Banks: bad guys one minute; put-upon credit providers the next

With Scott Morrison hit by a seemingly unending series of headline-making problems, his standard techniques for dealing with them are getting easier to detect. He sees them not so much as policy deficiencies to be rectified as political embarrassments to be “managed” away.

One technique is to tough it out, hoping the media caravan will soon lose interest and move on. When that doesn’t work you give the appearance of responding to the outcry without actually doing much. Call an inquiry of some sort – maybe, if the pressure continues, even three or four different inquiries – then say you can’t act, or even discuss the matter further, until the inquiry has reported many months hence.

I’m finding it hard to avoid the suspicion this is how he’s dealing with the huge – and hugely expensive – problems in aged care. When Four Corners came up with (yet another) expose of the mistreatment of old people in institutional care as the election approached in 2019, he neutralised it as an election issue by promising a royal commission.

The commission’s hearings and interim report confirmed our suspicions that mistreatment was widespread. While releasing the interim report, Morrison announced that quite some millions would be spent on measures that sounded like they should help ease the problem – a bit.

When he released the commission’s final report early this month, he announced more millions of spending on this and that, promising the government’s full response to the commission’s multi-billion-dollar recommendations would be revealed in the May budget.

He seemed open to the idea of using an increase in the Medicare income-tax levy to cover the massive cost, but Treasurer Josh Frydenberg lost little time in hosing down that possibility. Aged care has hardly been mentioned again from that day to this.

Why do I have a terrible feeling that, should aged care not come back on the media agenda between now and budget night, what’s announced will be only a token response to the continuing and worsening problem?

You see a similar trickiness in the government’s response to the widespread complaints about the behaviour of the banks and other financial institutions. Those complaints led to repeated calls for a royal commission.

Malcolm Turnbull and his treasurer, Morrison, went for ages fobbing off these demands – denying there was a problem. But when some government backbenchers threatened to support an opposition motion for an inquiry, Turnbull had no choice but to relent.

The hearings by former High Court judge Kenneth Hayne revealed endless instances of financial “misconduct” and received months of media coverage.

Hayne’s final report lobbed just a few months before the 2019 election. Morrison’s successor as Treasurer, Frydenberg, immediately announced he was “taking action on all 76 recommendations” and “going further”. This apparently wholehearted acceptance of the recommendations defused bank misconduct as an issue in the election campaign.

It’s now two years since Frydenberg’s commitment. Professor Kevin Davis, of Melbourne University, says the government has yet to implement 44 of the commission’s recommendations, and has turned its back on five key reforms.

Frydenberg initially accepted the proposal to outlaw the practice of mortgage brokers being remunerated by the lending banks with a commission based on a percentage of the size of the loan. But, after industry lobbying, Frydenberg let it stand, replacing it with an obligation that brokers act in the best interests of their customers.

Hayne’s very first recommendation was that the existing “responsible lending obligation” – making it illegal to offer credit that was unsuitable for a consumer based on their needs and capacity to make payments – not be changed.

But, last September, Frydenberg announced that this obligation had been costly to lenders and was delaying the approval of loans. The present principle of “lender beware” would be replaced with a “borrower responsibility”. Legislation to bring this about is awaiting approval in the Senate.

It’s a “reform” that’s been welcomed by the banks, but vigorously opposed by Davis, various legal academics, consumer groups, the Financial Rights Legal Centre, Financial Counselling Australia – and my co-religionists at the Salvos, whose free Moneycare financial counselling service is offered at about 85 sites across Australia.

Like all the critics, the Salvos note the “asymmetry of knowledge and power” between consumers and the providers of financial services. The credit products offered have become increasingly complex and opaque. “Our experience is that understanding these products requires an above average level of literacy and financial literacy,” they say.

The proposed reduction in the scope of responsible lending obligations would reduce regulatory oversight and thus increase the risks for borrowers. “Our overwhelming evidence [from] delivering financial counselling in Australia for the past 30 years is that credit remains too easily accessible and that this has devastating consequences for the people we support . . .

“For people already experiencing, or at risk of, financial hardship, easier access to credit may mean they will get caught in a cycle of increasing debt. This has significant implications for physical and mental health.”

I fear the Salvos are right.

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More to running the state than keeping a lid on wages and debt

You’d think that, when it came to assessing the performance of a government in power for 10 years, its handling of economic issues would be central. But, in truth, not as central as you’d think. Much that state governments say about their “state economy” is mere boosterism – or another word starting with b.

The present NSW Treasurer, Dominic Perrottet, is no slouch in telling us how well the state’s doing economically. Before the arrival of the coronacession changed his tune, he used to say we had the “fastest-growing state economy over the past five years” and were “leading the nation” in this or that.

He told us about the Coalition’s “strong financial management” which kept the government’s triple-A credit rating secure, had produced a string of budget surpluses and a “negative net debt”.

“The greatest threat to our future prosperity,” he told us, “would be a return to the budget deficits ... of the past”. Ask him about the present huge deficit and the return to positive net debt and he’ll tell you we’d be crazy not to be borrowing when interest rates are at rock bottom.

Several of the big banks regularly rank the eight states and territories according to their economic performance. This is like calling a horse race. At any point in the race, some horses will be ahead and some behind. At a different point in the race, the order will be different. What does this prove? Not much.

Time for some sense. The fact is, many silly claims are made about the “state economy” because there’s no such animal. The lack of hard economic borders between the states means there’s one, national economy, with eight corners.

The national economy is managed nationally from Canberra and Martin Place, not Macquarie Street (the Reserve Bank, not the NSW Parliament). Interest rates don’t vary by state, nor the rates of income tax, company tax or the GST.

With a few exceptions – mining and financial and professional services – the industry composition of the states is very similar. The feds carefully divide the proceeds from the GST between the states in a way intended to minimise difference in the quality of public services provided by them. The wealthier states subsidise the poorer ones.

The states have responsibility for public health and hospitals, schools, law and order, roads and transport, planning and local government. But they each deal with them in much the same way.

And, in any case, because NSW accounts for about a third of the nation’s population and economic activity, its performance is rarely far from the national average.

All this explains why talk that purports to be about the management of the state’s economy ends up being about the government’s management of its own finances, as shown by its budget and annual capital works program.

Perrottet and his predecessors are terribly proud of their success in limiting the growth in government spending but, since the wages of state government employees account for well over half that spending, they’ve achieved this mainly by keeping a tight 2.5 per cent cap on annual wage rises and using the excuse of the coronacession to freeze state workers’ wages.

Trouble is, this is a two-edged sword. Every dollar the government doesn’t pay its workers is pretty much a dollar they don’t spend on the products of the state’s businesses. What’s more, there’s evidence that keeping the lid on public sector wages encourages private sector employers to give smaller increases. Screwing down wages is the way to grow the economy?

The Coalition boasts it’s spending a lot more on infrastructure – particularly motorways and railways – than its penny-pinching predecessors. True. Much more. Labor allowed a bunch of discredited American rating agencies to dictate how much it could spend on infrastructure, for fear of what its political opponents would say if it lost its triple-A rating.

This government is no braver, but got the bright idea of “asset recycling”. You privatise government businesses – the electricity companies, ports, buses, ferries, the lottery office, whatever – then use the proceeds to build new stuff without upsetting the Yanks.

Trouble is, the government decided to “fatten the pig for market”. To maximise the sale price of the electricity businesses, it created arrangements that allowed the new owners to put up their prices. When it sold Port Botany and the Port of Newcastle, it did what was intended to be a secret deal where, if the new Newcastle owner decided to build a container terminal in competition with the new owners of Botany, it would have to pay compensation.

So the government got great sale prices at the expense of the state’s electricity users, people who hate all the container trucks rumbling through Sydney streets on their way north, and Novocastrians (including me) who worry about where the jobs will come from as the world stops buying our coal.

Sorry, I can’t say I’m wildly impressed by the Coalition’s decade of financial dealings. Too many bankers, not enough economists.

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Neglect of aged care more proof of PM's blokey blind spot

Everywhere you look, Scott Morrison and his ministers have a women problem. You see it even as he uses the media focus on allegations of sexual assault as cover for his efforts to convey the aged care royal commission’s damning report to the too-hard basket.

When you think about it, aged care is the ultimate women’s issue. Of those receiving aged care, women outnumber men two to one. Who does most of the worrying about how mum or dad are being treated – and probably most of the visiting? More likely to be daughters than sons.

The commission’s report found that the root cause of the common ill-treatment of people in aged care is the insufficient number, inadequate training and low pay of aged care workers. And who are these overworked, undertrained and woefully paid age care workers? Almost all of them are women.

Now do you see why aged care conditions have been low on the priorities of successive governments? Not enough rich white men jumping up and down.

Aged care is huge. Despite understaffing, it has 366,000 paid staff, 68,000 volunteers and 28,000 contractors – about 3 per cent of the whole workforce.

The report found that at least a third of people in residential and at-home care had experienced substandard care. It identified food and malnutrition, dementia care, use of physical and chemical restraints and palliative care as needing urgent improvement.

Aged care used to have prescribed staffing ratios, but they were removed as part of the push to get for-profit providers into the “industry”. The report found that what regulation of facilities exists isn’t enforced because the government knows it’s not paying enough to make quality care possible.

The providers will tell you there’s a shortage of properly qualified personal care workers and nurses. Probably true. But those who are qualified are less attractive because they have to be paid more. Registered nurses have more choice about the industry they work in, so they must be paid more and treated better.

Lack of trained workers is a two-sided problem. If there was more demand for qualified workers and they were offered better pay and conditions – permanency, for instance – more would go to the trouble and expense of acquiring qualifications to supply.

Providers complain of high rates of staff turnover. They don’t mention that when they overwork, underpay and give workers no guarantee of regular work – or delegate their responsibilities as employers to a labour-hire company - a lot of workers soon leave in search of something less terrible - say, picking fruit in the blazing sun at Woop Woop.

