Innovative: a two-class tax cut with disappearing cake

 Surely the most unfair criticism of Josh Frydenberg’s budget comes from the economist who said it was uninspiring. It’s the most innovative, creative document I can remember. With uncharacteristic modesty, he’s presented the tax cut that forms its centrepiece as just another cut, whereas in truth it’s like no other we’ve seen. Frydenberg will be remembered as the inventor of the two-class tax cut.

Those travelling first class get a big tax cut that’s permanent and will show up in their pay packet (or, these days, bank account) in a few weeks. Those in second class get a small tax cut that’s temporary, and they won’t see it until the second half of next year – which is when it will then be whipped away, leaving them paying more tax, not less.

This strange result arises because the second stage of last year’s three-stage tax plan was designed not to be of benefit to the great majority of taxpayers, those earning less than $90,000 a year. Also because of the great invention of Frydenberg’s predecessor as treasurer, Scott Morrison: the appetisingly named “low and middle income tax offset” – known to tax aficionados as the LaMIngTOn.

In its final form, announced in last year’s pre-election budget, the lamington provides an annual tax reduction of up to a princely $255 to taxpayers earning up to $37,000. Those earning between $37,000 and $48,000 have the size of their lamington phased up to $1080, with all those earning between $48,000 and $90,000 getting the full $1080 cake. Then it phases down to no cake at all by the time incomes reach $126,000.

That $1080 is equivalent to a tax cut of a bit less than $21 a week. But, being a “tax offset” rather than a regular tax cut, you don’t get your hands on it until you’ve submitted your tax return after the end of the financial year, and it’s included in your annual tax refund.

On the face of it, the second stage of the tax plan (which wasn’t intended to start until July 2022, but the budget brings forward to July this year) gives a tiny tax cut to those earning between $37,000 and $45,000 and a bigger cut that starts at incomes of $90,000 and keeps growing until income reaches $120,000 – by which time it’s worth $2430 a year, or about $47 a week.

Under the bonnet, however, stage two does something an old accountant such as me regards as quite clever. It whisks away the lamington and substitutes other things, without those who got it under stage one being any worse off.

Trouble is, while almost no one earning less than $90,000 would be worse off, nor would they be any better off. Taken by itself, stage two would give noticeable tax cuts only to those earning more than $90,000 (which is getting on for double the median taxpayer’s income).

Sound fair to you? It would be politically unsaleable. Nor would it fit with the government’s claim to have brought the tax cut forward purely to do wonders for “jobs and growth”.

So someone had a bright idea. While quietly whisking away the old lamington, introduce a new, identical lamington – but only for the present financial year. Problem solved. Every player gets a prize.

The 4.6 million taxpayers earning between $48,000 and $90,000 get a tax cut of $1080 or a little more, while the 1.5 million earning between $90,000 and $120,000 get up to $2430. Everyone earning more than $120,000 gets the flat $2430 (thanks, Josh).

All this was carefully spelt out in one of the sheaves of press releases Frydenberg issued on budget day. But the things he said in his televised budget speech didn’t quite fit his own facts.

“As a proportion of tax payable in 2017-18, the greatest benefits will flow to those on lower incomes – with those earning $40,000 paying 21 per cent less tax, and those on $80,000 paying around 11 per cent less tax this year,” he said.

“Under our changes, more than 7 million Australians receive tax relief of $2000 or more this year.”

Sorry. By comparing this financial year’s tax cuts not with last year’s, but with the tax we paid three years ago, in 2017-18, Frydenberg has managed to add last year’s tax cut to this year’s. For people receiving the lamington, that doubles the tax cut they’re supposedly receiving “this year”.

Why has Frydenberg chosen to describe his tax cut in such a misleading way? Because it helps disguise the truth that high-income earners are getting much bigger dollar savings than low- and middle-income earners.

Similarly, comparing tax cuts according to the percentage reduction in a person’s total tax bill is nothing more than playing with arithmetic – which, to be fair, every government does. Remember, if your income was so low you paid only $10 tax on it, I could change the tax system in a way that dropped you from the tax net and claim you’d had a 100 per cent tax reduction – which made you by far the biggest winner. Yeah, sure.

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Budget’s easy future: no more surpluses, lots more tax cuts

Last week’s budget quietly brought about a historic shift in the fiscal policy “framework”: we moved from the Treasury puritanical view of what constitutes responsible budgeting, to the more licentious Republican view.

Until now, the Liberals have been committed to ending “debt and deficit”, but now they’ve decided they can live with both. The coronacession has left them with little choice, but there’s more to it.

America’s Republicans adhere to two fiscal principles: first, budget deficits are terrible things - but only because those appalling, big-spending Democrats are in charge. Second, once the Republicans are back in power, deficits are of less concern and no barrier to us granting our supporters big tax cuts.

Treasuries – including state treasuries – have a lot of firmly held views about what constitutes good public policy, but what they care about most – their sacred duty – is to keep the budget in balance.

Every time a recession pushes the budget into deficit, they fight untiringly until the economy’s recovery and much “fiscal consolidation” has returned the budget to balance. Their rationale for this obsession is that if they don’t care about balancing the budget, who will? The vote-buying politicians?

Early in the term of the Howard government, when the budget had still not fully recovered from the recession of the early 1990s, Treasury persuaded the Libs to enshrine this objective as their “medium-term fiscal strategy” - to “maintain budget balance, on average, over the course of the economic cycle”.

Successive Labor and Liberal governments have adopted that strategy with minor alteration.

After the Rudd government’s use of fiscal stimulus to avoid the Great Recession in 2009, it added a “deficit exit strategy” which committed it to “banking” any recovery in tax receipts and avoiding any policy changes (that is, tax cuts), as well as limiting real growth in government spending to an average of 2 per cent a year (a commitment Labor only pretended to keep).

In Tony Abbott’s first budget, the Libs’ “budget repair strategy” committed them to more than offset new spending measures by reductions in spending elsewhere, and to bank any improvement in the budget bottom line until a surplus of at least 1 per cent of gross domestic product had been achieved.

In Malcolm Turnbull’s first budget in 2016, however, he broke the commitment by deciding to cut the rate of company tax while the budget was still well short of surplus.

With that commitment out the window, it was easy in last year’s pre-election budget for Scott Morrison to promise a three-stage tax cut, spread from July 2018 to July 2024 and costing $300 billion over 10 years, purely on the strength of projections showing that tax collections would otherwise exceed the government’s ceiling of 23.9 per cent of GDP and keep soaring to 25.6 per cent by 2029-30. Immediately after its miraculous re-election, it rushed the plan into law.

It was always folly for any government committed to eliminating its debt to enact tax cuts five years into an uncertain future. The projections were overly optimistic at the time, but then the coronacession blew them away.

Tax collections are now expected to be only 21.8 per cent of GDP this financial year, and are projected only to have recovered to 22.9 per cent by 2030-31 – still way below the ceiling formerly said to justify a round of tax cuts.

Any government still committed to getting the budget back to surplus as soon as reasonably possible would have cancelled the legislated tax cuts – which now would be funded by borrowing – when further targeted-and-temporary government spending would be far more effective in creating jobs. Rate-scale tax cuts (as opposed to the one-year extension of the middle-income tax offset) are a continuing drag on the budget balance.

But no, rather than cut his coat according to his cloth, Scott Morrison has doubled down, bringing the second-stage tax cuts forward two years under the pretence it will do wonders for “jobs and growth”. The budget is projected still to be in a deficit of 1.6 per cent of GDP in 10 years’ time.

To make it all legit, however, the commitment to achieve budget surpluses on average has been junked and replaced with a new medium-term fiscal strategy merely to “focus on growing the economy in order to stabilise and reduce debt”, which will thereby “provide flexibility to respond to changing economic conditions”.

As the budget papers explain, and Josh Frydenberg has said, “with historically low interest rates, it is not necessary to run budget surpluses to stabilise and reduce debt as a share of GDP – provided the economy is growing steadily”.

Which is true. And the new, weaker medium-term strategy also provides the flexibility for governments to act like the Republicans and give a tax cut in response to changing political conditions. Happy days.

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The Liberal Keynes moves back into Treasury

For a man who, just months ago, was too prudish to say that dirty word “stimulus”, there’s now no doubt Treasurer Josh Frydenberg has become a card-carrying Keynesian. This week’s budget administers a huge Keynesian boost to our recessed economy. But he’s done it in a very Liberal way.

And, although the budget papers prefer to say “support” rather than “stimulus”, the man himself is always tossing off Keynesian jargon such as “aggregate demand” and burbling about the budget’s “automatic stabilisers”.

(John Maynard Keynes, BTW, was an avowed supporter of the British Liberal Party – although it was a different animal to our party of that name.)

