Economies malfunction when we can't trust our leaders

With the federal, NSW and Victorian governments all mired in questionable conduct but refusing to accept responsibility for their actions, a reminder of the value of ethical behaviour to the good governance of the nation is timely.

A report, The Ethical Advantage, by John O’Mahony, of Deloitte Access Economics, and commissioned by Dr Simon Longstaff’s Ethics Centre, reminds us that while ethical behaviour and trust are different things, a long record of ethical behaviour builds trust, which can be quickly destroyed by unethical behaviour.

To be successful, business leaders need the trust of their customers, employees and suppliers. The less people trust them, the harder they must work – and the more they must spend on marketing and security – to remain profitable.

It’s true you can go for a fair while abusing the trust of others, but when eventually they wake up, they tend to be pretty dirty about it. For years our banks took advantage of their customers’ trusting inattention by, for instance, failing to advise loyal customers of the better deals they were offering new customers. Now they wonder why their customers hate and distrust them.

Years of declining standards of behaviour on both sides of politics, and refusal to accept responsibility when things go wrong, have led to declining levels of trust in our politicians, and lowering respect for our leaders.

The imminent threat posed by the pandemic prompted our federal and state leaders to stop bickering and pull together, with oppositions anxious to be co-operative. The result was a marked increase in public confidence in the Prime Minister and premiers – a bonus Queensland’s Annastacia Palaszczuk banked on Saturday.

But no sooner had the threat eased – but not passed – than we were back to politics as usual. Our leaders don’t lead, they try to score points off their opponents. Great way to kill their newfound popularity.

Unsurprisingly, the report finds that there remains significant scope for us to raise our levels of ethical behaviour and trust. The Governance Institute of Australia’s ethics index, based on an annual survey of Australians’ perceptions of the level of ethical behaviour in society, gave us a “somewhat ethical” score of plus 37 on a scale of minus 100 to plus 100.

This was for last year, before the pandemic, and down from plus 41 in 2017. Across industries, healthcare was seen as the most ethical, with a score of plus 67. Then came education, charities and not-for-profits, and agriculture. Banking, finance and insurance was seen as the least ethical industry, with a score of minus 18.

According to the 2020 Edelman Trust Barometer, just 47 per cent of Australians trust business, government, media and our non-government organisations to do the right thing. Worse, none was seen as strongly competent or ethical – with government being seen as the least competent and ethical out of all our institutions.

Remembering the “steady stream of state and federal political scandals”, the report says, this weak ethical performance is no surprise. Royal commissions have uncovered unconscionable behaviour in religious and other institutions, widespread misconduct in the banking, superannuation and financial services industry, and alarming lapses in aged care quality and safety.

Behaving ethically requires us think a lot about what’s right and wrong in the things we do, the way we treat people and the choices we make. For some action to be legal doesn’t make it ethical. Grant Hehir, Commonwealth Auditor General, says “we care not only about whether an entity is following the legal rules, but also whether it is acting within the intent of the law and community expectations”.

Nor is an action ethical because “it’s what everyone does”. Professor Ian Harper, of Melbourne University Business School, says “we all have values and moral convictions – ethics is about having the courage to apply these in the real world”.

The report says that, apart from the pandemic, we’re facing big challenges to our future, including from climate change, an increasingly risky geo-political environment, new technology and the future of work, and reconciliation with Indigenous Australians.

The actions needed to cope with these challenges “will require leadership of a quality that enables society to cohere in the face of external and internal pressures that would otherwise cause divisions.

“In these circumstances, trust will be at a premium – especially for key institutions. In turn, this will depend on the quality of ethical decision-making by individuals, groups and organisations,” the report concludes.

When the unethical behaviour of business and politicians causes them to lose the public’s trust, governments lose the ability to make tough “reforms”. As the pandemic demonstrates, only when politicians can clearly be seen as acting in the whole public’s best interests will they be safe at the polls.

Read more >>

How inflation became a big problem, but has disappeared

Treasury Secretary Dr Steven Kennedy observed this week that there’s been “a fundamental shift in the macro-economic underpinnings of the global and domestic economies, the cause of which is still not fully understood”. He’s right. And he’s the first of our top econocrats to say it. But he didn’t elaborate.