It’s a funny thing: workers who are given little loyalty don’t tend to give much back. You’ve no idea how selfish workers can be. Don’t they know I’m trying to increase profits? Next time I see a Coalition MP I’ll give him (the hims are more receptive) an earful about how the dole’s so cushy these young bludgers don’t want to work.

It takes a lot of dedication to deal with the bodily needs of elderly people you’re not related to. But if you can find the motherly types, surely they won’t mind if you pay them peanuts. The full-time award rate for base-level aged care workers is $21.09 an hour, a fraction less than for base-level cleaners and just $1.25 above the Australian minimum wage.

Much of the poor treatment of people arises from the use of casualisation to save on wages and the resulting high rate of staff turnover, which makes it hard for residents and their carers to develop relationships.

The report found that “older people get the best care from regular workers they know, who respect them and offer continuity of care as well as insights into their changing needs and health requirements”.

In contrast, casually employed carers can struggle to “provide continuity of care and form ongoing relationships with older people”.

Professor Kathy Eagar, of the University of Wollongong, has said that “the staff are so busy that all they get time to do is tasks, like helping with toileting, showering, dressing and feeding residents. A lot of residents report they’re relatively lonely because, even if there are staff, they don’t have the time to talk to them.”

“For people with dementia, it helps to have the same people every day. If I don’t know my name because I’ve forgotten it, but the care worker does know my name, that’s a whole different proposition to if I don’t know it and my carer doesn’t know either,” she said.

Morrison says he’s focused on getting more jobs in the economy. Eagar has estimated that implementing the report’s proposals on staffing would increase the aged care workforce by about 20 per cent.

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Unless Morrison does a lot more, the recovery will be weak and slow

I fear we may be changing places with the United States. I fear the economy’s rapid rebound may have misled Scott Morrison into believing we’re home and hosed. I fear the Smaller Government mentality may trip us up again.

In response to the global financial crisis of 2008, the Americans and Europeans spent huge sums and ran up big budget deficits and public debt. They had to rescue their teetering banks and get their frozen economies going again.

It worked. The financial crisis dissipated and their economies started to recover. But before long they got a bad case of the Smaller Government frights. Look at those huge deficits! What have we done? Our children will drown in government debt!

So they put their budgets into reverse and cut government spending – especially spending aimed at helping the poor and unemployed – to get their deficits down and slow the growth in debt. Critics dubbed this a policy of “austerity”.

Trouble was, it backfired. Their economies weren’t growing strongly enough to withstand the withdrawal of government support. Their growth slowed, their budget deficits didn’t fall much, and their premature removal of support contributed to the deeper, structural problems that caused the developed economies to endure a decade of weak growth.

Point to note: unlike the Americans (and the others) our Rudd-Gillard government didn’t take fright and start slashing government spending. But now we’ve come to the global coronacession, it seems this time the roles may be reversed.

The Americans – who, admittedly, are in a much deeper hole than us – have just legislated a third, $US1.9 trillion ($2.5 trillion) spending package.

So what are we doing? With the economy having rebounded strongly in the second half of last year, we’re concluding the recovery’s in the bag and proceeding to wind back the main stimulus measures as fast as possible.

In the budget last October, the government foresaw the budget deficit falling from a peak of $214 billion last financial year to $88 billion next financial year.

At the Australian Financial Review’s business summit on Wednesday, one speech was given by Morrison and another by Reserve Bank governor Dr Philip Lowe. Their contrasting tones really worried me.

Morrison’s self-congratulatory speech could have come with a big, George W Bush-like sign, MISSION ACCOMPLISHED. He said it had been a tough 12 months, “but here we are, leading the world out of the global pandemic and the global recession it caused”.

He recalled telling last year’s summit that the government’s economic response “would be temporary and have a clear fiscal [budgetary] exit strategy”.

And “thankfully, we are now entering the post-emergency phase of the . . . response. We can now switch over to medium and longer-term economic policy settings that support private sector, business-led growth in our economy.”

Get it? Now it’s the time for the government to pull back and for business to take the running. Why? “Because you simply cannot run the Australian economy on taxpayers’ money forever. It’s not sustainable.”

(Note the trademark Morrison argument-by-non-sequitur: since you can’t do it forever, you mustn’t do it for another few years.)

Trouble is, Lowe gave an unusually sombre speech, highlighting the key respects in which business wouldn’t be taking the running.

He warned that the better-than-expected rebound after the lifting of the lockdown “does not negate the fact that there is still a long way to go and that the Australian economy is operating well short of full capacity. There are still many people who want a job and can’t find one and many others want to work more hours”.

“And on the nominal side of the economy [that is, on wages and prices] we have not yet experienced the same type of bounce-back that we have in the indicators of economic activity [such as employment and GDP]. For both wages and prices, there is still a long way to go to get back to the outcomes we are seeking.”

One of the main ways we get “business-led growth” is by growth in its investment in expansion. But it’s clear Lowe’s worried that it’s not really happening and may not for some years.

“While there was a welcome pick-up in the December quarter, particularly in machinery and equipment investment, investment is still 7 per cent below the level a year earlier . . . Non-residential construction is especially weak, with the forward-looking indicators suggesting that this is likely to remain so for a while yet,” he said.

Since 2010, business investment as a proportion of gross domestic product has averaged just 9 per cent, compared with 12 per cent over the previous three decades.

“A durable recovery from the pandemic requires a strong and sustained pick-up in business investment. Not only would this provide a needed boost to aggregate demand over the next couple of years, but it would also help build the [stock of physical capital] that is needed to support future production,” Lowe said.

Next is weak wage growth. “For inflation to be sustainably within the 2 to 3 per cent [target] range, it is likely that wages growth will need to be sustainably above 3 per cent . . .

“Currently, wages growth is running at just 1.4 per cent, the lowest rate on record. Even before the pandemic, wages were increasing at a rate that was not consistent with the inflation target being achieved. Then the pandemic resulted in a further step-down. This step-down means that we are a long way from a world in which wages growth is running at 3 per cent plus.”

The financial markets need to remember that you don’t get high inflation without high wages. Business needs to remember that its sales won’t grow strongly if it keeps sitting on its customers’ wages.

And Morrison needs to remember that if he withdraws budgetary support at a time when business is unlikely to take up the slack, the economy will go flat and the voters will blame him.

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Stuck with crappy aged care because Morrison won’t ask us to pay

I’m sorry to be so pessimistic but I fear that, in just its first week, the likelihood of the aged care royal commission’s report leading to much better treatment of our elderly has faded.

Within a day or two, Scott Morrison and his Treasurer, Josh Frydenberg, made it known they had “little appetite” for the commission’s plan to use an “aged care improvement levy” of 1 per cent of taxable income to cover the considerable cost of the reforms it proposed.

Morrison wants to be seen as delivering lower – not higher – taxes. I suspect the pair have realised that announcing an increase in tax on all income earners wouldn’t fit well with the costly third stage of their tax cuts, due in 2024, which will go mainly to high income-earners (like my good self).

Rather, the pair are murmuring about making the elderly contribute more from their own retirement savings towards the cost of their care by tightening the means-testing of aged care benefits. Maybe there’d be more and bigger “refundable accommodation deposits”.

Making the better-off old cover more of their own costs – including by taking account of the much-increased value of their homes – would be very fair. Too fair, you’d have thought, for the Liberal Party and its heartland.

Remember how the party’s “base” revolted against Malcolm Turnbull’s measures to restrict tax concessions to just the first $1.6 million of superannuation balances? Remember how hard well-off retirees fought against Labor’s plan to limit dividend franking credits at the last election, with the Libs egging them on?

Can you imagine how keen Morrison would be to have the tables turned in the coming election? He’d be the one seeking support for what Labor would quickly label his “retirement tax”.

Implementing the commission’s report would cost a minimum of $10 billion a year and probably a lot more. It’s impossible to imagine this government having the courage to raise anything like that much by tightening the means-testing of its own well-off supporters.

The commission’s report has been pushed aside before we’ve had time to understand what it’s proposing and why it would be so expensive. Whereas the present Aged Care Act was designed to help the government limit its spending, the report goes the opposite way, proposing a new act which enshrined every person’s statutory right to aged care of decent quality, with reasonable choice.

This would remove the government’s ability to limit the number of people receiving care, making access to free aged care “universal” – just as access to free public schooling has long been universal and, since Medicare, access to free care in public hospitals is universal.

In this context, “free” means the cost is covered by general taxation, not by user charges or means-tested charges. (Note that the freedom from direct charging would apply only to aged care proper. People’s food and accommodation costs would be means-tested. But refundable accommodation deposits would probably go.)

The report found that the root cause of the (often literally) crappy treatment of people in age care was the inadequate number, training and pathetic pay of aged care workers (almost all of them women). Properly done, almost all the increased cost of aged care would end up in the hands of these women.

In principle, it would be perfectly fair to cover the cost of better, universal aged care with a tax levy paid by all income-earners. We’d be paying for aged care the way we’ve always paid for the age pension and much else – by a “generational bargain”.

It’s fair to ask the present generation to pay for the retirement costs of the older generation because the present generation will be old themselves soon enough. When they are, their retirement costs will be paid for by the generation coming behind them. In the end, every generation pays and every generation benefits.

But that’s just in principle. In practice, the Grattan Institute has shown that successive governments – particularly the Howard government – have reneged on the intergenerational bargain by changing the tax and welfare system in ways that favour the old and penalise the young.

Tax concessions on super are now so generous that few retirees pay any income tax, no matter how well-off. As my colleague Jessica Irvine has shown, tax and welfare concessions to existing home owners have made homes such a desirable investment that a growing proportion of the young will never be able to afford to join the charmed circle.