According to the budget papers, the budget announced a further $73 billion in stimulus (plus $25 billion in virus-related health measures) over the next four years, on top of earlier spending of $159 billion.

Another way of judging the budget’s effect on aggregate (total) demand in the economy is to say the government expects the underlying cash deficit to increase from $85 billion last financial year to $213 billion this year.

This increase of $128 billion is equivalent to more than 6 per cent of gross domestic product. Unlike a strict Keynesian analysis, however, this takes the stimulus’ addition to the “structural component” of the budget balance, arising from the government’s explicit decisions to increase government spending or cut taxes, and combines it with the addition to the “cyclical component” made by the operation of the budget’s automatic stabilisers.

As the budget papers explain, “automatic stabilisers are features of the tax and transfer system that dampen the size of economic cycles without the need for explicit actions by policymakers. The government has allowed the automatic stabilisers to operate freely to dampen the effect of the COVID-19 shock.

“In a downturn, household and business after-tax income falls by less than before-tax income (for instance, due to progressivity in the tax system and [provisions for companies to deduct their losses from future - and now past – profits for tax purposes]) and transfer payments increase (due to increases in unemployment benefit payments and income-testing of other transfer payments).

“This provides an economic stimulus [whoops] that can reduce the magnitude of the downturn,” the papers say.

But Frydenberg wants to be clear that he’s embraced Keynesianism on his own terms. The budget papers say the economic recovery plan “is consistent with the government’s core values of lower taxes and containing the size of government, guaranteeing the provision of essential services, and ensuring budget and balance sheet discipline”.

And, as Frydenberg has said many times, the goal is to use budgetary stimulus to bring about a “business-led recovery”. I’d have thought that spending a lot of public money makes it a government-led recovery, but I think what he means is that most of the public money should be given to businesses, rather than being spent directly or given to punters.

Once you realise this, Frydenberg’s choices of what measures to include in the budget are easier to understand.

For instance, by far the most expensive measure – costing $27 billion over four years – is a temporary concession allowing businesses to deduct the full cost of all the new equipment they buy in the first year, rather than apportion the cost over the life of the asset.

Next are the personal income-tax cuts, costing $18 billion over the budget year and the three years of the “forward estimates”.

Then there’s infrastructure grants to the states of $7 billion, plus $2 billion for road safety improvements and upgrades. Then the $5 billion cost of letting loss-making businesses get an immediate tax deduction for their loss.

Only now do we get to the budget’s other centrepiece beside the tax cuts, the JobMaker hiring credit (wage subsidy) for employers who hire jobless young people under 35, which is the government’s replacement for the $101 billion JobKeeper wage subsidy scheme when it finishes in March. The new scheme will cost just $4 billion over three years.

Then we come to the cash splash payments to pensioners ($2.6 billion), $2 billion in new spending on aged care and $2 billion on a research and development tax incentive.

You see from this incomplete list how many of the budget’s measures seek to direct money into the hands of businesses: $34 billion in tax breaks and $4 billion in wage subsidies, compared with $20 billion in personal tax cuts and the pensioner cash splash.

Most of these measures are intended to get businesses investing and employing, but they do so by cutting the cost to them of capital equipment or labour. Those who would have invested and employed anyway are left better off, without taxpayers getting any value.

(And remember that one reason the government was happy to pay what it thought would be $130 billion for the JobKeeper scheme was that the money went to workers via their employer. This left businesses better off to the extent that their workers kept working.)

You do have to wonder whether all this spending would have done more to get the economy moving and unemployment falling if more of it had gone on job subsidies and less on investment incentives. Trying to get businesses investing in expanding their production rather than trying to get more people in jobs and spending on the things businesses produce seems to get things the wrong way round.

And you see that this “Liberal values” business-directed, tax-reducing approach to fiscal stimulus explains why the budget didn’t include the two measures economists most wanted to see because they’d do most to boost consumer spending and jobs: a big spend on social housing (a no-no under the rules of Smaller Government) and a permanent increase in unemployment benefits (almost every cent of which would have been spent).

The risk with Frydenberg’s politically correct stimulus is that too much of it will be saved. He needs to bone up on Keynes’ warning about the “paradox of thrift”.

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Morrison's new goal: tax cuts adding to higher debt and deficit

This is the hanged-for-a-sheep-rather-than-a-lamb budget. Realising the coronacession means it will be ages before he can make good his premature claim to have the budget Back in Black, Scott Morrison has decided to go for broke (if you'll excuse the expression).

Many people have been anxious to see just how big Josh Frydenberg's expected budget deficit will be (a record $213 billion, dwarfing anything produced by the free-spending Kevin Rudd) and how much public debt it will leave us with (almost a net $1 trillion by June 2024, and continuing to grow every year until at least June 2031).

Mr Frydenberg is right to say that, if we want to get the economy moving and unemployment falling, he has no choice but to spend in giant licks. More concerning is whether all the money added to the debt has been chosen to deliver the greatest possible gain in jobs.

That's the problem. It hasn't. Although the plan to subsidise the wages of newly employed young people in their first year gets a big tick, the brought-forward and back-dated tax cut that is the centrepiece of this budget is among the least effective ways to create jobs.

That's because much evidence shows that a high proportion of tax cuts is saved rather than spent. This is particularly likely at present, when so many people fear they may be next to lose their job.

To be fair, Mr Frydenberg has not brought forward the third stage of the tax plan – still scheduled for July 2024 – which is slanted heavily in of favour high earners. It's well established that high income-earners save a higher proportion of tax cuts than lower income-earners.

If you remember, when stage one of these tax cuts allowed people getting the new "low and middle income tax offset" to receive a flat $1080 refund in July and August last year, Mr Frydenberg confidently predicted it would give a fillip to retail sales. Didn't happen.

Summarising, the new tax cut will be worth the equivalent of almost $21 a week to those earning between $50,000 and $90,000 a year, but about $47 a week to those earning more than $120,000 a year.

Mr Frydenberg justifies the tax cut by saying "we believe people should keep more of what they earn". Fine. But such a belief has little to do with this budget's stated goal, nor the justification for adding to the deficit: it's "all about jobs".

This tax cut is much more about political popularity than getting the economy out of recession.

The government has made much of its efforts to limit the rise in deficits and debt by keeping new spending measures temporary. But the cost of the changed tax scales will roll on forever.

When the Economic Society of Australia surveyed 49 leading economists recently, asking them to choose the four programs that would be most effective in supporting recovery, only 10 of them nominated bringing forward the legislated tax cuts.

So what measures did they favour? More than half wanted spending on social housing (which creates employment in the housing industry, adds to our stock of homes and helps the disadvantaged).

Half the economists wanted a permanent increase in JobSeeker unemployment benefits (because $40 a day is below the poverty line and any increase is almost certain to be spent).

But those two top preferences have been ignored in this budget.

By contrast, some of the measures that are in the budget didn't raise much enthusiasm. An expanded investment allowance for business got support from only 29 per cent of the economists – presumably because it wasn't expected to be very effective. At best, it's likely to draw forward some of the spending on capital equipment that would have been spent in later years.

And even spending on infrastructure projects was preferred by only 20 of the 49 economists – perhaps because too much of it goes on wasteful projects.

The government's two main stimulus measures – the JobKeeper wage subsidy and the JobSeeker temporary supplement – have been most successful in breaking the economy's fall.

But they were cut back from the end of September, and this budget doesn't change the plan to end them from March and December respectively.

If the measures in the budget prove insufficient to fill the gap their withdrawal leaves, and so keep the recovery progressing, it will be because the government has been too quick to limit its spending and replace it with tax cuts.

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Smaller Government has failed, but let's cut taxes anyway

Think about this: despite a rocketing budget deficit, Scott Morrison is planning to press on with, and even bring forward, highly expensive tax cuts for high income-earners at just the time we’re realising that the 40-year pursuit of Smaller Government has been a disastrous failure.

Wake-up No. 1: the tragic consequences of the decision to outsource hotel quarantine in Victoria have confirmed what academic economists have long told us, and many of us have experienced. Contracting out the provision of public services to private operators cuts costs at the expense of quality.

Wake-up No. 2: efforts to keep the lid on the growing cost of aged care have given us appalling treatment of the old plus high profits to for-profit providers and some not-for-profits seeking to cross-subsidise other activities.

A new report by Dr Stephen Duckett and Professor Hal Swerissen, of the Grattan Institute, summarises the aged care system’s “litany of failures”, as revealed by the royal commission, as “unpalatable food, poor care, neglect, abuse and, most recently, the tragedies of the pandemic”.

There was a time when aged care was provided by governments, particularly in Victoria and Western Australia. But as the population has aged, successive federal governments have sought to limit the role of government by having aged care provided first by religious and charitable organisations and then by for-profit businesses.

