The secret sauce is missing from our recovery recipe

According to Reserve Bank deputy governor Dr Guy Debelle, a big lesson from the global financial crisis was “be careful of removing the stimulus too early”. Good point, and one that could yet bring Scott Morrison and his nascent economic recovery unstuck. But there’s something that’s even more likely to be his – and our – undoing.

Debelle was referring to the way the British and other Europeans, having borrowed heavily to bail out their banks and stimulate a recovery in the real economy, took fright at their mountain of debt and, before the recovery had got established, undercut it by slashing government spending. The consequences – contributing to more than a decade of weak growth - are hardly to be recommended.

The Yanks have been doing something similar this time round, with the Republican-controlled Senate agreeing to a huge initial stimulus package but, with the nation caught in a ferocious second round of the pandemic, having so far steadfastly refused a second package.

It almost seems a design flaw of conservative governments always to be tempted to pull the plug too early.

So premature withdrawal of stimulus is certainly a significant risk to the strength of our recovery. But I doubt it’s the biggest one. We should be giving much more thought than we have been to the sources of growth that will keep the economy heading onward and upward once the stimulus peters out.

The basic idea of managing the macro economy is that, when it’s flat, you use budgetary and interest-rate stimulus to give it a kick start, but then all the usual, natural drivers of growth take over.

Such as? We can talk about population growth, but it could well take more than a year or two to return to its accustomed annual rate of 1.5 per cent. And, in any case, it does far less to increase gross domestic product per person than it suits its promoters to admit.

We can talk about business investment spending but, though it does add to demand for goods and services, it’s essentially derived demand. That is, it doesn’t spring up spontaneously so much as grow in response to the growth in consumers’ demand for the goods and services businesses produce.

This being so, the government’s various tax incentives intended to get businesses investing in advance of the surge in consumer demand are unlikely to get far.

Up to 60 per cent of aggregate demand comes from household consumption. But the strong growth in consumer spending in the September quarter – with more to come this quarter – isn’t a sign that healthy growth in consumption has resumed. It’s just the semi-automatic rebound in spending following the lifting of the lockdown.

The leap in the household saving rate to a remarkable 18.9 per cent of disposable income is some combination of greater “precautionary” saving – “Who knows whether I’ll yet lose my job?” – and pent-up demand caused by the lockdown.

As things return to something reminiscent of normal, we can expect people to run down this excess saving to keep their spending returning to normal despite higher unemployment and widespread wage freezes.

But this is a once-only catch-up, spread over several quarters, not a return to on-going healthy real growth in consumer spending. For this, the occasional tax cut can help – though not by much if its prime beneficiaries are the top 20 per cent of income-earners, as scheduled for July 2024 – but there’s simply no substitute for healthy real growth in the dominant source household income: wages.

Real wage growth is the secret sauce missing from the hoped-for recovery. The Reserve Bank’s latest forecasts are for real wage growth of a mere 0.25 percentage points in each of calendar 2020, 2021 and 2022.

The econocrats don’t want to dampen spirits by admitting what they surely know: that without decent growth in real wages there’s little hope of a sustained recovery. Reserve governor Dr Philip Lowe’s recent remarks say we’re unlikely to see much growth in real wages until a rate of unemployment down to 4.5 per cent means employers must bid up wages in their competition to attract all the skilled labour they need.

This implies that, even if we were to achieve healthy rates of improvement in the productivity of labour – a big if – it’s no longer certain that organised labour retains the bargaining power to ensure ordinary households get their fair share of the spoils; that real wages still grow in line with productivity.

The government and its advisers ought to be grappling with the question of how we can get real wages up – but I doubt that’s what we’ll see this week when it reveals its plans for yet more “reform” of industrial relations.

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Economy's rebound goes well, but now for the hard part

Does the economy’s strong growth last quarter mean the recession is over? Only to those silly enough to believe in "technical" recessions. Since few economists are that silly, it’s probably more accurate to call it a "journalists’ recession". Makes for great headlines; doesn’t make sense.

It’s probably true – though not guaranteed - we’ll suffer no more quarters where the economy gets smaller rather than bigger. But people fear recessions not because they deliver growth rates with a minus sign in front of them, but because they destroy businesses and jobs.

You’ll know from walking down the main street that some businesses have closed and not been replaced. You’ll probably also know of family or friends who’ve lost their jobs or now aren’t getting as much casual work as they need and were used to.

By any sensible measure, this recession won’t be over until the rates of unemployment and underemployment are at least back down to where they were at the end of last year, before the virus struck. And Reserve Bank governor Dr Philip Lowe said this week that wasn’t likely for more than two years.