The young bear the brunt of our willingness to live with high unemployment and underemployment and our unwillingness to regulate the gig economy. And the young pay far more for their higher education than earlier generations (and now those with the temerity to do an arts degree pay double).

In the face of this unfairness, the Grattan Institute’s Brendan Coates has sensibly proposed that the cost of fixing aged care be covered by reducing super concessions to higher income-earners, but I doubt Morrison’s game to try that one on his base – or the voters.

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QE is a lobster pot: easy get it, hard to get out unscathed

Since the global financial crisis and more so since the coronacession, the normal way things work in financial markets has been turned on its head. Standard monetary policy (the manipulation of interest rates) has stopped working so, led by the US Federal Reserve, the biggest rich economies have plunged into “quantitative easing” (QE) and other “unconventional policies” which, frankly, are weird and wonderful.

Heading our response to this topsy-turvy world has been Reserve Bank governor Dr Philip Lowe. There’s never a shortage of smarties thinking they could do a much better job than the governor – whoever he happens to be – but Lowe’s getting a double dose of second-guessing. I don’t envy him – I’m just glad it’s him making the impossible calls, not me.

Lowe’s having to respond to forces way beyond his control. We’ve seen official interest rates around the world fall to zero because of a lasting global imbalance between saving and investment (or, alternatively, because the US Fed stuffed up). With interest rates already so low, further rate cuts ceased to have much effect in encouraging borrowing and spending on consumption and investment goods.

Undeterred, the Fed leapt into QE - buying longer-dated second-hand government bonds with created money - and soon was joined by the Europeans, Brits and Japanese. This did little to stimulate demand for goods and services, but did inflate the prices of houses, shares and other assets, as well as lowering your exchange rate relative to everyone else’s.

The Europeans went even further down the crazy paving to “negative” interest rates (where the lenders pay the borrowers to borrow their money) and now the Americans are considering it.

Lowe resisted cutting our official interest rate to zero and engaging in QE, until the pandemic prompted the big boys to do yet more of it. His hesitation revealed his scepticism about the benefits and risks of QE, though he did want to keep the Reserve at the demand management top table.

In any case, he didn’t think he could go on letting the big boys devalue their currencies at the expense of our industries’ international price competitiveness – especially when the return to top-dollar iron ore prices was pushing up our “commodity currency”. Had he not acted, exporters and importers would be screaming abuse and unemployment would be worse.

But this has plunged Lowe into a world of second-guessers. Some smarties are criticising him for not cutting the official rate to zero early enough and not doing much more QE. But others – businessman Andrew Mohl, in the Financial Review, for instance - are making the opposite criticism: why is he engaging in behaviour every ex-central banker knows is bad policy and highly risky?

I think the RBA old boys’ association’s fears about QE make more sense than the critique of the shoulda-done-double brigade. But everyone needs to remember Lowe had little choice but to join the big boys’ high-risk game, where they’ll worry about the fallout later.

It’s a delusion that, in the years before the arrival of the virus, growth would have been much stronger had Lowe acted earlier and harder. These critics conveniently ignore the obvious truth – which Lowe quietly but continually spoke of - that growth was weak not because he wasn’t trying hard enough to stimulate it, but because the elected government had its policy arm (the budget; fiscal policy) pushing in the opposite direction as it sought the glory of a budget surplus.

The shoulda-done-double brigade refuse to accept that monetary policy has lost its potency partly because fixing the economy with monetary policy is their only expertise and way of earning a living, and partly because their Smaller Government political inclination makes them disapproving of using increased government spending – though never tax cuts – to stimulate demand.

The RBA old boys’ association (and they are all boys) is right that we ought to be thinking a lot more about the reasons “unconventional” measures have formerly been verboten. QE doesn’t do what monetary policy’s supposed to, but does foster asset-price inflation, does risk boom and bust in asset markets, does favour the better-off, and does foster “beggar-thy-neighbour” exchange-rate contests.

The most immediate and worrying aspect of this is what it’s doing and will do to house prices and the affordability of home ownership. It’s literally true, but not good enough, for Lowe to say the Reserve doesn’t, and shouldn’t, target house prices. Saying the stability of the housing market isn’t the Reserve’s department won’t, and shouldn’t, save the central bank from copping most of the blame should something go badly wrong. (Little blame will go to the distortions caused by tax policy and local planning rules.)

People have been predicting a collapse in house prices for decades, but the more house prices are allowed to move out of line with household incomes – and the more highly geared the nation’s households become - the greater the risk the Jeremiahs’ prophecies come to pass.

It makes no sense for the people living on a big island to bid the prices of their fairly fixed stock of houses higher and higher and higher, then tell themselves how much richer they all are. Is this prudent central banking?

The equanimity with which some people contemplate negative interest rates is remarkable. Sometimes I think too much maths can make economists mad. The arithmetic works the same whether you put a minus sign or a plus sign in front of an interest rate, but the humans don’t. It’s not much better when you think paying oldies a zero interest rate on their savings a matter of no consequence.

When central bankers manipulate interest rates to encourage or discourage borrowing and spending, they are knowingly distorting prices and behaviour in the financial markets. Conventionally, they have minimised their distortion of market signals by limiting themselves to affecting short-term and variable interest rates.

But QE takes their distortion further out along the maturity “yield curve”, interfering with the market’s ability to decide how much more a saver should be paid for tying up their money for 10 years rather than one. When you move to negative interest rates, you rob pension and insurance funds of the ability to match their financial assets with their long-term liabilities.

One of the signals the market should be sending via longer-term yields (interest rates) on government bonds is the inflation rate it’s expecting down the track. This, by the way, explains why the Reserve is wise to buy only second-hand government bonds – that is, buy them at a market-set price – rather than buying them direct from the government, even though it’s buying them with newly created money either way.

As the economy’s CCO – chief confidence officer – Lowe is in no position to bang on about the costs and risks involved as the big boys force us further down the crazy paving of unconventional monetary policy. It’s the more academically inclined outside monetary experts who should be urging caution rather than criticising Lowe for not doing double.

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Coronacession: great initial rebound, but recovery yet to come

If you’re not careful, you could get the impression from this week’s national accounts that, after huge budgetary stimulus, the economy is recovering strongly and, at this rate, it won’t be long before our troubles are behind us.

The Australian Bureau of Statistics issued figures on Wednesday showing that the economy – real gross domestic product – grew by 3.1 per cent over just the last three months of 2020. This followed growth of 3.4 per cent in the September quarter.

When you remember that, before the virus arrived, the economy’s average rate of growth was only a bit more than 2 per cent a year, that makes it look as though the economy’s taken off like a stimulus-fuelled rocket.

Even the weather is helping. The drought has broken and we’ve had a big wheat harvest. We keep hearing about the Chinese blocking some of our exports, but much less about them going back to paying top dollar for our iron ore. This represents a massive transfer of income from China to our mining companies and the federal and West Australian governments.

So much so that our “terms of trade” – the prices we get for our exports compared with the prices we pay for our imports – improved by 4.7 per cent in the December quarter, and by 7.4 per cent over the year.

Sorry. It certainly is good, but it's not as good as it looks. The trick is that you can’t judge what’s happening as though this is just another recession. It’s called the coronacession because it’s unique – sui generis; one of a kind.

Normal recessions happen because the economy overheats and the central bank hits the interest-rate brakes to slow things down. But it overdoes it, so households and businesses get frightened and go back into their shell. The fear and gloom feed on each other and unemployment shoots up. (If you’ve heard of poets’ license, economists have a licence to mangle metaphors.)

This time, the economy was chugging along slowly, with the Reserve Bank using low interest rates to try to speed things up, when a pandemic arrived. Some people were so worried they stopped going to restaurants and pubs. But to stop the virus spreading, the government ordered many businesses to close and the whole nation to stay at home.

(To translate this into econospeak: normal recessions are caused by “deficient demand”; this one was caused by “deficient supply” - on government orders.)

Knowing this would cause much loss and hardship, governments spent huge sums to support individuals and firms, including the JobKeeper wage subsidy (intended to discourage idle firms from sacking their workers), the temporary JobSeeker supplement (to help those workers who were sacked), help business cash flows and much else.

The politicians and their econocrats assured us this would be sufficient to hold most of the economy intact until they’d be able to lift the lockdown. Despite much scepticism (including from me), this week’s figures offer further proof they were right.

The national lockdown was imposed in March, and caused GDP to contract by a previously unimaginable 7 per cent in just the June quarter. The national lockdown was lifted early in the September quarter, when most of that 7 per cent should have returned.

If it had, it would have been easier to see what it was: not the start of a “recovery”, but just the rebound when businesses are allowed to reopen and consumers to go out and shop.

But the need of our second biggest state, Victoria, to impose a second lockdown – which wasn’t lifted until November - has seen the rebound spread over two quarters, with a bit more to come in the present, March quarter.

When you study the figures, you see that most of the collapse in growth and rebound in the following two quarters is explained by just the thing you’d expect: the downs and ups in consumer spending. It dived by 12.3 per cent in the June quarter, then rebounded by 7.9 per cent in the following quarter and a further 4.3 per cent in the latest quarter.

Consumer spending grew strongly in the December quarter, even though the wind-back of federal support measures caused household disposable income to fall by 3.1 per cent. How could this be? It was possible because households cut their outsized rate of saving.

At the end of 2019, households were saving only 5 per cent of their disposable income. By the end of June, however, they were saving a massive 22 per cent. But by the end of last year this had fallen back to 12 per cent. This suggests people were saving less because they were worried about their future employment and more because they just couldn’t get out to shop.

Note that, by the end of December, the level of real GDP was still 1.1 per cent below what it was a year earlier. Economists figure we’ve rebounded to about 85 per cent of where we were. But what happens when, after the present quarter or next, we’re back to 100 per cent?

