come from the cash-flow rebates to employers, and most of the rest from the $750-a-throw cash splash to social welfare recipients (including parents receiving family payments).

Not all the cash will have been spent, of course, but our and other countries’ experience suggests a lot more will be than you may expect. Former prime minister Rudd’s two cash splashes in 2008 and 2009 are immediately apparent in the retail sales figures of the time.

In any case, to the possible $11 billion you have to add well over $4 billion worth of spending on cars, vans and equipment by small and medium-size businesses, induced by the temporary investment incentive, which will be spent before June 30 but won’t hit the budget until next financial year.

This helps explain why Treasury estimates that the stimulus package will add 1.5 percentage points to whatever other growth or contraction in real GDP we get in the June quarter. Since growth in a normal quarter would be about 0.5 per cent – and, for comparison, Treasury and the Reserve Bank have estimated that the coronavirus will subtract 0.5 percentage points from growth in the present March quarter – this suggests the package stands a good chance of stopping next quarter being a second successive quarter of "negative growth" – contraction.

So, recession avoided? No, all that would have been avoided is having the financial markets and the media running around like headless chooks, shouting the R-word – and so frightening the pants off the rest of the populace – just as it was avoided in the March quarter of 2009, after Rudd’s carefully timed second cash splash.

Let’s be clear. Just as it was exactly right for Rudd and his advisers to do everything they could to avoid a second successive quarter of contraction, so it’s exactly right for Morrison and his advisers to do the same. That’s not because the two-quarters rule makes any sense, it’s because so many silly people think it makes sense.

When you’re trying to head off – or at least minimise – a recession, what people think and feel (their animal spirits) matter as much as what they actually do, for the simple reason that what people think and feel – their "confidence" – ends up having so much influence over what they do.

(What a pity the epidemiologists don’t have the same tried-and-true template for responding to a virus outbreak that economists have for responding to the risk of recession.)

But what anyone who wants to be smarter than the average bear needs to know is that the two-quarters rule makes little sense. It’s no more than an arbitrary rule of thumb with no science behind it. It appeals to the simple souls in the financial markets and the media because it’s simple, objective and (the killer argument) involves minimum waiting.

Only trouble is, for a rule of thumb it doesn’t work well. As the independent economist Saul Eslake demonstrated some years ago, it throws out too many false negatives. That is, it can tell you we don’t have a recession when we do. For instance, two negative quarters separated by even a zero quarter tells you we’re home free. Really? How long will the punters swallow that?

But another problem is that it focuses on the wrong variable – production – when what we really care about is employment and unemployment. Dr David Gruen, now boss of the Australian Bureau of Statistics, once proposed the most watertight definition of recession: "A sustained period of either weak growth or falling real GDP, accompanied by a significant rise in the unemployment rate."

And Eslake has road-tested a different rule, showing it has produced no false signals. It defines recession as "any period during which the rate of unemployment rises by more than 1.5 percentage points in 12 months or less".

Guess what? In the nine months between September 2008 and June 2009, the rate of unemployment rose by 1.6 percentage points to a peak of 5.9 per cent, but then fell back to 5.1 per cent over the following year. So we did have a recession, but it was so short and mild the punters didn’t notice it.

And taming recession so successfully brought Labor no thanks at the ballot box.

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Too soon to say how hard virus will hit economy

To judge by the gyrations of the world’s sharemarkets, the coronavirus has us either off to hell in a handcart or the markets are panicking about something bad that’s happening, but they’re not sure what’s happening, how long it will last or how bad it will end up being. I’d go with the latter.

So would Reserve Bank deputy governor Dr Guy Debelle. He said in a speech this week that there’s been a large increase in the financial markets’ "risk aversion and uncertainty".

"The virus is going to have a material economic impact but it is not clear how large that will be. That makes it difficult for the market to reprice financial assets," he said.

That’s central-bankerspeak for "they’ve got no idea what will happen". Which is hardly surprising, since no one else has, either. More from Debelle’s speech as we go.

But understand this. Farr’s law of epidemics, developed in the mid-19th century, says that the number of cases of a new disease rises and then falls in a roughly symmetrical pattern, approximating a bell-shaped curve.

Depending on how quickly the disease spreads, the bell can have a steep rise and fall or a shallow one. Epidemiologists seek to make the bell as shallow as possible by slowing the disease’s spread. This allows the health system to avoid being overwhelmed – reducing the likelihood of panic and chaos, and making it more likely those who most need medical attention get it.

In theory, it allows more time for the development of a vaccine or useful drugs, but the World Health Organisation has said it will take about 18 months for a coronavirus vaccine to be widely available.

At this stage, the main way of slowing the spread is "social distancing" – reducing the contact between people by cancelling sporting events, closing schools or workplaces or ordering people to work at home. Of course, many people are doing their own social distancing by staying away from restaurants and bars.

The virus has now arrived in most countries. Its spread is well advanced in China, Iran, Italy and South Korea, but much less so in Singapore and Hong Kong, where the authorities got in earlier with their social distancing measures.

Such measures, however, cause considerable inconvenience, especially to parents, and disruption to the economy – both to the production of goods and, more particularly, services, and to their purchase and consumption. Not to mention the associated loss of income.

Some of this economic activity may merely be postponed – so that there’s a big catch-up once the epidemic subsides. But much of it – particularly the performance of services (if you miss a restaurant meal or a haircut you don’t catch up by having two) – will be lost forever.

Obviously, China is central to the story for both the world economy and ours. China’s economy was hit hard by the virus and the drastic but belated measures to slow its spread, though the number of cases does seem to have passed its peak and rapidly declined. Debelle said "the Chinese economy is now only gradually returning to normal. Even as this occurs, it is very uncertain how long it will take to repair the severe disruption to supply chains."

The globalisation of the world economy in recent decades is a major part of the story of this virus. It means people in any part of the world are almost instantly informed about unusual things happening anywhere else in the world. It’s good to be better informed, but sometimes it can be frightening.

For another thing, globalisation has greatly increased the trade between countries, particularly trade in services, such as tourism and education. Trade in services has been greatly facilitated by the emergence of cheap air travel.