This week we got further evidence of that fundamental shift. The Australian Bureau of Statistics’ consumer price index for the September quarter showed an annual “headline” inflation rate of 0.7 per cent and an “underlying” (that is, more reliable) rate of 1.2 per cent.

This is exceptionally low and is clearly affected by the coronacession, as you’d expect. But there’s more going on than just a recession. Since 1993, our inflation target has been for annual inflation to average 2 to 3 per cent. For the six years before the virus, however, it averaged 1.6 per cent. And most other rich countries have also been undershooting their targets.

So, part of the “fundamental shift” in the factors underpinning the global economy is that inflation has gone away as a significant problem. But why? As Kennedy says, these things are “still not fully understood”. Some economists are advancing explanatory theories, which the other economists are debating.

Former Reserve Bank governor Ian Macfarlane, who has form for being the first to spot what’s happening, offered his own explanation of the rise and fall of inflation in a recent Jolly Swagman podcast.

Macfarlane says that, though every developed economy’s experience is different, they’re all quite similar. If you stand well back and look at the rich countries’ experience over the past 60 years, he says it’s not too great a simplification to say that two phases stand out: inflation rose in the first phase to reach a peak in the mid-1970s to early 1980s, but then fell almost continuously until we reached the present situation where it’s below the targets set by central banks.

In our case, we had double-digit inflation in the ’70s and rates of 5 to 7 per cent in the ’80s, then a long period within the target range until about six years ago. Since then it’s been below the target “despite the most expansionary monetary policy [the lowest interest rates] anyone can remember”.

So how is this experience of roughly 30 years of rising inflation, then 30 years of falling inflation explained? Macfarlane thinks there are about half a dozen reasons for the worsening of inflation in Australia.

For a start, the growth of production and employment during the 30-year post-war Golden Age was stronger than any period before or since. We had high levels of protection against imports, with little or no competition from developing countries.

We had a strong union movement, confident that in pushing for higher wages it wasn’t jeopardising workers’ job prospects. We had a centralised system for setting wages, with widespread indexation of wages to the consumer price index.

Our businesses took a “cost-plus” approach to their prices. If wages or the cost of imported components rose, this could be passed on to customers, confident your competitors would be doing the same. That is, firms had “pricing power”.

Finally, businesses’, unions’ and consumers’ expectations about how fast prices would rise in future were quite low at the start of the period, but they picked up and, by the end, had become entrenched at a high rate.

“This macro-economic environment was clearly conducive to rising inflation, and it took one policy error to push it over the limit,” Macfarlane says.

Under the McMahon government – predecessor of the Whitlam government – fiscal policy was made expansionary even though the inflation rate was already 7 per cent. Monetary policy was eased, with interest rates remaining below the inflation rate. And the centralised wage-fixing system awarded 6 or 9 per cent pay rises.

So, that’s how we acquired an inflation problem. What changed in the second 30-year period of declining inflation? Macfarlane thinks “the defining feature of the later period was that, in the long struggle between capital and labour, the interests of capital took precedence over those of labour”.

That is, the bargaining power of labour collapsed. In most countries the labour share of gross domestic product has declined, with the profits share increasing. Wage growth has been restrained, union membership has shrunk and the inequality of income and wealth has increased.

“These features have been most pronounced in the US, but many other countries, including Australia, have shown most of the same signs,” he says.

Two main developments account for this change. First, globalisation. The rapid growth of manufactured exports from China and the developing world pushed down consumer prices. More importantly, businesses and workers in the rich world realised that firms or whole industries could be shifted to countries where wages were lower.

Businesses had lost pricing power and sought to maintain profits by cutting costs and reducing staff levels. Union members became more concerned with saving their jobs than pushing for higher wages.

Second, labour-saving technological advance. In manufacturing, sophisticated machines started replacing workers. In the much bigger services sector, advances in information and communications meant that armies of state managers, regional managers and other middle management were no longer needed. Clerical processes were automated. Call centres were cheaper than a network of offices. Customers could buy on the internet, without the need for shop assistants.

As the period of high inflation passed into distant memory, Macfarlane says, inflationary expectations fell. Inflation expectations – whose importance comes because they tend to be self-fulfilling – change very slowly. It took decades for them to rise in the earlier period and, now, after nearly three decades of moderate and low inflation, it will take a long time before higher inflationary expectations are rekindled.