Will we keep growing at the rate of 3 per cent a quarter? Hardly. The easy part – the rebound – will be over, most of the budgetary stimulus will have been spent, and it will be back to the economy growing for all the usual reasons it grows.

Will it be back to growing at the 10-year average rate of 2.1 per cent a year recorded before the virus interrupted? If so, we’ll still have high unemployment – and no reason to fear rising inflation or higher interest rates.

But it’s hard to be sure we’ll be growing even that fast. On the Morrison government’s present intentions, there’ll be no more stimulus, little growth in the population, a weak world economy, an uncompetitive exchange rate thanks to our high export prices and, worst of all, yet more years of weak real growth in income from wages. The “recovery” could take an eternity.

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Only bipartisanship will let us relieve the squaller of aged care

Despite all the appalling stories of the neglect and even abuse of old people we’ve heard during the two years of the royal commission into aged care, it’s hard to be confident this will be the last time we’ll need an inquiry into what’s going wrong and why.

Looking at the eight volumes of the commission’s report – even its executive summary runs to 115 pages – it’s easy to conclude the problem must be hugely complicated. And if you get into the gruesome detail, it is.

But if you look from the top down, it’s deceptively easy. All the specific problems stem from a single cause: we’ve gone for decades – under federal governments of both colours – trying to do aged care on the cheap, and it’s been a disaster.

The basic solution is obvious: if we want decent care of our oldies we must be prepared to pay more for it – a lot more. The problem is, neither side of politics has been game to ask us to do so.

That’s partly because the first side to do so fears it would be attacked by the other: “Don’t vote for them, they want to put up your taxes!”

But also because neither side believes the public is prepared to put its money where its mouth is. We’re happy to be scandalised by the terrible treatment of many people in aged care, and blame it on our terrible politicians, but don’t ask us to kick the tin. We’re paying too much tax already.

I believe that a government with the courage to make the case for a specific tax increase to cover the cost of better aged care could be successful, but in this age of leaders who find it easier to follow than to lead, it’s not terribly likely.

The commission makes no bones about its conclusion that the aged care system has been starved of funds. It finds that the Aged Care Act, introduced in 1997 by the Howard government, was motivated by a desire to limit its cost to the budget.

“At times in this inquiry, it has felt like the government’s main consideration was what was the minimum commitment it could get away with, rather than what should be done to sustain the aged care system so that it is enabled to deliver high quality and safe care,” the report says.

In 1987, the Hawke government introduced an “efficiency dividend” under which the running costs of government departments and agencies are cut automatically each year by a per cent or two. The practice persists to this day. The report estimates that, by now, this has cut more than $9.8 billion from aged care’s annual budget.

Another way the government has limited costs is by rationing access to home care packages – which help people avoid going into residential care (and so, in the end, help the government save money). There’s a long waiting list for home care, with those in greater need of help waiting longer than those needing less.

Every so often the government announces with great fanfare its decision to cut the waiting list by X thousand places. But since the demand for places is growing – and even though many people die before their name comes up – the list never seems to get lower than about 100,000 at any time.

“The current aged care system and its weak and ineffective regulatory arrangements did not arise by accident,” the report says. “The move to ritualistic regulation was a natural consequence of the government’s desire to restrain expenditure in aged care.

“In essence, having not provided enough funding for good quality care, the regulatory arrangements could only pay lip service to the requirement that the care that was provided be of high quality.”

Yet another way governments have sought to limit the cost of aged care is to contract out responsibility to charities – including Anglicare and United Care – and then for-profit providers.

Commissioner Lynelle Briggs finds that government-run aged care providers “perform better on average than both not-for-profit and, in particular, for-profit age care providers”.

This is hardly surprising. All of them are underfunded, but private operators have to cut costs harder to make room for their profits.

The report doesn’t say how much extra we need to pay to have decent aged care, but the Grattan Institute suggests about $7 billion a year would do it. That would be on top of the $21 billion the government already spends, plus user fees of $5 billion a year.

Briggs says the government should introduce an “aged care improvement levy” of 1 per cent of personal taxable income, from July next year.

Would Morrison do such a thing? Well, “you know our government’s disposition when it comes to increased levies and taxes. It’s not something we lean to,” he says.

Oh. Well-informed sources, however, tell us he’d be prepared to introduce the levy if the opposition supported it. If Labor chooses to play politics, he’ll let the aged care misery continue.

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Funding the budget by printing money is closer than you think

Many people are alarmed by “modern monetary theory”, the seemingly radical idea that the government should cover its budget deficit simply by creating money. But in his new book, Reset, Professor Ross Garnaut, one of our most respected economists, has joined the young turks.

And that’s not all. Last Monday I wrote about the things Reserve Bank governor Dr Philip Lowe doesn’t feel he can say out loud in this era of unconventional “monetary policy” (the manipulation of interest rates). Something else he doesn’t want to say is that the Reserve is funding the budget deficit already.

(By the way, what follows ignores the present flurry in bond markets, where some players have leapt to the conclusion that inflation’s about to take off. I wish. Don’t worry, the market will return to reality soon enough.)

Until Garnaut’s intervention, this issue has seemed divided between two groups. One is younger economics graduates who think of this revolutionary new idea that the federal government shouldn’t bother borrowing to finance its budget deficits but simply print all the money it needs – thus avoiding all that debt and interest payments – as a breakthrough that would transform the management of our economy and hasten our return to full employment.

The rival group is older, more experienced economists – and a lot of ordinary citizens – who see it as a dangerous, even crazy, idea that would surely end in disaster. It would be the primrose path of indiscipline that led to ever-rising inflation, maybe even hyper-inflation – a dollar that was worth next-to-nothing – and unemployment that was worse, not better.

Ostensibly, the opponents of modern monetary theory (MMT) are led by Lowe, as boss of our central bank. At his appearance before a parliamentary committee last month, he replied to a question from Greens leader Adam Bandt that he would “push back” against any assertion the Reserve was “financing the government”. (Note the curious wording: not that it should, but that it already was.)

Debate between the two sides has established that MMT is neither as modern and revolutionary as its proponents imagine, nor as crackpot as many of its critics imagine. The fact is, until as recently as the mid-1980s, it was common practice for national governments (including ours) to cover their budget deficits partly by borrowing from the public and partly by “borrowing” from the central bank – which would create the money the government wanted.

This was when the developed economies were struggling with high inflation, and Milton Friedman’s “monetarists” were telling people that adding to the supply of money would inevitably lead to inflation.

So all the governments (including the Hawke-Keating government) decided to fund their deficits solely by selling government bonds to the public. Ironically, this meant the banking system (not an individual bank, but the system as a whole) could and did continue creating money, but the government – despite being the issuer and backer of the currency – couldn’t.

The monetarist dogma that creating money inevitably leads to inflation turned out to be wrong. It’s inflationary only if it causes the demand for the “real resources” – land, labour and physical capital – used to produce goods and services to exceed the supply of real resources. Until you reach that point, the creation of more money – whether by the banking system or the government – should give you stronger demand and more jobs without causing problems.

So the real reason for worry about MMT isn’t the theory, but the practice. If you give a bunch of vote-buying politicians a licence to spend as much as they like up to a certain point, how could you be sure they’d stop, and revert to borrowing, when they reached that point?

It’s this that Lowe is really on about, though he doesn’t want to say so.

Since last year he’s had little choice but to join the other, bigger economies in resorting to “quantitative easing” (QE) – the central bank buying second-hand government bonds, so as to lower the “yields” (interest rates) on such bonds, but paying for them merely by crediting the bond sellers’ bank accounts.

In particular, since March last year the Reserve has guaranteed that it would buy sufficient bonds to stop the yield on three-year Australian government bonds rising above 0.25 per cent (later lowered to 0.1 per cent). In practice, because the market believed the Reserve would honour its promise, it hasn’t had to actually buy all that many bonds – until last week.

Then, last November, the Reserve went further into QE, announcing it would buy $100 billion worth of second-hand federal and state government bonds with maturities of five to 10 years so as to force their yields down, too. The Reserve estimates that these purchases have lowered yields by about 0.3 percentage points.

Last month it decided to buy another $100 billion worth. Under questioning by Labor’s Dr Andrew Leigh at the parliamentary committee, Lowe and his deputy, Dr Guy Debelle, revealed that $80 billion of the first $100 billion had gone on federal (as opposed to state) government bonds, which represented about 10 per cent of the feds’ entire stock of bonds outstanding.

The further $100 billion would take the Reserve’s holding of the feds’ total debt to 20 per cent. If there was yet another $100 billion purchase after the second, that would take its holding to 30 per cent. With the Reserve buying second-hand bonds at the steady rate of $5 billion a week, it was buying more than the new bonds the government was issuing to fund its huge budget deficit, Debelle revealed.

In his opening statement to the committee, Lowe insisted that “the RBA does not, and will not, directly finance governments. The bonds we own will have to be repaid in the same way as if they were owned by others.

“We are lowering the cost of finance for governments – as we are for all borrowers – but we are not providing direct finance. There remains a strong separation between monetary and fiscal [budgetary] policy,” he said.

That last sentence is the key to why Lowe is drawing such fine distinctions. Fiscal policy is controlled by the politicians, whereas monetary policy is controlled by the Reserve, which is independent of the elected government.

The Reserve is buying all these second-hand bonds of its own volition, and doing so because it believes QE is part of monetary policy’s best contribution to getting people back in jobs. It’s not acting under any directive from the government to fund its deficit directly. So the problem of the pollies continuing to spend beyond the point where this becomes inflationary doesn’t arise.

All true. But Lowe can’t suspend the truth that money is “fungible” – all dollars are interchangeable. Funding the deficit indirectly rather than directly may be important from the perspective of good governance, but from the perspective of the economic effect, they’re the same.

Back to the views of Professor Garnaut: “The fiscal deficits should be mainly funded directly or indirectly by the Reserve Bank, at least until full employment is in sight.”

