THE GLOBAL ECONOMY

Aurora College Economics HSC Study Day, Sydney

Every year there’s some event in the news that’s relevant to your study of the global economy, and this year it’s Russia’s invasion of Ukraine. This has combined with the continuing disruptions to supply caused by the pandemic to greatly increase imported inflation in all the advanced economies. These supply-side price rises have interacted with the huge fiscal stimulus the rich countries used to support their economies during the lockdowns to give them worries about continuing high rates of inflation. Most of the advanced economies have been increasing interest rates to slow their economy’s growth and ensure inflation does not become entrenched.

There’s nothing new or special about one country attacking another, but the invasion of Ukraine has major implications for the global economy for two reasons. First, because Russia is a major supplier of oil and gas to Europe, and the reduction of this trade has caused big increases in the world prices of all fossil fuels. Russia and Ukraine are also major exporters of wheat and other food, and the reduction in this trade is raising world prices and causing many countries to worry about having enough food. Second, world trade has been further disrupted by many countries siding with Ukraine and imposing economic sanctions on Russia, including restraints on its financial transactions. The point is that our more globalised world economy – where countries are more closely integrated by trade and financial flows – has caused a war between two countries to significantly affect far more economies than would have happened in earlier times.

The pandemic

It’s the same story with the pandemic. There’s nothing new about epidemics starting in one country then spreading to many other countries. It’s been happening for millennia. Even so, it’s the world’s worst pandemic since the “Spanish” flu epidemic immediately after World War I, and the first where the greater economic integration of the world’s countries – and particularly, the huge number of people at any time flying around the world on jumbo jets – caused the virus to reach all corners of the world in a few weeks rather than years. But globalisation and co-operation between pharmaceutical companies in different advanced economies – plus billions in government subsidies – have also helped us produce effective vaccines in record time, thus greatly reducing the pandemic’s economic and social disruption.

With the pandemic now in its third year, it’s easier to see its effect on world trade. International trade fell after the start of the pandemic in 2020, but recovered sharply in 2021, to be back to pre-pandemic levels in 2022. However, not all countries and not all products are back to where they were. In many countries, the lockdowns saw a surge in demand for goods (which could be bought without leaving home) and a corresponding decline in demand for services (many of which couldn’t be, including tourism, overseas education, and live entertainment). The sudden surge in demand for imported goods (including cars) led to shortages of shipping containers and ships, and hence delays and higher prices. There was a worldwide shortage of semiconductors (chips). Many other shortages and bottlenecks occurred, but these are being resolved. However, China’s continuing difficulties in controlling the virus via lockdowns, is likely to lead to continuing supply shortages in the rest of the world and possibly a recession in the Chinese economy.

Definition

The OECD defines globalisation as “the economic integration of different countries through growing freedom of movement across national borders of goods, services, capital, ideas and people”.

That’s a good definition, but I like my own: globalisation is the process by which the natural and government-created barriers between national economies are being broken down.

Globalisation’s two driving forces

With this definition I’m trying to make a few points. One is that globalisation has had two quite different driving forces. The one we hear most about is the decisions of governments around the world to break down the barriers they have created to limit flows of goods and money between countries by reducing their protection of domestic industries and by deregulating their financial markets and floating their currencies.

But the second factor promoting globalisation is just as important, if not more so: advances in technology – including advances in telecommunications, digitisation and the internet, which have hugely reduced the cost of moving information and news around the world, as well as increasing the speed of its movement. This has allowed a huge increase in trade in digitised services. As well, advances in shipping – containerisation, bigger and more fuel-efficient ships – and in air transport have led to increased movement of goods and people between countries.  

Globalisation is a process

Another point my definition makes is that globalisation is a process, not a set state of being. Because it’s a process, it can go forward – the world can become more globalised – or it can go backwards, as national governments, under pressure from their electorates, seek to stop or even reverse the process of economic integration. Among the advocates of globalisation there has tended to be an assumption that the process of ever greater integration is inevitable and inexorable. That was always a mistaken notion.

Earlier globalisation

The process of globalisation is and always was reversible. People should know this because this isn’t the first time the process of globalisation has occurred and then been rolled back. The decades leading up to World War I saw reduced barriers and greatly increased flows of goods, funds and people between the old world of Europe and the new world of America, Australia and other countries. But this integration was brought to a halt in 1914 by the onset of a world war. And the period of beggar-thy-neighbour increases in trade protection, to which countries resorted in response to the Great Depression of the early 1930s, greatly increased the barriers between national economies. Indeed, in the years after World War II, the many rounds of multilateral tariff reductions brought about under the GATT – the General Agreement on Tariffs and Trade, which has since become the World Trade Organisation – were intended to dismantle all the barriers to trade built up in the period between the wars.