I see much truth in Macfarlane’s explanation. But it certainly means there’s been a “fundamental shift” in the factors bearing down on the economy – the implications of which we’re yet to fully realise, let alone fix.

Read more >>

Privatisation crusade is core business for tribal Libs

Critics of this year’s strange budget, which claims to be “all about jobs” but is really about helping some people and not helping others, accuse Scott Morrison and his faithful Treasurer of being “ideological”. That’s not a sensible criticism.

To accuse someone you disagree with of being “ideological” is dishonest and hypocritical. It misuses the word, turning it into a meaningless term of abuse. It implies that you’re being ideological, but I’m not.

To be ideological is to hold to a system of beliefs about how the world works and how it should work. So every adult who hasn’t wasted too much of their life watching reality television rather than thinking has an ideology — some better thought through than others.

When I accuse you of being “ideological”, what I’m really saying is that your ideology differs from my ideology and I think yours is wrong.

But I object to the term also because it’s an attempt to intellectualise and dignify a motivation far less noble: our deeply evolutionary instinct to form ourselves into tribes. My side, your side. Us and them. Good guys versus bad guys.

In politics, partisanship leads to polarisation and polarisation to policy gridlock and impotence. For example, look at the dis-United States. The richest, smartest big country in the world has been hopeless at coping with the pandemic, with many, many deaths. The Democrats and Republicans refuse to co-operate on anything. They’ve even turned mask wearing into a partisan issue.

It’s not so surprising that Morrison and Josh Frydenberg have been happy to justify their widely criticised budget choices by reference to their own ideology, saying the budget strategy “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”.

These “core values” are elaborated on the Liberal Party website. “We work towards a lean government that minimises interference in our daily lives, and maximises individual and private sector initiative.”

“We believe ... in government that nurtures and encourages its citizens through incentive, rather than putting limits on people through the punishing disincentives of burdensome taxes and the stifling structures of Labor’s corporate state and bureaucratic red tape.”

“We believe ... that businesses and individuals — not government — are the true creators of wealth and employment.”

To summarise, the individual is good, the collective is bad. Private good, public bad. Government is, at best, a necessary evil, to be kept to an absolute minimum.

Sorry, but this is just tribalism — the Liberal private tribe versus the Labor public tribe — masquerading as eternal truth. It’s phoney party-political product differentiation. Vote Liberal for low taxes; vote Labor for high taxes. Really? I hadn’t noticed much difference.

Private good/public bad makes no more sense than its left-wing opposite, public good/private bad. Both are a false dichotomy. It takes little thought to realise that the two sectors of the economy have different and complementary roles to play. One could not exist without the other, and we need a lot of both.

The individual and the collective. Competition and co-operation. Both sectors do much good; both can screw up. The hard part is finding the best combination of the two somewhere in the middle, not at either extreme.

As Frydenberg has often said, the budget’s strategy is to bring about a “business-led” recovery. This explains why most of the money it spends or gives up goes to business as tax breaks. Tax cuts and cash bonuses to individuals come a poor second and direct spending on job creation has largely been avoided.

Frydenberg justified this by saying that “eight out of every 10 jobs in Australia are in the private sector. It is the engine of the Australian economy.”

Surely he’s exaggerating, I thought on budget night. But I’ve checked and it’s true. Or rather, it is now. These days, 89 per cent of men and 81 per cent of women work in the private sector, leaving just 15 per cent of workers in the public sector.

In 1994, before the mania for privatisation and outsourcing took hold, 28 per cent of employees worked in the public sector (with two-thirds of those working for state governments).

The electricity, gas and water utilities used to be almost completely public sector. Now they’re 78 per cent private. Sale of the Commonwealth Bank, state banks and insurance companies mean the finance sector is almost totally private.

The sale of Qantas and Australian Airlines, ports and shipping, airports and much public transport means employment in the transport industry is 90 per cent private. Despite state government ownership of schools, TAFEs and universities, employment in education is now only 54 per cent public.

Despite health and community services being largely government-funded, three out of four workers are privately employed.

See what’s happened? With some help from their rivals, the Libs have worked tirelessly over the past 25 years moving workers from the Labor public tribe to the Liberal private tribe. Haven’t you noticed the big improvement?