It’s all the overseas air travel everyone does these days that has caused epidemics that break out in one part of the world to spread around the world within a few weeks. More pandemics has become one of the big downsides of globalisation.

And when governments try to limit the spread of a virus by banning the entry of people from countries where the virus is known to have spread widely, this disrupts and damages those of that country’s industries who sell their services to foreign visitors.

(When the government stops you supplying a service to willing buyers, economists classify this as a shock to the "supply side" of the economy. When your sales fall because customers become more reluctant to buy whatever you’re selling, that’s a "demand-side shock" to the economy.)

Our imposition of a ban on non-residents entering Australia from China has hit our tourism industry and our universities. Debelle said that, since January, inbound airline capacity from China has fallen by 90 per cent. Until recently, he said, tourist arrivals from other countries had held up reasonably well, "but that may no longer be true".

The Reserve estimates that Australia’s services exports will decline by at least 10 per cent in the March quarter, roughly evenly split between tourism and education. Since services exports account for 5 per cent of gross domestic product, this suggests the travel ban will subtract 0.5 percentage points from whatever growth comes from other parts of the economy during the quarter.

Another consequence of growing globalisation is the emergence of "global supply chains" – the practice of multinational companies manufacturing the components of their products in different countries, before assembling them in one developing country and exporting them around the world.

China is at the heart of the supply chains for many products. So Debelle’s remark about the delay in repairing "the severe disruption to supply chains" is ominous. The Reserve’s business contacts tell it supply chain disruptions are already affecting the construction and retail industries – but there’s sure to be more of this "supply-side shock" to come.

And the shock to demand as - whether through virus-avoidance, necessity or uncertainty - consumers avoid spending money, has a long way to run. But, Debelle said, it’s "just too uncertain to assess the impact of the virus beyond the March quarter".

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Morrison's trickle-down stimulus may not be enough

I hope I’m wrong, but I doubt if Scott Morrison’s $17.6 billion stimulus package is big enough to stop the temporary shock of the coronavirus outbreak becoming a longer-lasting blow to the economy.

We live in an economy that produces goods and services worth $2 trillion a year. To have a significant impact on the economy we needed measures worth at least 1 per cent of that – about $20 billion in their first year.

To be fair, the package is much bigger than earlier envisaged, but “a touch less than 1 per cent” isn’t as comforting as well over 1 per cent. It’s clear the measures in the package have been carefully designed – Treasury’s fingerprints are everywhere – and Morrison keeps saying it’s “scalable”: it can be added to. Maybe he’s already intending to top it up.

Treasury’s famous advice to former prime minister Kevin Rudd during the global financial crisis in 2008 was “go hard, go early, go households”. That advice is as good today as it was then. Morrison and his Coalition colleagues have spent the past decade finding fault with Rudd’s stimulus but, as the prominent economist Chris Richardson has said, “it worked”.

Apart from not going hard enough, Morrison’s package is – for reasons easy to guess at - half-hearted about “going households” – that is, sending cash direct to households in the hope of making them less worried about their debts and getting them to spend in the shops.

Morrison’s allegedly nothing-like-Labor’s cash splash is $750 a throw, but limited to welfare recipients. Since retailers were doing it tough even before the virus, it should have gone to all low and middle income-earners.

A special feature of the virus “challenge” (as the spin-doctors prefer to put it) will be the need for workers to stay home – and the temptation for the quarter of them not covered by sick leave to keep working and earning when they shouldn’t.

Morrison’s solution is to waive the delay period once casual workers have jumped through all Centrelink’s hoops and applied for the little-used “sickness allowance”. Much easier and more effective to have included them in the cash splash.

Rather than the direct approach of a bigger cash splash, Morrison has favoured the trickle-down approach: he gives cash rebates to small and medium businesses, intended to discourage them from laying off workers if the virus disruption means they don’t have much work to do.

(Big businesses have been incentivised with an appeal to their patriotism. How this works if they are foreign-owned – like the Big Singaporean, BHP - I’m not sure.)

A praise-worthy effort to protect the jobs of the nation’s 120,000 apprentices and services-sector trainees has been included.

The temporary expansion of the instant asset write-off for smaller businesses should have some success in encouraging them to spend on new cars, trucks and equipment before June 30, despite the less-than-booming demand for their products. Of course, this will mainly draw forward spending that now won’t occur over the next year or two.

But the real money - $6.7 billion - will be spent on a temporary scheme to improve the cash flow by between $2000 and $25,000 of small to medium businesses that keep their staff on this year.

Trouble is, much of that money will go to businesses that had no intention of letting their skilled (and thus well-paid) workers go, whereas many small businesses whose workers are unskilled and badly paid (and thus more likely to be let go) won’t be entitled to anything more than the minimum $2000 rebate.

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It will take time to get used to living with the new virus

The coronavirus is deadly – it will end up killing quite a few oldies – but we (and the rest of the world) are making so much fuss about it mainly because it’s new. Thanks to that fuss, it’s likely to do more damage to the economy than it does to life and limb.

How much damage we do to the economy – and whether it lasts a few months or a few years – will be determined largely by the way Scott Morrison and his ministers manage all the fuss: on the medical side and the economic side.

There’s one sound medical reason for being concerned about the newness of this particular virus: as yet, we have no natural immunity to it. But don’t worry, we’ll get it in due course – although we’ll have calmed down long before that. The “novel coronavirus”, as the medicos call it, will have lost its novelty in a different sense.

The news media are making a great fuss for no reason other than the virus’ newness. New is what news is about. What’s new is unknown and what’s unknown is frightening.

You may think we’re making all this fuss not because the virus is new, but because it’s deadly. But we have daily contact with a lot of deadly things we don’t make a fuss about because we’re used to them.

It could be that road accidents cause more deaths – and certainly more injury – than the virus does this year. And seasonal flu carries off a lot of oldies every year without much fuss. In the end, Sydneysiders decided that the death and injury caused by late-night drinking wasn’t a good enough reason to limit the fun.