The report’s authors note how little we spend on aged care. Countries with well-functioning aged care – such as the Netherlands, Denmark, Sweden and Japan – spend between 3 and 5 per cent of gross domestic product, whereas we spend 1.2 per cent.

“Rather than ensuring an appropriately regulated market, the government’s primary focus has been to constrain costs,” they say. When old people are assessed for at-home care or for residential care, the emphasis is less on their needs than on their eligibility for less-costly or more-costly support.

Partly because of the failure to set out clear standards for the quality of the care the community should be providing to our elderly – presumably, because keeping it vague helps limit costs – the system has become “provider-centric”.

Over the past two decades, the provision of aged care has increasingly been regarded by government as a market. “Residential facilities got bigger, and for-profit providers flooded into the system. Regulation did not keep pace with the changed market conditions,” the authors say.

But, though you’d better believe the profit motive of for-profit providers is super real, anyone who’s done even high-school economics could tell that the aged-care “market” offers nothing like the countervailing forces that textbooks describe.

The royal commission’s interim report found “it is a myth that aged care is an effective consumer-driven market”. A myth instigated and perpetuated by the Smaller Government brigade.

Duckett and Swerissen say that, “in practice, providers have much more information, control and influence than consumers. In residential care, a veil of secrecy makes it very difficult for consumers to make judgments about key quality variables such as staffing levels.”

Rather than turning aged care into a well-functioning market, “the so-called reforms resulted in for-profit providers increasingly dominating the system. The number of for-profit providers has nearly tripled in the past four years, from 13 per cent in 2016 to 36 per cent in 2019".

Even the Land of the Free has instituted a five-star system for ranking residential institutions to better inform the aged and their families. We haven’t bothered. But research for the royal commission shows that a majority of providers have staffing levels below three stars. And, the authors add, it doesn’t necessarily follow that the more you pay, the higher the quality.

Residential aged care can be so offputting that it’s gone from being a lifestyle choice to a last resort. So great is the public’s aversion to aged care that the government has had to offer a range of at-home assistance packages.

But, consistent with the half-arsed pursuit of Smaller Government, the government has allowed a waiting list of about 100,000 people to build up. And, since the packages are delivered by private providers, amazing proportions of the cost can be eaten up by “administrative costs”.

Duckett and Swerissen say that, while (much) more money is needed, this won’t be enough to fix the problem without not only better regulation but fundamental change in principles, governance and incentives. Access to extra funding should be tightly scrutinised so the money goes to upgrade staffing and not to greater profits for wealthy owners of provider businesses.

Back to tomorrow’s budget. The strongest motivation behind the Quixotic quest for Smaller Government is the desire of the better-off to pay lower taxes. Like Don Quixote, it has failed. Fixing it will cost billions. But blow that, let’s cut taxes regardless.

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The greenie good guys are wrong to oppose economic growth

Only a few sleeps to go before our annual Festival of Growth – otherwise known as the unveiling of this year’s federal budget. People will want to know whether Treasurer Josh Frydenberg has done enough to “stimulate” growth. And whether the government’s forecasts for growth are credible. But not everyone will be on the growth bandwagon.

A lot of people who worry about the natural environment will be dubious and disapproving. “Don’t these fools know that unending growth is physically impossible?” “What kind of wasteland is all this growth in the production of stuff turning the planet into?”.

I’ll be banging on next week about the need for growth, but I know I’ll be getting emails from reproving readers. “I thought you were one of the good guys. I thought you cared about the environment and had doubts about all the growth boosterism.”

Sorry, I do care about the environment and I do have doubts about the popular obsession with eternal growth. But I will still be marking the government down if it hasn’t done enough to foster growth over the next year or three.

The anti-growth lobby is half right and half wrong. They know a lot about science and they think this means they know all they need to know about economics. What they don’t know is the growth that scientists know about isn’t the same animal as the growth economists measure and business people and politicians care so much about.

And I have a challenge for the anti-growth brigade: don’t you care about the big jump in unemployment?

Let’s start with the immediate crisis. The pandemic and our attempts to suppress it have led to a fall of 7 per cent in the size of the economy in the June quarter – as measured by the quantity of Australia’s production of goods and services (real gross domestic product).

This massive contraction in production has involved a fall of more than 400,000 in the number of jobs, almost a million people unemployed and a jump in the rate of underemployment from 9 per cent to 12 per cent. Most of the people affected are young and female.

If you’re tempted to think that this fall in our production and consumption of “stuff” is a good thing and there ought to be more of it, what’s your plan for helping all those people who’ve lost their livelihood? Put ’em on the dole and forget ’em?

The standard plan for helping them get their livelihood back (or find their first proper job after leaving education) is to get production back up and keep it growing fast enough to provide jobs for those in our growing population who want to work.

Until we’ve instituted a better way of securing the livelihoods of our populous, that’s the solution I’ll be pushing for. And the growth we end up with won’t do nearly as much damage to the natural environment as the growth opponents imagine.

That’s because what our business people, economists and politicians are seeking is growth in real GDP, and growth in GDP doesn’t necessarily involve growth in our use (and abuse) of renewable and non-renewable natural resources. Indeed, as each year passes, GDP grows faster than growth in our use of natural resources.

What many environmentalists don’t understand is that increased digging up of minerals and energy, and increased damage to tree cover, soil, rivers and biodiversity as a result of farming and other human activity accounts for only a small part of the growth of GDP.

It’s wrong to imagine that growth in GDP simply involves growth in the production of “stuff” – things you can touch. What economists call “goods”. No, these days (and for decades past) most – though not all - of the growth in GDP has come from the growth in “services”.

That is, people - from the Prime Minister down to doctors, teachers, journalists, truck drivers and cleaners - who run around doing things for other people. Some of this running around involves the use and abuse of natural resources – including the burning of fossil fuels – but mostly it involves using a resource that’s economic but not environmental: the time of humans. And, of itself, human time doesn’t damage the environment.

The production of goods – by the agricultural, mining, manufacturing and construction industries – accounts for just 23 per cent of GDP, leaving the production of services accounting for the remaining 77 per cent.

Next, remember that a significant proportion of the growth in GDP over the years has come not from the application of more raw materials, land, capital equipment and labour, but from greater efficiency in the way a given quantity of those resources is combined to produce an increased quantity goods and services.

Economists call this improved “productivity” (output per unit of input). And it’s the main source of our higher material standard of living over recent centuries, not our use of ever-more natural resources per person.

In my experience, many people with a scientific background simply can’t get their head around the concept of productivity – which helps explain why many economists dismiss the anti-growth brigade as nutters. They can’t take seriously people who appear to think increased efficiency must be stopped.

A final point is that growth in population adds to environmental damage – although this is a moot point when most of the growth in a particular country’s population comes merely from immigration.

Now, let’s be clear: none of this is to dismiss concerns about the immense damage we’re doing to the natural environment, nor to imply that the global environment could cope with the world’s poor becoming as rich as we are.

No, the point is that concern should be directed to the right target: not economic growth in general, but those aspects of economic growth that do the environmental damage: world population growth, use of fossil fuels, indiscriminate land clearing, irrigation, over-fishing, use of damaging fertilisers and insecticides, and so on.

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Doing health admin on the cheap may mean things go wrong

In my game, where you spend years watching the antics of politicians and bureaucrats from a ringside seat – say, watching the inquiry into Victoria's tragic hotel quarantine debacle – you tend to become cynical. But not as cynical as a gym buddy of mine, who's had much experience of such inquisitions.

He says that when everyone's denying having made the fateful decision, but saying they don't know who did make it, it's usually a sign they're trying not to dob in the boss.

It's possible the boss in question was now-departed health minister Jenny Mikakos, but I doubt it. Bureaucrats from one department don't usually cover for some other department's minister.

One thing I've noticed over the years is that when the hue and cry is closing in on the really big political boss, it's not surprising to see someone else take the dive on their behalf. If it's a public servant writing the so-sorry-I-misled-you-prime-minister letter, they can expect to be looked after in their next appointment. When it's another minister, it's usually less congenial.

The inquiry revealed various instances of ministers claiming not to have been briefed by their departments. So, the Sir Humphreys work it out themselves and let their ministers know later? Don't believe it. The days of Yes, Minister are long gone.

These days, department heads – federal and state – are sacked so often that senior public servants live in fear of displeasing their minister. How might that happen? If you told them something they'd prefer to be able to say they hadn't been told. Or even if you gave them advice that really annoyed them.

As so often happens, what was missing from the quarantine inquiry's proceedings was acknowledgment of the role of ministerial staffers. They're invisible, apparently. These days, much communication between a department and its minister goes via the staffers. They decide what's too trivial, inconvenient or potentially embarrassing to be passed on.