Read more >>

Putting pollies back behind the wheel means a bumpier ride

This budget marks a historic shift in how the macro economy is managed. After 30 years, the dominant influence has moved from monetary policy (interest rates) to fiscal policy (the budget). Which means day-to-day economic power has transferred from the econocrats back to the politicians.

And as Paul Bloxham, of the HSBC bank, has reminded us, that means we’re in for a bumpier ride. It’s a fair bet that our days of a long gap between recessions are over and we’ll return to having recessions about every seven years, not every 30.

With monetary policy having run out of puff, the coronacession has seen almost all the heavy lifting left to fiscal policy. Whereas before, the Reserve Bank could cut interest rates to get households and businesses borrowing and spending, now it has to be the government that spends our way back to recovery and lower unemployment.

To see how big this change is, we must go back in time. In the Golden Age of the 30 years after World War II, governments in all the rich economies used their budgets – changes in taxes and government spending – to smooth the economy’s path through the business cycle and keep it never far from full employment.

In some years a small surcharge was added to the rates of income tax; in others, a small discount was subtracted. The role of monetary policy was subsidiary and subordinate. Central bankers’ job was always to keep interest rates low.

But after the first OPEC oil price shock of 1973 (just before I became an economic journalist) it became clear the developed economies had a chronic problem with inflation, It stayed high even when the economy turned down.

It took some years – and much argument - for the world’s economists and econocrats to decide why economies had begun to malfunction and what to do about it. They had to find a way to get inflation under control.

A new conventional wisdom developed that monetary policy should become the primary instrument used to stabilise the economy’s path through the business cycle, with fiscal policy relegated to the medium-term role of ensuring levels of public debt didn’t get too high.

After the failed experiment of using monetary policy to target growth in the supply of money (a quantity), it was decided that central banks should use the manipulation of short-term interest rates (a price) to target the rate of inflation directly. To do this successfully, each country’s central bankers would need independence of the elected government, thus giving them a free hand on rates.

The major developed countries got inflation back in its box in the 1980s and we followed in the ’90s, after a deep recession had knocked the stuffing out of the economy, and the Reserve Bank had adopted its present inflation target in 1994, with the incoming Howard government formalising the Reserve’s independence in 1996.

I think turning the setting of interest rates over to the econocrats does much to explain how we managed to go for almost 30 years without a serious recession. Under the pollies, rates had been set more to fit the electoral cycle than the business cycle, and macro management had been erratic.

By contrast, former governor Bernie Fraser raised rates in the run-up to the Keating government’s defeat in 1996 and former governor Glenn Stevens raise rates during the 2007 election campaign, at which the Howard government was defeated.

Another factor contributing to our record period without a recession was the micro-economic reforms – particularly the move away from centralised wage-fixing – that made the economy less inflation-prone and thus easier to keep on a stable course.

But with the demise of inflation has come the impotence of conventional monetary policy. The central bankers will do what they can to still look relevant but, really, it’s the politicians who are back at the economy’s driving wheel.

And the sad truth is that politicians rarely manage to put the economy’s best interests ahead of their political objectives. This year’s one-year, fold-away budget is a good example. We’re told it’s “all about jobs” but, in truth, its measures will do far less to create jobs than they could have because they’ve been chosen to advance the Liberals’ “core values” of “lower taxes and containing the size of government”.

This translates as keeping new government spending projects temporary and brief (because government spending favours poor people less likely to vote Liberal) and keeping tax cuts and tax breaks permanent (because these favour people more likely to vote Liberal).

Trouble is, the Smaller Government push fitted well with macro management being left to monetary policy, but it’s a bad fit with our new-found dependence on fiscal policy to get people back into jobs.

The bumpy ride we’re in for is unlikely to mean a return to high inflation (sometimes I wish it did). No, it means weak economic growth and high unemployment while the Coalition – and the voters – learn the hard way that, in today’s world, Smaller Government and full employment are incompatible.

Read more >>

Budget's infrastructure spend more about sex appeal than jobs

Economists haven’t been enthused by inclusion in the budget’s big-ticket stimulus measures of $11.5 billion in road and rail projects. Why not? Because spending on “infrastructure” often works a lot better in theory than in practice.