One key group who are understandably worried about the virus because of its newness are doctors and other health and aged-care workers. It does matter more if someone in such intense contact with the elderly and the ill gets the virus than if I get it.

But what’s worrying the doctors is how little we yet know about the characteristics of the virus and, more particularly, how little they’ve been told about what to do. Where are the protocols on how to handle patients who present with symptoms? What about face masks and testing kits?

Our surgery or hospital or old people’s home is already stretched, how will we cope with the influx? What will we do if we have to send key workers home for a fortnight because they’ve caught it or may have caught it?

I’m sorry to disillusion you if you haven’t worked it out yet, but the health authorities aren’t trying to stop the spread of the virus. They’re not trying to nip it in bud or stop it in its tracks. The cat’s out of the bag and it’s too late for that.

So what are they trying to do? Just slow down its spread. Why? To give the medical and aged care system time to prepare for the onslaught – including the time to set up separate “fever assessment clinics” where the “worried well” are kept away from those likely to have caught the virus, and away from those known to have.

As the disease spreads to many more people, it won’t be possible to put lots of medical time into tracing the contacts of every particular carrier – nor close a school for a few days while you do it. That is, in the best sense, a delaying tactic.

As Dr Katherine Gibney, of Melbourne’s Peter Doherty Institute for Infection and Immunity, and others, explain on the universities’ The Conversation website, as case numbers rise, case management will need to be streamlined. “While many mild cases have been admitted to hospital during the containment phase, community-based care [that is, staying at home] will be the reality for most people,” they say.

Australia’s Chief Medical Officer, Professor Brendan Murphy, says travel bans are only a way to slow down the spread of the virus. “It is no longer possible” to prevent new cases entering Australia, he says. This suggests that, before long, the border measures will be relaxed.

Last week the NSW Chief Health Officer, Dr Kerry Chant, was blunt: “We are not going to be able to contain this virus.”

Gibney and colleagues say “it’s likely, but not certain, that COVID-19 will remain in circulation beyond 2020 and become ‘endemic’ in Australia – that is, here for good” – like many viruses before it, including seasonal flu. Last season almost 300,000 cases of flu were reported, with 810 deaths – a fatality rate of about 0.27 per cent.

As yet, figures for the coronavirus are preliminary but it’s thought to be much more deadly than the flu, with a fatality rate of 1 or 2 per cent. It’s also more contagious than the flu, though much less so than measles. Its incubation period of two to 14 days is three times longer.

Even so, about 80 per cent of those who get it have a mild to moderate illness and only 20 per cent have a severe to critical illness. Most people who aren’t elderly and don’t have underlying health conditions won’t become critically ill.

Disruption to the economy is unavoidable, but the danger is that hour-by-hour reporting of efforts to slow the spread is frightening a lot of people and will lead them to overreact to the risk of infection, closing businesses and purses and making everything worse than it needs to be.

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Back in Black one minute, loose talk of recession the next

For most of last year, people kept asking me if our slowing economy was headed for recession. I always replied that we weren’t, but that our chronic weakness left us exposed to any adverse shock.

Turns out we’ve been hit by two. According to Treasury’s estimates, the bushfires will subtract 0.2 percentage points from whatever growth we get from other sources in the present March quarter, and the response to the coronavirus outbreak will subtract a further “at least 0.5 percentage points”.

With just three weeks of March quarter left to run, it’s clear the coronavirus response will also subtract from growth in the June quarter. By how much? Showing better judgment and greater experience than his political masters, Treasury secretary Dr Steven Kennedy told Senate Estimates on Thursday that it would be “unhelpful” to speculate. True.

Had he been paying attention – or just been willing to meet the former fire chiefs – Scott Morrison had plenty of reason to expect a bad, economy-damaging bushfire season, but he asks us to put up our hand if we expected the coronavirus. A neat rhetorical trick but, from the leader of a party claiming to be good at managing the economy, not good enough.

The risk of the economy being hit by shocks (good or bad) is always present. We could have had a terrible cyclone up north – or more than one. The US-China trade war could have escalated. And this isn’t the first virus to spread around the world.

Consider this. If you were to contract the coronavirus, in what physical state would you prefer to be at the time – in good health or poor health? It’s the same with economies. The stronger the economy is when the adverse shock hits, the easier it is to contain the disruption and get back on track.

Point is, good economic managers don’t allow the economy to get so weak that, should it be hit by a serious shock, recovery from that shock would be much harder and the risk of it turning into an actual recession much greater.

This helps explain why Reserve Bank governor Dr Philip Lowe has been urging Morrison to use the budget to strengthen the economy for several years, backed up by the International Monetary Fund, the Organisation for Economic Co-operation and Development and many of the nation’s macro-economists.

But no, our headstrong Prime Minister knew better. If he wasn’t prepared to take advice from fire chiefs and climate scientists, why would he listen to economists on a subject which, being a Liberal, he already knew all he needed to know: despite its weakness, the economy can take its chances while we get the budget Back in Black. That will leave us better-placed to respond to a recession once it’s upon us.

Turns out it took the medicos to bring him to his senses. Impose travel bans that decimate most of our services export industries? Yes, doctor, certainly, doctor. So now we’re doing what we said only spendthrift, Keynes-crazed Labor governments do: spending money and, more particularly, cutting tax receipts, to offset the damage the travel bans are doing.

Since the return to surplus is no more, we could use the opportunity to give the economy a much wider stimulus – put money directly into the hands of consumers, for instance – but no. It seems Morrison is still hoping a quick recovery from the virus shock will have the budget back to surplus in time for the next election.

Really? This is where his amateurism is still showing. In principle, the virus is, as Kennedy says, no more than a “short-term shock” from which the economy soon bounces backs. And that’s the right objective for fiscal (budget) policy.

But if that’s your objective, you don’t brief political journalists in ways that encourage them to inform their audience that two successive quarters of contraction in real GDP are likely, which – as God ordained, and every fool knows – equals a recession. Even the usual weasel-word “technical” is missing from these confident assertions.