On a brighter note, the increase of 3.3 per cent in real gross domestic product during the September quarter, revealed by the Australian Bureau of Statistics in this week’s "national accounts", does mean the recovery from recession is off to a good start.

So far, however, what we’ve had is not so much a recovery as a rebound. Remember, this unique recession was caused not by an economic threat, as normal, but by a health threat.

The contraction in GDP of a record 7 per cent in the June quarter was caused primarily by a sudden collapse in consumer spending of 12.5 per cent. Why? Because, to halt the spread of the virus, governments ordered many retail businesses and venues to close, employees to work from home if possible, and everyone to stay in their homes and leave them as little as possible.

As a result, people who’d kept their jobs had plenty of money to spend, but greatly reduced opportunity to spend it. Even people who’d lost their jobs had their income protected by the JobKeeper wage subsidy scheme and the temporary supplement to the JobSeeker unemployment benefit.

Turns out that, despite the loss of jobs, those two big support measures actually caused a jump in the disposable incomes of the nation’s households in the June quarter. But, since it was impossible to keep spending, the proportion of households’ income that was saved rather than spent leapt from 7.6 per cent to 22.1 per cent.

The worst-hit parts of the economy were hotels, cafes and restaurants, recreation and culture, and transport (public transport, motoring, domestic and overseas air travel).

But this initial lockdown lasted only about six weeks before it was gradually lifted in all states bar Victoria. In consequence, consumer spending jumped by 7.9 per cent in the September quarter, more than enough to account for the 3.3 per cent jump in overall GDP.

Guess what? The strongest categories of increased spending were hotels, cafes and restaurants, recreation and culture, and transport services. Spending on healthcare rebounded as deferred elective surgery and visits to GPs resumed.

The quarter saw the rate of household saving fall only to 18.9 per cent – meaning people still have plenty of money to spend in coming quarters, even if pay rises will be very thin on the ground. And, since Victoria makes up a quarter of the national economy, its delayed removal of the lockdown ensures the rebound will continue in the present, December quarter.

See the point I’m making? When the greatest part of the collapse in economic activity was caused by a government-ordered lockdown, it’s not surprising most of that activity quickly returns as the lockdown is unwound.

But this is just a rebound to something not quite normal, not a conventional recovery as the usual drivers of economic growth recover and resume their upward impetus.

Thanks to the massive support from JobKeeper and JobSeeker, the rebound is the easy, almost automatic bit. But even the rebound is far from complete. The lockdown will leave plenty of lasting damage to businesses and careers – and the psychological and physical recovery is much harder matter to get moving.

Treasurer Josh Frydenberg boasts that, of the 1.3 million Australians who either lost their jobs or saw their working hours reduced to zero at the start of the pandemic, 80 per cent are now back at work.

Which is great news. But 80 per cent is still a long way short of 100 per cent. And even when 100 per cent is finally attained, that only gets us back to square one. It doesn’t provide additional jobs for those young people who’ll be needing employment in coming years.

Note, too, that most of the rebound in employment has been in part-time jobs. So far, less than 40 per cent of the 360,000 full-time jobs lost between March and June this year have returned.

In March, the rate of unemployment was 5.2 per cent; now it’s 7 per cent. The rate of underemployment was 8.8 per cent; now it’s 10.4 per cent.

And, returning to this week’s figures for GDP in the September quarter, once you look past the rebound in consumer spending, you don’t see much strength in the rest of the economy. Output in mining fell by 1.7 per cent, while production in agriculture was down 0.6 per cent.

One bright spot was home building, which ended a run of eight quarters of decline to grow by 0.6 per cent. Many new building approvals say this growth will continue.

But non-mining business investment in new equipment, buildings and structures incurred its sixth consecutive quarterly fall, with subdued investment intentions suggesting the government’s investment incentives will have limited success.

Little wonder the Reserve’s Lowe has warned the recovery will be "uneven, bumpy and drawn out". Don’t pop the champagne just yet.

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Super risk: be poorer today so you can live it up tomorrow

For a columnist, the trouble with taking leave is that something really interesting or important is likely to happen while you’re away from the keyboard. It’s now more than a week since the Treasurer Josh Frydenberg released the long-awaited review of retirement income by former Treasury heavy Mike Callaghan. But not to worry. I suspect we’ll still be furiously debating the report’s findings come the next election.

For most people, superannuation is an incomprehensible subject they prefer not to think about – just as they’ve never really understood the “dividend franking credits” that figured so prominently in last year’s election.