Economists were more enthusiastic about infrastructure before the pandemic, when Scott Morrison’s obsession with debt and deficit had him focused on returning the budget to surplus at a time when this was worsening the growth in aggregate demand and slowing the economy’s return to full employment.

Reserve Bank governor Dr Philip Lowe pointed out that, unlike borrowing to cover the government’s day-to-day needs, borrowing to fund infrastructure was a form of investment. The new infrastructure could be used to yield benefits for decades to come, and so justify the money borrowed. Indeed, well-chosen infrastructure could increase the economy’s productive efficiency – its productivity – by, for instance, reducing the time it took workers to get to work or the cost of moving goods from A to B.

Another motivation was the high rates of population growth the government’s immigration program was causing. More people need more infrastructure if congestion and shortages aren’t to result, and thus worsen productivity.

But much has changed since then. The arrival of the worst recession in many decades has changed our priorities. We’re much less worried about debt and deficit and much more worried about getting the economy going up and unemployment coming down. And we don’t want economic growth so much to raise our material standard of living as to create more jobs for everyone needing to work.

Because infrastructure involves the government spending money directly, rather than using tax cuts and concessions to transfer money to households and businesses in the hope they’ll spend it, it should have a higher “multiplier effect” than tax cuts.

But as stimulus, infrastructure also has disadvantages. Big projects take a long time to plan and get approved, so their addition to gross domestic product may arrive after the recession has passed. And major infrastructure tends to be capital-intensive. Much of the money is spent on materials and equipment, not workers.

In a budget we’re told is “all about jobs”, many economists have noted that the same money would have created far more jobs had it been spent on employing more people to improve the delivery of many government-funded services, such as education, aged care, childcare and care of the disabled.

Most of those jobs are done by women. Infrastructure is part of the evidence for the charge that this is a “blokey” budget, all about hard hats and hi-viz vests.

If there’s a TV camera about, no one enjoys donning the hard hat and hi-viz more than our politicians – federal and state, Labor and Liberal, male and female. And it turns out that “high visibility” is another reason economists are less enthusiastic about infrastructure spending than they were.

In practice, many infrastructure projects aren’t as useful and productivity-enhancing as they could be because they’ve been selected to meet political objectives, not economic ones.

Politicians favour big, flashy projects – preferably in one of their own party’s electorates – that have plaques to unveil and ribbons to cut. It’s surprising how many of these projects are announced during election campaigns.

An expert in this field, who keeps tabs on what the pollies get up to, is Marion Terrill, of the Grattan Institute. She notes that since 2016, governments have signed up to 29 projects, each worth $500 million or more. But get this: only six of the 29 had business cases completed at the time the pollies made their commitment.

So “politicians don’t know – and seemingly don’t greatly care – whether it’s in the community’s interest to build these mega-projects,” she says.

Terrill says the $11.5 billion new infrastructure spending announced in the budget includes a mix of small and large projects, such as Queensland’s $750 million Coomera Connector stage one, and $600 million each for sections of NSW’s New England and Newell highways.

The money is being given to the state governments to spend quickly, and it will be taken back if they don’t spend it quickly enough.

Which they may not, because the new projects go into an already crowded market. Federal and state governments have been pumping money into transport construction for so long that, even two years ago, work in progress totalled an all-time high of about $100 billion.

By March this year – before the coronacession – the total had risen to $125 billion, Terrill calculates.

In some states at least, the civil construction industry – as opposed to the home construction industry – is already flat chat. It’s hardly been touched by the lockdown and doesn’t need the support it will be getting. Just how long it takes to work its way through to the new projects, we’ll see.

Terrill notes that the bulging pipeline of infrastructure construction built up before the pandemic was all about responding to the high population growth we’d had for years, and imagined we’d have forever.

But the pandemic’s closure of international borders – and parents’ reluctance to bring babies into such a dangerous world - has brought our population growth to a screaming halt. The budget papers predict negligible population growth this financial year and next, with only a slow recovery in following years. That is, we’re looking at a permanently lower level of population, and maybe a continuing slower rate of population growth.

Terrill says that, rather than ploughing on, we should reassess all the road and rail projects in the pipeline when we’ve got a clearer idea of what our future needs will be. And when we have a better idea how social distancing may have had a lasting effect on workers’ future travel and work patterns.