What’s missing from the government’s – but, if you read them carefully, not its econocrats’ – thinking is an understanding that managing the confidence and expectations of consumers and businesses is half the battle. Animal spirits, as some unmentionable economist once put it.

If you’re trying to ensure that a short-term shock doesn’t become a lasting recession, you don’t encourage the media to make free with the R-word, even though it does help you cover your embarrassment at having claimed we were Back in Black when we weren’t, and now aren’t likely to be for ages.

When is a temporary economic shock a recession? When you listen to your political spin doctors, but not your econocrats.

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Coronavirus will hit an economy that’s already weak

It’s good to know the economy wasn’t as weak as we’d been told, but it’s not nearly good enough. Not when we know it’s getting walloped this quarter by the bushfires and the coronavirus.

This time three months ago, we were told that real gross domestic product had grown by just 1.7 per cent over the year to September. This week the Australian Bureau of Statistics announced that real GDP grew by 0.5 per cent during the December quarter and by 2.2 per cent over the calendar year.

On the face of it, this was the “gentle turning point” long promised by Reserve Bank governor Dr Philip Lowe. But when you look behind the headline numbers, it’s clear the economy’s basic problems continued unchanged.

Households are the bedrock of every economy, with consumer spending accounting for more than 60 per cent of total spending (aka “aggregate demand”). Obviously, households spend out of their income after paying income tax – their “disposable” income.

The greatest single factor driving household disposable income is income from wages. We know that employment has long been growing surprisingly strongly, so the income from the extra jobs is adding to household income.

But the main growth in wage income comes from pay rises. And we also know that, for five or six years now, wage rises haven’t been much bigger than the rises in the prices consumers pay. So if “real” wages aren’t growing strongly, it’s hard to see how real GDP – aggregate demand – can be growing strongly. Not in any sustainable way.

The full story is more complicated than that, of course, but that’s what an economist would call the “underlying” reality. So until strong growth in real wages returns, we’ll be spending our time examining the ups and downs in all the other, complicating factors that, over the short- to medium-term, cause the growth in real GDP to be a bit stronger or a bit weaker than the real growth in wages would lead us to expect.

(Should real wages never seem to return to the growth rate we were used to, we’d have to reassess our notions of what constitutes “strong” and “weak” growth – but that’s a story for another day.)

Back to the complications. Consumer spending grew by 0.4 per cent during the December quarter, which was a big improvement on its growth of 0.1 per cent in the previous quarter, but growth of 1.2 per cent over the year is less than half what it should be.

Much household spending goes on housing – whether renting or buying. And when people change houses they tend to have a burst of spending on “consumer durables” such as new furniture and appliances.

The buying and selling of existing homes doesn’t generate much economic activity, except to increase real estate agents’ commissions (and you’ll be delighted to hear that the increase in home sales, which is both a cause and an effect of the renewed rise in house prices in Sydney and Melbourne, caused such a boost in those commissions that it accounted for 0.2 percentage points of the overall increase of 0.5 per cent in GDP during the quarter).

But what does form a big part of GDP is investment in the building of new houses and units, plus alterations and additions. Here the news was not good. Home building activity fell by 3.4 per during the quarter and by 9.7 per cent over the year. It was the fifth quarter of contraction in a row.

Directly or indirectly, investment by businesses in new buildings, constructions and equipment is aimed at satisfying the expected demand for goods and services by households (although, when those households live overseas, we call it demand for exports).

So if consumers’ demand for goods and services has been weak for quite a few years, it’s not surprising that businesses’ investment spending on expanding their production capacity has also been weak. Although our miners have resumed investment, investment by the non-mining sector fell. Overall, business investment spending fell by 0.8 per cent during the quarter.

Put those three things together – consumer spending, new housing investment and business investment – and you’ve got the total demand of the private sector. It showed no growth during the quarter, and its annual contribution to overall GDP growth over the past few years has now fallen to zero.

So where is the growth coming from? From spending by the public sector. In previous quarters this has included strong growth in spending on infrastructure (mainly by the state governments), but this quarter it fell a bit. That left government spending on the provision of services (particularly on the federal rollout of the National Disability Insurance Scheme) growing by 0.7 per cent during the quarter and by 5.3 per cent over the year.

Now do you understand why governor Lowe keeps banging on about the need for governments to spend up?

The second factor helping to keep us growing is the “external sector” – specifically “net exports” (exports minus imports). The volume of exports of goods and services was unchanged during the quarter, but grew by 3.4 per cent over the year.

And the volume of imports of goods and services fell by 0.5 per cent during the quarter and by 1.5 per cent over the year. Which means that both the increase in exports and the fall in imports contributed to the overall growth in real GDP.

But ask yourself this: why would imports be falling? Because both consumer spending and business investment spending are so weak. Oh.

A final sign of the economy’s weakness comes when you remember how strongly our population’s been growing. Allow for this and you find that real GDP per person grew by just 0.2 per cent during the quarter and by only 0.7 per cent during the year.

And that’s before the economy’s hit by the bushfires and the economic disruption caused by our efforts to limit the spread of the coronavirus.

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Eat, drink and be merry, for tomorrow the virus won't get you

The coronavirus will harm the economy – ours and the world's – but how much damage it does will be determined not just by how far and how fast the virus spreads, but by what the government does to protect us from that spread and what people take it into their heads to do to protect themselves.

There's a good chance the reaction to the threat of the virus will do far more damage to the economy – and the livelihoods of the people who constitute it – than the damage it does to life and limb.

If the reports we hear of people stripping supermarket shelves and deserting cafes, bars and other places of recreation are a guide, the main consequence so far is an outbreak of national hypochondria. Crazed by an overexcited world media, Aussies have gone into panic mode well before the threat has materialised.

I suspect part of the problem is that word "pandemic" – the thing Scott Morrison last week acted on ahead of the World Health Organisation having declared. To many of us it's a highly emotive word, raising images of people dropping like flies as the disease spreads.

In the minds of epidemiologists, however, it just means the virus has popped up in quite a number of countries, without saying anything about how far and fast it's spreading in those countries.