The era of hyperglobalisation

The period between the end of World War II in 1945 and the late 1980s saw huge growth in trade between the advanced economies, as a consequence of those successive rounds of tariff reductions. But from the late ’80s until the global financial crisis and Great Recession of 2008 there was a period of “hyperglobalisation” in which trade between the developed and developing countries grew hugely. This was partly because of the way the digital revolution and other technological change broke down the natural barriers between countries. But also the result of the eighth and final “Uruguay round” of the GATT in 1994 reducing tariff and other trade barriers between the developed and developing countries.  Many poor countries joined the new WTO at this time, with China joining in 2001.

One measure of the extent of globalisation is the growth in two-way trade between countries (exports plus imports) as a proportion of gross world product (world GDP). Between 1990 and 2008, global trade rose from 39 pc to 61 pc of GWP – the period of rapid globalisation.

Note that the poor countries did well out of the quarter-century of rapid globalisation. Between 1995 and 2019, real GDP per person in the emerging economies more than doubled, whereas in the advanced economies it grew by only 44 pc (after allowing for differences in purchasing power).

The era of deglobalisation

But the end of hyperglobalisation can be dated to the global financial crisis in 2008, and the new era of “deglobalisation” has continued during the pandemic. Two-way trade as a proportion GWP fell after the global financial crisis, and even by 2019 had not regained its peak in 2008.

Among the signs of deglobalisation are Britain’s vote in 2016 to leave the European Union – Brexit – and thus to reduce its degree of economic integration with the rest of Europe – a decision most outsiders see as involving a significant economic cost to the Brits’ economy. Second, the Trump administration withdrew from the Trans Pacific Partnership, an agreement between the US and 11 other selected countries (including Australia) to reduce barriers to trade between them – although the remaining 11 finalised an agreement without the US.  Third, the Trump administration withdrew from the Paris global agreement on reducing greenhouse gas emissions. Fourth, Trump launched a trade war with China. President Biden has re-joined the Paris agreement and repaired America’s relations with its allies, but continues the contest with China.

The temptation of returning to protectionism

The period of hyperglobalisation saw the shift of much manufacturing from the rich countries (including Australia) to China and other developing countries with cheaper labour. But it’s likely that, in the period of slower growth that followed the global financial crisis, some countries yielded to the temptation to return to protecting their domestic industries against foreign competition, returning to the (failed) strategy of growth through “import replacement” rather than “export-led” growth. Regrettably, this trend is being led by the two biggest developing economies, China and India. China has raised its import barriers against many Australian exports.

This trend has continued during the pandemic, with The Economist magazine reporting that countries have passed more than 140 special trade restrictions during the pandemic. Some of these may arise from concerns in the rich countries over the lack of availability of personal protective equipment, or vaccines. Worries about the pandemic’s disruption of global supply chains may be another reason for the return of protectionist attitudes in the advanced economies.

The channels of globalisation

The four main economic channels through which the world’s economies have become more integrated are:

1) Trade in goods and services

2) Finance and investment

3) Labour

4) Information, news and ideas.

Trade is probably the channel that gets most attention from the public. Donald Trump’s populist campaigning against globalisation focused on the belief that America’s greater openness to trade – particularly with developing countries – has caused it to lose many jobs, particularly in manufacturing, as cheaper imports caused many domestic producers to lose sales, or as factories have been moved offshore to countries where wages are lower, without America receiving anything much in return.

Surprisingly, financial globalisation didn’t get as much blame as it could have for the global financial crisis and the Great Recession it precipitated. Most countries have not liberalised the flow of labour into their economy in the way they have the other factors of production.

Income distribution and the gains from trade

One of economists’ core beliefs is that there are mutual gains from trade. Provided the exchange of goods is voluntary, each side participates only because it sees some advantage for itself. This is undoubtedly true, but in the era of renewed globalisation we’ve been reminded that, though the gains may be mutual, they are not necessarily equal. Some countries do better than others.

Similarly, the benefits to a particular country from its trade aren’t necessarily equally distributed between the people within that country. When, for example, a country imports more of its manufactured goods because they are cheaper than its locally made goods, all the consumers who buy those goods are better off (including all the working people), but many workers in the domestic manufacturing industry may lose their jobs.

Another factor that has been working in the same direction is digitisation and other technological change which, in its effect on employers’ demand for labour, seems to be “skill-biased” – that is, it tends to increase the value of highly skilled labour, while reducing the value of less-skilled labour. It seems likely that, between them, trade and technological advance have worked to shift the distribution of income in America, Britain and, to a lesser extent, Australia, in favour of high-income families and against many middle and lower-income families.