What’s so stupid about mindlessly piling up further transport projects is that the glitz-crazed pollies are ignoring a real and long-neglected problem: inadequate maintenance of the roads and rail we’ve already got. No sex appeal, apparently.

Read more >>

Budget is blokey because Morrison's 'core values' make it so

I'm sorry to have to agree, but Grattan Institute boss Danielle Wood is right to say this is a "blokey" budget. As are those who add it's a blokey budget from a blokey government.

Scott Morrison is offended by the charge, but the trouble is, the blokier you are, the harder it is to see what's blokey and what's not. Women see it sticking out, but blokes often can't.

The simple truth is that, over the centuries, what economists call the "institutional arrangements" that make up the economy have been designed by men, for the convenience of men. This was fine when the great majority of the paid (note that word) work was done by men, but not so fine now women are better educated than men and make up 47 per cent of the paid workforce.

It's because the blokiness of the way we've always managed the economy is so deeply ingrained in the way we've always thought about the economy that so many men can't see it. Outsiders can; insiders can't. To steal a phrase from the feminists of my youth, it's now the men who need the "consciousness raising".

(Of course, it's nothing new that people can see their own point of view – and their own vested interest – far better than they can see other people's.)

The first place a bias in favour of men is hidden is the division we make between the production of "goods" (by the agriculture, mining, manufacturing, utilities and construction industries) and the production of "services" by every other industry.

Kevin Rudd's declaration that he didn't want to be prime minister of a country that didn't "make things", and Morrison's similar noises recently, are manifestations of the truth that, in general, jobs in the goods sector are held in higher esteem than those that involve performing services.

Would it surprise you to learn that 79 per cent of the jobs in the goods sector are held by men whereas, in the almost four-times bigger services sector, 54 per cent of the jobs are held by women?

Would it surprise you that jobs held by men tend to be more senior and higher-paid than jobs held by women? Even within the services sector – which, of course, includes a lot of highly paid occupations, such as prime ministers and premiers, managers, doctors, dentists and lawyers.

Over the past 50 years, almost all the net growth in jobs has been in the service industries. This is because the production of goods has become increasingly "capital-intensive" (more of the work is done by machines), whereas the services sector is, by its nature, labour-intensive.

It's no accident that most of these extra service sector jobs have been filled by women, returning to the workforce or never really leaving it. Much of this growth has been in what the National Foundation for Australian Women's latest Gender Lens on the Budget report calls the "caring professions" – nursing, childcare, aged care and disabled care.

Would it surprise you that caring jobs are done mainly by women and tend to be low-status and low-paid? Surely it's obvious that being in charge of an expensive machine is a far more responsible role than being in charge of children, the elderly, the sick or disabled?

Although the coronacession is unusual in having its greatest effect on service industries, the budget sticks to the standard script of directing most stimulus to the goods sector: construction, energy, manufacturing and road and rail projects.

The concession to encourage more business investment in equipment favours capital-intensive goods industries over service industries. The tax cuts will go more to men than to women, especially after the middle-income tax offset is withdrawn next financial year.

But there's where the budget aims its stimulus and where it doesn't. No economic modelling should be taken as gospel truth, but modelling by Matt Grudnoff, of the Australia Institute, finds that bringing forward stage two of the government's tax plan will create only between 13,400 and 23,300 jobs – depending on how much of the cut is saved or is spent on imports.

By contrast, Grudnoff estimates that splitting the same $13 billion evenly between service industries – universities, childcare, healthcare, aged care and the creative arts – would create almost 162,000 jobs.

Modelling commissioned by the women's foundation from Dr Janine Dixon, of Victoria University, has found that redirecting government spending from infrastructure to the provision of greater care for children, the aged or the disabled would yield significantly greater benefit to the economy and jobs.

So why did Morrison and his Treasurer choose not to spend more on services sector jobs? Because this didn't fit with the "core values" that guided their choice of stimulus measures: "lower taxes and containing the size of government".

Although these days most of the heavily female-performed childcare, healthcare, aged care and disabled care has been contracted out to the community and private sectors, its cost is heavily subsidised by the taxpayer.

I bet it's never crossed Morrison's mind that his commitment to Smaller Government is biased against women and the further growth of female employment.