As a former accountant, however, I’ve always been fascinated by the ins and outs of super. And being a boring accountant has an odd benefit: paying attention to super all these years has left me with hugely more than I'm likely to need for a comfortable retirement.

Scott Morrison has been dreading the release of this report because he knew it would incite his hard-line backbenchers to demand that he cancel the long-legislated increase in employers’ compulsory contributions to their workers’ super from 9.5 per cent of wages to 12 per cent by 2025.

He knew Labor would oppose this every step of the way, there’d be a huge fight to get it through the Senate and, even if he succeeded, his opponents would take the issue to the election as proof he was so down on workers’ wages he was willing to destroy their chances of a decent retirement.

Truth is, super has been an unending source of conflict between Labor and the Liberals since the present compulsory-contribution scheme was implemented by Paul Keating and the unions’ Bill Kelty in the early 1990s.

Labor sees it as one of the great social reforms of the Hawke-Keating government. But the Libs opposed it from the beginning. They claimed this was because of their philosophical objection to compulsory saving, but it’s easy to see their real objection was partisan.

Compulsory super was introduced in a way that ensured some of the super contributions were managed by non-profit “industry” super funds, rather than the usual for-profit funds set up by banks and insurance companies.

In principle, these new industry funds would be run by equal numbers of trustees from the unions and the employer groups. In practice, the unions have dominated. The ACTU will tell you union officials are required to pay their directors’ fees into union coffers. Some doubt that always happens.

The Libs always saw the industry funds – which have consistently outperformed the for-profit “retail” super funds – as an incursion into Liberal-owned territory. The nation’s share capital should be controlled by Liberal supporters, not unionists. And what’s to stop a little of the billions going into industry funds from trickling down into Labor campaign funding?

Throughout his time in office, John Howard was always coming up with ways to clip the wings of the hated industry funds – with little success.

So there’s nothing any Liberal government can do on super that doesn’t cause the unions and Labor to smell a conspiracy. If the Libs want to cancel any further increase in the rate of employers’ compulsory contributions, their only conceivable motive must be to cripple the industry funds.

Just one problem with this theory. A survey in August of 44 leading economists by the Economic Society found that two-thirds of them wanted the increases deferred or abandoned. This isn’t surprising. As far back as 2010, the Henry tax review found that a higher contribution rate wasn’t needed to ensure people retired with adequate incomes, when there was so much fat in the fees the fund managers were charging.

The findings of the Callaghan review also cast doubt on the need for an increased rate of contributions. So why do the experts disagree with the supposed champions of the workers?

Two main reasons. First, because of convincing empirical evidence that, over time, about 80 per cent of the cost of increased rates of contribution by employers is passed on to their workers in the form of pay rises that are lower than otherwise.

So employer contributions are no free gift. They involve forcing workers to spend less and save more today, so they can have more to spend in retirement. But for many middle-income workers, the more super savings they amass, the more their entitlement to a full age pension is reduced.

Second, in its long-running campaign to persuade governments to force workers to hand over more of their wages to super funds, the fee-hungry superannuation industry has played on people’s instinctive fears they aren’t saving enough.

But careful calculations by the Callaghan review – coming on top of those by the independent Grattan Institute – have found that, on the present contribution rate, most workers will retire with disposable incomes at least equal to the widely accepted benchmark of 65 to 75 per cent of their pre-retirement disposable income.

If so, why deny yourself more than you need to in your working years, so you can have more than you need in retirement?

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THE POST-COVID ECONOMY: How our economy has changed

Talk to virtual Comview conference

I want to talk to you about how the Australian economy has changed as a result of the pandemic, including a once-in-30-year change in the macro-economic policy mix, and consider how the economy can recover from this unique recession.

You don’t need me to tell you that the coronavirus is the greatest threat to the health of Australians and the entire world since the “Spanish” flu pandemic a century ago. Nor that the recession this pandemic has precipitated is the greatest blow to our economy, and the world economy, since the Great Depression of the 1930s. What I may need me to remind you of is that, despite Victoria’s second wave, Australia has so far had more success in suppressing the virus than almost all the other advanced economies, and this should mean we suffer less economic damage than they do. It’s also true that our major trading partners – China, Japan and South Korea – have also done well in controlling the virus, which is another good sign for our recovery relative to the other rich countries. However, the pandemic is far from over and we don’t know when that will be. We could still suffer setbacks, and it’s hard to see a full return to business and consumer confidence until it’s clear the pandemic is over. With the rich countries likely to grab the vaccine before the poor countries get it, it seems likely that international travel will be the last thing to return to something like we were used to.