The unwelcome surprise many politicians and economists have received from the high protest votes for Brexit, Trump and One Nation is causing them to wonder if too little has been done to assist the workers and regions adversely affected to retrain and relocate, and too little to ensure the winners from structural change bear most of the cost of this assistance.

Shares of the World Economy, 2021

GWP Exports Population

China          19   13     18

United States   16     9         4

Euro area (19 countries)   12   26         4

India     7     2       18

Japan     4     3         2

Advanced economies (40) 42   61       14

Developing economies (156) 58   39       86

            100 100     100

Source: IMF WEO statistical appendix; GWP based on purchasing power parity                 

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What we weren't told before the election: taxes to rise, not fall

The rule for Treasury bosses is that, as public servants, any frank and fearless advice they have about the state of the federal budget must be given only to their political masters, and only in private.

But last week the present secretary to the Treasury, Dr Steven Kennedy, used a speech to economists to deliver a particularly frank assessment of the Labor government’s budgetary inheritance.

We can be sure his remarks came as no surprise to his boss, Dr Jim Chalmers, who would have been happy to have his help to disabuse us of any delusions lingering from an election campaign which, as always, was fought in a confected fantasy-land of increased spending on bigger and better government services and lower taxes.

Surprise, surprise, the post-election truth is very different. The budget released just before the campaign began foresaw a budget deficit of a huge $80 billion in the financial year just ending, with only a trivial decline in the coming year and continuing deficits for at least another decade.

Neither side admitted to any problem with this prospect during the campaign, but Kennedy’s first bit of frankness about such a leisurely approach was to observe that “a more prudent course” would be for the budget deficit to be eliminated and turned to a surplus. (By the standards of bureaucratic reticence, this was like saying, “You guys have got to be joking”.)

Eliminating the deficit would mean adding no more to our trillion-dollar debt. Running budget surpluses would actually reduce the debt, thus leaving us less exposed should there be a threatening turn in the economy’s fortunes.

The two obvious ways of improving the budget balance are to cut government spending or to increase taxes. Some people love making speeches about the need to absolutely slash government spending, but they usually mean spending that benefits other people, not themselves.

The sad truth is that “waste and extravagance” is in the eye of the beholder. There’s always some powerful interest group on the receiving end of government spending – medical specialists, say, or the nation’s chemists – and they don’t take kindly to any attempt to slash their incomes.

The last time a serious attempt was made to cut government spending – by Tony Abbott in his first budget, in 2014 – the public outcry was so great that the Coalition beat a hasty retreat, and never tried it again.

Instead, it limited its parsimony to quietly restraining money going to the politically weak – the jobless, the public service, overseas aid – but this didn’t make a huge difference to the more than $600 billion the government spends each year.

Kennedy’s next frank observation was that, even excluding the many billions in spending related to temporarily supporting the economy during the lockdowns, government spending as a proportion of the nation’s income is expected to average 26.4 per cent over the coming decade, compared with 24.8 per cent in the decades before the pandemic.

In other words, government spending is likely to grow much faster than the economy grows, to the tune of about $36 billion a year in today’s dollars.

The new government is undertaking a line-by-line audit of all the Coalition’s “rorts, waste and mismanagement”. But, to be realistic, it’s unlikely to find much more in savings than it needs to cover its own new spending promises.

Kennedy said that most of this additional spending is driven by money going to the National Disability Insurance Scheme (by far the biggest), aged care, defence, health and infrastructure. “Further pressures exist in all these areas,” he said.

To that you can add underfunding by the Coalition in tertiary education and healthcare, plus a massive capability gap over the next 20 years or more which can only be fixed by an immediate increase in spending on defence, diplomacy and foreign aid.

Which leaves us with taxes. Higher taxes. Scott Morrison’s promise to guarantee the delivery of essential services while reducing taxes was delusional – a delusion many of us were happy to swallow.

The simple, obvious truth is that if we want more services without loss of quality, we’ll have to pay higher taxes.

Kennedy warned that the expected (but, in his view, inadequate) improvement in the budget balance over the coming decade will rely largely on higher income tax collections. “Inflation and real wages growth will result in higher average personal tax rates.”

This is a Treasury secretary’s way of saying “the plan is to let bracket creep rip”. And unless other taxes are increased, there’s “little prospect” of giving wage earners any relief via tax cuts.

“This would see average personal tax rates increase towards record levels,” he said, meaning more of the total tax burden would fall on wage earners.