According to Professor Ilan Noy, a specialist in the economics of disasters at New Zealand's Victoria University, "All signs point to a global overreaction to this crisis, and therefore to an amplified economic impact."

According to Professor Cass Sunstein, of Harvard Law School, "A lot of people are more scared than they have any reason to be. They have an exaggerated sense of their own personal risk."

That's because humans are notoriously bad at assessing the risks they face. Studies by psychologists and behavioural economists show individuals typically overestimate risks that are memorable, vivid or generate fear, while underestimating more common risks.

Noy says that, in a survey of 700 people in Hong Kong at the height of the SARS epidemic in 2002, 23 per cent of respondents feared they were likely to become infected. In the US, 16 per cent of respondents to a survey felt they or their family were likely to be infected. The actual US infection rate was 0.0026 per cent.

Sunstein says it's likely that, for residents of a particular city, "The risk of infection is really low and much lower than risks to which they are accustomed in ordinary life – say, the risk of getting the flu, pneumonia or strep throat."

One implication of this, he says, is that, "Unless the disease is contained in the near future, it will induce much more fear, and much more in the way of economic and social dislocation, than is warranted by the actual risk.

"Many people will take precautionary steps - cancelling holidays, refusing to fly, avoiding whole nations - even if there is no adequate reason to do that. Those steps can, in turn, increase economic dislocations, including plummeting stock prices."

But let's say you defy the odds and actually get infected. What are your chances then? Last week WHO said that, using the figures for China, for every 100 cases of coronavirus, about 80 people get better unassisted, 15 have serious but manageable problems, five are very serious and about three die. But that's for China. For the rest of the world it's more like 1 per cent who die.

So, like the flu, the coronavirus is usually something you get over fairly quickly. The people who don't recover quickly tend to be the elderly, and the few who die are usually those with another complication, such as asthma, cancer, cardiac disease or diabetes. (Oh no, that's me! I'm done for.)

But while you await your certain demise, remember something Scott Morrison said last week that didn't hit the headlines: "You can still go to the football, you can still go to the cricket, you can still go and play with your friends down the street, you can go off to the concert, and you can go out for a Chinese meal."

When it comes to the economy, remember that the share market is the drama queen of the financial world. It tends to overreact to bad news – but it does so knowing that later in the week it will be overreacting to good news. A cut in interest rates? God be praised.

Even so, the coronavirus and the efforts to contain it – official and amateur - have had adverse effects on the Chinese economy, with flow-on effects to our economy among others. The Chinese are already getting back to business, but it will be slow and economic activity – producing and consuming – has been seriously disrupted in the present quarter and probably the next. The world economy isn't strong and this will make it weaker.

Our border controls are hitting our tourist industry and universities. How much the overreaction of individuals adds to that we'll soon start seeing in economic indicators rather than anecdotes. In principle, we're experiencing a temporary adverse shock to the economy extending over a quarter or three, followed by a partial bounce back as consumers release pent-up demand and firms rush to fill back orders and re-stock.

Coming on top of all our other economic woes, however, it won't be fun.

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Productivity problem? Start at the bottom, not the top

Whenever we’re told we’re not achieving much improvement in our productivity, a lot of people assume it must be something the government’s done – or more likely, failed to do. Such as? Isn’t it obvious? Failed to cut the tax on companies and high income-earners.

But though the national rate of productivity improvement is merely the sum of the performances of all the industries that make up the economy, no one ever imagines the problem might be something the nation’s businesses have been failing to do.

This, however, is where a lot of research is pointing, as summarised by the Labor shadow minister and former economics professor, Dr Andrew Leigh, in a recent speech. He starts by explaining that productivity measures how efficiently the economy turns labour and capital into goods and services.

"Last year, Treasury’s Megan Quinn revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving into fresh data about the dynamics of the Australian economy," he says.

"Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s 'productivity frontier' has slipped back by about one-third. The best of 'Made in Australia' hasn’t kept pace with the best of 'Made in Germany', 'Made in the Netherlands' or even 'Made in America'."

And then there’s the other 95 per cent. In the past two decades, their output per hour worked has barely risen. So 19 out of 20 Australian firms don’t produce much more per hour than they did when Sydney hosted the Olympics.

What’s going wrong? "Part of the problem is that many firms aren’t investing in new technologies," Leigh says. "Less than half have invested in data analytics or intelligent software systems. Only three in five have invested in cyber security, making them vulnerable to hacking and ransomware attacks.

"It’s not just that companies aren’t investing simply in technology – they’re not investing in anything at all." In the Productivity Commission’s regular report, it measures how the amount of capital equipment per worker has increased, a process known as "capital deepening".

The commission has had to invent a new term to describe what happened last financial year – "capital shallowing". For the first time ever, the amount of capital per worker went backwards. "Given that capital deepening has accounted for about three-quarters of labour productivity growth, this is frightening," Leigh says. (To which Scott Morrison might well respond: do I look frightened?)

Across the economy, businesses are cutting back on research and development and investing less in good management. Just 8 per cent of our firms say they produce innovations that are new to the world, down from 11 per cent in 2013.

A Productivity Commission study has found that half the slowdown in productivity improvement in the market economy in recent years is accounted for by manufacturing. A separate survey of management practices in manufacturing firms found that Australia’s managers rank below those in Canada, Sweden, Japan, Germany and the US.

Leigh argues that newborn firms are as critical to an economy as newborn babies are to a society’s demography, bringing fresh approaches, shaking up existing industries, and offering new opportunities to workers.

Yet our new-business creation rate isn’t accelerating, it seems to be stopping. Defining new businesses as those that employ at least one worker, Treasury estimates that the new-business formation rate in the early 2000s was 14 per cent a year. Now it’s down to 11 per cent a year.

"Another sign that the economy may be stagnating comes from figures on job-switching," Leigh says. "Workers who switch jobs typically experience a significant pay increase. In the early 2000s the rate of job switching was 11 per cent of employees a year. Now it’s down to 8 per cent. And "Treasury’s analysis finds that a drop of one percentage point in the job-switching rate is associated with a 0.5 percentage point drop in wage growth across the economy".