Why this recession is unlike previous recessions

Usually, recessions occur not simply because the economy runs out of puff, but because an inflationary boom prompts the macro authorities to apply the interest-rate brakes, but they hit it too hard and the boom turns to bust. The mood of optimism flips to pessimism, and greed turns to fear. This time, however, there was no boom and no inflation. The economy had not properly recovered from the global financial crisis more than a decade earlier, it was growing slowly and the mood was already sombre.

This time, the recession was driven by governments’ attempts to limit the spread of the virus by closing our borders, shutting down a large part of the economy and requiring people to leave their homes as little as possible. This means the contraction in demand came suddenly and completely, rather taking months to decline, as it usually does. Note, however, that had the government not ordered a lock down, economic activity would have fallen anyway as people tried to avoid being infected.

But the fact that it was the government’s own actions in ordering the lockdown meant that its fiscal policy and monetary policy response to the recession was faster and larger, particularly its two big measures, the JobKeeper wage subsidy scheme and the temporary supplement to JobSeeker unemployment benefits. JobKeeper’s objective was to maintain the link between employers and their workers even if the lockdown left them with little work to do, so that once the lockdown ended, normal trading could resume. Together with other measures, another goal was to help protect the cash flow of firms during the lockdown. At one point 3.5 million workers were benefiting from JobKeeper, who otherwise would have been unemployed. With the lockdown having soon been lifted in all states bar Victoria, it’s now clear that much of the collapse in employment and hours worked in April has now been reversed, with Victoria now following. So there has been a significant bounce-back, with much of the 7 per cent decline in real GDP during the June quarter reversed in the two following quarters. Even so, the bounce-back has been far from complete. And although the collapse of many businesses has been avoided, many failures haven’t been.

How the coronacession has changed the economy

In a recent speech, Reserve Bank governor Dr Philip Lowe listed five respects in which the pandemic is leaving its mark on the economy. The first is on the labour market. The rate of unemployment is expected to peak at about 8 per cent by the end of the year, with the rate of under-employment even higher. Unemployment will then decline only slowly and still be above 6 per cent by the end of 2022, the year after next. This suggests wage growth will continue weak.

Second, weak population growth. Restriction of international travel and migration, and a lower birth rate, mean the population is expected to grow by just 0.2 per cent in the present financial year, the lowest since 1916, and be weak the following year. This compares with growth averaging 1.5 per cent a year over the past two decades. Even when eventually international travel resumes, it’s not clear that our rate of immigration will return to what it was. And, even if it does, it seems unlikely that the two or three years of lost population growth will be made up. Australia has had one of the fastest rates of population growth among the advanced economies, with higher rates of economic growth to match. This may not continue, although it may not mean lower rates of economic growth per person. If so, we’ll have a smaller housing industry and less need for investment in new infrastructure.

Third, a changed property market. The market is being hit by a range of conflicting factors: a recession; lower population growth; record low interest rates; government incentives to support residential construction; and changes to the way that people work, shop and live. Rents for CBD retail properties have fallen, as have vacancy rates for office blocks. Residential property prices have fallen in Sydney and Melbourne, particularly for apartments.

Fourth, attitudes to risk. Businesses and households seem to have become more averse to the risks involved in decisions to borrow and spend, despite the fall in interest rates. This is understandable when there is so much uncertainty about what the future holds but, as Lowe reminds us, economic growth depends on business people and consumers being willing to take calculated risks to advance their prosperity. Lowe worries greater risk aversion may add to the signs that the economy has become less “dynamic” – slower to change over time. These signs include low numbers of new firms, less switching between jobs, slower adoption of new technology, and fewer workers moving from low to high productivity firms.

Fifth, digitisation. It seems clear that the pandemic and the lockdown has hastened the adoption of digital technology. Doctors’ longstanding resistance to telehealth and electronic prescriptions has broken down. Many firms have used technology to allow their staff to work from home, and much of this may continue after the pandemic is past, with big implications for time spent commuting, CBD retailing and transport infrastructure needs. Online meeting technology has reduced the need for travel. There has been huge growth in online retailing, which is unlikely to be reversed. Electronic transactions have greatly reduced cash transactions.