The election saw both sides promising not to introduce new taxes or increase the rates of existing taxes (apart from, in Labor’s case, promising to extract more tax from multinationals).

But neither side made any promise not to let inflation push people into higher tax brackets. One way or another, we’ll be paying higher taxes.

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Maybe Left versus Right is turning into smart versus not-so

Here’s a funny thing to think about on a holiday Monday: what if all the well-educated people voted Labor and the lowly-educated voted Liberal or National? How would that change our politics? A preposterous notion? Not as much as you may think.

As I’ve mentioned once or twice before, the great political stereotype is that the Liberals are the party of the bosses, while Labor, with its link to the union movement, is the party of the workers. So the people who own and manage the country vote Liberal, whereas the people who do as they’re told vote Labor.

This is the basis for the Liberals' instinctive confidence that they’re the natural party of government. Such belief is reinforced by their having spent far more of the past 75 years in office than their opponent has.

The better-situated, better-off suburbs in any city tend to vote Liberal, while the inner and outer, less-desirable suburbs vote Labor. Most people living in country areas and voting for the Nationals tend to be on modest incomes, similar to the stereotypical Labor voter.

The owners and managers tend to be pretty happy with the world as it is, whereas those further down the pecking order, with less wealth and less income, can always think of things they’d like to see changed. The Liberals defend the status quo, while Labor is the party of “reform”.

This is the basis for the standard perception of politics as a conflict between the privileged Right and the discontented Left.

But what if this conventional setup was changing - being undermined – before our eyes? We all know that strange things happened in last month’s federal election. As usual, we’ve tried to understand these from the top down. How the parties’ share of the national vote changed, then looking by state and even at the 151 electorates.

But Luke Metcalfe, founder of the property and data analytics consultancy, Microburbs, (and, as it happens, a nephew of mine), has done a bottom-up, more “granular” analysis.

He’s taken the Australian Electoral Commission’s voting figures by polling booth and matched them with all the detailed demographic information for corresponding small statistical areas in the 2016 census. They’re not a perfect fit, but they’re a good guide.

Metcalfe finds that “we’re seeing a continuation of the trend in the [2019] federal election, where the Coalition’s support base is shifting towards poorer, less-skilled, less-educated people born in Australia”.

When Labor lost in 2019, many people noticed the swing against Labor in regional mining seats in the NSW Hunter Valley and Central Queensland. What few noticed was the swing to Labor in many safe Liberal seats.

This time, Metcalfe says, rich, educated professionals swung 11 to 12 per cent against the Coalition, while the country’s working poor - the fifth of polling booths paying the lowest rent, earning the lowest incomes and with the least skills - swung only 3 to 4 per cent against it.

As we know, much of this shift away from the Liberals came via the teal independents in Liberal heartland seats in Melbourne, Sydney and Perth. The teal seats’ most dominant characteristic was their high levels of “educational attainment”.

Unsurprisingly, income and education are highly correlated. But Metcalfe says it’s education, not income, that’s doing the driving.

Many people think they’ve detected in recent election results a growing divide between city and country in Australia, but also in Britain and America. But maybe it’s more about the better-educated concentrating in the big cities – where the best-paying jobs are – leaving the less well-educated in outer suburbs or back in country towns, feeling the world has changed in ways they don’t like and thinking of voting One Nation.

Some political scientists think voters in the rich economies are dividing between the globalists and the nationalists. In the same vein, David Goodhart famously explained Brexit as a battle between those who could live and work “anywhere” and those who had to live “somewhere”.

But it still gets down to education and the way ever-rising levels of educational attainment - particularly among women – are remodelling the party-political landscape.

Take climate change. The better educated you are, the more likely you are to accept the science, believe we should be acting, and not be worried about either losing your job in the mine or paying a bit more for power.

Wouldn’t it be funny if the party of the workers became the party of the well-educated, while the party of the bosses became the party of the battlers?

I can’t see that happening, it’s too incongruous. There’s no way the Coalition could get enough seats without the Liberals’ leafy heartland. But it will need radical policy change to get the well-educated back into the fold, or into bed with the Neanderthal Nationals.

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Treasury boss’s message: higher taxes the cure for debt and deficit

Anthony Albanese and his Treasurer, Dr Jim Chalmers, have inherited many problems that won’t be solved quickly or easily. Nor will they be solved without the new government being willing to persuade voters to accept the sort of tax changes no pollie wants to talk about in an election campaign.

That’s the conclusion I draw from Treasury secretary Dr Steven Kennedy’s belated annual speech to the Australian Business Economists this week.

