Frydenberg right to put full employment ahead of budget repair

It’s hard to feel sympathy for a government that used ignorant scaremongering about the public debt to get elected in 2013, but now doesn’t want to mention the D-word and is being attacked by its own deluded conservatives (plus point-scoring Laborites). Even so, Treasurer Josh Frydenberg has his priorities right in leaving budget repair for later.

It’s noteworthy that the governments’ critics have turned their guns on the likelihood that Scott Morrison will use next year’s pre-election budget to announce yet another one-year extension of the low and middle-income tax offset at a one-off cost to the budget of $8 billion, while studiously ignoring the stronger case for abandoning the stage three tax cut legislated for July 2024, with an ongoing cost of double that.

Stage three is aimed at benefiting higher income-earners. Could this be mere coincidence? Trouble is, as Frydenberg has explained, “we have been working to a clear fiscal [budgetary] strategy to drive the unemployment rate to historically low levels” as we emerge from this great economic shock.

This being so, the only justification for a country with so much debt awarding itself another unfunded tax cut is that most of it will be spent rather than saved and thus hasten our achievement of very low unemployment.

But since households’ rate of saving tends to rise with their income, that makes the cheaper temporary low-and-middle tax cut likely to help much more than the dearer and long-lasting tax cut aimed at higher income-earners.

The belief that cutting tax rates helps by giving people greater incentive to work is an article of (self-interested) faith among high income-earners. And for the Liberal Party. Indeed, Frydenberg repeats this supposed self-evident truth many times a week.

But it’s not based on economic theory, nor supported by empirical evidence. The evidence is that a person’s marginal tax rate (the tax on any extra income they earn) doesn’t greatly affect the work effort of primary earners (mainly, men with full-time jobs) but does affect the work effort of secondary earners – particularly those with young children.

This is why the government’s decision in this year’s budget to greatly reduce the cost of childcare for second and subsequent children should do far more to raise workforce participation than the stage three tax cut ever could. Money well spent.

This, however, doesn’t fit the biases of many of those who profess to be so worried about our high public debt. Their real motive is just to pay less tax, which explains why they think all tax cuts and tax concessions are good, but all government spending is bad. This is economic nonsense.

Leaving aside the self-interest of high income-earners, many conservatives’ concern about our high level of debt is just instinctive. They have a gut feeling that it must be dangerous. They really ought to give the matter more study.

But here’s something even many well well-versed people don’t realise, mainly because it hasn’t suited the politicians and econocrats to tell them: effectively, all the bonds the government has had to issue to cover the huge budget deficits since the pandemic are now held by . . . the Reserve Bank of Australia - which, of course, is owned by the federal government.

So most of the extra interest the feds are paying will find its way back to the budget in the form of higher dividends from the Reserve.

This is not because the Reserve bought the new bonds directly from the government, but because its extensive program of “quantitative easing” – buying second-hand government bonds and paying for them by creating money out of thin air – has amounted to a sum roughly equal to the new bonds sold to the public (mainly to superannuation funds).

But the most important thing to understand is Frydenberg’s repeated statement that the government’s strategy is to “repair the budget by repairing the economy”. This is not just another meaning-free slogan, it’s a statement of fundamental economic truth and political reality.

Governments rarely pay off the debt they incur. Rather, they reborrow to cover their bonds as they fall due, and concentrate on ensuring the economy grows faster than the debt’s growing, thus reducing the debt relative to the size of the economy – and the taxes being paid by the people in the economy.

Which brings us back to where we started: Frydenberg’s strategy of forcing the pace of economic growth to get the rate of unemployment sustainably down to the low 4s or even lower.

This strategy – to keep pushing unemployment down until it’s clear the inflationary pips are squeaking – was first suggested by Professor Ross Garnaut in his book, Reset, and taken up by Peter Martin, of The Conversation website.

It was inspired by the example of the United States which, before the pandemic, got unemployment down to near 3 per cent before wages got moving.

The first point is that there’s nothing better you could do to make the economy bigger (and bigger relative to the public debt) than to ensure more of those who want to work actually get jobs, earning incomes and paying taxes.

Labour lying idle is the worst kind of economic inefficiency.

But the strategy has a deeper objective: to make the market for labour so tight that employers have no option but to increase wages to retain the people they need.

Like all sensible economic managers, Frydenberg’s unspoken concern is the risk that, once the economy has rebounded from the coronacession - with considerable help from temporary fiscal stimulus - it falls back into the “secular stagnation” low-growth trap that the rich countries have been caught in since the global financial crisis.

Our wage growth has stagnated since this government came to power. It’s the most important single cause and consequence of our low growth. Labor will be making hay with this in the election campaign.

Ending wage stagnation is the key to a sustainable return to a healthy rate of economic growth. And given the Coalition’s tribal objection to using regulatory reform to get wages moving, getting unemployment down and tightening the labour market is the right solution to the problem.

Once it has been solved, the budget balance will be improved and the public debt will be less worrying to the unversed. If Frydenberg can get us back to the lowest unemployment since the 1970s, he’ll be up there with Paul Keating as one of our greatest treasurers.

In this column last Monday I overstated the regressiveness of the stage three tax cut. I quoted a summary of the findings of analysis by the Parliamentary Budget Office, but should have checked it. The office’s actual findings are that about two-thirds of the tax cut will go to taxpayers earning $120,000 or more. The highest-earning 20 per cent of taxpayers will receive more than three-quarters of the money. My statement that only a third will go to women remains correct.

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Like election promises, many budget forecasts never materialise

You’d think after the fiasco of Back in Black, Josh Frydenberg would have learnt not to count his budgets before they’re hatched. But no, he’s a politician facing an election and nothing else matters.

His message in this week’s mid-year budget update is: the virus is in the past and the economy is fixed – as you’d expect of such great economic managers as our good selves.

Well, it’s not certain the pandemic has finished messing with the economy. Unmessed with, we can be confident the economy will bounce back the way it did after last year’s national lockdown. But there’s no guarantee it will be soaring high into the sky.

The main thing to remember is that a budget forecast is just a forecast. Under all governments – but particularly this one – a lot of forecasts never come to pass.

It was the unexpected pandemic, of course, whose arrival stopped the budget deficit ever turning into a surplus, despite Morrison and Frydenberg’s repeated claim in the last election campaign that we already were Back in Black. They even produced coffee mugs to prove it.

Frydenberg’s big word this week for the economy under his management is “strong”. He is sticking to the government’s “plan to secure Australia’s strong recovery from the greatest economic shock since the Great Depression”.

“Having performed more strongly than any major advanced economy throughout the pandemic, the Australian economy is poised for strong growth” in real gross domestic product of 4.5 per cent this calendar year and 4.25 per cent next year, his budget outlook says.

This reflects “strong and broad-based momentum in the economy”. “Income-tax cuts and a strong recovery in the labour market are seeing household consumption increase at its fastest pace in more than two decades” while “temporary tax incentives will drive the strongest increase in business investment since the mining boom, with non-mining investment expected to reach record levels”.

Consistent with the “strong economic recovery”, the rate of unemployment is forecast to reach 4.25 per cent in the June quarter of 2023 which, apart from a brief period before the global financial crisis in 2008, would be the first time we’ve had a sustained unemployment rate below 5 per cent since the early 1970s.

This, should it actually come to pass, really would be something to crow about. But the return to a goal of achieving genuine full employment has been made necessary by this government’s chronic inability to achieve decent growth in real wages.

Without such growth you don’t get sustained strong growth in consumer spending and, hence, adequate growth in the economy overall. Thus the economic managers have become so desperate they’re trying to create a shortage of labour, as the only way of forcing employers to resume awarding decent pay rises.

Trouble is, this could become a vicious circle: you won’t get employment growing strongly and unemployment falling without sustained strong growth in consumer spending, but you won’t get that until real wages are growing strongly.