In all the toing and froing before the inquiry, you may have noticed a lot of witnesses declining to accept responsibility for "collective decision-making" decisions. Such evasion of responsibility is one of the besetting sins of public servants. Their political masters ought to put a stop to it. Which they would – were they not too busy playing the same game.

Back to the search for a guilty party. In Canberra lore, conspiracies are always trumped by stuff-ups. So I don't find it hard to believe that no one in particular made the decision to outsource the running of hotel quarantine to private contractors. It really was a decision that, in Scott Morrison's memorable phrase, "made itself".

It was taken without much thought or discussion because "that's what we always do". Outsourcing the provision of public services has become so ubiquitous no one thought of doing it any other way.

You may think that outsourcing the delivery of public services to for-profit providers – a form of privatisation – must be the bright idea of some naive economist, and you'd be right. Actually, half right.

An economist who's put much thought into government "contracting out", Oliver Hart, of Harvard, demonstrated that it was a good idea if your goal is to cut costs, but a bad idea if you care about maintaining the quality of the service.

This is because of a problem economists call "incomplete contracts". It's humanly impossible to write a contract that covers every problem that could arise and every way the contractor could game the contract at your expense. When you deliver the service yourself, you retain control over quality. Hart was awarded the Nobel prize for his sagacity.

Outsourcing is hugely fashionable in business as well as government. In my experience, it's always about saving money in the fond hope any loss of quality won't be noticed.

Often, the saving comes from ending the good wages and conditions you pay your own workers by sacking them and sending them down the road to work for some contractor on lower pay and worse conditions. It's a way of side-stepping successful unions.

In the public sector, however, another attraction of outsourcing is that it blurs lines of responsibility. "The contractors are giving you a hard time? Blame them, not me." "You'd like to see the contract I've made with the supplier? Sorry, commercial in confidence."

Truth is, governments at both levels and of both colours have gone for years saving money by contracting out wherever possible and imposing annual "efficiency dividends" (an Orwellian term for public service redundancies).

They've given us government on the cheap because they believed we'd prefer a tax cut to decent service. They could have striven to give us better government – including government that was big on accountability and where lines of responsibility were clear – but they settled for cheaper government.

They've spent decades cutting corners in a hundred ways, hoping we wouldn't notice (or do no more than grumble about) the slow decline in quality. Now the pandemic has caught them out. Pity so many lives were lost in getting the message through.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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It won’t be just the budget that sets our speed of recovery

 In Scott Morrison’s efforts to get us out of the coronacession, lesson No. 1 is that it’s up to the government to produce the increase in demand we need by spending an absolute shedload of money. But this week the boss of the Productivity Commission interjected with lesson No. 2: while you’re at it, don’t forget the role of the supply side.

In every recession, “aggregate demand” (gross domestic product) goes backwards, and unemployment shoots skywards, because the private sector – households and businesses – have cut their spending on consumption and physical investment in new houses, business equipment and structures.

To get the private sector going again, the public sector has to more than make up the gap by greatly increasing its own spending. That’s particularly true in this recession because, with the official interest rate already close to zero, there’s been almost no scope for the authorities to do the other thing they usually do to get the private sector spending again: slash interest rates to encourage spending on borrowed money.

Because this government has made so much of the evils of “debt and deficit”, however, it’s been tempted to limit its budget spending by using economic reforms to pursue “jobs and growth”. The response of me and others has been to say “not so fast”. Reforms aimed at making our production of goods and services – the “supply side” of the economy - more efficient are no substitute for boosting the demand side of the economy when that’s what’s causing high unemployment.

After all, what could be more inefficient and wasteful than having hundreds of thousands of people who could be working and producing things sitting on their bums?

But in a virtual speech to the Australian Business Economists this week, Productivity Commission chairman Michael Brennan argued that the state of the supply side of the economy would be highly relevant to our success in having the economy recover as quickly as possible.

He made some good points. Note, he wasn’t challenging the fundamental importance of ensuring adequate growth in aggregate (total) demand. He was saying that the state of the supply side also matters. It’s not a substitute for adequate demand, but is an important supplement to it.

“Supply-side policy is an important enabler of the recovery, without which demand-side stimulus is incomplete or compromised in its effectiveness,” he says. It’s not so much about correcting inefficiency in the allocation of resources (labour, capital and land), as about “dynamic efficiency” – the speed with which the economy can move from one state to another, and how we minimise the various “frictions” that slow it down.

He says there are three main reasons why we should focus on micro-economic policy even in the midst of a recession. First, the coronacession is not just a demand shock, it’s also a reallocation shock. It will involve many workers, and much capital and land-use moving between industries and locations. Some industries will get bigger, some smaller.

Change in the industry structure of the economy is happening continuously, but a lot more of it happens during and after recessions. Many more businesses go out backwards, while new ones spring up. As well, firms use the impetus or excuse of the recession to stop doing unprofitable things they should have stopped doing years earlier.

Classic example: all the firms in this recession slashing the amounts they’re prepared to pay for sport broadcast rights and sponsorships. They’re blaming the tough times, but they’re also correcting their own error in allowing bidding wars to push the salaries of professional sportsmen (but few sportswomen) way above their commercial value.

So recessions involve much reallocation of resources. The economy won’t have fully recovered from the recession until that process is complete. But how long it takes will be heavily influenced by the frictions that slow it down.

Brennan quotes research showing that reasons for delay in reaching the new allocation “include the time needed to plan new enterprises and business activities, the time required to navigate regulatory hurdles and permit processes to start or expand businesses, time [to acquire new financial and physical] capital . . . and [time to seek out] new relationships with suppliers, employees, distributors and customers”.

His point is that some of these delays are caused by government regulation, so there are things governments could do to speed up the reallocation process and thus cause unemployment to come down faster.

Brennan’s second reason for arguing that micro-economic policy is relevant to the recession is the need to facilitate the forming of new businesses, and the possibility that recent experience of the pandemic leads entrepreneurs to overestimate the risk of future disruption to any business they start.

Governments can try to offset such “belief scarring” by streamlining the approvals process for new businesses, improving the culture of regulators, reforming insolvency rules, and in other ways.

Brennan’s third reason for arguing the relevance of micro policy is that reforms can help reduce the disruption caused by macro-economic shocks by making the economy more resilient – able to roll with the punches. (I believe this was one of the big but unexpected benefits of the Hawke-Keating government’s many micro reforms, which helps explain why we went for 29 years between recessions.)

But though Brennan makes good points, let me make two. As he envisages them, the reforms he advocates would leave us better off. But economists’ grand plans have to be implemented by fallible politicians and, as we’ve seen too many times in recent decades, by the time the pollies have engaged with the lobbyists what emerges is often more akin to rent-seeking than good policy.

Finally, unlike macro measures, micro reforms usually take some years to be brought into effect and then have their affect on behaviour. So, unless we take years to recover from this recession, any micro reform we begin now will be in time to help us with the next one.

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How economists got it wrong for so long

Most economists are great believers in the need for "reform" – for other people, not themselves. Over the past 30 or 40 years, no profession has had more influence over the policies governments have pursued, but the results have hardly been flash.

Even the lightning speed at which an epidemic in part of China became a pandemic reaching every corner of the globe can be blamed in large part on the globalisation that economists long championed.

After the unmitigated disaster of the global financial crisis of 2008 – which the economists not only failed to foresee, but did much to help bring about by their advocacy of deregulated financial markets – many people assumed this would force the economists, shamefaced, back to the drawing board.

It didn't happen. But the poor performance of economies in the decade following the Great Recession hasn't allowed the more intellectually honest among the world's economists to delude themselves that all's well with their theories and policy prescriptions.

At present, politicians and policymakers are preoccupied with suppressing the virus and countering the coronacession this effort has led to. Economists are worried about the depth of this recession, and are warning politicians that they'll need to spend (and borrow) unprecedented sums to bring about a sustainable recovery.

A big part of the economists' concern arises from their knowledge that deep, structural problems had caused the rich economies to be in a weak state before the arrival of the virus. This suggests that, without an extraordinary effort by governments, the recovery is likely to be slow, with unemployment staying high.

Worse, the "normal" to which we return after the virus has been fully vanquished isn't likely to be nearly as good as the normal we remember. Not only will material living standards be improving at a glacial pace, but there'll be continuing, maybe worsening, social conflict (not to mention a worsening climate).

The good news, however, is that leading thinkers among the world's economists are still grappling with the embarrassing question of why their profession's advice over many decades seems to have made our lives worse rather than better.

I'm just back from a couple of weeks catching up on my reading. I noticed several books by well-known economists coming to similar conclusions about how the ideas of "neoliberalism", which dominated economic advice to governments for so long, led us astray.

In their book Greed is Dead, two leading British economics professors, Paul Collier and John Kay, both from Oxford, argue that the problem with what they (and I) prefer to call "market fundamentalism" – which oversimplifies and takes too literally the basic model of how markets work – is its overemphasis on the role of competition between self-interested individuals in generating economic progress.