Election campaigns are times when we hear about all the wonderful things the politicians want to do to improve the public services we get and reduce the taxes we pay. It’s after the election that pollies present the bill.

Especially when the election has changed the government. This wasn’t Chalmers bringing us the bill, it was the waiter reminding us we’d eaten quite a lot and the bill was getting pretty long.

The economic story had “shifted significantly”, Kennedy said. Inflation pressures had emerged faster and more strongly than most people expected. These were likely to persist into next year “at the very least”.

This, of course, is why the Reserve Bank has been raising the official interest rate – to eventually bring inflation back to acceptable levels.

“Interest rates are at near-record low levels and therefore highly accommodative and should normalise”, Kennedy said. In other words, they need to be increased until they’re back to more-normal levels. If so, they have a lot further to go.

But, Kennedy says that “just as fiscal [budgetary] and monetary [interest-rate] policy worked together to respond to the pandemic, they will need to work together in managing the risks to inflation and the economy more broadly”.

Ah yes, the dreaded duo, Debt and Deficit. Not a subject to be dwelt on during election campaigns, but one to return to afterwards. Presenting the bill, remember?

Chalmers is, understandably, anxious to remind us that our trillion-dollar public debt is inherited from his predecessors. What Kennedy does is implicitly confirm that the previous government’s “medium-term fiscal strategy” - to “focus on growing the economy in order to stabilise and reduce debt” - is still the go.

With an important, after-the-election qualification: “a more prudent course would be for the budget to assist more over time”.

How? We’ll get to that. But first, he gave the best explanation I’ve seen of how a government can get on top of a big debt simply by ensuring the economy grows at a faster annual rate than the rate of interest on the debt.

To “get” the explanation you have to accept one proposition that many otherwise sensible people and media commentators can’t get their head around: that the government of a nation is in a radically different position to an individual household.

Households have to repay any money they borrow sooner or later, but governments don’t. That’s because every family gets old and dies, whereas nations are a collection of many millions of households that, though the faces change, goes on forever.

For a nation, what matters is not its ability to repay the debt, but just its ability to afford the interest payments on it. As long as the nation continues to exist, it can re-borrow by issuing a new government bond to replace an old government bond as it falls due for repayment.

Kennedy explained that strong economic growth and interest rates that are low compared with what’s been normal for the past 50 years are likely to ease the burden of the debt. This is by reducing its size not in dollar terms, but relative to the size of the economy, measured by the dollar value of all the goods and services the economy produces annually (nominal gross domestic product) in coming years.

Interest payments add to the amount of debt the nation owes, but growth in the economy (nominal GDP) increases the economy’s capacity to “service” (pay the interest on) that debt. “When the economy grows quicker than the interest payments add to the debt, the debt burden will decrease,” he said.

That’s the basic mechanism all governments in all the rich countries have relied on since World War II to get on top of their debt. It’s what the Morrison government was relying on, and it will be what the Albanese government continues relying on.

But – with Treasury there has to be a but – there was a weakness in the previous government’s strategy: their projections showed the budget remaining in deficit for the next decade and, indeed, the next 40 years.

That means it wasn’t just the interest bill that was adding to the debt each year, it was also the continuing deficits.

“The current projected reduction in the debt [relative] to GDP is unusual in that it is relying solely on favourable growth and interest-rate dynamics [that the average rate of interest on the debt will rise more slowly than the rising rate of interest on the new borrowing because the average government bond takes about seven years to fall due] to reduce the ratio [of debt to GDP],” Kennedy said.

So here’s the post-election But (which, since it’s the same Treasury, would probably have happened even without a change of government): “A more prudent course would be for the budget to assist more, over time,” Kennedy said.

How? By getting the budget deficit down a lot faster than the Liberals were planning to. Maybe even by running budget surpluses for a while – which would involve repaying a bit of the debt.

Sure, but how do you get the deficit down? The government will be reviewing all the spending programs left by the Coalition, looking for savings. But what savings it finds will mainly be used to pay for Labor’s promised new spending.

So the main way to improve the budget balance will be by “raising additional tax revenues”. Kennedy implied that this would be done by reducing businesses’ and households’ tax concessions.

The next three years will be interesting.

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Albanese must stop government malice towards the jobless

I was chuffed on election night to hear Anthony Albanese repeat his election slogan, “No one held back and no one left behind” and his promise of “kindness to those in need”. Really? Kindness? Now that’s a first for Labor. And unimaginable from the Liberals, whose promise to give needy people “a go” was limited to those they judged to have “had a go”.