Frydenberg’s advance advertising for the budget update said that, under his revised forecasts, the rate of increase in wages will get greater each year for the next four years. According to his modelling, he said, on average a person working full time could see an increase of $2500 a year till 2024-25.

But, assuming it happens, that makes it sound a lot better than it is. Comparing the rise in the wage price index with the rise in the consumer price index, real wages fell by 2.1 per cent last financial year, 2020-21.

Since that’s in the past, we know it actually happened. Turning to the budget’s revised forecasts, real wages are expected to fall by a further 0.5 per cent this financial year, before rising by 0.25 per cent in the following year, then by 0.5 per cent the next year and by 0.75 per cent in 2024-25.

Doesn’t sound like a lot to boast about. If it actually happens, Frydenberg’s “plan to secure the recovery and set Australia up for the future” will have taken another three or four years before it’s delivering for wage earners.

To be fair, this week we did get impressive evidence that the economy is rebounding strongly from the lockdowns in Sydney, Canberra and Melbourne. In just one month – November – employment grew by a remarkable 366,000, while the unemployment rate fell from 5.2 per cent to 4.6 per cent. And there was a big fall in the rate of underemployment.

It’s a matter of history that the economy did bounce back strongly from the initial, nationwide lockdown last year. (This, by the way, shows the pandemic bears no comparison with the Great Depression.)

It’s noteworthy that, whereas the update’s fine print says the economy is “rebounding” strongly, Frydenberg says the economy is “recovering” strongly. The two aren’t the same. This week’s wonderful employment figures say we can be confident the economy is rebounding after the latest lockdowns just as strongly as in did the first time.

But a rebound gets you quickly back to square one. It doesn’t necessarily mean that, having rebounded, you’ll go on growing at a faster rate than the anemic rate at which we were growing before the pandemic.

That remains to be seen. And that’s where Frydenberg is being presumptuous with all his confident inference that a strong recovery’s already in the bag.

Lots of things could confound his happy forecasts. The obvious one is more trouble from the virus. Less obvious is this. You may think that getting unemployment down to 4.6 per cent in November means we’ll have no trouble achieving the forecast of getting it down to 4.25 per cent by June 2023.

But you’ve forgotten something. One important reason we’ve had so much success getting unemployment down to amazing levels is because we’ve done it with closed borders. When the borders reopen, it will become a lot harder.

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Inheritance: the major life event no politician wants to mention

When I was growing up, my family didn’t have much. We lived rent-free in a succession of down-at-heel manses (the Salvos called them “quarters”), but my father’s stipend was a small one on which to support four kids.

Mum worried about where my parents would live after they retired but, with much scrimping and saving (including making my sisters hand over almost all their wages), they built and paid off a small cottage at Lake Macquarie, near Newcastle.

After my father died, Mum spent many impatient years in God’s waiting room, longing to be “promoted to Glory” and thus reunited with my Dad.

That was in 2004 but, though all she had was the cottage and a thousand or two in the bank, that was enough for the four of us to receive one or two hundred thousand each. By then, we were middle-aged and well established. It was nice to add it to the pile, but we didn’t desperately need it.

More people are receiving significant inheritances these days. They’re getting bigger and will get bigger still.

We worry that houses are becoming unaffordable, but the other side of ever-rising house prices is that inheritance has become an important event in most people’s lives. Many people look forward to it, and family disputes or unhappiness over wills is not uncommon.

But here’s a funny thing. When was the last time you heard a politician talking about inheritances? You didn’t. They never do. I’m sure they think about their own inheritance, but they never want to mention yours or anyone else’s.

In the 1970s, Australia became one of the few rich countries to abolish death duties (state and federal). People were so happy to see the end of them that death duties have become one of the bogeymen of federal politics.

Want to start a scare campaign? Spread a rumour that the other side has a secret plan to reintroduce death duties. Want to oppose limits on share franking credits? Claim it’s a form of death duties.

This is why, compared with other countries, we have little information – and even less reliable figures – on the size and dispersion of inheritances. The pollies fear that if they let the bureau of statistics ask people questions about their wealth, their opponents would jump to conclusions.

This explains why last week’s report from the Productivity Commission was “the first comprehensive research report on wealth transfers” and was initiated by the commission, not requested by the government.

The report explains that rising house prices are just the main reason inheritances are getting bigger. Another is that, with superannuation having been compulsory for about 30 years, more people are dying with unspent super balances. And, of course, family sizes are getting smaller.

The report finds that each generation has been wealthier than the previous one, though Baby Boomers have done particularly well. It found that $120 billion was transferred in 2018 – 90 per cent as inheritances and 10 per cent as earlier gifts – which was more than double that in 2002.

The average inheritance, we’re told, was $125,000. But that included a few large inheritances plus many much smaller ones. The average inheritance received by the wealthiest 20 per cent of recipients was $121,000, and by the poorest 20 per cent was about $35,000. Or so we’re told.

Not surprisingly, the children of rich parents received much bigger inheritances than the children of poor parents. Nor is it very surprising that the children of rich parents tend also to be rich, while the children of poor parents tend also to be poor.

But this may surprise: if you switch from focusing on absolute dollars to looking at relative size, you find that the smaller inheritances received by people without much wealth increase that wealth by a much higher percentage than the larger inheritances increase the wealth of already-rich recipients. The same thing can be seen in other countries’ figures for wealth transfers.

So, to a small extent, the growing prevalence of inheritance is reducing the gap between rich and poor. And, as the report’s authors stress, inheritance isn’t the main reason the children of the rich are also rich and the children of the poor also poor.

No, monetary inheritances explain only about a third. The rest is explained by “all the other things parents give their children – education, networks, values and other opportunities”. And remember, IQ is mainly genetic. Luck is another factor.

Did you notice how little of the wealth transfers gifts accounted for? The authors say they couldn’t find strong evidence of larger transfers from the Bank of Mum and Dad “despite popular belief”.

Sorry, not convinced. By their own admission, the data they’ve been using are “somewhat limited”. My guess is that more people receive inheritances than their figures show. The size of inherited amounts seems very low. As for parents having to cough up to help their kids buy a home, it’s become a big deal relatively recently.

So if the statisticians can’t find much evidence of it, that’s probably because they haven’t been asking the right questions.

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Stop kidding: the 2024 tax cut will be economically irresponsible

It’s a safe bet that, once we’ve seen the mid-year budget update on Thursday, we’ll hear lots of economists and others saying the government should be getting on with budget repair: spending cuts and tax increases.

That’s despite the update being likely to show that the outlook for the budget deficit in the present financial year and the following three years is much better than expected in the budget last May.

It’s also true even though the case for “repairing the budget by repairing the economy” is sound and sensible. The federal public debt may be huge and getting huger, but, measured as a proportion of gross domestic product, the present record low-interest rates on government bonds mean the interest burden on the debt is likely to be lower than we’ve carried in earlier decades.

It’s true, too, that recent extensive stress-testing by the independent Parliamentary Budget Office has confirmed that the present and prospective public debt is sustainable.

It remains the case, however, that both this year’s Intergenerational report and the budget office project no return to budget surplus in the coming decade, or even the next 40 years – “on present policies”.

So, it’s not hard to agree with former Treasury secretary Dr Ken Henry that doing nothing to improve the budget balance is more risky than it should be, too complacent. It leaves us too little room to move when the next recession threatens.

And, indeed, the Morrison government’s revised “medium-term fiscal strategy” requires it to engage in budget repair as soon as the economy’s fully recovered.

But there’s no way Scott Morrison wants to talk about spending cuts and tax increases this side of a close federal election. Nor any way Anthony Albanese wants to say he should be.