By sanctifying selfishness, it has undermined community-mindedness and the role of co-operation in advancing our mutual interests. Voting has become a simple matter of "what's in it for me and mine", while businesses and industries have been licensed to lobby for preferment at the expense of everyone else.

"In recent decades the balance between these instincts [of competition and co-operation] has become dangerously skewed: mutuality has been undermined by an extreme individualism which has weakened co-operation and polarised our politics," they say.

In his book, The Third Pillar, Raghuram Rajan – a US-based Indian economist who did foresee the global financial crisis, but was told by his elders and betters not to be so stupid – argues that society is supported by two obvious pillars, the state and markets, but also by a neglected third pillar: the community. That is, the social aspects of society.

"Many of the economic and political concerns today across the world, including the rise of populist nationalism and radical movements of the Left, can be traced to the diminution of the community," he says.

"The state and markets have expanded their powers and reach in tandem, and left the community relatively powerless to face the full and uneven brunt of technological change. Importantly, the solutions to many of our problems are to be found in bringing dysfunctional communities back to health."

In his book, The Common Good, Robert Reich defines his subject as "our shared values about what we owe one another as citizens who are bound together in the same society – the norms we voluntarily abide by, and the ideals we seek to achieve".

Since the late 1970s, however, Americans have talked less about the common good and more about self-aggrandisement; less "we're all in it together" and more "you're on your own". There's been "growing cynicism and distrust toward all the basic institutions of American society – governments, the media, corporations" and more.

But the last, more hopeful words go to Collier and Kay: "We see no inherent tension between community and market: markets can function effectively only when embedded in a network of social relations.

"Humans are not selfish, maximising individuals, pursuing their conception of happiness; they seek fulfilment which arises largely from their interaction with others – in families, in streets and villages, at work."

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Memo generals: China is our inescapable economic destiny

There must be times in Australia’s history when people look at the nation’s economic experts and wonder if they have any idea what they’re doing. Today, the boot’s on the other foot: people who care about our economic future are wondering what game the nation’s defence and foreign affairs experts think they’re playing.

The concern of many business people and others has been most eloquently expressed by Dr John Edwards, former Reserve Bank board member, in a paper for the Lowy Institute. He’s in complete agreement with Scott Morrison’s assertion last year that “even during an era of great-power competition, Australia does not have to choose between the United States and China”.

Edwards says Australia made its choices long ago, and is now locked into them. “It chose its region, including its largest member, China, as the economic community to which it inescapably belongs. It also long ago chose the US as a defence ally to support Australia’s territorial independence and freedom of action.”

There is a good deal of tension between these two choices, but no possibility that either will change, he says. “Like many other enduring foreign policy problems, it cannot be resolved. It must instead be managed.

“However, it can only be managed if the Australian government has a clear and united understanding of Australia’s interests, and competent people to execute policies consistent with that understanding.”

Australia’s trade with East Asia has been growing faster than its gross domestic product and its trade overall for many decades. Our exports to East Asia now account for more than a sixth of our total GDP. Half of these exports go to China, and now amount to 10 times those going to the US.

Australia is meshed with China’s economy not only because China is such a big market for our exports, but also because China is the major trading partner of our other major markets in East Asia: Japan, South Korea, Taiwan and the ASEAN countries.

Today, East Asia and the Pacific form a regional economic community that, in terms of trade and investment between its members, is only a little less integrated than the European Union, and very much more integrated than the North American region.

“Already selling all it can to Japan and Korea, Australia would not find new markets for iron ore and coal to replace even a part of what it now sells to China. Nor could it easily replace exports of wine, meat, dairy products and manufactures to China. The largest share of foreign tourists is from China, as is the largest share of foreign students,” Edwards says.

“Without trade with China, Australia’s living standards would be lower, its economy smaller and its capacity to pay for military defence reduced.” (Generals – armchair and otherwise – please note.)

“It is difficult to imagine plausible circumstances in which an Australian government would voluntarily cut exports to China. Australia cannot and will not decouple from China’s economy any more than Japan, Korea, Taiwan or Southeast Asia can, wish to, or will,” he says.

Australia’s stance towards the US-China competition must therefore be informed by a recognition that what injures China’s prosperity also injures Australia’s prosperity. Economic "decoupling" of China from North America or Europe is not in Australia’s interests.

But “nor will Australia decouple from its security arrangements with America. The US will remain the primary source of advanced military technology for Australia. It will also remain the primary source of security intelligence.

“And no hostile power can entirely discount that possibility that the US would come to Australia’s military assistance if required. The security arrangements Australia has with America are therefore sufficiently valuable that no Australian government would voluntarily depreciate them, let alone relinquish them.”

The tension between these two pillars of Australia’s engagement with the world will continue for decades to come. The centrality of these relationships makes it all the more important for Australia to conduct them carefully and cleverly, always guided by a notion of Australia’s long-term interests, we’re told.

“China’s growing role on the world stage, its authoritarian government, its suppression of internal dissent, its territorial claims and defence build-up in the South China Sea, together with the deterioration of the relationship between the US and China, make this tension increasingly difficult to manage.

“Thus far, the cleverness Australia increasingly needs is not evident in its handling of relations with China . . . Refusing to take sides in the trade and technology competition between China and the US is Australia’s declared policy. It was wisely adopted – but not deftly implemented,” Edwards concludes, with admirable restraint.

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It'll be a long haul to get the economy going properly

If you’ve been away on Mars for the past five months, it will have been a huge surprise to learn this week that the economy is now "officially" in recession. For the rest of us, the news is the size of the recession, how it compares, what contributed most to the contraction, and the cloudy outlook for recovery.

The Australian Bureau of Statistics’ "national accounts" show real gross domestic product fell by 7 per cent in the June quarter, on top of the 0.3 per cent fall in the previous quarter. This is by far the largest fall in any quarter since we began measuring quarterly GDP in 1959.

The next biggest was a fall of 2 per cent in the June quarter of 1974. As Callam Pickering, of the Indeed global job website, reminds us, our total fall since December compares with peak-to-trough falls of 1.4 per cent in our previous recession in the early 1990s, and 3.7 per cent in the recession of the early 1980s.

So, no doubt this is indeed the worst recession since the Great Depression of the 1930s. Why so bad? Because, as David Bassanese of BetaShares tells us, "this is a recession like no other," being caused by the almost instantaneous spread around the world of a deadly virus and the consequences of our efforts to suppress the virus by ceasing much economic activity.

This coronacession is distinguished by its very front-loaded and cruelly uneven nature. “Unlike past recessions, which usually evolve over a year or so, most of the contraction in the economy took place within two short months,” Bassanese says.

The sudden need to lock down much of the economy and get people to leave their homes as little as possible raises the hope that, as the economy is re-opened, much of that activity will be resumed. And if we switch the focus from what’s happening to GDP – the economy’s production of goods and services – to the more important issue of what’s happening to jobs, we see this is already happening.

Treasurer Josh Frydenberg reminds us that, of the 1.3 million people who either lost their job or were stood down on zero hours following the outbreak, more than half were back at work by July.

This suggests we should be able to expect a significant bounce-back in production in the present September quarter, which has less than a month to run. Sorry, Victoria’s second wave and return to lockdown have put paid to that fond hope.

With the rest of the nation re-opening, but Victoria accounting for about a quarter of GDP, the optimists in Treasury are hoping for a line-ball result, but most business economists seem to be expecting a further (though much smaller) fall.

With any luck, however, Victoria should have started re-re-opening by the end of this month. So, a big recovery in production in the run up to Christmas? Sorry. Unless the government changes its tune by then, the economy will be struggling to cope with the withdrawal of much of Scott Morrison’s budgetary support.

Time for some good news. Remember that, no matter how tough things are looking in Oz, they’re looking better than in the rest of the developed world, with the United States losing 9 per cent during the June quarter, the Europeans down 12 per cent, and Britain down 20 per cent.

Why have we been hit less hard? Because we closed our borders earlier and had more success at containing the virus. We didn’t have to lock down as hard and were able to re-open earlier.

Now back to the details of how our 7 per cent contraction came about. The great bulk of it came from consumer spending - accounting for well over half of GDP – which fell by a remarkable 12.1 per cent during the quarter.

Consumption of goods fell a bit, while consumption of services fell hugely. Why? Because staying at home and social distancing slashed our spending on services such as hospitality, recreation and transport (public, car and air).

To the fall in consumer spending we must add falls of 6.8 per cent in new home building and 6.2 per cent in business investment in new equipment and structures. Note that this continued the declines in these two areas that began well before the virus arrived, showing the economy was weak even before the crisis.