The changed macro management policy mix

For the first 30 years following World War II, the main policy instrument used to stabilise demand as the economy moved through the business cycle was fiscal policy, with monetary policy playing a subsidiary, supporting role. That changed in the late 1970s when the advanced economies acquired a serious problem with high and rising inflation, and “stagflation” destroyed confidence in the simple Phillips curve trade-off between inflation and unemployment. The conventional wisdom became that monetary policy, conducted by an independent central bank, should be the main instrument used for stabilising demand, with fiscal policy playing the subsidiary role.

But roughly 30 years later, the coronacession has a seen a reversion to fiscal policy playing the dominant role in short-term stabilisation, leaving monetary policy as a back-up. Ostensibly, this is because the need for stimulus was so great and because, with interest rates already so low, monetary policy was left with little room to move. In the recession of the early 1990s, for instance, the official interest rate was cut by more than 10 percentage points. In the response to the global financial crisis of 2008-09, the rate was cut by more than 4 percentage points. In the response to the coronacession, the RBA has been able to cut by less than 1 percentage point before taking the cash rate virtually to zero, at 0.1 per cent. Since March the RBA has also resorted to “quantitative easing” – buying second-hard government bonds from the banks and paying for them merely by crediting amounts to the banks’ exchange-settlement accounts with the RBA – but how much this does to stimulate demand for goods and services (as opposed to demand for assets such has houses and shares) is open to doubt. By contrast, the federal budget has provided a total of $257 billion in direct stimulus over serval years, equivalent to 13 per cent of nominal GDP in 2019-20. (This compares with stimulus in response to the GFC of 6 per cent of GDP in 2008-09.)

Behind these immediate reasons for fiscal policy resuming the leading role, however, are deeper, structural factors. As Treasury Secretary Dr Steven Kennedy has observed, there has been “a fundamental shift in the macroeconomic underpinnings of the global and domestic economies, the cause of which is still not fully understood”. This is a reference to the “secular stagnation” or “low-growth trap” I discussed at last year’s Comview. Your modern, independent central bank – and the policy mix that gave top billing to monetary policy – was designed to cope with the problem of high and rising inflation. But, as former Reserve governor Ian Macfarlane has explained, inflation in the advanced economies has been falling for the past 30 years and is now below central bank targets. Low inflation means low nominal interest rates, of course. And, as Treasury’s Kennedy has reminded us, the global real interest rate, similar to the neutral interest rate – the real official rate that’s neither expansionary nor contractionary – has been falling steadily for the past 40 years. This has been due to structural developments that drive up savings (the supply of “loanable funds”) relative to the willingness of households and firms to borrow and invest (the demand for loanable funds), he says. This “is likely due to some combination of population ageing, the productivity slowdown and lower preferences for risk among investors,” he says.

All this says that fiscal policy’s return to primacy over monetary policy is not just a temporary development, but the culmination of structural forces building up over decades, suggesting this will be a lasting change. It may be many years before inflation returns as a problem.

Fiscal policy and monetary policy: pros and cons

Monetary policy’s great advantage is that it can be changed so quickly and easily, by a decision of the RBA board (this covers the decision lag and implementation lag), whereas fiscal policy changes involve possibly protracted development of measures and consideration by cabinet (the decision lag), and then often delays before the measures can be put into effect (the implementation lag). But, once implemented, monetary policy changes probably take longer to have their full effect on the economy (the impact lag) than does fiscal policy.

But fiscal policy measures – whether on the tax or spending sides of the budget - can be targeted to fixing particular problems, whereas monetary policy is a “blunt instrument” or one-trick pony: it uses interest rates to encourage or discourage borrowing and spending. Fiscal policy includes the budget’s automatic stabilisers (to which, Kennedy has argued, JobKeeper and the JobSeeker supplement, being open-ended, were temporary additions).

Economists at the IMF and elsewhere argue that fiscal policy multipliers are higher than earlier believed. This is partly because leakages to imports are less significant when all major governments are stimulating simultaneously in response to the same global shock (such as the GFC or a pandemic). But it’s also because the effect of fiscal stimulus isn’t reduced by the “monetary policy reaction function” – the decisions of independent central banks to raise interest rates because they fear the fiscal stimulus will add to inflation pressure.

Finally, and as I said in last year’s talk, monetary policy’s “comparative advantage relative to fiscal policy is controlling inflation, not stimulating demand when the economy is again caught in a liquidity trap”. Because we are likely still to be caught in a low-growth trap even when the pandemic is a receding memory, l have no trouble believing the econocrats’ repeated warnings that the road to recovery will be long and bumpy.

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Reserve Bank suffering relevance deprivation syndrome

I’m sorry to say it, and it’s certainly not the done thing to say, but the Reserve Bank looks to me like that emperor with a serious wardrobe deficiency.