Of course, that won’t stop Morrison & Co waxing on about how “economically responsible” the government is – especially compared to that terrible spendthrift Labor rabble. Nor stop Labor pointing to all the taxpayers’ money Morrison has squandered on pork barrelling, and promising an Albanese government would be more “economically responsible”.

But here’s my point. There’s a simple and obvious way both sides could, with one stroke, significantly improve prospective budget balances, and because it would be front-end loaded, disproportionately reduce our prospective public debt over years and decades to come.

There’s no way such a heavily indebted government should go ahead with the already-legislated third stage of tax cuts from July 2024, with a cost to the budget of more than $16 billion a year.

Those tax cuts were announced in the budget of May 2018 and justified on the basis of a mere projection that, in six years’ time, tax collections would exceed the government’s self-imposed ceiling of 23.9 per cent of GDP. That is, the government would be rolling in it.

It was said at the time that it was reckless for the government to commit itself to such an expensive measure so far ahead of time. It was holding the budget a hostage to fortune.

But so certain were Morrison and Josh Frydenberg that the budget was Back in Black that, soon after winning the 2019 election, they doubled down on their bet and insisted the third-stage tax cuts be legislated. Desperately afraid of being “wedged”, Labor went weak-kneed and supported the legislation.

If, at the time, a sceptic had warned that anything could happen between now and 2024 – a once-in-a-century pandemic, even – they’d have been laughed at. But they’d have been right.

Just last week, Finance minister Simon Birmingham righteously attacked his opponents for making election promises that were “wasteful and unfunded” – by which he meant that they would add to the budget deficit.

But the tax cut both sides support is now also “unfunded”. We’ll be borrowing money to give ourselves a tax cut. That’s economically responsible?

It might be different if you could argue that the tax cut would do much to support the recovery, but it wasn’t designed to do that, and it won’t. Stage three is about redistribution, not stimulus and not (genuinely) improved incentives.

The budget office has found that about two-thirds of the money will go to the top 10 per cent of taxpayers, on $150,000 or more. Only a third will go to women. So, the lion’s share will go to those most likely to save it rather than spend it. Higher saving is the last thing we need.

Now, I know what you’re thinking. Get real. There’s no way either side would want to repeal a tax cut, especially just before an election.

Regrettably, that’s true. But, this being so, let’s tolerate no hypocrisy from politicians – or economist urgers on the sidelines – making speeches about “economic responsibility” without being willing to call out this irresponsible tax cut.

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Don't let any politician convince you your taxes will be going down

Whenever an election approaches, we can expect the bulldust count to soar on claims about the prospects for the economy and, particularly, about how well the budget’s being managed.

Election campaigns inhabit a financial fantasyland, with both sides promising lower taxes, higher government spending and improved budget balances.

Our politicians have spent decades training voters to believe that, when it comes to the budget, we can have our cake and eat it.

It’s now pretty clear that, whether the federal election is held in March or May, Scott Morrison will be repeating the winning formula he used last time: the Liberals are the party of lower taxes, whereas Labor is the big-spending, big-taxing party.

You want lower taxes? Vote Liberal.

But take my tip. Whatever party gets voted in, and whatever tax cuts they’ve promised in the short term, over any longer period taxes will be going up.

Why? Two reasons, one general, one specific. And remember this: one of Morrison’s claims is to have abolished “bracket creep” – the way inflation causes you to pay a higher proportion of your income in tax. He hasn’t.

The general reason we’ll be paying more in tax is that, as the Australian Council of Social Services reminded us this week, “as people become wealthier, they expect better health, education and income support and modern public infrastructure.

“As the populations of wealthy nations age, we sensibly devote more resources to health and [aged] care.”

Just so. Where it concerns budgets, the notion of Smaller Government – lower government spending and lower taxes – was always a pipedream.

As the Economist magazine has written recently, “stopping further growth of government over the coming decades will be close to impossible. The most important debates to come will be about the state’s nature, not its size.”

Why is it that economists, business people and mainstream politicians unceasingly advocate economic growth? To raise our material standard of living. To give us more income to spend on the things we want, to improve our lives.

But here’s the trick: many of the things we want more of come from the government, or are heavily subsidised by the government. We pay for them indirectly, via the taxes we pay.

That’s true of health (doctors, medicines, hospitals), education (schools, TAFE and universities), all the various forms of “care” (childcare, disability care, aged care) and much else.

As our incomes rise over time, we spend more on some things but not others, as we see fit. Much of what we choose to spend more on comes from the private sector. Better homes, for instance. Not a problem, as young waiters say incessantly.

But when the things we want more of come via the government, suddenly there is a problem. What? You want me to pay higher taxes just because I demanded more and better health care? Outrageous.

We even have conservative politicians trying to tell us paying more tax for more health care is bad for the economy. Bad for jobs and growth.

What? Employing more doctors, nurses and other health workers is bad for jobs? Spending more on health is bad for growth? Are you stupid? It is growth.

Over the 30 years between 1991 and 2019, federal government spending per person grew at the rate of 1.7 per cent a year, after inflation.

What we got for that included the introduction of Medicare, pensions (but not unemployment benefits) linked to wage increases so pensioners’ living standards kept pace with the rest of the community, and introduction of the National Disability Insurance Scheme.

But get this. Between 2010 and 2018, the rate of real growth in federal government spending per person slowed to just 0.5 per cent a year.

And the budget last May projected that the rate of growth from 2022 to 2024 would be minus 0.7 per cent a year.

But the independent Parliamentary Budget Office warned in its recent review of budget projections to 2032: “Australians’ expectations about the volume and quality of services provided by government mean greater risks that [public expenditures] will be higher”.

That’s a bureaucrat’s way of saying “You guys have got to be kidding”.

The latest growth in real annual spending per person of just 0.5 per cent is unsustainable. The projected fall of 0.7 per cent a year is simply unbelievable.

The Morrison government has been trying to cover the cost of its various tax cuts by, as ACOSS and the community sector have said, running a “low-cost government”. It claims to have guaranteed the provision of “essential services” but, in truth, it’s been cutting corners and penny-pinching all over the place.

Its income support payments to people of working age, of just $45 a day, are well below the poverty line. We have a growing number of people who can’t afford housing, but the government refuses to spend on social housing.

The government imposes long waiting times for in-home aged care packages and other care services – which are often of poor quality. It seems to be yielding to pressure to reduce funding of the national disability scheme.

It has neglected to spend what it should on dental care and mental health care. Its privatised system of employment service providers has failed to reduce entrenched, long-term unemployment. It has allowed a decline in public and community education and training infrastructure.

It has failed to Close the Gap with community-controlled Aboriginal and Torres Strait Islander services.

And it’s made inadequate investment in the transition to a clean economy, disaster resilience and other help for people to adapt to global warming.

Governments can get away with this neglect for only so long before voters start pushing back and – as we saw with the big spending on aged care in this year’s budget, following the royal commission’s damning report – government spending has to catch up.

And where government spending goes, taxes follow – whatever false impressions pollies try to give us in election campaigns.

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Beware of governments using algorithms to collect revenue

A great advantage of having children and grandchildren is that they can show you how to do things on the internet – or your phone – that you can’t for the life of you see how to do yourself. But a small advantage that oldies have over youngsters is that we can remember how much more clunky and inconvenient life used to be before the digital revolution.

When you had to get out of your chair to change the telly to one of the other three channels. When you spent lunchtimes walking to companies’ offices to pay bills. When you had to visit your own branch of a bank to get cash or deposit a cheque.

When you had to write and post letters, rather than dashing off an email or text message. When we were paid in notes and coins rather than via a direct credit. When buying something from a business overseas was too tricky to ever contemplate.

Computers connected by the internet are transforming our world, making many of the things we do easier, more convenient, better and often cheaper. Businesses are adopting new technology because they see it as a way to cut costs, compete more effectively, attract more customers and make more money.