This collapse in private sector spending was partly offset by growth in two parts of the economy. First, public sector spending grew by 2.5 per cent, mainly reflecting greater health care costs. (Note that, being "transfer payments", the huge spending on the JobKeeper wage subsidy scheme shows up as an addition to wage income, while the greater spending on JobSeeker unemployment benefits also shows up as an addition to household disposable income.)

This increased government assistance, at a time when job losses meant wage income was falling, actually caused household disposable income to rise by 2.2 per cent. Combined with the remarkable fall in consumer spending, however, this helps explain why the rate of household saving leapt from 6 per cent of household income to almost 20 per cent.

Second, our international trade made a 1 percentage point positive contribution to growth because, although the volume of our exports of goods and services fell, the volume of our imports of goods and services (which subtract from growth) fell by more.

(Just so you know, partly because of this we recorded our largest quarterly current account surplus on record of $18 billion, or 3.8 per cent of GDP. This is our fifth consecutive surplus, the longest run of surpluses since the 1970s. For a financial capital-importing economy like ours, this is actually a sign of economic weakness.)

Remembering that the outlook for coming quarters isn’t bright, I leave the last, sobering word to the ANZ Bank’s economics team: “Significant further stimulus over the next few years is likely to be required to generate growth and jobs and drive the unemployment rate down.”

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Pandemic: inconvenient for the privileged, rough on the poor

The popular coronavirus refrain that "we're all in this together" is a call for everyone to pull together and be more conscious of the interests of others, not just our own. What it's not is a statement of fact.

Far from it. When you take a closer look, what you see is inequality and injustice – on many dimensions. Some of these have been created by the way our governments have decided who gets help to cope with the pandemic and who doesn't.

But others are the consequence of our politicians going for years pushing problems under the carpet because fixing them would just be too expensive for taxpayers.

You and I have generally been content for these problems to be kept out of our sight. But the virus has drawn these injustices to light. In some cases, the victims have continued to suffer in silence. In others, they've continued going about their business in ways that have undermined our efforts to limit the virus's spread.

Like many of us, no doubt, I've been aware of much of this. But the recent writings of Dr Stephen Duckett, of the Grattan Institute, have brought it together in a way that's shocked me. Duckett is the nation's leading health economist. Most of what follows comes from him.

His account begins at the beginning. We congratulate ourselves that we were quick to block the arrival of foreigners who could be bringing the virus with them. We closed our borders to China early, and soon added Iran and South Korea to the list. A planeload of repatriated Chinese Australians from Wuhan was quarantined well away from us at the Christmas Island detention centre.

"However, we baulked when countries like us – white and wealthy – began to show higher levels of infection," he says. "Italy had higher levels of infection than the Asian countries, but our borders remained open to Italians."

The United States was the next source of infections. "Some Aspen skiers, returning home, brought the infection with them. They were asked, probably politely, to self-isolate in their Portsea beach houses. They did not, and the virus spread. The first wave of infections was mostly these international transmissions, returning travellers, probably wealthier than the average Australian."

At that time we didn't know much about the virus, except that it seemed to have started in China. With people of Chinese appearance being vilified in the streets, Australians were not shown at their best (or brightest).

Look at Victoria's second wave, however, and you see people at the other end of the income scale helping to spread the virus and being its greatest victims. Low-paid and poorly trained hotel-quarantine guards, with precarious job security, were the human channels from supposedly quarantined travellers to the guards' families and friends.

It was not by chance that the first areas in the renewed lockdown were social housing towers where immigrant families lived cheek by jowl. "Communication problems with residents were exacerbated by the authorities' failure to adequately recognise the need for cross-cultural communication. And the authorities in turn seemed not to trust the residents, with whom they had little contact," Duckett says.

Generations of neglect of public housing have caused overcrowding in the estates and created the conditions for rapid transmission of disease. The same could be said of jails, where our enthusiasm for locking up offenders has not been matched by our enthusiasm for building new prisons. Then, of course, there's our neglect of residential aged care.

When you think about it, the device of limiting the spread of the virus by locking down large parts of the economy and encouraging people to stay in their homes inevitably hurts the poor more than the well-off.

As a general rule (to which there will always be exceptions, without that stopping the rule from holding much truth), the more skilled, better paid and permanent jobs can be done safely from home, whereas jobs that involve the face-to-face delivery of services are more likely to be less skilled, less well-paid and less secure.

Many of these jobs – particularly in hospitality and tourism – just disappeared, while others kept going, but with greater risk of becoming infected. Health workers were particularly exposed, often with inadequate access to personal protective equipment. Disgracefully, this sometimes led to them being shunned in public.

The "flexibility" afforded by the growth in part-time and casual work has been of great benefit to employers and some benefit to young parents and full-time students. But when casuals work multiple jobs to make ends meet, any infection spreads further. And when they lack paid sick leave, their temptation to keep working despite symptoms is great.

Then there's our treatment of overseas students and others on temporary visas. The moment their costs exceed their benefits to us, we cut them adrift without a shilling.

"The privileged among us have been inconvenienced by the pandemic; the vulnerable have suffered and in some cases died because of its unequal health and economic effects," Duckett concludes.

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We're edging towards a change in economic management

We must be in a recession because I’m getting a lot more letters from readers telling me they’ve figured out how to fix the economy in a way the economists haven’t been smart enough to discover.

Their solutions can be weird and wonderful, but a lot of them boil down to a simple proposition: if the economy’s in recession and unemployment’s high because people aren’t spending enough money, why doesn’t the government just print a lot of money and spend it itself?

But here’s the scoop: the idea that, rather than borrowing to fund their budget deficits – thus incurring big debts and interest bills – governments should just create the money they need has been anathema to economists for the past 40 years, but this may be changing.

There is a growing debate among economists, between the proponents of what they call “modern monetary theory” and more conventional economists and econocrats over whether governments should just create the money they need.

The defenders of the conventional wisdom have had to concede a lot of ground. Whereas a decade ago MMT was lightly dismissed as a crackpot idea, as this radical idea has gained more attention its opponents have had to admit it would be perfectly possible to do. They just think it would be a really bad thing to do.

Trick is, the “unconventional policy” of “quantitative easing” – where the central bank buys second-hand government bonds and other securities and pays for them merely by crediting the seller’s bank account – is quite similar to what the radicals are seeking.

All the major advanced economies – the US, the Eurozone, Britain and Japan - began doing this in big licks in the aftermath of the global financial crisis in 2008, once their official interest rates were so close to zero that they could be pushed no lower.

And now, once this coronacession had prompted our Reserve Bank to drop our official rate to its “effective lower bound” of 0.25 per cent in March, it too has resorted to quantitative easing, promising to buy as many second-hand bonds as necessary to keep the interest rate on three-year government bonds no higher than 0.25 per cent.

So, how exactly would what the Reserve is already doing be very different to what the MMT advocates say it should be doing?

The greatest proponent of MMT is an Australian, Professor Bill Mitchell, from my alma mater, the University of Newcastle. Internationally, its highest profile salesperson is Professor Stephanie Kelton, of Stony Brook University in New York, author of the big-selling The Deficit Myth.

Our leading commentator on the debate is Dr Stephen Grenville, a former deputy governor of the Reserve. And our most vocal opponent of MMT is present Reserve governor Dr Philip Lowe.

Those opponents are right to say there’s nothing new about “modern” monetary policy. In the days before the loss of faith in simple Keynesianism, it was common for governments to fund their budgets partly by selling bonds to the Reserve Bank, rather than to the public.

So the fatwah on governments “printing money” dates back only as far as Milton Friedman and his monetarists’ semi-successful attack on Keynesian orthodoxy in the late 1970s, when all the developed economies had a big problem with high inflation.

Friedman argued that inflation was “always and everywhere a monetary phenomenon” which governments could control by limiting the supply of money. Governments eventually realised that the quantity of money was “demand-determined” and that setting targets for growth in the money supply didn’t work. They switched to using the manipulation of interest rates to target the inflation rate.

As sensible economists always knew, it was never true that creating money always leads to greater inflation. It does so only when the demand for “real resources” – land, labour and physical capital – exceeds the supply of real resources. Only then do you have “too much money chasing too few goods”.

This has been confirmed by the failure of all the money created by quantitative easing since the global financial crisis to cause much, if any inflation, contrary to the predictions of the world’s few remaining monetarists.

The opponents are also right to say, quoting Friedman’s most famous aphorism, that “there’s no such thing as a free lunch” and it’s a delusion to imagine MMT offers one.

As Lowe argued vigorously at his appearance before the Parliament’s economics committee earlier this month, in reply to questions from Greens leader Adam Bandt, it may seem that by creating money rather than borrowing it you’re avoiding a lot of debt and interest payments but, in reality, all you’re doing is delaying and hiding the bill to the government and its taxpayers.