Read more >>

This one-year, fold-away budget won't do the trick

From the way the budget blows out debt and deficit, it may seem that Scott Morrison and Josh Frydenberg have stopped caring how much they rack up, but it ain’t so. This budget is just a one-year plan, which not only brings the handouts to an early stop, but then starts reeling much of the money back in.

This budget is like a fold-up bike you can put back in the boot after you’ve finished with it. Technically, its design is clever. But I fear it’s too clever by half.

If it turns out Morrison has turned off the budgetary stimulus too soon – as many business economists fear – he won’t have got the economy growing strongly enough and unemployment falling far enough.

His decision to turn the stimulus off so early – and to choose his budget measures based more on political correctness than job-creating effectiveness – may prove a great error of political (as well as economic) judgment as the election approaches in late next year or early 2022.

But let’s unfold Frydenberg’s one-year, fold-away budget. First, the two initial, big-ticket stimulus measures – the JobKeeper wage subsidy scheme and the temporary JobSeeker unemployment benefit supplement – have already been scaled back and their termination dates set.

The $17-billion dole supplement will end in December (with almost every dollar saved coming out of retailers’ cash registers) and JobKeeper will end in March, after a total cost of $101 billion.

First among the budget’s new measures is the immediate write-off for tax purposes of businesses’ capital equipment purchases. It will apply to new assets from now until June 2022, at a cost to revenue of $31 billion over the three years to June 2023.

But because this measure simply allows firms to deduct the cost of new equipment earlier than would otherwise apply, by the fourth year, 2023-24, firms are expected to be paying in excess of $4 billion more tax than they otherwise would have in that year.

Buried deep in the budget’s fine print you discover that what costs the revenue $31 billion in the first three years, ends up costing only a net $3 billion “over the medium term”.

Similarly, while the measure allowing companies (but not unincorporated firms) to carry back losses incurred in the three financial years to June 2022 for tax purposes will cost the revenue more than $5 billion in its first two years, by 2023-24 it will begin reeling the money back in. The net cost over the medium term is expected to be less than $4 billion.

Get it? Though the huge early cost of these measures, combined with the miniscule number of new jobs they are expected to create, makes them look like a giant handout to the government’s business supporters, in truth all they involve is a temporary improvement in businesses’ cash flows, as opposed to their profits.

Next, note that, though the JobMaker wage subsidy “hiring credit” has a cost of $4 billion over three years (with almost three-quarters of that hitting the budget next financial year), the scheme will be open only until October 7, 2021. The further cost to the budget after June 2022 will be minimal.

Finally, remember that the tax cut comes in two bits: the continuing tax cuts for people earning more than $90,000 a year, plus the temporary cost of the one-year extension of the misleadingly named “low and middle income tax offset”, aimed mainly at above-median tax-filers on $48,000 to $90,000.

Because the cash benefit of the temporary tax offset is delivered retrospectively, the two-year draw-forward of stage two (as opposed to its continuing cost from July 2022 on) will cost the budget about $7 billion this financial year and about $17 billion next year but – get this – add to revenue by almost $6 billion in 2022-23.

By then, much of this year’s budget will have been folded away.

Now you see why, after blowing out to $85 billion last financial year and an expected $213 billion this year, the budget deficit is expected almost to halve to $112 billion next year, and fall to $88 billion in 2022-23. (After that, the rate of improvement tapers off, with the deficit projected to take seven years to fall from 3 per cent of gross domestic product to 1.6 per cent.)

Question is, will the economy be able to keep up with this contraction in the budget? At present, the $101-billion JobKeeper is supporting 3.5 million workers – a quarter of all workers. It will end in March, to be replaced by the $4-billion JobMaker scheme for young workers. Doesn’t seem enough.

Read more >>

Budget is big on political correctness but weak on job creation

The more I study the budget, the less impressed I am. It spends a mint of money – which it should - but Scott Morrison and Josh Frydenberg have chosen its measures based on how well they fit the government’s "core values", not on whether they’re likely to deliver "bang for buck" – maximum jobs per dollar forgone.

The funny thing is, if you read the budget papers carefully, they admit that its measures were run through the filter of Liberal Party political correctness, while also providing enough information to allow us to calculate that its most expensive measures are expected to create surprisingly few jobs.

The budget papers say the government’s fiscal (budgetary) strategy "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".