The drop we’ve experienced is "not the fault of employees: there are simply fewer good opportunities available. According to Treasury’s analysis, much of the drop in job-switching is because workers are less likely to transition from mature firms to young firms. With fewer start-up firms, it stands to reason that there are fewer start-up jobs."

It’s all pretty dismal – and, of course, all the fault of the government. But I know just the reform we need to fix the problem. Morrison should offer chief executives of ASX200 companies a cut in their tax rate, provided they can show they were too busy during the financial year sticking to their knitting to attend any meetings of the Australian Business Council called to discuss lobbying the government for favours.

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Despite neglect, we're muddling towards low-carbon electricity

To coin a phrase, Australia’s governments are making heavy weather of their efforts to give us an electricity system that’s secure, reliable and affordable – with declining carbon emissions. Progress is slow in every respect bar one: the move to renewable energy is showing “remarkable growth”.

That’s clear from this week’s annual Health of the National Electricity Market report, by the Energy Security Board of the Council of Australian Governments. The peak security board is composed of the heads of the three government agencies that share the running of the national electricity market, plus an independent chair, Dr Kerry Schott, an economist.

If it all sounds a bit bureaucratic, it is. The national market (which covers all states bar Western Australia and the Northern Territory) is a “market” created by government and managed by bureaucrats. You have to give six months’ notice of your intention to blow your nose. Schott’s energy board – a further layer of bureaucracy – was set up partly to get the three lower outfits to work together more co-operatively.

Having been written by bureaucrats, the report (littered with industry jargon) is too polite to remind us why the industry’s having so much trouble getting its act together: the federal Coalition government’s inability to tell the many businesses exactly how they'll be required to reduce their emissions as part of the government’s commitment under the Paris agreement.

Without that degree of certainty – ideally, a plan both sides of politics are committed to – businesses are reluctant to invest. The Turnbull government had such a plan – the national energy guarantee – but its minority of climate-change deniers refused to accept it. The plan was abandoned and, pretty soon, so was Malcolm Turnbull.

Of the three key objectives – security, reliability and affordability – the report rates the status of the first two as “critical” (bureaucratspeak for “a real worry”) and only the last as “moderate-critical” (“not as bad as it was”).

To be fair, coal-fired power and renewable energy are so different in their nature that moving the power system from one to the other – and don’t doubt that this is what’s already happening – was always going to be a tricky business. That, of course, is why decent politicians would be doing all they could to minimise the uncertainty.

“Security” is now “the issue of most concern” to the board. It means maintaining a consistent flow of power at the right frequency and voltage. Failure to do so can seriously damage the system and cause significant interruptions to power supply – that is, days or months, not hours.

The problem is caused by the increasing role of “variable renewable energy resources” (aka wind farms and solar farms) and “distributed energy resources” (aka rooftop solar panels and maybe batteries).

“Reliability” – that is, the avoidance of much shorter blackouts – is now a bigger worry than it was. It has improved since last year, but the balance between demand and supply is still very tight during the summer peak demand in Victoria, NSW and South Australia.

“The increased severity of weather events, especially over summer, coincides with an ageing, and hence less dependable, coal generator fleet,” the report says.

When we come to affordability, it has “improved slightly over the year for retail customers”. Considering that retail prices leapt by 80 per cent between June 2004 and June last year, I suppose you have to regard that as progress.

Why did prices go so high? Well, not for the reason Scott Morrison keeps diverting our attention to: Labor’s evil tax on carbon, which Tony Abbott soon abolished. No, the report explains that the years of soaring prices were “largely driven by overbuilt [transmission] networks in Queensland and NSW, rising wholesale fuel costs, retail market [profit-motivated] inefficiencies and the cost of a range of renewables subsidies”.

Why did affordability (that is, not price per unit of power, but the size of people’s bills) improve slightly last financial year? Mainly because the average amount of energy from the grid fell as people moved to rooftop solar and also used electricity more efficiently – say, by buying appliances with better ratings.

Now the good news: over the three years to 2021-22, prices are expected to fall by 7 per cent, mainly because wholesale prices will fall as more power comes from renewables generation, which is very cheap. Really? That much, eh?

So don’t imagine retail prices will ever fall back to anything like what they were. And even as more and more of our power comes from renewables, there’ll be a lot of new cost coming from the rejig of the transmission network needed to connect to the different locations of the renewables’ generators.

By June last year, the proportion of the national market’s electricity generated by wind and solar had reached 16 per cent. It’s expected to reach 27 per cent by 2022, and be above 40 per cent in 2030.

There is huge variance between the states on their rate of transition. With its hydro and wind, Tasmania is close to 100 per cent renewables. South Australia is up at 53 per cent, leaving the rest of us between 10 and 20 per cent.

Contrary to Morrison’s claim that we’re a “world leader” in renewables investment, the report says we’re in the same class as Ireland, California, Germany, Spain and Portugal.

All that’s before you take account of rooftop solar. The report says it’s our high prevalence of rooftop that’s uniquely Australian. It’s now equivalent to 5 per cent on top of the national market’s total generation, and expected to be 10 per cent by 2030.

So don’t let anyone tell you we’re not getting on with the shift to renewables. But, by the same token, don’t imagine we’re doing anything like enough. We need to get to carbon-free electricity long before 2050, not just to do our bit in limiting global warming but because, as the report confirms, Australia has a “global comparative advantage in renewable energy”. We’d be mugs not to exploit it.

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Don’t forget: we all benefit from the magic of capitalism

The human capacity for adaptation – our ability to soon get used to our changed circumstances – is one of our great strengths. It means we can suffer a major misfortune – the death of a spouse, divorce, loss of a limb – and yet eventually get back to being pretty much as happy as we were.

But this pillar of human resilience has a big downside. It means when good things happen to us – even things we’ve long strived for – we soon stop being gratified and grateful, and within days or weeks start taking our advances for granted, part of the status quo.