It’s also a delusion (as the leading proponents of MMT acknowledge) that governments would be free to create (or “print”, to use a misleading metaphor) as much money as they needed, without restraint. The restraint is the same one it always was: the limited supply of real resources.

While ever the demand for real resources – the things we use to produce goods and services – is falling short of the supply of those resources, creating money should lead to increased demand for them (provided you do it more effectively than the big central banks did it after the financial crisis).

But once demand was growing faster than the supply of real resources, any further money you created would simply cause inflation. This is what’s really worrying the opponents of MMT (and me). If you let the politicians off the leash to spend as much as they liked up to a point, how would you ever get them to stop once that point was reached?

While ever all we’re doing is quantitative easing, the independent central banks do the deciding, not the politicians. Which brings us to Lowe’s “advanced negotiating position”: why risk letting the pollies start creating money when the government can borrow from the public at interest rates that are pathetically low. And Lowe’s promising to keep them low for as long as necessary.

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The young will carry the worst scars from this recession

When Scott Morrison spoke to the first day of the National Youth Commission's virtual "youth futures summit" on Monday, he sought to assure the young people that, difficult as the pandemic and the economy are at the moment, there is another side to it, "where Australia emerges once again, where we actually do go back to the life that we loved".

I'm sure that's true. But if past recessions are any guide, most of us will have recovered from the coronacession and be back enjoying the life we love long before most of the present crop of youngsters leaving education have found themselves a decent job.

If the past is any guide, the government won't do nearly as much as it should to help those youngsters who, "through no fault of their own", as Morrison would say, had the immense misfortune to be born in the wrong year or three.

And, quite apart from the pain so many young people will suffer, the money the taxpayer saves from that neglect is likely to be exceeded by all the subsequent cost to the budget in healthcare, unemployment benefits and workers whose reduced incomes mean they don't pay as much tax as they might have.

The greatest burden of recessions always falls on the young for the simple reason that employers' automatic response to a recession is to cancel their annual intake of school and university leavers. The deeper the recession, and the slower the recovery from it, the more years that entry-level hiring is postponed.

This was the case for many years after the global financial crisis of 2008 even though, for the rest of us, a recession was avoided.

You've heard that, unusually in this recession, the greatest burden has fallen on women rather than men. But this can be true while it remains true that the young are the greatest losers. That's because a disproportionate share of the women is young.

As summarised for the summit by the independent economist Saul Eslake, recent research by Treasury has found that people who enter the jobs market for the first time during a recession are less likely to change jobs – which means they're more likely to miss out on one of the main ways by which people get pay rises during their first 10 years in the workforce (that is, by changing jobs).

This matters because almost 80 per cent of lifetime wage rises occur during the first 10 years of someone's working life. So the "scarring" effect of leaving education in a bad year lasts for 10 years.

Treasury finds that the scarring effect has been bigger since 2000 than it was in earlier recessions, so that the most recent generations of young people have been affected more than previous generations. And it's worse for women than for men.

All this is consistent with the interim findings of a nationwide inquiry into youths' transition from education to employment, which the National Youth Commission published on Monday. It finds that unemployment for 15- to 24-year-olds is consistently higher than for 25- to 64-year-olds. And that traditional pathways to employment for young people have eroded over the past couple of decades.

One thing that's changed over the years is the growth of underemployment. To the present unemployment rate of 7.5 per cent and rising must be added the underemployment rate of 11.2 per cent, representing those who have some paid work but want more.

Just remember it's the young who dominate the underemployed. Many of them have multiple jobs, but still can't make ends meet. Many are in the "gig economy", whom governments have allowed to be defined as "independent contractors", thus permitting those wonderful innovative outfits that run app-based fast-food delivery and all the rest to sidestep the legal obligations of an employer.

Remember, too, that the seeming epidemic of "wage theft" – which, by their neglect, governments have done too much to allow and too little stamp out – would be perpetrated particularly on the young.

Unsurprisingly, the inquiry found the (pre-pandemic) levels of the youth allowance and unemployment benefits – which successive governments have frozen in real terms for 25 years – are inadequate. It's the young who suffer most from this parsimony.

Morrison and his ministers have repeatedly defended the $40 a day by saying people are on the dole only temporarily before they find a job. That was certainly the reasonable expectation in the past. Now, however, it's one of the respects in which the inquiry found the system no longer fit for purpose.

Another respect is, it's no longer true that most jobs for young people are full-time. Only in the past month has the government temporarily changed the means test to encourage the unemployed to look for part-time jobs. Pity so few of them are on offer at the minute.

The youth commission has proposed a detailed "youth futures guarantee" laying out reforms and measures that would better support our young people in meeting the challenges they face. Challenged to respond to the proposal, Morrison was masterfully noncommittal.

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Pandemic could kill off governments' credit rating bogeyman

I guess we shouldn’t be surprised that an economic shock as big as the pandemic is breaking down longstanding rules – written and unwritten - about how the national economy should be managed.

One rule is the rigid demarcation between fiscal (budgetary) policy and monetary (interest-rate) policy. Another is that the states leave management of the macro economy to the feds, and stick to a Good Housekeeping approach to their own budgets. A third is that there should be free trade and movement between the states.

A corollary of the strict separation of fiscal policy and monetary policy is that the federal government and its Treasury should leave all public comment about the appropriate levels of interest rates and the dollar to the independent Reserve Bank, while the Reserve makes no public comment on the appropriate levels of government spending, taxation and budget deficits.

On that convention, Reserve governor Dr Philip Lowe has been stretching the friendship almost since the day he took the job in 2016. His problem is that macro management works best when both arms of policy are pushing in the same direction: either moving the economy along or holding it back.

But whereas his goal has been to use low interest rates to stimulate a weak economy and get unemployment down, the Abbott-Turnbull-Morrison government’s goal has been to tighten fiscal policy and turn the budget deficit into a surplus.

Lowe hasn’t been able to resist the temptation to note - repeatedly - that he could do with more help from fiscal policy. And as the level of interest rates has fallen further and further towards zero, he’s been more and more outspoken. Now the official interest rate has reached the “effective lower bound” of 0.25 per cent, he’s been even more importuning.

But in his evidence to the House of Reps economics committee a fortnight ago, he moved to putting the hard word on the premiers. Replying to a question about fiscal stimulus, he said: “I think we need both the federal government and the state governments carrying their fair share.

“The federal government, I understand, has announced measures so far equivalent to roughly 7 per cent of gross domestic product ... The measures to date from the state governments add up to close to 2 per cent of GDP ...

“The challenge we face is to create jobs, and the state governments do control many of the levers here. They control many of the infrastructure programs. They do much of the health and education spending. They’re responsible for much of the [regular] maintenance of much of Australia’s infrastructure.

“So I would hope, over time, we would see more efforts to increase public investment in Australia to create jobs, and the state governments have a really critical role to play there.”

At the national cabinet meeting on Friday, we’re told, Lowe told the premiers they should collectively spend $40 billion over the next two years – equivalent to 1 per cent of GDP per year – on job creation measures, including infrastructure, social housing and training.

Trouble is, the states have already done about as much as they can without exceeding the borrowing limits set by the credit-rating agencies, and so endangering their triple-A ratings. So what’s Lowe’s solution to that problem? Dooon worry about ’em.

At the parliamentary hearing, he said: “From my perspective, creating jobs for people is much more important than preserving the credit ratings. I have no concerns at all about the state governments being able to borrow more money at low interest rates. The Reserve Bank is making sure that’s the case.”

At one level, this is a sign of the momentous times we live in. Governments around the world are borrowing massively as the only way they can think of to overcome the coronacession. With interest rates on long-term government borrowing at unprecedented lows, what have they got to fear?

In effect, they’re daring the three big American for-profit rating agencies to downgrade them. And so far, those supposedly righteous judges haven’t accepted the dare. Perhaps they’re remembering the time after the global financial crisis when one of them had the temerity to downgrade US government bonds. No one took any notice.

The presumed penalty for being downgraded is that the bond market increases the interest rate it requires to lend to you. But what if the market has stopped listening? In any case, with interest rates ultra-low, why should anyone fear having to pay a tiny fraction more?

At another level, however, this is Lowe telling Treasuries, federal and state, that the jig is up. Ever since the mid-1980s, they’ve used the threat of a rating downgrade as a stick to wave over the heads of the spending ministers, to limit their spending. They’ve used the rating agencies as the ultimate policemen enforcing Smaller Government.

Not any more, it seems. Right now, apart from the appalling prospects for unemployment, Lowe has bigger worries: the push from the proponents of “modern monetary theory” urging governments to stop funding their budget deficits by borrowing from the public and just print the money they need.

In Lowe’s mind, this would be the ultimate breach of the separation of fiscal policy and monetary policy. The elected government would be telling the independent central bank how much money to create.