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We must stop making excuses and push now for full employment

In his new book, Reset, outlining a plan to get the economy back to top performance, Professor Ross Garnaut makes the radical proposal to keep stimulating the economy until we reach full employment within four years. Excellent idea. But what is full employment? Short answer: economists don’t know.

In principle, every economist believes achieving full employment is the supreme goal of economic policy, because it would mean using every opportunity to get everyone working who wants to work and so achieve the maximum possible rate of improvement in our material living standards.

In practice, however, we haven’t achieved full employment consistently since the early 1970s – a failure that few economists seem to lose sleep over. It’s like St Augustine’s prayer: Lord make me pure – but not yet.

The economists’ ambivalence starts with the truth that, contrary to what you’d expect, full employment can’t mean an unemployment rate of zero. That’s because, at any point in time, there’ll always be some people moving between jobs.

In the days when we did achieve full employment, from the end of World War II until the early ’70s, its practical definition was an unemployment rate of less than 2 per cent.

But then economists realised that the full employment we wanted had to be lasting – “sustainable”. And if you had the economy running red hot with everyone in jobs and using the shortage of labour to demand big pay rises, this would push up the prices businesses had to charge and inflation would take off. The managers of the economy would then have to jam on the brakes, and before long we’d be back to having lots of unemployed workers.

This was when economists decided that sustainable full employment meant achieving the NAIRU – the “non-accelerating-inflation” rate of unemployment. This was the lowest point to which the unemployment rate could fall before wages and inflation began accelerating.

This makes sense as a concept. So the economic managers decided they could use fiscal policy (increases in government spending or cuts in taxes) and monetary policy (cuts in interest rates) to push the economy towards full employment, but they should stop pushing as soon as the actual unemployment rate fell down close to the NAIRU.

Trouble is, the NAIRU is “unobservable” – you can’t see it and measure it. So economists are always doing calculations to estimate its level. But every economist’s estimate is different, and their estimates keep rising and falling over time for unexplained reasons.

In the 1980s, people thought the NAIRU was about 7 per cent. In the late ’90s, when someone suggested we could get unemployment down to 5 per cent, many economists laughed. But it happened.

For a long time, our econocrats had it stuck at “about 5 per cent”. But the rich economies have been stuck in a low-growth trap, with surprisingly weak growth in wages and prices, even as unemployment edged down. This suggests the NAIRU may now be lower than our calculations suggest.

Garnaut recounts in his book US Federal Reserve chairman Jerome Powell saying that, in 2012, the Fed thought America’s NAIRU was 5.5 per cent. In 2020, they thought it had fallen to 4.1 per cent. But this seems still too high because, before the virus struck, the actual unemployment rate had fallen to 3.5 per cent without much inflation.

In Australia, in 2019 the Reserve lowered its estimate to a number that “begins with 4 not 5”, or “about 4.5 per cent”. With wage growth “subdued” for the past seven years, and consumer prices growing by less than 2 per cent a year for six years, this downward correction is hardly surprising. Indeed, Garnaut thinks the true figure could be 3.5 per cent or less.

But Treasury secretary Dr Steven Kennedy said last October he thought the coronacession, like all recessions, had probably increased the NAIRU - to about 5 per cent.

Now get this. Treasurer Josh Frydenberg has said he won’t start trying to reduce the budget deficit – apply the fiscal brakes – until unemployment is “comfortably below 6 per cent”.

Really? That would be well above any realistic estimate of the NAIRU. So the Morrison government is saying it will stop using the budget to reach full employment well before it’s in sight, making reducing government debt its top priority. We’d love to get everyone possible back to work but, unfortunately, we can’t afford it.

So we’re prepared to let continuing unemployment erode the skills of those who go for months or even years without a job because the cost of helping them is just too high. Those likely to be most “scarred” by this will be young people leaving education in search of their first proper job.

But we’ll blight their early working lives in ways that will harm them – and the economy they’ll be making a diminished contribution to - for years to come. That’s okay, however, because we’ll be doing it – so we tell ourselves – to ensure we don’t leave the next generation with a lot of government debt.

Yeah sure. In truth, we’ll be doing it because, so long as I and my kids have jobs, we’ve learnt to live with a lot of other people not having them. We believe in full employment, but we’re happy to continue living without it.

This complacency is what Garnaut says must change. He’s right. He’s right too in saying that with the rise in wages and prices so weak for so long, we should stop trying to guess where the NAIRU is. “We can find out what it is by increasing the demand for labour until wages in the labour market are rising at a rate that threatens to take inflation above the Reserve Bank [2 to 3 per cent] range for an extended period,” he says.

And here’s something else to remember: the Reserve has begun warning that we won’t get back to meaningful real wage growth until we get back to full employment.

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Ross Garnaut's new plan to lift us out of mediocrity

If your greatest wish is for the virus to go away as we all get vaccinated, and then for everything to get back to normal, I have bad news. You’ve been beaten into submission – forced to lower your expectations of what life should be bringing us, and our nation’s leaders should be leading us to.

Without us noticing, we’ve learnt to live in a world where both sides of politics can field only their B teams. Where our politicians are good at dividing us and making us fearful of change, but no good at uniting us, inspiring us and taking us somewhere better for ourselves and our kids.

Scott Morrison hopes that if he can get us vaccinated without major mishap and get the economy almost back to where it was at the end of 2019, that should be enough to get him re-elected. He’s probably right. Even his Labor opponents fear he is.

Fortunately, whenever our elected leaders’ ambition extends little further than to their own survival for another three years, there’s often someone volunteering to fill the vision vacuum, to supply the aspiration the pollies so conspicuously lack. Among the nation’s economists, that person is Professor Ross Garnaut, of the University of Melbourne.

In a book published on Monday, Reset: Restoring Australia after the pandemic recession, Garnaut argues we need to aim much higher than getting back to the “normal” that existed in the seven years between the end of the China resource boom in 2012 and the arrival of the virus early last year.

For a start, that period wasn’t nearly good enough to be accepted as normal. Unemployment and underemployment remained stubbornly high – in the latter years, well above the rates in developed countries that suffered greater damage from the global financial crisis in 2008-09 than us, he says.

“Wages stagnated. Productivity and output per person grew more slowly than in the United States, or Japan, or the developed world as a whole,” he says. (If that weakness comes as a surprise to you, it’s because our population grew much faster than in other rich countries, making it look like we were growing faster than them. We got bigger without living standards getting better.)

So that wasn’t too wonderful, but Garnaut argues if that’s what we go back to, it will be worse this time. Living standards would remain lower, and unemployment and underemployment would linger above the too-high levels of 2019.

We’d have a lot more public debt, business investment would be lower and we’d gain less from our international trade, partly because of slower world growth, partly because of problems in our relations with China.

Continuing high unemployment would devalue the skills of many workers, particularly the young. Many of our most important economic institutions – starting with the universities – have been diminished.

The new normal would be more disrupted than the old one by the accumulating effects of climate change and continuing disputes about how to respond to this.

So Garnaut proposes radical changes to existing economic policies to make the economy stronger, fairer, and to treat climate change as an opportunity to gain rather than a cause of loss.

At the centre of his plan is returning the economy to full employment by 2025. That is, get the rate of unemployment down from 6.5 per cent to 3.5 per cent or lower – the lowest it’s been since the early 1970s.

This would make the economy both richer and fairer, since it’s the jobless who’d benefit most. Returning to full employment would take us back to the old days when wages rose much faster than prices and living standards kept improving.

Returning to full employment, he says, would require a radical change to the way businesses pay company tax and the introduction of a guaranteed minimum income, paid to almost all adults at the present rate of the dole, tax-free and indexed to inflation.

It would involve rolling the present income tax and social security benefits into one system. This would benefit people working in the gig economy and other low-paid and insecure jobs, and greatly reduce the effective tax rates that discourage women and some men from moving from part-time to full-time work.

Changing the basis of company tax would cost the budget a lot in the early years but then raise a lot more in the later years. The guaranteed minimum income would cost a lot but would become more affordable as more people were in jobs and paying tax.

Much of the economic growth Garnaut seeks would come from greater exports. Australia’s natural strengths in renewable energy and our role as the world’s main source of minerals requiring large amounts of energy for processing into metals creates the opportunity for large-scale investment in new export industries. We could produce large exports of zero-emissions chemical manufactures based on biomass, and also sell carbon credits to foreigners.

Of recent years, Australia has fallen into the hands of mediocrities telling us how well they – and we – are doing. Surely we can do better.

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Here's the unspeakable truth about the fall in interest rates

In these unprecedented times, Reserve Bank governor Dr Philip Lowe is having trouble explaining his actions and motivations because there are various things someone with his degree of influence feels he can’t admit. But I’m under no such constraint. So let me have a go at giving you the message he won’t.

Despite Lowe’s reticence, he’s a fundamentally honest person and if you study what he’s saying – and avoiding saying – you can join the dots.

Long before the coronavirus appeared on the horizon early last year, the rich economies had been caught in a low-growth trap caused by a global imbalance between how much people wanted to borrow and invest, and how much other people wanted to save and lend. Around the world, interest rates were heading close to zero.

With our economy growing at a rate well below its “potential” to produce more goods and services, Lowe slowly and reluctantly cut our official interest rate. He was reluctant because he knew that, with rates already so low and households already so much in debt, cutting rates further would do little to help.

But also because, with the official rate already down to 0.75 per cent, he was perilously close to running out of ammunition, while the Morrison government was totally focused on getting the budget back to surplus and so reluctant to use the budget to stimulate growth.

He didn’t want to follow the other, bigger central banks into the unconventional, uncharted and unhinged territory of “quantitative easing” (QE) – central banks buying second-hand government bonds and paying for them merely by creating money, so as to lower longer-term public and private sector interest rates – much less engineer “negative” interest rates (where the lender pays the borrower to borrow).