Apart from the nation’s allegedly “self-funded” retirees – whose angry letters to Reserve governor Dr Philip Lowe must by now be absolutely blistering – no one wants to question last week’s decision to make what must surely be the smallest-ever cut in the official interest rate, and engage in a bit more of what central bankers prefer to call “quantitative easing” or “balance-sheet expansion” rather than use those verboten words Printing Money.

I guess there’s no reason any borrower would object to paying lower interest rates, no matter how microscopic the reduction. Nor are the nation’s treasuries and governments likely to object to having their own interest bills cut a fraction.

As for the experts in the financial markets, their vested interest lies in having the central bank stay as busy as possible, organising events where they can lay bets. An inactive Reserve is a central bank that’s not helping them justify their lucrative but unproductive existence. “Negative interest rates? Might be a fun day out. Bring it on.”

But I’ve heard from a lot of retired central bankers who disapprove of the Reserve’s scraping of the barrel. And last week Dr Mike Keating, a former top econocrat, also questioned the wisdom of keeping on keeping on.

Some other people have seen the Reserve’s decision to, in Lowe’s words, “do what we reasonably can, with the tools that we have, to support the recovery” as a sign it judged last month’s budget not to have done enough.

Maybe, but I doubt its motives are so noble. Alternatively, Lowe’s reference to “doing what we can” with “the tools we have” could be taken as a tacit admission that his tools can’t do much.

As Treasury Secretary Dr Steven Kennedy made clear last week, monetary policy’s “scope . . . to provide sufficient stimulus is limited and has necessitated the large levels of fiscal support”. His speech was devoted to making sure his financial-markets audience – and the rest of us – understood that the headquarters of short-term management of the macro economy has now shifted from Martin Place, Sydney to Parkes Place, Canberra.

No, I think what we’re seeing is our most well-resourced economic regulator (well-resourced because it prints its own banknotes) desperately trying to look busy and relevant because it’s lost its main reason for existence, but can’t be shut down or even sent on “furlough” – the latest euphemism for being put on unpaid leave, in the hope the need for your services will return.

No country could leave itself bereft of a central bank. The Reserve can’t be shut down because one of its infrequent but vital roles is to flood the financial markets with liquidity whenever they become dysfunctional (as happened in the global financial crisis and, in a smaller way, in the early days of the pandemic).

But the fact remains that the Reserve’s primary function – the short-term stabilisation of demand - has gone away and isn’t likely to come back in my lifetime (another 20 years, max). That is, its problem is structural (long-lasting) not cyclical (temporary).

Your modern, independent central bank was designed to respond to the problem of high and rising inflation. And during the 1980s (and, in Australia, 1990s) its ability to do so was clearly demonstrated.

But, as former Reserve governor Ian Macfarlane has reminded us, inflation rates in the advanced economies have been falling for the past 30 years, and now seem entrenched below the central banks’ targets. And, as Treasury’s Kennedy reminded us last week, the global (real) neutral interest rate has been falling for 40 years.

Central banks need independence of the politicians so they can raise interest rates to fight inflation. They don’t need it to lower rates. But with inflation having gone away as a problem, it’s now 10 years since the Reserve last raised rates (and even that proved unnecessary and had to be unwound).

When nominal interest rates were high, cutting rates in big licks did seem effective in helping revive growth and employment. But with interest rates now so low and getting lower in the 12 years of weak Australian and advanced-country growth since the financial crisis, there’s little reason to believe cutting rates is effective in reducing unemployment and underemployment.

Last week Lowe insisted that an official interest rate down at 0.1 per cent does not mean the Reserve has “run out of firepower” – by which he meant that there’s still plenty of money he can print.

True. But, as Reserve assistant governor Dr Chris Kent has explained, the dominant purpose of the money-printing is to lower “risk-free” (government bond) interest rates further out along the maturity curve beyond the official overnight cash rate.

And this doesn’t provide a reason to believe slightly lower interest rates will induce households and firms to borrow and spend in a way that fractionally higher rates didn’t. Whatever people’s reasons for not spending, the high cost of borrowing isn’t one of them.

The old jibe that cutting interest rates to induce growth is like “pushing on a string” for once seems apposite.

Remembering the retired Reserve bankers’ point that it chose to limit its intervention in financial markets to short-term and variable interest rates for good reason – to limit monetary policy’s distortion of private sector choices - one thing we can be more confident of is that printing money and cutting rates when few people want to borrow for consumption or real investment will be effective in inflating bubbles in the prices of assets such as houses and shares.