Governments have been slower to take advantage of digitisation, websites, artificial intelligence and machine learning. But there’s a lot to be gained in reduced red tape, convenience for taxpayers, efficiency and cost saving, and now governments at all levels are stepping up their use of new technology – which most of us would be pleased to see.

But, as with so many things, new technology can be used for good or ill. The most egregious case of government misuse of technology was surely Centrelink’s “automated income compliance program” aka robo-debt.

Here, a dodgy algorithm was used to accuse people on benefits of understating their income over many years and to demand repayment. Despite assurances by the two ministers responsible – Christian Porter and Alan Tudge – that all was fair and above board, huge anxiety was caused to many unjustly accused poor people.

The Coalition government obfuscated for years before a court finally ruled the program unlawful and the government agreed to return $1.8 billion. For a scheme intended to cut costs, it was an immoral own goal.

But last week the NSW Ombudsman, Paul Miller, revealed that something similar had been going on in NSW. Between 2016 and 2019, the state’s debt-collection agency, Revenue NSW, unlawfully used an automated system to claw back unpaid fines from financially vulnerable people, in some cases emptying bank accounts and leaving them unable to buy food or pay rent.

The automated system created garnishee orders, requiring banks to remove money from debtors’ bank accounts, without the debtors even being informed. The computer program took no account of any hardship this would impose.

Between 2011 and 2019, the number of garnishee orders issued by Revenue NSW each year jumped from 6900 to more than 1.6 million. The Ombudsman began investigating after receiving “a spate of complaints from people, many of them financially vulnerable individuals, who had discovered their bank accounts had been stripped of funds, and sometimes completely emptied.

“Those people were not complaining to us about the use of automation. They didn’t even know about it.”

As usually happens, we find out about this long after the problem has been (apparently) rectified. Unlike the feds, the NSW Revenue office agreed to modify its process in 2019, so that garnishee orders are no longer fully automated.

People identified as vulnerable were excluded from garnishee orders. And a minimum amount of $523.10 (!) is now left in the garnished account.

But Revenue NSW didn’t seek advice on whether the original scheme was legal, so the Ombudsman did. It wasn’t. The lawyers say the law gives the right to extract money from people to an “authorised person” – not to a machine.

So, two isolated incidents – one federal, one state – and everything’s now fixed? Don’t be so sure. Miller says that, in NSW, other agencies are known to be using machine technologies for enforcement of fines, policing, child protection and driver licence suspensions.

How do we know it isn’t happening – or will happen – in other states?

NSW Finance Minister Damien Tudehope said garnishee orders were a last resort after a person had been contacted multiple times in writing and given options about overdue fines.

“For those who have chosen to ignore our notices and simply don’t want to pay, the community has an expectation we take action to recover what is owed,” he said.

Yes, but few of us want governments riding roughshod over people who can’t pay because they’re on poverty-level social security benefits.

I leave the last word to Anoulack Chanthivong, NSW opposition finance spokesman: “The pursuit of economic efficiency through artificial intelligence should never come at the expense of treating our more vulnerable citizens with dignity and decency.

“Governments at all levels are meant to serve our community and make their lives better, not find unlawful ways to make them worse.”

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Panicking financial markets could stuff up another global recovery

In economics, there’s not much new under the sun. When I became a journalist in the mid-1970s, the big debate was about which mattered more: inflation or unemployment. You may not realise it, but that’s the great cause of contention today.

With prices having risen surprisingly rapidly this year in the US and Britain – but few other advanced economies – we’re witnessing a battle between people in the financial markets, who fear inflation is back with a vengeance and want interest rates up to get it back under control, and the central banks.

The central bankers see the higher prices as a transitory consequence of the supply and energy disruptions arising from the pandemic. They fear that, once their economies have rebounded from the government-ordered lockdowns and fear-induced reluctance to venture forth, their economies will soon fall back to into the “secular stagnation” or weak-growth trap that gripped the advanced economies for more than a decade following the 2008 global financial crisis until the arrival of the pandemic early last year.

The decade of weak growth involved high rates of saving but low rates of business investment, record low interest rates, weak rates of improvement in the productivity of labour, low wage growth and, not surprisingly, inflation running below the central banks’ target rates. All that spelt adequate supply capacity, but chronically weak demand.

In the months before the arrival of the pandemic, central banks grappled with the puzzle of why economic growth had been so weak for so long – and what they could do about it.

In particular, our Reserve Bank had to ask itself why it had gone year after year forecasting an imminent rise in wage growth, without it ever happening. With such weak growth in real wages – the economy’s chief source of income – it was hardly surprising that consumer spending and growth generally were weak, and that inflation remained well below the Reserve’s target.

Earlier this year, with the economy rebounding so strongly from last year’s nationwide lockdown – but before the Delta setback – the econocrats in the Reserve and Treasury realised that recovering from the coronacession wouldn’t be a problem.

But once all the fiscal stimulus and pent-up consumer spending had been exhausted and the economy returned to its pre-pandemic state, where would the impetus for further growth come from? Certainly not, it seemed, from healthy growth in real wages.

What explained the way we’d finally joined the Americans in their decades-long wage stagnation? And what could central banks do about it? The obvious answer seemed to be to run a much tighter labour market and see if that got wages moving.

Perhaps, as a hangover from the 1970s and ’80s, when the world really did have an inflation problem, we’d continued worrying too much about inflation and not enough about getting the economy back to full employment.

For years we’d been making these fancy theoretical estimates of the NAIRU – the non-accelerating-inflation rate of unemployment; the point to which unemployment could fall before labour shortages caused inflation to take off – but unemployment rates had fallen quite low without the remotest sign of excessive wage growth.

Perhaps we should be less pre-emptive. Stop relying on theoretical estimates and just keep allowing the economy to grow until we had proof that wages really were taking off before we applied the interest-rate brakes.

And perhaps we should base decisions to raise rates on actual evidence of a problem with inflation – including, particularly, evidence of excessive growth in real wages – rather than on mere forecasts of rising inflation.

Our Reserve’s thinking was matched by the US Federal Reserve’s. Chairman Jerome Powell told Congress in July 2019 “we have learned that the economy can sustain much lower unemployment than we thought without troubling levels of inflation.”

Which brings us to this year’s budget, back in May. Although the economy seemed clearly to be rebounding from the coronacession, and debt and deficit were high, Treasurer Josh Frydenberg swore off the disastrous policy of “austerity” (government spending cuts and tax increases) that panicking financial markets had conned the big advanced economies into after the Great Recession, thus crippling their recoveries.

While allowing the assistance measures for the initial lockdown to terminate as planned, the budget announced big spending on childcare and aged care, following a strategy of “repairing the budget by repairing the economy”.

Treasury secretary Dr Steven Kennedy and Reserve governor Dr Philip Lowe made it clear they wanted to keep the economy growing strongly until the unemployment rate was down to the low 4s – something we hadn’t seen for decades – as the best hope of getting some decent growth in real wages.

This is still what the central banks want to see: a new era of much lower unemployment and, as a consequence, much healthier rises in real wages to power a move to stronger economic growth than we saw in the decade before the pandemic.

But now Wall Street is panicking over the surprisingly big price rises caused by the pandemic’s disruption, and has convinced itself inflation’s taking off like a rocket. If the Fed doesn’t act quickly to jack up interest rates, high and rising inflation will become entrenched.

Despite our marked lack of worrying price rises, our financial markets – not known for their independent thinking – have joined the inflation panic, betting that, despite all Lowe says to the contrary, our Reserve will be putting up rates continuously through the second half of next year.

So convinced of this are the market dealers that the (better educated) market economists who service them have begun thinking up more plausible arguments as so why rates may need to move earlier than the Reserve expects. ANZ Bank’s Richard Yetsenga, for instance, fears that if everyone tries to spend all the money they’ve saved during the lockdowns, “rates will need to rise to crimp spending intentions”.