Albanese’s magnanimity was a surprise considering Labor’s only mention of our wildly generous $46-a-day unemployment benefit – JobSeeker – was an announcement that, doubtless as part of its small-target election strategy, it was abandoning its previous promise to review the payment’s adequacy.

Fortunately for those of us struggling to get by on $548 a day – $200,000 a year and above – Labor’s small-target approach also involved promising to match the Liberals’ stage-three tax cuts in 2024. So our $25-a-day tax cut is safe. That blatantly unfair and unaffordable promise hangs round Albanese’s neck like a millstone.

We’re hearing a lot lately about the need for a higher minimum wage. The basic single JobSeeker payment is just 42 per cent of the national minimum full-time wage.

Two of our leading scholars in this field, Professor Peter Whiteford of the Australian National University and Professor Bruce Bradbury of the University of NSW, calculate that, those people also eligible for the maximum rate of rent assistance get 57 per cent of the minimum wage … sorry, that was at the start of the 2000s. Now it’s down to 50 per cent.

A lot of us worry about the jump in energy costs. Those on JobSeeker won’t have a care. They get a special energy supplement of 63 to 86 cents a day.

Does it surprise you to hear that our “net replacement rate” – which compares JobSeeker with the average wage – is about the lowest in the OECD rich nations’ club? If you set the poverty line at half the median (dead middle) income, the base JobSeeker rate is two-thirds of it.

As the boss of the Australian Council of Social Service, Dr Cassandra Goldie, keeps saying, poverty in a rich country like Australia isn’t inevitable, it’s a policy choice. You can see this from the first six months of the pandemic, when the Morrison government’s policy choice was to almost double the rate of the benefit.

Allowing for those unemployed people getting a little income from casual work, the Centre for Social Research and Methods at ANU calculates that this move cut the proportion of recipients in poverty from 67 per cent to just 7 per cent.

And Anglicare found that, while it lasted, the special supplement allowed families to pay rent, access nutritious food and avoid seeking emergency relief from charities. Thank goodness a stop was put to it. Poor people getting it so easy – it’s not right!

But the meagre rate of JobSeeker is just the start of the punishment. According to recent research by ACOSS, in a typical month more than 200,000 people have their payment suspended.

This is nearly one in four of people using “jobactive” services (the private contractors who’ve taken the place of the Commonwealth Employment Service). Nearly half of these suspensions are because people can’t meet the unrealistic job search targets they’ve been set.

More than two-thirds of these people have been looking for work for more than a year. “Despite the low unemployment rate, employers are still reluctant to employ people who have been out of the paid workforce for more than 12 months, older workers, and people with disability,” Goldie says.

“Setting rigid job search targets so high – a default of 20 per month – is setting people up to fail. Unrealistic and inflexible targets have no place in employment services that are designed to help people, and they are an inconvenience to employers.”

Many people locked out of paid work long-term find themselves at the back of the job queue, not because they aren’t trying, but because many employers are still wary of giving them a chance, she says.

There are more than 850,000 people who’ve been on income-support for over a year, and there are 440,000 people aged 45 or older, 390,000 people with a disability, 120,000 sole carers for children (like Albo’s mum was) and 130,000 from Indigenous communities.

According to ACOSS’s survey, two-thirds of respondents said their payment was suspended because of errors made by employment service providers.

Why was the Morrison government so punitive? Because it was always trying to cut government spending in penny-pinching ways the public wouldn’t see. The illegal “robo-debt” exercise – where many people were falsely accused of owing the government money – was primarily about saving money.

But politicians on both sides have also been content to pander to the prejudices of voters who are happy to see people who don’t work (like they do) given a hard time. This mean-mindedness is ennobled as “mutual obligation”. It’s the antithesis of kindness.

To be fair, the new government is keeping its promise to end compulsory “income management” and the use of the cashless debit card in “selected communities”. It was thinly disguised racial discrimination.

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Labor mustn't be panicked into doing something stupid

Who’d want to be the new Treasurer, Dr Jim Chalmers? Certainly, not me. But that won’t stop me giving him a shed-load of free advice. Starting now.

As Chalmers sees it, the economy he’s inherited is in “dire” straits. Everywhere he looks there’s another problem. First, “skyrocketing” inflation.

Second, falling real wages as “a consequence of almost a decade of the deliberate undermining of pay and job security, now coming home to roost in the form of a full-blown cost-of-living crisis”.

And third, a budget “heaving with more than $1 trillion in debt” and worse (though he doesn’t mention it), a budget projected to stay in structural deficit for as far as the eye can see, meaning the debt continues to grow in dollar terms, and falls relative to the growing size of the economy only after a delay, and only slowly.