By the Reserve’s board meeting early last March, it was clear the virus would slow the economy a bit, so Lowe cut the official rate to 0.5 per cent. Within a fortnight it had become clear the pandemic was a much bigger deal.

So, after an emergency meeting, Lowe announced another cut, taking the official rate down to 0.25 per cent, the level he’d long told us was its “effective lower bound”. He also embarked on various forms of QE, including guaranteeing to buy sufficient second-hand Commonwealth bonds to keep the “yield” (interest rate) on three-year bonds at about 0.25 per cent.

The next big move came last November, when Lowe lowered the official rate’s effective lower bound to 0.1 per cent, lowered the target for the yield on three-year bonds similarly, and decided to buy $100 billion-worth of second-hand bonds with maturities of five to 10 years, so as to force their yields down, too.

Then, earlier this month, Lowe announced a decision to spend a further $100 billion buying longer-dated bonds once the first $100 billion had gone. But, he insisted, the board had “no appetite” to push interest rates “into negative territory”.

So what do all these moves prove?

It’s understandable that Lowe should want to maintain public confidence that the independent authority which has had most influence over the day-to-day management of the economy for the past three decades, the Reserve, is at the helm, actively wielding an instrument that’s still highly effective in keeping us on course.

To this end, he has denied that monetary policy (the manipulation of interest rates) has run out of fire power. As he’s stepped further and further into unconventional measures, he’s suppressed his former reservations about their effectiveness and possible adverse side-effects, and striven to give the impression that everything’s under control and going fine. Monetary policy is playing an important part in getting the jobless back to work.

The reality is different. Movements in interest rates – whether achieved by conventional or unconventional means – affect different aspects of the economy via different mechanisms, or “channels”.

The most front-of-mind channel – “intertemporal substitution” – tells us a cut in the cost of credit encourages households to borrow more and spend it on consumption, while encouraging businesses to borrow more for investment in expansion. But if you read his words carefully, Lowe never claims his measures are causing this to happen – because it’s unlikely much of it is.

Rather, he alludes to the “cash flow” channel, saying lower rates are lowering the interest bills of households and businesses with existing debts, thereby leaving them with more money to spend on other things. True – but not terribly powerful, particularly since most people with home loans leave their monthly payments unchanged and thus pay off their mortgage a bit faster, a form of saving.

In his evidence to a parliamentary committee earlier this month, Lowe vigorously denied that the Reserve was “targeting the dollar” or that he saw signs of “currency manipulation” by other central banks (also known as “competitive devaluations”). Strictly true – but misleading.

Lowe isn’t “targeting the dollar” at a particular level or as a goal in its own right. But he cares deeply about the level of our currency’s rate of exchange against the currencies of our trading partners because this greatly affects the international price competitiveness of our export and import-competing industries, and thus how much they produce and how many people they employ.

When discussing the benefits his recent interest-rate moves have brought us, Lowe never fails to mention that they’ve caused our exchange rate to be “lower than otherwise”. That’s true – but it’s not a lot to show for all the Reserve’s lever-pulling. Lowe isn’t actually denying that monetary policy is much less effective in boosting demand than it used to be.

There’s little evidence that QE does much to increase demand for goods and services – as opposed to demand for assets such as shares and houses (probably with adverse consequences for the distribution of income and wealth). But it does seem clear that QE gives you a lower exchange rate.

Trouble is, when the Americans use QE to make their exchange rate more competitive, this makes other countries’ exchange rates less competitive. So the Europeans and Japanese defend themselves and start doing it too.

Get it? Now all the big boys are doing it – and keep doing more – Lowe’s had little choice but to do it too. Had he resisted getting into the unknown waters of unconventional measures, our dollar would be a lot higher and hugely uncompetitive.

Which means almost everything he’s done over the past year hasn’t been making things better for the economy so much as stopping things getting worse. And it also suggests that, however much Lowe lacks an “appetite” for moving to negative interest rates, if the big boys choose to go further down that path, he’ll have little choice but to join them.

There are other issues on which Lowe has felt the need to be less than frank, but they’re for another day.

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One problem at a time: jobs first, inflation much later

It had to happen: at a time when inflation is the least of our problems, some have had to start worrying that prices could take off. Funny thing is, it’s not the usual suspects who are concerned.

As so often happens, the new concern is starting in America. But since so many people imagine globalisation means our economy is a carbon copy of America’s, don’t be surprised if some people here take up those concerns.

The new Biden administration is about to put to Congress a recovery support package of budget measures – a key election promise – worth a mind-boggling $US1.9 trillion ($2.5 trillion).

Particularly when you remember that, after the US election but before President Biden’s inauguration, Congress stopped stalling and put through another, smaller but still huge, package of spending measures, it’s not surprising that some people are saying it’s all too much and will lead to problems with inflation.

What’s surprising is that the worries have come not from Republican-supporting and other conservative economists, but from an academic economist who’s been prominent on the Democrat side, Professor Larry Summers, of Harvard.

Summers, a former secretary of the Treasury in the Clinton administration, has been supported – on Twitter, naturally – by Professor Olivier Blanchard, of the Massachusetts Institute of Technology, a former chief economist at the International Monetary Fund.

The Biden package has been vigorously defended by the new Treasury secretary and former US Federal Reserve chair Professor Janet Yellen, supported by Professor Paul Krugman, a Nobel prize-winning economist and columnist for the New York Times.

All four of these luminaries have long been advocates of vigorous use of fiscal policy (budget spending and tax cuts) whenever the economy is recessed.

As well, Summers is the leading exponent of the view that America and the other rich economies (including ours) have, at least since the global financial crisis in 2008, been caught in a low-growth trap he calls “secular stagnation”, because investment spending (on new housing, business equipment and structures, and public infrastructure) has fallen well short of the money being saved by households, businesses and governments.

This imbalance, Summers argues, explains why interest rates have fallen so close to zero. He’s long advocated that governments spend on big programs of infrastructure renewal and expansion (including on the cost of fighting climate change by moving from fossil fuels to renewables) to “absorb” much of the excess savings and, at the same time, lift the economy’s productivity.

All four of these economists would fear (as I do) that the structural problems that kept the economy stuck in a low-growth trap for years before the pandemic came along will reassert themselves once the world gets on top of the virus and we recover from the coronacession.

So why would Summers, of all people, fear that Joe Biden’s massive support package could lead to the return of something that hasn’t been a problem for several decades, rapidly rising prices of goods and services?

Because he fears the package’s spending is three times or more the size of the hole in demand that needs to be filled to get the US economy back to “full employment” – low unemployment and underemployment, and factories and offices operating at close to full capacity.

When the demand for goods and services exceeds the economy’s capacity to produce goods and services, what you get - apart from a surge in imports – is rising prices.

Economists believe that an economy’s “potential” rate of growth is set by the rate at which its population, workforce and physical capital investment are growing, plus its rate of improvement in productivity – the efficiency with which those “factors of production” are being combined.

For as long as an economy has idle production capacity – unemployed and underemployed workers, and offices, factories, farms and mines that aren’t flat-chat – its demand can safely grow at a rate that exceeds its potential annual rate of growth.

But once that idle production capacity – known as the “output gap” – has been eliminated and demand’s still growing faster than supply, the excess demand shows up as higher inflation.

Summers’ concern comes because the Congressional Budget Office’s estimate of the US economy’s output gap is several times less than $US1.9 trillion.

Roughly half of the package’s cost is accounted for by spending on virus testing, the vaccine and other health costs, spending to get schools open again, and income-support for victims of the coronacession, including a temporary increase in unemployment benefits.

Summers has no objection to any of that. But much of the rest of the proposed spending is the cost of cash payments of $US1400 ($1800) a pop to most adults, regardless of their income. This is pure “stimulus” spending, and Summers worries that it may crowd out Biden’s plans for subsequent spending on infrastructure, to be spread over several years.

But calculations of the size of an economy’s output gap are rough and ready. Who’s to say the assumptions on which the budget office’s estimates are based are unaffected by the causes of secular stagnation, or by the unique nature of the coronacession?

And even if the spending of those cheques (much of which is more likely to be saved) did lead to price rises, this doesn’t mean we’d be straight back to the bad old days of spiralling wages and prices. (If we were, it would be a sign the era of secular stagnation had mysteriously disappeared.)

Remember, the Americans’ inflation rate (like ours) has long been below their target. Getting up to, or even a bit above, the target would be a good thing, not a bad one.

And, in any case, a good reason we shouldn’t worry about inflation at a time like this is that, should it become a problem, we know exactly how to fix it: put interest rates up. Australia’s households are so heavily indebted that, in our case, just a tiny increase would do the trick.

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Water reform report’s big smile hides its big teeth: much more to do

A quick look at the Productivity Commission’s draft report on national water reform reminds me of the repeated judgment from old Mr Grace, the doddering owner of the department store in Are You Being Served? as he headed for the door: “You’ve all done very well!”

Its review of the progress of the National Water Initiative signed by the federal and state governments in 2004 – encompassing agreements on the Murray-Darling Basin – is terribly polite, understated and relentlessly upbeat.

Apparently, governments have made “good progress” in having “largely achieved” their reform commitments. All that remains is just the need for a teensy-weensy bit of “policy renewal”.

This mild-mannered stuff and congratulatory tone bear no resemblance to my memories of meetings of angry farmers railing against stupid greenies and other city slickers; of their insistence that the immediate needs of irrigators and irrigation towns along the river take priority over the river system’s ultimate survival; of each state government’s insistence on favouring their own irrigators over those in states further down the river; of federal and state National Party ministers happy to slip farmers a quiet favour, avoid enforcing the rules and turn a blind eye to blatant infringements; of federal Labor ministers who, even with no seats to lose in the region, were unwilling to make themselves unpopular by standing up for the rivers’ future.