See what’s happening? According to the financial markets, the pandemic has not merely cured a decade of secular stagnation, it’s transported us back to the 1970s and out-of-control inflation. That’s the big threat, and unemployment will have to wait.

Apparently, this dramatic reversal in the economy’s fortunes has occurred without workers getting even one decent pay rise.

There are three obvious weaknesses in this logic. First, globalisation has not made our economy a carbon copy of America’s. Second, there’s a big difference between a lot of one-off price rises and ongoing inflation. If the price rises don’t lead to higher wages, no inflation spiral.

Third, even if the central banks did get a bit worried, they’d start by ending and then reversing “quantitative easing” – creating money from thin air – before they got to raising the official interest rate.

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A quick economic rebound seems assured - but then what?

The good news in this week’s “national accounts” for the three months to end-September is that the Delta-induced contraction in the economy was a lot less than feared – not just by the financial market economists (whose guesses are usually wrong) but by the far more high-powered econocrats in Treasury and the Reserve Bank. So now it’s onward and upward.

According to figures from the Australian Bureau of Statistics, real gross domestic product – the economy’s total production of goods and services – fell by 1.9 per cent in September quarter, thanks to the lockdowns in Sydney, Melbourne and Canberra.

This contraction of 1.9 per cent compares with the fall of 6.8 per cent in the June quarter of last year, caused by the initial, nationwide lockdown. We know that, as soon as that lockdown ended, the economy rebounded strongly in the second half of last year, and kept growing in the first half of this year – until the Delta variant came along and upset our plans.

So we have every reason to be confident the economy will rebound just as strongly in the present December quarter now the latest lockdowns have ended. We’ve yet to assess and respond to the latest, Omicron variant but, now so many of us are vaccinated, it shouldn’t require anything as drastic as further lockdowns.

We can be confident of another rebound not just because we now understand that the contractions caused by temporary, government-ordered, health-related lockdowns bear little relationship to ordinary recessions, but also because the early indicators we’ve seen for October and November – including those for what matters most, jobs – tell us the rebound’s already started.

In ordinary recessions, it can take the government months to realise there is a recession and start trying to pump the economy back up. With a government-ordered lockdown, the government knows what this will do to reduce economic activity so, from the outset, it acts to make up for the loss of income to workers and businesses.

As with all contractions, most people keep their jobs and their incomes and so keep spending. In a lockdown, however, they’re prevented from doing much spending by being told to stay at home.

This means everyone has plenty they could spend – even people whose employment has been disrupted. So their savings and bank balances build up, waiting until they’re allowed to start consuming again. When the lockdown ends, the floodgates open and they spend big.

After last year’s lockdown, the proportion of their income being saved by the nation’s households leapt to more than 23 per cent, up from less than 10 per cent. Over the following four quarters, it fell to less than 12 per cent.

What we learnt this week is that, following the latest lockdown, the household saving ratio jumped back to almost 20 per cent. So there’s no doubt households are cashed up and ready to spend.

The main drop during the September quarter was in consumer spending (down 4.8 per cent), with business investment spending down 1.1 per cent, and housing investment treading water. Even so, earlier government support measures mean the outlook for business and housing investment spending remains good.

Why was the blow from the latest lockdown so much smaller than that from last year’s? Mainly because it only applied to about half the economy. The other states grew by a very healthy 1.6 per cent during the quarter.

But the main reason this year’s contraction proved smaller than economists were expecting seems to be that businesses and households have “learnt to live with” lockdowns. We now know they’re temporary and we’ve found ways to get on with things as much as possible.

Businesses have thought twice about parting with staff, only to have trouble getting them back. Businesses have become better at using the internet to keep selling stuff and consumers better at using the net to keep buying.

The volume (quantity) of our exports rose during the quarter and the volume of our imports fell sharply, meaning that “net exports” (exports minus imports) made a positive contribution to growth during the quarter of 1 percentage point.

However, this was more than countered by a fall in the level of business inventories, which subtracted 1.3 percentage points from growth. The two seem connected.

The fall in imports seems mainly explained by temporary pandemic-related constraints in supply. And inventory levels are down mainly for the same reason. Seems cars are the chief offender.

Our “terms of trade” – the prices we receive for our exports relative to the prices we pay for our imports – improved a little during the quarter to give a 23 per cent improvement since September last year.

Both the improvement in our terms of trade and the improvement in net exports help explain some news we got earlier in the week: the current account on our balance of payments (a summary record of all the financial transactions between Australia and the rest of the world) rose by $1 billion to a record $23.9 billion surplus during the quarter.

The surplus on our trade in goods and services rose to almost $39 billion and, while our “net income deficit” (the interest and dividends we paid to foreigners minus the interest and dividends they paid us) rose to more than $14 billion, that was a lot less than it used to be.

If you think that sounds like good news, you have more economics to learn. We’ve run current account deficits for almost all the years since white settlement because, until recent years, we’ve been a “capital-importing country”.

The sad truth is, in recent years we’ve been saving more than we’ve needed to fund investment in the expansion of our economy, so we’ve been investing more in other people’s economies than they’ve been investing in ours.

But that’s because we haven’t had much investment of our own. The rebound to a growing economy seems assured, but returning to the old normal isn’t looking like being all that flash.

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When house prices soar, everyone forgets who suffers most

One of the darker arts of politics involves manoeuvring to ensure that election campaigns focus on issues that favour my side over yours, regardless of whether these are the issues most likely to be pertinent to the nation’s needs over the next three years.

Because the pollies believe us all to be self-centred, they never try to appeal to the greater good. If the world worked the way it should, you’d expect housing affordability – and what each side was promising to do about it – to be a big issue in the coming campaign, but I doubt it will be.

The Libs won’t want to draw attention to it, and though Labor will make noises about how terrible it is for young people, it’s unlikely to have any serious proposal to take the heat out of house prices. It did take a plan to discourage negatively geared property investment to the last election, but now believes this contributed to its defeat, so has dropped it.

As I’ve said before, since home-owning voters far outnumber would-be home-owning voters, neither side wants to be seen as doing anything that stops homes becoming ever-more valuable.

But if you think that’s all there is to the issue of housing affordability, it just shows how narrowly the politicians – and the media – have shaped our perception of the issue. In all the agonising over house prices and home ownership – which has gone on for as long as I’ve been a journalist – we always forget the renters.

If you define housing as having a place to live rather than to own, renters also suffer when house prices soar. The relationship between house prices and rents is far from one-to-one but, even so, rising house prices usually mean rising rents.

The more the number of people moving from renting to owning is restricted by high house prices, the more the growing number of renters puts upward pressure on rents. Rents are rising much faster than prices in general, or than wages.

Our thinking is still heavily influenced by the Great Australian Dream, which sees renting as a temporary state while young couples save the deposit for a home. In truth, many of the roughly one-third of households living in rented accommodation have never had high enough incomes to afford a home of their own.

So, many people will live all their lives in rented accommodation and their proportion is growing as many middle-income couples who, in former times, would have moved on to home ownership, now do so at a much later age – or go into retirement as renters.

The value of the age pension is based on the implicit assumption that retirees own their home. If so, living on the age pension is tolerable. If not, having to rent privately pushes age pensioners below the poverty line. That’s particularly true of single, usually widowed pensioners.

For many years, the federal government dealt with the problem of people on very low incomes by funding the states to provide a lot of what used to be called “housing commission” accommodation, now called public housing.

Trouble is, the rise of neo-liberalism has made government ownership of housing deeply unfashionable. As the Grattan Institute’s Brendan Coates reminds us in a paper issued this week, the national stock of about 430,000 public housing dwellings has barely grown in 20 years, while the population has increased by 33 per cent.