He could have added a fourth problem: a hostile international economic environment, with a fair risk of the US falling into recession and, worse, a major trading partner – China – that’s mishandling both its response to the pandemic (think more supply-chain disruptions) and its management of the macroeconomy.

Chalmers is, of course, doing what all incoming treasurers (and chief executives) do and laying it on thick. Like Mother Hubbard, he’s discovered the cupboard is bare. Actually, he’s cleaning out the cupboards and finding all the bad stuff his predecessor hid. He’s snapping people out of the campaign fairyland, where government spending can go up while taxes go down and deficits fall.

Even so, his four big problems are real enough – and seem to be getting worse as each week passes. The latest gas crisis is a parting gift from the Liberals, arising from nine years of indecision about how the transition from fossil fuel to renewables should be managed to avoid unexpected mishaps – such as a Russia-caused leap in global fossil fuel prices.

So what should he do? Avoid being panicked by the many partisan ill-wishers and ideological barrow-pushers who would do so. He needs to think carefully about the various problems, the highest priorities, the right order in which to tackle them, their varying degrees of difficulty and urgency, and the way they interrelate - the ways he can kill two birds with one stone, or make choices to fix one problem that make another problem worse.

Chalmers should be wary of conventional thinking about problems that are of unconventional origins. Just as the “coronacession” was unlike an ordinary recession because it was caused by government-imposed restraints on the supply side rather than efforts to curb excessive demand, so he shouldn’t be using demand restraint to try to fix disruptions to supply.

Inflation problems normally arise from an overheated economy leading to excessive wage growth. The standard solution will involve cutting real wages to make labour less expensive. But we’ve had weak real wage growth for a decade.

Those ideologically opposed to fiscal stimulus tell us our stimulus has given us a red hot, inflation-prone economy – as proved by our super-tight labour market. They conveniently forget to mention that the pandemic caused us to ban all imported labour for two years, but that this supply constraint has now been lifted.

If excessive wage growth didn’t cause our high and rising prices, what did? Fiscal stimulus has caused shortages of materials and workers in housing and construction, but most of the price rises have come from external supply constraints caused by the pandemic and the war on Ukraine.

Nothing we could do can fix problems coming from the rest of the world. But we shouldn’t forget that these are once-off price increases. And those import prices will fall at some stage as pandemic disruptions are resolved and the war ends.

It’s not that simple, of course. Why not? Because our businesses don’t seem to have hesitated in passing their increased import costs through to retail prices. That’s the start not of a wage-price spiral, but price-wage spiral. And business and employer groups’ solution to the spiral is simple: allow only a token increase in wages, and inflation will come down in no time.

This is the unspoken doctrine that’s the bastard child of the economic rationalist era: give business whatever it demands and everything in the economy will be wonderful. The business lobby has become so consumed by short-sighted self-interest – so used to getting its own way – that we need a new government with the wisdom and strength to save business from its own folly.

We need a government capable of seeing what business can’t: that wages aren’t just a cost to business and an impost on profits, but also the chief source of income for the 10 million households who are the reason we have an economy and whose spending on the things our businesses produce is what generates their profits in the first place.

Screwing the workers by tolerating ever-falling real wages is a delusional way to increase profits in anything but the short term. The bigger the fall in real wages – and the government can’t stop them falling – the more Labor risks joining the US and China in recession.

This is why, in its worthy desire to keep big business in the tent, the government was wrong to ask the Fair Work Commission to increase award wages by 5.1 per cent only for “low-paid” workers – that is, only about the bottom 12 per cent of workers rather than the bottom 25 per cent.

Do you really think the 88 per cent of workers reliant on bargaining with bosses rather than a commission edict will get anything like a 5 per cent pay rise?

Former Reserve Bank governor Bernie Fraser used to say that any fool could get inflation down – all you had to do was crunch the economy. Is that what business would like? It’s certainly what the financial markets – whose model of our economy is a footnote saying “see America” – want.

As I’m sure the Reserve well understands, we need to get inflation down without causing a recession. And that means being patient about how long it takes. We were below the target range for six years; we can be above it for a few years without the sky falling.

And remember this: if we did fall into recession, the strategy of growing our way out of debt would explode. Not only would the economy be growing more slowly than the debt, the budget’s “automatic stabilisers” would reverse and the deficit would blow out, greatly increasing the debt.

On the other hand, Chalmers should be sceptical of the argument that an additional reason we need to cut the budget deficit ASAP is to reduce the need for interest rates to rise so far. Getting inflation under control is not a big ask – provided we’re patient.