Lowe would be willing to bend the rules a lot to avoid this ultimate breach. He certainly wouldn’t want the rating agencies adding to the pollies’ temptation to print rather than borrow. But he would be willing to resort to “unconventional measures” and buy big quantities of second-hand Commonwealth and state government bonds and so ensure their interest-rates stay ultra-low.

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It may be a terrible recession, but it could have been worse

In economics, everything is relative. Relative to you, the coronacession is likely to be the worst economic disaster you’ll experience in your lifetime. Relative to Australia, it is – as the media (including yours truly) keep telling us – the worst recession since the Great Depression of the 1930s.

But, as a report published this week by the Lowy Institute reminds us, there’s another side of the story. Relative to what we were expecting initially, the recession isn’t as bad as feared. And relative to many other developed economies, we’ve got off lightly.

The report is by Dr John Edwards, a former member of the Reserve Bank board. Perhaps in reaction to his former career as a journalist, Edwards has a penchant for highlighting the aspects of an economic story his former colleagues have tended to gloss over. Which means he finds the not-so-bad bits – and so is always worth hearing from.

How badly a country is suffering economically is largely a function of how well it responded to the pandemic. Those that followed the medicos' injunction to "go early, go hard" have done better than those that procrastinated. Fortunately, and thanks in large part to Scott Morrison’s leadership, we’re in the former group.

Edwards says that, because of our early success in controlling the virus, the "pandemic in Australia is fading sooner and with less economic damage than expected. While the secondary wave of infection in Victoria is a big setback and there may yet be other regional or local outbreaks, the economic recovery already evident is set to continue."

The pandemic "from which Australia is now emerging was the most abrupt, savage and frightening economic shock in the lifetime of most Australians. But the jolt was also short and unexpectedly shallow."

If you judge it by the progress of the economy’s output (real gross domestic product), you may not be convinced the recovery has begun. But judging it by the state of the jobs market, which is what matters most, leaves little doubt.

The best measure of the immediate employment response is the total number of hours worked in the economy. Between March and April we experienced an astonishingly swift fall of 9 per cent. The following month it fell by less than 1 per cent. In June, however, it rose by 4 per cent. The 1.3 per cent rise in July signals a slowdown in the rate of the jobs recovery.

So in July we were still down 5 per cent on July 2019. But here's Edwards’ other way of looking at it: "Through the four months of what was widely portrayed as a general economic cessation, a large proportion of Australian employees kept working.

"New networking technologies permitted most office work to be performed at home. Mining and farming continued. So did much of manufacturing and construction. Electricity, gas and water utilities employees kept their jobs.

"Throughout Australia, public servants continued working, often at home. Tradespeople, cleaners and gardeners more often than not were working. Most health employees remained on the job, busier than ever. Childcare facilities remained open in most places and, where necessary, classroom teaching continued remotely. Media workers struggled to keep up with the demand for news and entertainment.

"The economic cessation, such as it was, centred on restaurants, clubs, pubs and accommodation, discretionary retail such as clothing and furniture, local and international travel, sports, entertainment, and the arts.

"Take-up of the JobKeeper program, which helped businesses retain employees, was far lower than expected because the economic damage was less than expected. All up, most of the Australian workforce remained on the job, either from their usual place of work or from home."

Surprisingly, most of the economic downturn took the unusual form of a sudden cessation in household consumption.

While it’s true that colleges and universities have been hurt by the suspension of foreign student arrivals, Edwards says the majority of international students living in Australia before the pandemic stayed. Indeed, many of them had little choice. Quarantines will remain necessary, but plans are now being made to permit the resumption of student arrivals.

More than nine million foreigners, mostly tourists, visited Australia last year. The number arriving since March this year is “scarcely worth counting," he admits. The resumption of mass foreign travel, unimpeded by quarantine, awaits not only the discovery and approval of a vaccine, but also its worldwide distribution in millions of doses.

But get this: in the short term, however, the suspension of normal international travel actually adds to Australia’s gross domestic product. That’s because Australians’ spending abroad exceeds foreigners’ spending in Australia.

Now, compare how we’ve fared with how the other rich countries have. Taking total coronavirus deaths as a proportion of the population, Edwards calculates that our rate is less than a thirtieth of the rates for the United States and Britain.

So it’s little wonder our economy hasn’t been as badly hit. Using the forecasts of the International Monetary Fund, the economic contraction in the United States, the whole of the Euro area, Britain and Canada will be twice the size of our contraction.

Global economic growth will be lower than it would otherwise have been for years to come. And, "while unemployment will be the principal domestic problem, the changing global context will also shape the Australian economy for years to come", Edwards predicts.

Doesn’t sound good. But he has found a silver lining: “The impact for Australia of lower global demand and production is mitigated because three-quarters of its goods exports are to East Asia, a region that is growing faster than Europe or the United States and which, in most cases, has handled the pandemic well.

"While world output [gross world product] will contract nearly 5 per cent in 2020 on IMF forecasts, developing Asian countries will contract by less than 1 per cent."

For us, it all could have been much worse.

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We've been electing governments that damage our kids' future

One of the most dismal ideas for our youth to entertain is that their lives won't be as comfortable as their parents'. Everyone in the older generation knows how much their lives have improved over the decades, and how much better off we are than our parents were.

We've come to regard continuous improvement in living standards and quality of life over the generations as part of the natural order. Our pay-off for living in a capitalist economy.

So how can our kids have become so pessimistic about the future? How can they imagine their parents would allow such an appalling prospect to befall their offspring? Isn't improving their kids' chances in life a big part of the reason parents work so hard?

Isn't it why so many parents pay so much to send their kids to private schools? Isn't preserving their kids' inheritance the reason the well-off retired fought so hard against Labor's plan to take away their dividend franking credits?

How could any government that presided over a significant deterioration in our children's prospects hope to survive?

Trouble is, the kids are right to be so pessimistic. We can't know what the future holds, but we do know that various trends in that direction are well-established.

And the plain truth is that one way governments have got themselves elected and re-elected in recent decades has been to pursue policies that favour the old and don't worry about the young.

Politicians have been tempting us to put our immediate interests ahead of our offspring's future – and it's worked a treat.

This week the Actuaries Institute of Australia published a new index of intergenerational equity, which compares the "wealth and wellbeing" of people aged 65 to 74 with that of people aged 25 to 34 between 2000 and 2018.

Note that this is before any effect of the coronacession. And remember that the faces in these two aged groups keep changing as people age. No one who was between 65 and 74 in 2000 is still in that group now.

Since the Baby Boomers were born between 1946 and 1964, probably more than half of them were in the 65 to 74 age range by 2018. And the Millennials were joining the 25 to 34-year-olds.

The actuaries have divided "wealth and wellbeing" into six "domains": economic and fiscal (allocated a subjective weighting of 30 per cent in the index), health and disability (20 per cent), social (including rates of homelessness, incarceration and being a victim of robbery; 15 per cent), environment (15 per cent), education (10 per cent) and housing (10 per cent).

The scores for people aged 65 to 74 in 2000 were given an index value of 100. In the same year, the scores of people aged 25 to 34 amounted to 70. It's hardly surprising that people 40 years younger have significantly lower scores. They've had much less time to gain promotion, earn, save and pay off a home (or even receive an inheritance).

No, what matters more is how the two groups' scores have changed over time. Over the 18 years, the older group's score has risen to 115, whereas the younger group's score has fallen to 69.

Turning to the size of the young's deficit relative to the old, it improved from minus 30 to minus 11 between 2000 and 2006 – presumably mainly because the young did well in the resources-boom-driven labour market – but then deteriorated to minus 20 by 2012.


That year, 2012, was when the resources boom started winding down. And it was when the Baby Boomers started reaching 65. Over just the six years to 2018, the young's deficit relative to the old worsened dramatically to minus 46.

But why has the position of the young relative to the old deteriorated so badly since 2006? Well, they've benefited from improving health, as life expectancy has increased and rates of disability have decreased.

They've benefited also from increasing levels of educational attainment and, socially, from modest reductions in the gender pay gap and falling rates of robbery (which affect the young more than the old).

But these gains have been more than countered by losses in other domains. In ascending order of loss, young people have suffered economically as, since the global financial crisis, education-leavers have taken much longer to find full-time jobs; government spending has been skewed towards older generations (higher spending on health, pensions and aged care, but less on the rate of unemployment benefits) and public debt has risen.

The young have suffered in housing, as the rate of home ownership for their age group has dropped from 51 per cent to 37 per cent over the past two decades. But their greatest loss (sure to grow in coming years) is from the deterioration in the natural environment: rising carbon emissions and temperatures, the drying Murray-Darling Basin and declining biodiversity.

And all these trends before the likely weak and prolonged recovery from the coronacession scars the careers and lives of another generation of education-leavers, without governments or voters being too worried about it.

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