Whereas in 1991 public housing accounted for about 6 per cent of all housing, it’s now less than 4 per cent. Some of this is made up by government-subsidised “community housing”, but not much.

In public housing, rents are capped at 25 per cent of tenants’ incomes. By contrast, Coates says, the typical low-income private renter pays 37 per cent of their income.

When the Hawke-Keating government turned away from public housing, it shifted to paying rent assistance to people on social welfare. But these payments have failed to keep up with private rents.

The Morrison government says spending on social housing is up to the states. But compared to the feds, the states have a lot less money to spare. Anthony Albanese’s Labor has proposed setting up a $10 billion “housing Australia future fund”, the earnings from which would be used to finance the building of additional public housing.

Coates proposes a fund twice that size, which he calculates would provide 3000 extra housing units a year, in perpetuity. Which, he says, would cost the taxpayer very little. He also wants the feds’ rent assistance to be indexed to the cost of renting.

The point is that when people on low incomes become unable to afford private rents, the next step is homelessness.

If, under pressure from all us affluent home owners, neither side of politics is willing to make home ownership more affordable by removing the many tax breaks that make it so attractive as a form of investment, then the least they – and we – can do is reduce the housing pain of those who really struggle to rent a place.

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NEW ISSUES IN MACRO MANAGEMENT: public debt, MMT and QE

Talk to virtual Comview conference

As you well know, thanks to a long period of weak economic growth, we hadn’t made any progress in reducing the federal government’s debt arising from the global financial crisis of 2008-09 before the arrival of the huge budget deficits associated with our response to the pandemic. This has left us – and all the other advanced economies – with levels of public debt higher than anything we’ve known since the period after World War II.

Right now, the economy has yet to recover from the protracted lockdowns employed to deal with the Delta variant of the coronavirus, but the econocrats and most other economists are confident the economy will bounce back almost as strongly and quickly as it did following the end of the initial lockdowns last year. It’s important to remember that the strength of these bounce backs owes much to the huge government spending on the JobKeeper wage subsidy scheme, the temporary Job Seeker supplement and various other assistance programs designed to hold the economy together during the government-imposed lockdowns. The huge loss of household income occurring in a normal recession was thus avoided, leaving people well able to resume spending as soon as restrictions were eased. So there’s no reason to regret the huge increase in public debt. It’s important also to make sure your students understand that the government’s explicit spending decisions explain only part of the huge budget deficits incurred. Much of it is explained by the collapse in tax collections and increased number of people on unemployment benefits – that is, by the automatic operation of the budget’s “automatic stabilisers”. That, too, should be seen as a good thing.

In passing, be clear that, contrary to the “policy mix” of the past 30 years, where monetary policy was the primary instrument used for short-term management of demand, with fiscal policy playing a subsidiary role, fiscal policy has now returned to primacy. To quote this year’s budget papers: “with further support from monetary policy limited, fiscal policy will need to continue to play an active role in driving the unemployment rate lower”.

It’s obvious that budget deficits lead to increased government debt, and only a return to budget surpluses will produce a fall in the absolute level of debt. The underlying cash deficit for last financial year, 2020-21, was $134 billion, or 6.5 pc of GDP, well down on what was expected at the time of the budget in May. This left us with a net debt of $590 billion, or 28.6 pc of GDP. We’ll see the latest estimates of this and future years’ deficits and debt in the mid-year budget update in mid-December. But, though all the pandemic-related assistance measures were temporary, meaning the deficit should fall pretty sharply, all the projections we’ve seen to date show no likelihood of the budget returning to surplus in coming years, “on unchanged policies”.

So, how concerned should we be about our post-post-war record level of debt, and what can or should we be doing to reduce it? And what about the argument of the proponents of “modern monetary theory” who say we should be covering the budget deficit not by borrowing from the public but simply by printing money. And finally, what does the RBA’s resort to “quantitative easing” involve, and how does it relate to the MMT debate?

The changed attitude to public debt

 After the big increase in the federal government’s net debt following the Rudd government’s use of considerable fiscal stimulus to stop the global financial crisis of 2008 causing a severe recession, the government’s view was that, in accordance with the “medium-term fiscal strategy” instituted by the Howard government in 1996, the budget should be returned to surplus as soon as reasonably possible after the economy had recovered. The strategy was to “maintain a budget balance on average over the economic cycle”. That is, the budget would be in deficit during the weak years of the cycle, but this would be offset by surpluses during the strong years, leaving a balanced budget on average, and leaving no net addition to the public debt.

The Abbott government promised to quickly eliminate the debt but, instead, the net debt doubled in nominal terms in the period up to the arrival of the pandemic in early 2020. By then, weak economic growth meant it had taken the Coalition six years just to get the budget back to balance.

The (delayed) budget of October 2020 announced a radical change in the government’s medium-term fiscal strategy. It became to “focus on growing the economy in order to stabilise and then reduce gross and net debt as a share of GDP”. That is, there was no goal to get the budget back to surplus – and, hence, no goal to reduce the public debt in nominal (dollar) terms. Rather, the goal was simply to reduce the size of the debt relative to the size of the economy (nominal GDP). In the government’s oft-repeated slogan: “repair the budget by repairing the economy”.

One of the reasons the advanced economies’ recovery from the Great Recession was so weak was that many of them panicked when they saw how much debt they’d run up and, before their recoveries had properly taken hold, they began cutting government spending and increasing taxes in an effort to get their budgets back to balance. This policy of “austerity”, as its critics called it, proved counterproductive. It weakened their economies’ growth and thus limited their success in reducing budget deficits. This is why Treasurer Frydenberg has repeatedly sworn not to “pivot to austerity policies”.

In switching from using budget surpluses to reduce debt in absolute terms to using stronger economic growth to reduce debt in relative terms, the government is adopting a change in concern about public debt that has occurred among leading American academic economists, influenced by the advanced economies’ pre-pandemic experience of “secular stagnation” or being caught in a “low-growth trap”. Weak growth makes “fiscal consolidation” (spending cuts and tax increases) harder and unwise at a time when governments should probably be investing more to offset the weakness in business investment. At the same time, the low-growth trap has produced exceptionally low interest rates, meaning the cost of “servicing” (paying the interest on) the public debt is lower than ever.

The government (and Treasury Secretary Dr Steven Kennedy) have taken up the American academics’ simple formulation that, whatever its absolute size, a stable amount of public debt will fall as a proportion of GDP so long as nominal GDP is growing at an annual rate exceeding the average rate of interest on the debt. The interest rates on Australian government debt have been between 1 and 3 pc, whereas our nominal GDP should be growing on average by 4 to 5 pc [inflation of 2.5pc plus real growth of 2.5pc]. The wider the gap between GDP growth and interest rates, the greater the scope for modest continuing budget deficits while the debt still falls as a proportion of GDP.

Several points can be made to reinforce this argument for being less anxious about the size of our public debt. First, as I’m sure you understand (but need to explain to every year’s bunch of students), the financial constraints that make it reckless for an individual household to have ever-growing debt don’t apply to governments, particularly national governments. In practice, governments mainly roll-over their debts rather than repaying them.

Second, measured relative to GDP, Australia’s public debt remains about half the size of most other advanced economies’ debt. Third, according to calculations by Saul Eslake, our projected interest payments on the federal public debt will be about 1 pc of GDP over the medium term to 2032, much lower than we’ve been used to. In the late 1980s it was above 2.5 pc. That is, there was never a time when we needed to be less anxious about the interest burden.

Even so, some respected economists – such as Productivity Commission chair Michael Brennan and former Treasury secretary Dr Ken Henry – have expressed concern that this more relaxed attitude to debt is too risky. Henry worries that, without efforts to get the budget back to balance and surplus, we will have limited scope to make an adequate response to the next fiscal crisis. Brennan worries people will conclude that debt and deficit no long matter, that “we can afford the next and the next ‘one-off’ rise in debt”.