I remember that the Howard government spent billions of city slickers’ money helping individual farmers make their irrigation systems more resistant to evaporation and seepage when all the benefits went to the farmer and none to the river system.

I remember all the infighting between government water agencies, and the mass fish kills during the recent drought in NSW and Queensland, for which the managers of the system accepted no responsibility.

Fortunately, reporters are adept at ignoring all the happy flannel up the front of government reports and finding the carefully hidden bad bits. And fortunately, we have the assistance of long-standing water experts, including the economist Professor Quentin Grafton, of the Australian National University, whose summary of the report on The Conversation website is headed: “Our national water policy is outdated, unfair and not fit for climate challenges.”

“The report’s findings matter to all Australians, whether you live in a city or a drought-ravaged town. If governments don’t manage water better, on our behalf, then entire communities may disappear. Agriculture will suffer and nature will continue to degrade,” he says.

The report’s proposal to make “water infrastructure developments” a much larger part of the National Water Initiative is a critical way to keep governments honest. For years, state and federal governments have used taxpayers’ dollars to pay for farming water infrastructure that largely benefits big corporate irrigators, Grafton says.

Last year the Morrison government announced a further $2 billion for its Building 21st Century Water Infrastructure project. Such megaprojects, he says, perpetuate the simplistic myths of the early 20th century that Australia – the driest inhabited continent on Earth – can be “drought-proofed”.

When governments signed the original initiative in 2004, they agreed to ensure investments in infrastructure would be both economically viable and ecologically sustainable. But many projects appear to be neither.

The report notes, for example, that the construction of Dungowan Dam in NSW means “any infrastructure that improves reliability for one user will affect water availability for others”. The “prospect of ‘new’ water is illusory”.

The report warns that projects that aren’t economically viable or ecologically sustainable can “burden taxpayers with ongoing costs, discourage efficient water use and result in long-lived impacts on communities and the environment”.

Equally disturbing is that billions of dollars for water infrastructure are presently targeted primarily at the agriculture and mining industries, while communities in desperate need of drinking water that meets water quality guidelines miss out, Grafton says.

Fortunately, the report isn’t so house trained as to avoid mentioning the gorilla the Morrison government prefers not to notice. There’s a lot about the consequences of climate change. It says droughts will likely become more intense and frequent and, in many places, water will become scarce.

In Grafton’s summary, the report says planning provisions were inadequate to deal with both the millennium drought and the recent drought in Eastern Australia. The 2012 Murray-Darling Basin Plan, for instance, took no account of climate change when determining how much water to take from rivers and streams.

The present federal government actually dismantled the National Water Commission in 2015, meaning we no longer have a resourced, well-informed agency to “mark the homework” and make sure the reforms were being implemented as agreed, Grafton says.

In 2007, the worst year of the millennium drought – and the year John Howard feared he’d lose the election if he didn’t match Labor’s promise to introduce an emissions trading scheme – Howard remarked that “in a protracted drought, and with the prospect of long-term climate change, we need radical and permanent change”.

Grafton says we’re still waiting for that change. “If Australia is to be prosperous and liveable into the future, governments must urgently implement water reform.”

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Flogging the monetary-policy horse harder won't help

It didn’t quite hit the headlines, but when Reserve Bank governor Dr Philip Lowe appeared before the House of Reps economics committee a week or so ago, he came under intense questioning from the Parliament’s most highly qualified economist, Labor’s Dr Andrew Leigh.

In my never-humble opinion, Leigh had the wrong end of the stick.

One criticism was that the board of the Reserve Bank is dominated by “amateurs” – business men and women appointed by successive federal governments. According to Leigh, pretty much every other central bank has its decisions on monetary policy (whether to raise or lower interest rates) made by committees of outside monetary experts, who are well equipped to challenge the bank’s own technical analysis.

This is a chestnut I’ve been hearing for decades. It smacks of the old cultural cringe: Australia is out of line with the big boys in America and Europe, therefore we’re doing it wrong. The people in our financial markets spend so much time studying the mighty US economy that their line’s always the same: whatever the Yanks are doing we should be doing.

Sorry, not convinced. It sounds to me like a commercial message from the economists’ union. Why give those plum appointments to businesspeople when you could be giving them to us? When you leave the “technical analysis” just to the hundreds of economists working in the Reserve, you risk them suffering from “group think”, we’re told.

And you’d escape group think by having a committee dominated by professional economists? Economics is the only profession that doesn’t suffer from “model blindness” – the inability to see factors that have been assumed away in the way of thinking about issues that’s been drummed into them since first year uni?

I don’t think so. It’s inter-disciplinary analysis that might improve the decisions, but that’s something most economists hate. After reading Kay and King’s Radical Uncertainty, I’m happier than ever with the idea that the governor and his minions should be put through their paces by people chosen for their real-world experience, not their membership of the economists’ club.

Leigh was on stronger ground when he asked why governments had stopped including a union boss along with all the businesspeople.

But Leigh’s main criticism was that the Reserve had been “too timid in focusing on getting inflation up into the target band”. For the “amateurs” reading this, he meant why hadn’t the Reserve cut the official interest rate earlier and harder since the global financial crisis, so as to get demand growing faster, creating more employment, lifting real wages and the inflation rate in the process.

After his board’s February meeting, Lowe announced that it would be doing $100 billion more “quantitative easing” (buying second-hand government bonds with created money, so as to lower longer-term public and private interest rates). Leigh asked why he hadn’t been more purposeful and announced $200 billion in purchases.

When you’re looking for things to criticise, saying that whatever’s just been done should have been done earlier or bigger is the easiest one in the book. Various other dissident economists are saying what Leigh’s saying.

But, as so often with economists, they’re not drawing attention to the assumptions – explicit and implicit – that lie behind their policy recommendations. Their key assumption here is that cutting interest rates is still as effective in encouraging borrowing and spending as the textbooks say it is.

If households are saving more than we’d like, the reason is that interest rates are too high; if businesses aren’t investing enough, the reason is that rates are too high. So, although interest rates have been at record lows for years, just a couple more cuts (achieved by conventional or unconventional means) would do the trick and get the economy growing strongly.

And although household debt is at record highs, this wouldn’t inhibit people’s willingness to load themselves up with more. Leigh and his mates seem to be having trouble with the concept of “diminishing returns” – that the third ice cream you eat never tastes as good as the first.

Though Lowe can’t or won’t admit it, the obvious truth is that, in the world economy’s present circumstances – “secular stagnation” and all that - monetary policy has pretty much run out of puff. Which explains why he’s been moving into unconventional monetary policy so reluctantly and why, for the whole of his term, he’s been pressing the government to make more use of its budget (fiscal policy) to get the economy moving.

Some of Lowe’s critics, being monetary specialists, have (like the Reserve itself) a vested interest in continuing to flog the monetary policy horse. Other’s deny the effectiveness and legitimacy of using fiscal policy to manage demand, as part of their commitment to Smaller Government.

But perhaps the most revealing exchange came when Leigh accused the Reserve of failing to act on what its own econometric model of the Australian economy, MARTIN, (as in Martin Place) would be telling it. The reply from Lowe’s deputy, Dr Guy Debelle (whose PhD from the Massachusetts Institute of Technology is a match for Leigh’s from Harvard) was dismissive.

“I would just note that macro models don’t do a very good job of modelling the financial sector [of the economy]. They failed pretty poorly in 2007 [the global financial crisis] when macro discovered finance. I think there’s an issue around transmission [the paths through which a change in interest rates leads to changes in other economic variables] which these models don’t take into account,” Debelle said.

“They’re linear. Actually, they assume that financial markets don’t exist, broadly speaking.”

I find it reassuring that our econocrats understand how primitive econometric models of the economy are, and don’t take their results too seriously.

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Why we're stuck with low interest rates for a long time

When it comes to interest rates, we’re living in the strangest of times, with rates lower than ever.

Savers are getting next to no reward for lending their money. Does this make sense? Not really. But we’re moving through uncharted waters and aren’t sure how we’ll get out of them, nor what happens next.

When Reserve Bank governor Dr Philip Lowe appeared before Parliament’s economics committee last Friday, he was asked whether we get the interest rates the world forces on us, or whether our authorities are free to set the rates they want.

Lowe’s answer was “we have the freedom, but we don’t”. Huh? “It’s complicated,” he explained.

Sure is. What he could have said is that we have some freedom, but not much. Were we to set our interest rates at a very different level to those in the rest of the world, there’d be a price for us to pay.

His own explanation was as clear as mud: we don’t have freedom in a structural sense, but we still have freedom in a cyclical sense.

Let me have a go. Remember that, as part of the process of globalisation over the past 40 years, the rich countries’ national financial markets are now so closely integrated with each other that each country exists in what’s pretty much a single global market, producing a single long-term real interest rate.

Purely by virtue of its big share of the global market, the things an economy as big as the US does can influence the level of the global interest rate. But nothing a middle-size economy like ours does is big enough to move the world rate. We are, as economists say, a “price taker”. We’re free only to take it or leave it.

The market price of something (including the price of borrowing money – the rate of interest) is set by the interaction of demand and supply: how much of it the buyers want to buy, relative to how much the sellers want to sell.

Lowe explained that the reason the “world equilibrium interest rate” has fallen so close to zero since the global financial crisis of 2008 is that, around the world, there’s been an increased desire by people to save, but a reduced desire to invest. That is, savers want to lend a lot more money than investors want to borrow, so interest rates have fallen sharply.

I think by now most economists accept this as the best explanation for the amazing low to which interest rates have fallen. It’s what Lowe means by “structural”. Just why saving is so much greater and investment so much smaller are questions economists are still debating.

Note that this explanation laughs at the standard view in neo-classical economics that saving increases when interest rates are higher, while investment increases when interest rates are lower.