How this would leave the unemployed better off is hard to see. Risking our heavily indebted household sector becoming more so doesn’t seem a great idea.

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Treasury chief warns big changes are on the way

When finally the pandemic has become just a bad memory, we’ll see it has left big changes in the way the macro economy is managed and the way we work and spend. Whether that leaves us better or worse off we’ve yet to discover.

That’s the conclusion I draw from Treasury Secretary Dr Steven Kennedy’s (online) post-budget speech to the Australian Business Economists on Thursday, the restoration of a tradition going back to the 1990s.

Kennedy observes that, although “fiscal policy” (changes in government spending and taxing) has always responded to large shocks such as recessions, for the past 30 years the accepted wisdom in advanced economies has been that the preferred tool for stabilising the ups and downs in demand is “monetary policy” (changes in interest rates by the central bank), leaving fiscal policy to focus on structural and sustainability (levels of public debt) issues.

This mix of policy roles was preferred because central banks could make timely decisions, using an appropriately nimble instrument – the official interest rate. Interest rates, it was considered, could help manage demand without having much effect on the allocation of resources (the shape of the economy) in the long-run, Kennedy says.

In previous downturns, monetary policy played a major part in helping to get the economy moving. In response to the 1990s recession, Kennedy reminds us, the Reserve Bank cut the official interest rate by more than 10 percentage points. In response to the global financial crisis of 2008-09, it cut rates by more than 4 percentage points.

By now, however, the Reserve has run out of room. In its response to the coronacession, it cut the rate by 0.5 percentage points to 0.25 per cent. This week it squeezed out another cut of 0.15 percentage points and went further in “unconventional” monetary policy measures. That is, printing money.

Why so little room? Interest rates are down to unprecedented lows partly because, as I wrote last week, the rate of inflation has been falling for the past 30 years.

But Kennedy explains the other reason: the “natural” or “neutral” interest rate has been “steadily falling globally over the past 40 years”. The neutral interest rate is the real official rate when monetary policy is neither expansionary nor contractionary.

(Note that word “real”. Conceptually, nominal interest rates have two parts: the bit that’s just the lenders’ compensation for expected inflation, and the “real” bit that’s the lenders’ reward for giving borrowers the temporary use of their money.)

“The declining neutral rate is due to [global] structural developments that drive up savings relative to the willingness of households and firms to borrow and invest,” Kennedy says.

“While the academic research is not settled on the relative importance of different structural drivers, it is likely due to some combination of population ageing, the productivity slowdown and lower preferences for risk among investors,” he says.

Because this is a “structural” (long-term) rather than “cyclical” (short-term) development, “a number of central banks have suggested that interest rates will not rise for many years”.

Kennedy says the size and speed of the shock from the pandemic necessitated a large fiscal (budgetary) response. This would have been true even if a large response from conventional monetary policy had been available – which it no longer was.

Monetary policy is a one-trick pony. It can make it cheaper or dearer to borrow, and that’s it. As we saw with the early measures – particularly the JobKeeper wage subsidy and the temporary supplement to the JobSeeker dole payment – fiscal policy can be targeted to problem areas. “Monetary policy cannot replace incomes or tie workers to jobs,” he says.

So the move from monetary policy to the primacy of fiscal policy is not only unavoidable, it has advantages.

Since the onset of the pandemic, the federal government has provided $257 billion in direct economic support over several years, which is equivalent to 13 per cent of last financial year’s nominal gross domestic product. That compares with the $72 billion the feds provided in economic stimulus during the global financial crisis, or 6 per cent of GDP in 2008-09.

Kennedy notes that fiscal policy is about stabilising the economy’s rate of growth over the short term; it can’t increase economic growth over the medium to long-term. According to neo-classical theory, that’s determined by the Three Ps – growth in population, participation in the labour force, and productivity.

But whereas over the 10 years to 2004-05 our rate of improvement in “multi-factor” productivity averaged 1.4 per cent a year, over the five years prior to the pandemic it averaged half that, 0.7 per cent.

There are many suggested causes for this slowdown (which can also be observed in the rest of the rich world). Treasury research has highlighted signs of reduced “dynamism” (ability to change over time), such as low rates of new firms starting up, fewer workers switching jobs, slower adoption of the latest technology, and fewer workers moving from low-productivity to high-productivity firms.

Kennedy says it’s not clear how the pandemic will affect Australia’s long-run rate of improvement in productivity. But it has the potential to cause some large structural changes in the economy. We’ve seen the way it has forced businesses to innovate.