But the new, more relaxed attitude to debt and deficit has also been attacked from the other direction – that this attitude remains more worried about debt than it needs to be – by proponents of “modern monetary theory”.

Modern monetary theory

MMT is a school of economic thought that’s been around for some decades. Its great proponent in Australia has been Professor Bill Mitchell, of my alma mater, Newcastle University. But it’s had a great push from the best-selling book, The Deficit Myth, by American Professor Stephanie Kelton.

There is nothing new about MMT. As the syllabus says, national governments face a choice of whether the finance their deficits via borrowing from the public or via borrowing from the central bank – that is, covering the deficit with newly created money. As recently as the mid-1980s, early in the term of the Hawke-Keating government, Australia followed other advanced economies in introducing the rule that deficits must be fully funded by borrowing from the public. This was at a time when the advanced economies were still struggling to get inflation under control. And, since the decision about how budget deficits should be funded is one to be made by governments, central bankers argue that MMT is about fiscal policy, not monetary policy.

Even so, there is much truth to the contentions of MMT. Like everyone else, we have a fiat currency, issued by the government and not backed by a quantity of some valuable commodity such as gold. So, in principle, governments are free to decide how many dollars to create. The MMTers remind us that it’s strange for us to have an arrangement where the private banking system (the banks in total, not an individual bank) able to create money, but the government prohibiting itself from doing so.

MMT is also right in rejecting the monetarist notion that printing money is always inflationary – “too much money chasing too few goods”. As economists have long understood. It’s not how much money has been created that matters, it’s the command over “real resources” – land, labour and physical capital – that money buys. Inflation occurs only when the demand for real resources exceeds the supply of real resources. To demonstrate the point, since the GFC the central banks of America, Britain, Europe and Japan have created massive amounts of money, yet inflation rates have stayed low or fallen (until the recent disruptions to supply caused by the pandemic). Inflation has stayed low because the demand for real resources has remained low relative to the supply of real resources.

Inflation is a consequence of demand being stronger than supply. At least since the GFC, the developed world’s problem has been the weakness of demand relative to supply. This does much to explain the new-found attention to MMT. What can be done to strengthen demand? Why shouldn’t the government add to demand by spending on lots of worthy projects and just create the money to cover it? This is the great theoretical truth highlighted by MMT: for as long as demand is running behind supply, anything the government spends can add to demand without causing inflation.

So in theory, MMT is correct. The econocrats’ objection to it is practical rather than theoretical. If you tell our fallible politicians they can spend as much as they like without bothering to borrow until we reach the point where the “output gap” has been eliminated and aggregate demand is running in line with “potential” – that is, the economy has reached full employment of all real resources – how will you get them to resume covering their spending by borrowing once that point has been reached? Even before you reach that point, how will you get fallible politicians to worry about stopping government spending that wastes real resources when government spending seems like a free lunch? This is what explains RBA governor Dr Philip Lowe’s vehement rejection of MMT. He sees himself responsible for achieving non-inflationary growth. He doesn’t want a new system in which the politicians tell him how much money they want him to create.

Quantitative easing

Short-term interest rates in the US and the other major advanced economies had got to very low levels before the global financial crisis of 2008 precipitated the Great Recession of 2008-09. The US Federal Reserve needed to cut its policy interest rate (the Fed funds rate) a long way to apply sufficient monetary policy stimulus, but was already close to the “zero lower bound”. So it resorted to “unconventional measures”. It intervened directly into particular financial markets that had frozen to get them trading again, and extended its conventional measures, of only influencing short-term interest rates, to lowering longer-term interest rates further out along the maturity “yield curve”. This is “quantitative easing”. Similar to conventional monetary policy, you buy longer-dated second-hand bonds, which forces up their price and so reduces their “yield” (interest rate). Since government bonds set the “risk-free” base on which private sector lending rates are set, this lowers the rates paid by people borrowing for longer fixed-rate periods. The central bank pays for the bonds it buys simply by crediting the accounts of the banks it buys from. That is, it creates the money out of thin air. Once the Fed adopted QE it was soon joined by the Europeans, Brits and Japanese.

It’s not clear that QE does much to encourage borrowing for consumption of goods and services or for business investment, rather than borrowing to buy assets such as houses and shares. But it is clear that the extra outflow of created dollars lowers the country’s exchange rate relative to the currencies of other countries. This lower exchange rate does stimulate the economy of the country engaging in QE by improving the international price competitiveness of its export and import-competing industries. This, however, adds to the reasons the other big advanced economies lost little time in also resorting to QE: so that their exchange rates wouldn’t appreciate against the US dollar.

In principle, once their economies had recovered from the Great Recession the Fed and other big central banks should have stopped buying second-hand bonds and started selling the bonds they’d bought back into the market, thus pushing rates back up to where they had been. It didn’t really happen. Rather, interest rates were still exceptionally low when the pandemic arrived. The Fed and the others leapt into another round of QE.

In Australia, the success of our efforts to avoid being sucked into the Great Recession, and our policy interest rate being a fair bit higher than those of the major advanced economies, meant we didn’t engage in QE at that time. It seems clear that Lowe had his doubts about the effectiveness of QE. But once the severity of the pandemic became clear in late March last year, the RBA cut the cash rate to 0.25 pc (and, in November, to 0.10 pc) and engaged in QE. It guaranteed that it would buy as many bonds as needed to keep the yield on three-year government bonds at the same rate as the cash rate. This was design to assure the financial markets that the cash rate wouldn’t be increased for at least the next three years. This was intended to encourage people to take advantage of the low, emergency-level interest rates. It also had the effect of encouraging the banks to offer very low fixed-rate home loans.

From November 2020, the RBA also announced it would buy $100 billion worth of second-hand federal and state government bonds with maturities of five to 10 years, at the rate of $5 billion a week. This was intended to lower interest rates further out along the yield curve. When the $100 billion had been spent in February this year, the RBA announced it would spend a further $100 billion, although it later decided to cut the rate at which it was buying bonds to $4 billion a week. Early this November, the RBA decided to discontinue limiting to 0.1 pc the yield on the Australian government bond maturing in April 3024. This made it possible for the RBA to decide to increase the cash rate in 2023, even though its forecast still suggested no increase would be needed before 2024.

Purchases of $200 billion worth of second-hand bonds represent about 20 pc of the total stock of federal public debt, meaning the RBA’s purchases of second-hand bonds would be about as much as the government’s issue of new bonds to cover the huge budget deficits it’s been running since the arrival of the pandemic. As part of QE, the cost of the RBA’s bond purchases has been covered merely by creating money, of course. So, despite Lowe’s vehement rejection of the MMT argument that the government fund its deficits by creating money rather than borrowing from the public, his QE has achieved essentially the same effect. The government will have to pay the RBA interest on the bonds the central bank has bought – and in due course, redeem the bonds when their term expires – but, since the government owns its central bank, this will just be a book entry inside the federal public sector. But though you and I can say MMT and QE amount to the same thing, Lowe would insist they are very different. How? MMT means the decisions about how much money to create are made by the fallible politicians, QE leaves the decisions about money creation in the hands of the independent central bankers. So the MMT advocates have had a qualified win.

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Interest rates definitely to rise - sometime, maybe

The geniuses in the financial markets – and they must be geniuses because they’re paid far more than we are – think next year will be an absolute ripper. Workers will be getting their first decent pay rise in six years or more. Say, 3 to 4 per cent. Whoopee. Gee, thanks guys.

Find that hard to believe? So do I. It’s the logical implication of the bets they’re making that the Reserve Bank will begin lifting its official interest rate – which has been at almost zero for a year – by the middle of next year and be up to 1 or 1.25 per cent by the end of next year.