Over the years, macro economists have given much thought to how well particular types of budget measures stimulate the economy and create jobs. They identify three broad categories of measures.

First, give tax breaks and incentives to businesses, in the hope that this will induce them to expand their operations, spending more on capital equipment and new employees.

Second, give tax cuts (or maybe one-off cash grants) to individual taxpayers or welfare recipients, in the hope that they will spend most of the money and thereby generate economic activity and jobs.

Those two categories involve the government making "transfer payments" from itself to households or firms. The third category is the government spending money directly by paying someone to build a house or an expressway or to work for the government and perform some service.

As a rule, economists expect direct spending to yield a greater stimulus (and thus have a higher "multiplier" effect) than transfer payments. That’s because all the government’s spending adds to demand for goods and services in the "first round", whereas some of the money you transfer to a firm or individual may be saved rather than spent, even in the first round.

Economists consider saving a "leakage" from the various rounds of the "circular flow of income" round and round the economy. Other leakages occur if the money is spent on imports rather than locally made goods and services.

Still on direct spending, if your primary goal is not so much to add to the production of goods and services (real gross domestic product) as to increase employment, you’d be better off directing your government spending to a labour-intensive purpose (employing an extra uni tutor or aged-care nurse, for instance), rather than a capital-intensive purpose, such as a new expressway.

Now let’s look at how the budget’s main measures fit these three categories. Its temporary measure to allow firms an immediate write-off of the cost of new equipment (costing the revenue $26.7 billion over four years), its temporary measure allowing firms to carry back current losses for tax purposes ($4.9 billion), its research and development tax incentive ($2 billion) and its temporary JobMaker "hiring credit" - wage subsidy – ($4 billion) add up to total revenue forgone under the first category of tax breaks to businesses of almost $38 billion.

This is far bigger than the money going to individual taxpayers and welfare recipients in the second category: personal tax cuts ($17.8 billion over four years) and "economic support payments" to pensioners ($2.5 billion), a total of just over $20 billion.

Under the third category, direct government spending on goods and services, the main measures are various infrastructure programs – mostly via grants to state governments - worth more than $10 billion over four years.

So you see how much the budget’s fiscal stimulus measures have been affected by the government’s "core values". No less than $38 billion goes as tax breaks to business, three-quarters of the $20 billion in transfers to individuals comes as tax cuts, leaving about $10 billion in direct spending going to the least labour-intensive purpose – transport infrastructure.

Now, according to the budget papers – or according to the budget "glossies" fudged up by ministerial staffers with lots of colour photos of good-looking punters – the government and its minions have estimated the number of jobs the top programs are expected to create.

The immediate asset write-off and loss carry-back for businesses is expected to create about 50,000 jobs. Is that a lot? Well, remembering we have a labour force of 13.5 million, it doesn’t seem much. And dividing the 50,000 into the budgetary cost of $31.6 billion gives a cost of $632,000 per job.

That’s infinitely more than any of those extra workers are likely to be paid, of course, and absolutely pathetic bang per buck. Giving money to business in the hope it will do wonders for "jobs and growth" is a classic example of "trickle-down economics". Clearly, a lot of the money doesn’t.

But, when you think about it, it’s not so surprising that so much money produces so few extra jobs. Why not? Because almost all the capital equipment Australian firms buy is imported. And because firms get the concession even if they don’t buy any more equipment than they would have done.

Next, the budget documents imply that the personal tax cuts worth $17.8 billion will create a further 50,000 jobs. That works out at $356,000 per job – still terrible bang per buck. Why so high? Too much of the tax cut is likely to be saved.

Finally, the budget documents tell us the $4 billion cost of the JobMaker hiring credit will yield "around 450,000 positions for young Australians". That’s a much better – but still high - $8900 per "position" – which I take to mean that a lot of the jobs won’t be lasting or full time.

So, what measures would have yielded better job-creation value? The ones rejected as politically incorrect: big spending on social housing, a permanent increase in the JobSeeker unemployment benefit – or even just employing more childcare workers.

Read more >>

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.

Read more >>

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.

Read more >>

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”.

Read more >>

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.

Read more >>

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.

Read more >>

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.

Read more >>

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.

Read more >>

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.

Read more >>

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.

Read more >>

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."

Read more >>

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.

Read more >>