It’s this adaptability that keeps many of us caught on what psychologists call the “hedonic treadmill”. The new house we moved to a few months back is fine, but now we really need a new car. I’ve got more clothes at home in the wardrobe than I can wear, but I’d really get a kick from buying a new jacket. All I need is a bit more money and then I’ll be happy.

With the media continually reminding us of all that’s wrong with our economy – weak wages growth, still-high unemployment and underemployment, a government not game to tackle climate change – it’s too easy to take for granted all that’s right with it. We’re the richest generation of Australians who’ve ever lived, and we shouldn’t forget it (especially when our politicians try to tell us we can’t afford to help the poor).

Enter Michael Brennan, chair of the Productivity Commission. If you think Reserve Bank governor Dr Philip Lowe is our only top econocrat who sees our glass as two-thirds full, you need to meet Brennan. He’s on a mission to show us how well we’re doing thanks to . . . productivity improvement.

In his speeches in recent months, Brennan has noted that it’s “been the great fortune of humankind, particularly in . . . the developed economies, to have experienced rapid growth in incomes and living standards over the last 200 years”.

Before and after Federation in 1901, we were the richest country in the world – thanks to our “wealth for toil”, mainly in the form of gold and wool. As the American Century got under way, we lost that lead.

In the period after World War II, our real gross domestic product per person went from being nearly $6000 a year above the rich-country average in 1950, to below the average in 1990.

But we began opening up and modernising our economy in the mid-1980s. Over the past 30 years our real GDP per person – that is, after allowing for inflation and population growth – has out-performed all of the G7 economies of North America, Europe and Japan, and our incomes have risen back to being well above the rich-world average. (Take a bow, Paul Keating.)

We have one of the strongest budgetary positions (which remains true even if we don’t make it “back in the black” this year) and the most progressive tax-and-transfers system in the Organisation for Economic Co-operation and Development.

Contrary to any impression you may have gained, our inequality of income hasn’t worsened a lot over the past 30 years. And, although our household wealth (assets minus debts) is a lot more unequal than our incomes, it’s low by rich-world standards.

Brennan says our life expectancy is high, for spending on healthcare that’s modest as a share of GDP. We face neither the budgetary and demographic problems of the Eurozone, the inequality of the US or the stagnation of Japan.

Average incomes in Australia today are seven times higher than they were in 1901. Environmentalists should note is that only some of this growth has come from increased exploitation of natural resources and damage to the environment (which is certainly something we need to correct).

No, the great majority of this growth has come from the magic of the capitalist system: improved productivity (the very magic Brennan is paid to promote). The average worker today can produce hugely more value in goods or services per hour than the average worker in 1901. Why? Because we’re healthier, better educated and more highly skilled, and we’re not only given far more equipment to work with, but those machines can do tricks that were never dreamt of a hundred years ago. And factories and offices are more efficiently organised.

That’s the capitalist magic of productivity improvement.

Brennan’s party trick is to demonstrate what a seven-times higher real income means in concrete terms. He calculates, for instance, that whereas the average employee had to work 22 hours to rent the average Australian three-bedroom house for a week in 1901, today it takes 12 hours (and it’s a much better house).

The cost of a bicycle – which in those days was the main form of transport – has dropped from 527 hours of work to less than eight hours. The cost of a kilo of rump steak has gone from 143 minutes work to 38; a loaf of bread from 20 minutes to six; a litre of milk from 31 minutes to just over two.

It’s noteworthy that whereas the wage cost of manufactured goods has fallen hugely, the wage cost of services hasn’t – because the wage of the person delivering the service has gone up with the wage of the person buying it.

But Brennan says the point of economic progress isn't just having more and cheaper "stuff", but also having qualitatively different stuff thanks to innovation and technology. That includes all the stuff we take for granted around the home - television, refrigeration, indoor plumbing and airconditioning - not to mention cars, air travel, the internet and smartphones. Then there's statins, the polio vaccine, a much lower likelihood of dying in childbirth, and antibiotics, which can be bought with as little as a quarter of an hour's work.

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Phone users have a reason to cheer ACCC's black eye

How much do you pay for your mobile phone contract – a lot or a little? Do you wish there was more price competition in a market dominated by three big companies, Telstra, Optus and Vodafone?

The Australian Competition and Consumer Commission has been stymied in its efforts to make that possibility more likely.

Last year the competition commission blocked a plan for Vodafone (one of the world’s biggest mobile phone companies) to "merge" with TPG (a mainly fixed-line phone and internet service provider) on the grounds that it could substantially lessen competition in the mobiles market.

Earlier this month the Federal Court overturned the commission’s ruling and allowed the merger to proceed – to much cheering from big business, which loves seeing the interfering competition regulator get a poke in the eye.

But phone users have nothing to cheer about. A chance to get more effective competition in the mobile phone market has been lost. Any threat of disruption to the comfortable life of the three-firm oligopoly – which already controls almost 90 per cent of the market – has been removed.

The competition commission thought the merger would do little to increase competition in the mobiles market, whereas allowing the smallest of the big-three oligopolists to take out the one outsider that could have threatened their cosy oligopoly – TPG – made it unlikely their cosy arrangement would ever be disrupted.

It thought this because, under the leadership of its swashbuckling chairman, David Teoh, TPG had turned itself into a company big enough to challenge Telstra and Optus in the internet provider market by acquiring various smaller providers and offering more competitive prices. And it had already spent $1.26 billion preparing to build a mobile network, before the government refused to let it partner with the Chinese-owned leader in 5G technology, Huawei.

Were the merger to be prevented, the commission believed, there was a good chance that TPG, with its record as a disrupter of markets, would revert to its plan to break into the mobile market, and do so by undercutting the incumbents’ prices.

The court rejected the competition regulator’s argument, primarily because it accepted Teoh’s assurance that he’d abandoned his plan to break into the mobiles market and wouldn’t return to it.

The court ruled that “it is not necessarily the number of competitors that are in the relevant market, but the quality of the competition that must be assessed. Further, it is not for the ACCC or this court to engineer a competitive outcome”.

Sorry, your honour, not sure what you mean. It’s certainly true that assessing the competitiveness of an oligopolistic market is more complicated than counting the number of dominant firms. The complexity comes in assessing the nature of the competition.