For that to happen, the underlying or core rate of inflation, which has been below the bottom of the Reserve’s 2 to 3 per cent target for years and only just a few weeks ago lifted its head to 2.1 per cent, would need to have shot up close to 3 per cent.

And, because the inflation rate doesn’t rise sustainably unless it’s being driven up by rising wages, an inflation rate approaching 3 per cent couldn’t happen without annual pay rises averaging 3 to 4 per cent.

Reserve Bank governor Dr Philip Lowe has spelt out this relationship between inflation, wages and interest rates almost every time he’s opened his mouth since even before the arrival of the pandemic. He did so again twice last Tuesday and once on Friday.

So pay rises of unheard-of size are the logical implication of the money market’s bets that the Reserve is about to become so desperately worried about soaring wages that it will have raised the official interest rate four or five times in the next 12 months.

Trouble is, I doubt the financial market players are thinking logically. I doubt they’ve thought it through to the extent I just described. The economists who work in the financial markets are well-educated, but this episode makes me wonder whether the guys laying bets in the dealing room even have wages in their mental model of what drives inflation and interest rates.

By the way, I’m not just being disparaging in describing the financial markets as a casino. As Professor John Kay explained in his book Other People’s Money, the buying and selling of currencies, bonds and other real and derivative securities each day in the world’s financial market dwarfs the number of transactions needed by real businesses to conduct their ordinary affairs.

Indeed, Kay told me those genuinely necessary transactions could be put through in about a quarter of an hour a week. So, what are all the remaining transactions? They’re dealers using their bank’s money to trade with dealers from other banks in the hope of making a quick million or two and a fat bonus at the end of the year.

I’m sure these professional gamblers are better at playing poker than you or I would be, but they aren’t trained economists, and they don’t think like economists. Certainly, not like central bank governors.

Because Wall Street has the greatest single influence over what happens in the global financial markets, these guys know more about what’s happening – and likely to happen – in the American economy than their own.

They also have a huge superficial knowledge of what’s been happening in lots of economies in the past few weeks. They know inflation has shot up in the US, Britain and a few other countries, wages have increased somewhat in the US and a few other places, and some minor central banks have started raising their official interest rates.

I think these guys’ mental model of what’s driving interest rates is no more profound than this: prices and wages are rising in the US and other places, rates are already rising around the world, so pretty soon rates will be rising here.

Lowe, the man with his hand on the lever, says he still doesn’t think a rate rise will be needed until 2024, but last week he admitted things could turn out stronger than he expects and make a rise necessary in 2023.

There you are. He’s as good as admitted he’ll have no choice but to start raising rates in a few months’ time. Anyway, that’s what we’re betting on. If we turn out to be wrong, it wouldn’t be the first time, and we won’t lose our jobs. We’ll just lay new bets and keep doing it until we’re right.

Which they will be – one day. Since rates can’t go lower it’s a cert that the next move will be up. Right now, when they’ll be going up is known only to God. In the absence of inside intel, I’d rather put my money on Lowe than on those geniuses.

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Masterpiece: the spin is Morrison's plan to reach net zero is dizzying

The more our politicians are full of bulldust – known euphemistically as “spin” – the more they rely on our short attention span. They make a grand announcement that doesn’t bear close scrutiny, but the media caravan moves on before it’s had time for a closer look. Well, not this time.

I’ve been looking more closely at the Plan to achieve net zero emissions of greenhouse gases by 2050 that Scott Morrison unveiled last week, shortly before jetting off to Glasgow.

It’s full of . . . hyperbole. A masterpiece of the spin doctor’s art. A document carefully crafted to mislead.

For someone claiming to have a Plan to achieve a difficult objective over the next 29 years, it was surprising to see Morrison claiming the Plan contained no new policy measures. By implication, no additional cost to taxpayers.

That’s true – and untrue. We know, for instance, that Morrison had to promise to spend a lot of money just to get the National Party’s permission to commit to achieving net zero by 2050.

So, what policy promises did Morrison make, and how much will they cost? We weren’t told. They weren’t mentioned in the 130-page plan. We’re told we’ll be told sometime before the election.

The Plan says Morrison’s “technology investment roadmap” will “guide” more than $20 billion of government investment in low emissions technology to 2030. So, further spending of $20 billion?

If that’s what you thought, the spin merchants would be pleased. They love giving the impression we can have our cake and eat it. But no, this is not new policy. All the $20 billion has already been announced.

And much of it has already been spent. Much of it by the previous Labor government. A bit over half of it is spending by the Australian Renewable Energy Agency and the Clean Energy Finance Corporation.

These were set up by the evil Julia Gillard in 2011, in association with her job-destroying and cost-of-living killing carbon tax. Tony Abbott tried to abolish them along with the tax, but failed.

Now they’re produced as evidence of how much the Morrison government’s doing to promote new emissions-reducing technology.

The Plan claims the government’s $20 billion will “leverage” more than $80 billion from government and the private sector by 2030. (What it doesn’t mention is that Australia’s total spending on research and development has plummeted since the Coalition returned to power in 2013.)

As to whether the Plan commits the government to spending a lot more, note that the modelling showing we can get to net zero by 2050 rests on various assumptions about the success of future new technology in producing clean products at specified low costs.

For instance, clean hydrogen will be produced for under $2 a kilogram. Carbon emissions from fossil fuels will be captured and stored at a cost of less than $20 a tonne.

But these happy assumptions come with an asterisk. The asterisk leads to very fine print saying “subject to offtake agreements”.

Oh yes, what are they? The Plan doesn’t say. But they’re the government agreeing to buy loads of the clean product at a price that allows the real customers to pay a very low price. That is, it’s a massive subsidy.

How much will the government buy? At what price? Morrison couldn’t tell us if he wanted to because these deals are way off in the future – if they ever happen. They’re not a new policy to spend taxpayers’ money, they’re just an assumption the modellers needed to make - that the necessary money would be spent - to achieve their prediction that we’d get to net zero by 2050.

You’ve noticed that the Coalition which, ever since Abbott rolled Malcolm Turnbull as Liberal opposition leader in 2009, has been vigorously opposed to doing anything much to reduce emissions, has now embraced the net zero target.

But have you noticed that now he’s big on reducing emissions, Morrison is quietly rewriting history to remove any trace of that former opposition? Worse, have you noticed Morrison is now taking credit for any progress we’ve made to date?

Any progress made by the policies of his evil Labor opponents and – as with the pandemic – any progress owed to the policies of those appalling premiers?

This is why politicians have spin doctors. “Our Plan will continue the policies and initiatives that we have already put in place and that have proven to be successful, reducing emissions and energy costs,” some spinner wrote.

Next, Morrison’s claim that Australia’s on track to reduce emissions by “up to” 35 per cent by 2030, well above the government’s target of 26 to 28 per cent. Independent analysis commissioned by the Australian Conservation Foundation confirms this is quite believable.

But, apparently, it’s all the Morrison government’s doing. He speaks of “our record of reducing emissions and achieving our targets” and “our strong track record, with emissions already more than 20 per cent lower”. “We have already achieved 20 per cent,” his energy minister says.

But Bill Hare, of Climate Analytics, says the feds are doing little, but claiming credit from the hard work of the states and territories.

It was the NSW and Queensland governments that saved most of the 20 per cent by restricting land clearing. It’s the states that encouraged the record rollout of rooftop solar and large-scale renewables.

NSW, Victoria, the ACT and South Australia have strong electric vehicle policies. Meanwhile, Morrison & Co have been encouraging gas production with new subsidies – which, of course, won’t be paid for by increasing your taxes.

Spin is claiming credit for any good thing, but blaming others for anything bad. You’ve heard that the Plan “will not cost jobs, not in farming, mining or gas”.

But the actual promise says that “not one job will be lost as a result of the government’s actions or policies under the Plan”.

Get it? Jobs will be lost, but we’ve set it up so no one will be able to blame us.

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