“Necessity is a great ramrod for breaking down the barriers to technological adoption,” he says.

Remote working is one example. In September, almost a third of workers worked from home most days. If this continues it could have “significant implications for transport infrastructure planning and for the functioning of CBDs”.

An official survey in September found that 36 per cent of businesses had changed the way products or services were provided to customers. The ability to pivot displayed by many firms indicates potential for innovation and adaptation.

On the other hand, there’s a risk that closures among smaller firms will lead to even more market concentration and slower productivity growth. Let’s hope not.

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We should stop backing losers in the Climate Change Cup

The big question for Scott Morrison and his colleagues is whether they want to be a backward-looking or forward-looking government.

Do they want to enshrine Australia as the last giant of the disappearing world of fossil fuels, and pay the price of declining relevance to the changing needs of our trading partners, with all the loss of jobs and growth that would entail?

Or do they have the courage to seize this opportunity to transform Australia into a giant in the production and export of renewable energy and energy-intensive manufactures, with all the new jobs and growth that would bring?

In recent weeks, the main customers for our energy exports – China, Japan and South Korea – have done something we’ve so far refused to do: set a date for their achievement of "carbon neutrality". Zero net emissions of greenhouse gases.

Faced with this, and the free advice from fellow conservative Boris Johnson that he should get with the program, Morrison has defiantly declared that Australia would make its own "sovereign decisions".

This is infantile behaviour from someone wanting to be a leader, like the wilful child who shouts, "You’re not the boss of me!"

It goes without saying that Australia will make its own decisions in its own interests. No other country has the ability or desire to force its will on us. But nor can we force our will on them. They will go the way they consider to be in their best interests, and it's clear most are deciding to get out of using fossil fuels.

We remain free to change our export offering to meet our trading partners’ changing needs, or to tell them all to get stuffed because producing coal and gas is what we’ve always done and intend to keep on doing. Our sovereignty is not under threat. No one can stop us making ourselves poorer.

A report issued on Monday by Pradeep Philip, head of Deloitte Access Economics, called A New Choice attempts to put figures on the choices we face in responding – or failing to respond – to global warming. I’m not a great believer in modelling results, but the report does much to illuminate our possible futures.

In last year’s election, Morrison made much of Bill Shorten’s failure to produce modelling of the cost to the economy of his plan to reduce emissions in 2030 by much more than the Coalition promised to do in the Paris Agreement.

Had he been sufficiently dishonest, Shorten could easily have paid some economic consultancy to fudge up modelling purporting to show the cost would be minor, but for some reason he didn’t. However, Morrison didn’t resist the temptation to quote the results of someone who, over decades of modelling the cost of taking action to reduce emissions, had never failed to find they would be huge.

It’s true that the decline of our fossil fuel industries will involve much expensive disruption to those businesses and the lives of their workers, as they seek out new industries in which to invest their capital and find employment.

But what’s a lot more obvious today than it was even last year is that this cost will be incurred whether it happens as a result of government policy, or because the decline in other countries’ demand for our fossil fuel exports leaves us with what financiers call "stranded assets" – mines and other facilities that used to turn a profit, but now don’t.

Last year it was possible for the cynical and selfish to ask why we should get serious about climate change when no one else was. Today the question is reversed: how can we fail to act when everyone else is?

One of Morrison’s great skills as a politician is his ability to draw our attention away from some elephant he doesn’t want us to notice. In the election he got us to focus on the cost of acting to reduce our emissions. The bigger question we should have been asking is, what’s the cost to the economy if we and the others don’t act to stop future global warming?

Whatever number some modeller puts on that cost, our "black summer" should have left us needing little convincing that climate change is already happening and already imposing great destruction, pain and cost on us. Nor is it hard to believe the costs won’t be limited to drought, heatwaves and bushfires, and will get a lot worse unless we stop adding to the greenhouse gas already in the atmosphere.

On a more positive note, Deloitte adds its support to those experts – including Professor Ross Garnaut and the Grattan Institute’s Tony Wood – finding that "in a global economy where emissions-intensive energy is replaced by energy from renewables, Australia can be a global source of secure and reliable renewable power. Countries such as Japan, South Korea and Germany have already come to Australia asking for us to export renewable hydrogen for their own domestic energy consumption."

We have a "once-in-a-lifetime opportunity to simultaneously boost economic growth, create sustainable jobs [and] build more resilient and cleaner energy systems".

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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.

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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.

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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?

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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.

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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.

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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.

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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.

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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.

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