But what does it mean to “engineer” a competitive outcome? If it means the competition regulator and the court can’t do anything that would increase the likelihood of an industry being disrupted by a new and aggressive entrant, it’s telling us the law is biased in favour of maintaining the status quo and thus protecting the comfortable lives of the incumbents.

Does it mean the only views the authorities may hold about how the future may unfold for the industry must come from what the companies seeking permission to merge say about their intentions, not from the evidence economists have gathered about how oligopolists seek to compete in ways that maximise their profits and limit the benefit to their customers?

One of the main ways the rich countries have become rich is by firms’ continuous pursuit of economies of scale. The inevitable consequence, however, is that most of our markets have become dominated by a small number of huge firms with considerable power to influence the prices charged – especially if they reach an unspoken agreement to avoid competing on price.

The big question for public policy is how to ensure the gains from scale economies flow through to customers in lower prices and better service, rather than being retained as “super profit” in excess of the “normal profit” needed to cover the firm’s cost of capital and the risks it’s run. This is why economists have built up a great body of empirical knowledge about how oligopolists behave.

The court found that increasing the number of big players in the mobiles market from three to four (should the merger be blocked and TPG resume its plan to enter the market) would do little to increase competition, whereas allowing Vodafone to buy out the potential entrant and so become closer in size to its two rivals would improve competition.

Sorry, both conclusions run contrary to what the empirical evidence tells us was likely to happen. Remember, the chief tactic the world's digital megafirms have used to protect their pricing power is buying out small outfits looking like they could become a disrupter.

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No progress on wages, but we’re getting a better handle on why

In days of yore, workers used to say: another day, another dollar. These days they’d be more inclined to say: another quarter, another sign that wages are stuck in the slow lane. But why is wage growth so weak? This week we got some clues from the Productivity Commission.

We also learnt from the Australian Bureau of Statistics that, as measured by the wage price index, wages rose by 0.5 per cent in the three months to the end of December, and by just 2.2 per cent over the year - pretty much the same rate as for the past two years.

It compares with the rise in consumer prices over the year of just 1.8 per cent. If prices aren’t rising by much, it’s hardly surprising that wages aren’t either. But we got used to wages growing by a percentage point or so per year faster than consumer prices and, as you see, last year they grew only 0.4 percentage points faster.

It’s this weak “real” wage growth that’s puzzling and worrying economists and p---ing off workers. Real wages have been weak for six or seven years.

So why has real wage growth been so much slower than we were used to until 2012-13? Various people, with various axes to grind, have offered rival explanations – none of which they’ve been able to prove.

One argument is that real wage growth is weak for the simple and obvious reason that the annual improvement in the productivity of labour (output of goods and services per hour worked) has also been weak.

It’s true that labour productivity has been improving at a much slower annual rate in recent years. It’s true, too, that there’s long been a strong medium-term correlation between the rate of real wage growth and the rate of labour productivity improvement.

When the two grow at pretty much the same rate, workers gain their share of the benefits from their greater productivity, and do so without causing higher inflation. But this hasn’t seemed adequate to fully explain the problem.

Another explanation the Reserve Bank has fallen back on as its forecasts of stronger wage growth have failed to come to pass is that there’s a lot of spare capacity in the labour market (high unemployment and underemployment) which has allowed employers to hire all the workers they’ve needed without having to bid up wages. Obviously true, but never been a problem at other times of less-than-full employment.

For their part, the unions are in no doubt why wage growth has been weak: the labour market "reforms" of the Howard government have weakened the workers’ ability to bargain for decent pay rises, including by reducing access to enterprise bargaining.

But this week the Productivity Commission included in its regular update on our productivity performance a purely numerical analysis of the reasons real wage growth has been weak since 2012-13. It compared the strong growth in real wages in the economy’s “market sector” (16 of the economy’s 19 industries, excluding public administration, education and training, and health care and social assistance) during the 18 years to 2012-13 with the weak growth over the following six years.

The study found that about half the slowdown in real wage growth could be explained by the slower rate of improvement in labour productivity. Turns out the weaker productivity performance was fully explained by just three industries: manufacturing (half), agriculture and utilities (about a quarter each).

A further quarter of the slowdown in real wage growth is explained by the effects and after-effects of the resources boom. Although the economists’ conventional wisdom says real wages should grow in line with the productivity of labour, this implicitly assumes the country’s “terms of trade” (the prices we get for our exports relative to the prices we pay for our imports) are unchanged.

But, being a major exporter of rural and mineral commodities, that assumption often doesn’t hold for Australia. The resources boom that ran for a decade from about 2003 saw a huge increase in the prices we got for our exports of coal and iron ore. This, in turn, pushed the value of our dollar up to a peak of about $US1.10, which made our imports of goods and services (including overseas holidays) much cheaper.

This, of course, was reflected in the consumer price index. When you use these “consumer prices” to measure the growth in workers’ real wages before 2012-13, you find they grew by a lot more than justified by the improvement in productivity.

In the period after 2012-13, however, export prices fell back a fair way and so did the dollar, making imported goods and services harder for consumers to afford. So there’s been a sort of correction in which real wages have grown by less than the improvement in labour productivity would have suggested they should. Some good news: this is a one-time correction that shouldn’t continue.

Finally, the study finds that a further fifth of the slowdown in real wage growth is explained by an increase in the profits share of national income and thus an equivalent decline in the wages share.

Almost three-quarters of the increase in the profits share is also explained by the resources boom. It involved a massive injection of financial capital (mainly by big foreign mining companies, such as BHP) to hugely increase the size of our mining industry – which, as the central Queenslanders lusting after Adani will one day find out, uses a lot of big machines and very few workers. Naturally, the suppliers of that capital expect a return on their investment.

But harder to explain and defend is the study’s finding that more than a quarter of the increase in the profits share is accounted for by the greater profitability of the finance and insurance sector. Think greedy bankers, but also the ever-growing pile of compulsory superannuation money and the anonymous army of financial-types who find ways to take an annual bite out of your savings.

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