Nor does it fit with the view that the “natural” rate of interest should reflect the rate of business profitability. Although the profits of some businesses have been hard hit by the pandemic, before it arrived – and even since, for most businesses – profitability has been high.

An alternative, minority view – pushed by economists at the Bank for International Settlements in Basel, the central bankers’ central bank – is that world interest rates have fallen so low because of the Americans’ excessive use of “quantitative easing” (central banks buying second-hand bonds and paying for them with money they’ve just created) after the global financial crisis and then, once the US economy had recovered, their failure to sell those bonds back to the market and so push interest rates back up.

An economy where households are saving too much of their incomes, and businesses don’t want to invest in expansion, is an economy that’s growing too slowly and not creating many new jobs. The solution, Lowe said, was to give people confidence to spend (and so get their rate of saving down) and give firms the confidence to invest.

How is he doing this? By cutting the official interest rate as close to zero as possible, and using quantitative easing to lower longer-term government and private sector interest rates. Really? Sounds to me like hoping to recover from a hangover by having another drink.

But back to the point. If interest rates ought to be higher to give savers a decent reward on the money they lend, why can’t our central bank set our interest rates higher than those being paid in other parts of the world?

Well, it can. We do retain that freedom. But because our financial markets are just part of the global market, what that would do is push up our exchange rate.

Why? Because financial institutions around the world would shift money into Australian dollars so as to get into our market and take advantage of our higher interest rates. When the demand for “the Aussie” exceeds the supply, the price goes up.

Such a rise in our currency’s rate of exchange against other currencies would reduce the international price competitiveness of our export and import-competing industries, thus reducing our economy’s growth and job opportunities.

That’s the price we’d pay for stepping out of line.

Lowe told the committee that the two main factors that drive the value of our dollar are world commodity prices and relative interest rates – that is, the level of our interest rates relative to other countries’ rates.

The prices we receive for the commodities we export (particularly iron ore) are up but, he said, the Aussie hadn’t appreciated (risen) by as much as you’d expect from past relationships. Why not? Because our lower official interest rates and quantitative easing have narrowed the interest rate “differential” between our rates and the rest of the world.

So, although rising commodity prices have caused our exchange rate to go higher, our quantitative easing has nevertheless caused the dollar to be “lower than it otherwise would be”. Ah. That’s the game he’s playing.

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Canberra's latest innovation: politics without policy

The most remarkable development since we returned to work this month is Scott Morrison’s barefaced announcement that the government has enough on its plate rolling out the virus vaccine and getting unemployment down, and so there’ll be no attempt to deal with any of our many other problems before the election late this year or early next.

There could be no franker admission that we live in an era of leaders who lack the ambition and courage to lead. Only on those problems so acute the mob is baying for the government to “Do Something!” will something be done – or grand announcements made that give the appearance it’s being done.

It’s Prime Minister as odd-job person. You don’t look for ways to secure our future, you sit there waiting for pressing matters to turn up: a light bulb that must be changed, a dripping tap that needs a new washer. Acute problems, yes; chronic problems, through to the keeper.

It’s the confirmation of what all but the rusted-on voters have long suspected: that our politicians are motivated far more by the desire to attain and retain office than by any great desire to make the world a better place for us to live and bring up our kids.

The opposing political parties continuously accuse each other of being “ideological” – of being mad free-marketeers or tax-and-spend socialists – but this serves mainly to con along their side’s true believers and conceal from the rest of us the political class’s overriding objective: to win the next election by fair means or foul.

It’s not hard to decipher Morrison’s thinking. Like the premiers, his popularity has soared following our successful containment of the pandemic, so his prospects of re-election are high – provided nothing goes wrong between now and then.

That does mean he must ensure there are no major glitches in the rollout of the vaccine – to which he will have to pay much attention – but he needs no further achievements to improve his chances of winning.

Indeed, anything else he attempts to fix offers more chance of losing the votes of the disaffected than of adding votes to his existing pile. According to informed sources (aka well-briefed gallery journalists), there’s little enthusiasm for “reform” of taxation, religious freedom, industrial relations or superannuation.

The government’s existing proposals for modest changes to industrial relations rules – about which the unions are making such fuss at present – will be put to the Senate next month but, should they fail to pass, will be dropped.

Some Liberal backbenchers’ urgings that the legislated phased increase in compulsory employer super contributions from 9.5 per cent of wages to 12 per cent be reversed (which I support) and the success of the non-profit industry super funds be sabotaged in other ways (which I don’t), have yet to be decided on, but will probably be rejected.

We’re told that Morrison’s thinking in turning away from any further policy improvement is that, after all the upheavals of 2020, the voters just want everything to calm down for a while. But that’s probably always true of many politician-weary voters. Sounds to me like a convenient rationalisation for a deeply cynical and self-serving political calculation.

You might expect this to hugely disappoint a policy wonk like me, but I confess my feelings are divided.

Morrison’s decision strike cuts both ways. He won’t be doing many things he should, but he won’t be doing many things he shouldn’t. The need for tax reform, for instance, is always with us – and urgent only in the minds of tax economists, who think of little else, and those well-to-do urgers hoping it will involve them paying less while others pay more.

There are, of course, many big problems he’ll be doing nothing to improve: the misregulation of aged care, the need for better-considered mental healthcare, the way the universities have been hung out to dry during the pandemic, the neglect and destruction of technical and further education, the many respects in which governments help oldies (including their parents) screw the younger generation.

The most urgent and important area of neglect is, of course, our response to climate change. But the federal Coalition is so deeply divided on the issue – and Morrison so hog-tied by loudmouth Liberal backbenchers and the Neanderthal Nationals – that it’s a delusion to expect genuine progress without a change of government.

And maybe not much then. As we speak, Labor is working on how many of its own policies to throw overboard. As Labor was reminded by its shock defeat in 2019, the trouble with policies is that they’re much harder for you to sell than for your opponents to misrepresent.

A big part of the reason politicians have become so lacking in policy courage is the way election campaigning has become so negative. After last time, the coming election is shaping as the battle of the scare campaigns.

Bulldust will fly on both sides. Both sides are readying themselves by having as few policies as possible. An unthinking electorate is being rewarded with policy-free elections. How edifying.

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The official forecasters’ latest guess is whistling in the dark

Although everyone knows it’s impossible to know what the future holds, everyone – from prime ministers to punters – asks economists to forecast what will happen to the economy. The economists always oblige. The latest set of official forecasts for our economy were laid before us by the Reserve Bank on Friday. You beaut. Now all is known.

Though economists have an appalling forecasting record, we are undeterred in asking for more, and the economists are undeterred in providing them.

Psychologists tell us people suffer from “the illusion of control” – the tendency to overestimate their ability to control events. Once we know what’s going to happen, we can duck and weave accordingly.

Maybe economists keep producing their forecasts merely to be obliging, but I suspect they suffer their own illusion: that having a dodgy forecast is better than not having any.

Particularly at times when we’re trying to recover from a recession – recessions the economists rarely if ever saw coming – Reserve Bank governors produce optimistic forecasts, or try to sound upbeat about a not-so-wonderful forecast, for the justifiable reason that what actually happens can, to some extent, be influenced by what enough people expect to happen. People tend to act on their expectations, as part of their illusion of control.

Reserve governor Dr Philip Lowe sounded very upbeat about his latest forecasts but, when you examine them closely, they’re not all that wonderful. Funny thing is, most of his optimism was based on the recession being not nearly as bad as he was forecasting throughout most of last year.

If he was conscious of the irony of sounding confident about this year’s forecast because last year’s had been so wrong, he did a good job of concealing it.

He’s certainly right in saying the economy bounced back after the easing of the initial lockdown far earlier and more strongly than anyone expected – with the possible exception of Scott Morrison, who was no doubt praying for another miracle.

If ever there was proof that we live in an age of “radical uncertainty” – where we must make decisions (or forecasts) on utterly insufficient information – the past year must surely be it.

The three after-the-fact reasons Lowe gave for being so wrong – we did a better job of suppressing the virus than expected; the government applied a lot more budgetary stimulus than expected; and businesses and households adapted their behaviour in unexpected ways to minimise the economic cost of the lockdown – are a useful checklist of what could go wrong with this year’s forecast of above-trend growth in real gross domestic product of 3.5 per cent in calendar 2021 and a further 3.5 per cent in 2022.

Such a seemingly optimistic prediction could prove just as wrong as last year’s – though in the opposite direction – if something goes wrong with the rollout of the vaccines or our containment of the virus, if the government’s imminent termination of its main stimulus measures proves premature, or if the behaviour of businesses and households is less helpful than the forecasters have assumed.

I suspect that most of the improvement in the economy’s rate of growth is improvement that’s already happened. It’s the bounce-back from the lifting of the lockdown, not the start of a sustainably strong recovery.

By about the middle of this year, the rapid bounce-back will have run its course, and the recovery proper will begin at a much weaker rate. If so, those two years of seemingly way-above-trend annual growth will look better than they really are, being partly an arithmetic illusion caused by our obsession with rates of change rather than the levels of GDP. The arithmetic catching up with the reality.

What forces will be driving the economy onward and upward? Not population growth, not a lower dollar, not a roaring world economy, not healthy business investment. Consumer spending is forecast to be strong, but it won’t get that strength from the forecast growth in real wages of a mere 0.25 per cent a year for the next two and a half years.

Nor will spending be powered by further budgetary stimulus. With the end of the JobKeeper wage subsidy and maybe the JobSeeker supplement in March, stimulus is being cut. No, if consumer spending stays strong it will be because stimulus payments made but not spent last year will be spent this year. Maybe. Maybe not.

But the ultimate proof that Lowe is not as optimistic as he appears is in his confident prediction that the Reserve won’t need to consider raising interest rates until 2024 at the earliest. Why? Because “wages growth and inflation are both forecast to remain subdued”. If so, the future won’t be all that wonderful.

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