The Reserve’s stated strategy is to shift the stance of monetary policy only from “emergency expansionary” to “neutral”. That is, to take its foot off the accelerator, not to jam on the brakes. This means slowly lifting the official interest rate to about 2.5 per cent, so the medium-term real interest rate is zero.

In theory, at least, this should not cause the economy to contract, nor great pain to most people with mortgages. And it would be a good thing in itself to get rates up to a level remotely approaching normal.

The real challenge for budget policy is to avoid getting us in deeper by proceeding with the stage-three tax cut in its present timing, size and form. It could be rejigged to make it more effective in relieving cost-of-living pressures for people in the bottom half.

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An economy with falling real wages can’t be “strong”

The main message from this week’s “national accounts” is that the economy isn’t nearly as Strong – Strong with a capital S – as Scott Morrison and Josh Frydenberg unceasingly claimed it was during the election campaign. In truth, it’s coming down to Earth.

According to the Australian Bureau of Statistics, real gross domestic product – the nation’s total production of goods and services – grew by 0.8 per cent during the three months to the end of March, to be up 3.3 per cent over the year.

Almost to a person, the business economists said – and the media echoed - this was “higher than expected”. But that just meant it was a fraction higher than they’d forecast a day or two before the announcement, once most of the building blocks for the figure had been revealed.

But as new Treasurer Dr Jim Chalmers has revealed, when Treasury was preparing its forecasts for the March 29 budget, it forecast growth of not 0.8 per cent for the quarter, but 1.8 per cent. Now that would have been strong.

True, if you compound 0.8 per cent, you get an annualised rate of 3.3 per cent. And that’s a lot higher than our average annual growth rate over the past decade of about 2.3 per cent.

But it’s high because the economy’s still completing its bounce-back from the two pandemic lockdowns when most people gained more income than they were allowed to go out and spend.

In other words, it’s a catch-up following highly unusual circumstances, which will stop once everyone’s caught up. It’s not an indication of what we can expect “going forward” as businesspeople love saying.

If you delve into what produced that 0.8 per cent result, you see we’re probably only a quarter or two away from returning to a much less Strong quarterly growth rate. Indeed, until we’ve fixed our problem of chronic weak wage growth, it’s likely to be quite Weak growth.

Growth during the quarter was led by a 1.5 per cent rise in consumer spending, which contributed 0.8 percentage points to the overall growth in real GDP. Pretty good, eh? Well, not really. Turns out real household disposable income actually fell by 0.9 per cent.

So the growth in consumer spending came from a 2 percentage-point fall in the rate of household saving during the quarter, to 11.4 per cent. Household saving leapt during the two lockdowns, from its pre-pandemic level of about 7 per cent.

This suggests it won’t be long before this honey pot’s been licked out. Note too, that consumer spending was very strong in the states still rebounding from last year’s lockdown – Victoria, NSW and the ACT – and particularly weak in the other states.

Why did real household disposable income fall during the quarter? Because real wages fell. The more they continue falling – as seems likely – the more continued growth in consumer spending will depend on households continuing to cut their saving. Sound sustainable to you?

The other big contributor to growth, of 1 percentage point, came from an increase in the inventories held by retailers and other businesses, caused by an easing of pandemic-related shortages of certain imported goods, including cars.

This is a sign of the economy returning to normal, but it’s a once-only adjustment, not a growth contribution that will continue quarter after quarter.

The third growth factor was a huge 2.7 per cent increase in government consumption spending, contributing 0.6 percentage points to overall growth.

Where did it come from? From increased health spending required by the Omicron variant and spending to help people affected by the floods in NSW and Queensland. Again, not something that will be happening every quarter – we hope.

With those three positive contributions adding up to a lot more than the final 0.8 per cent, there must have been some big negative contributions. Just one, actually. Net exports – exports minus imports – subtracted 1.7 percentage points.

The volume (quantity) of exports fell by 0.9 per cent, thus subtracting 0.2 percentage points from growth – mainly because the floods disrupted mineral exports.

The volume of imports jumped by 8.1 per cent, subtracting 1.5 percentage points from overall growth. Another sign of the economy returning to normal, with pandemic disruption easing and imports of cars (and their chips) resuming. Another once-off.

So, what else happened in the quarter? New home building activity fell by 1 per cent. The pipeline of new homes built up by lockdown-related government stimulus still contains homes yet to emerge, but the output has faltered because the industry’s at full capacity, with shortages of labour and materials.

Even so, with interest rates rising and house prices falling, you wouldn’t expect too many new building projects to be entering the pipeline. Housing won’t be a big part of the growth story “going forward”.

Business investment spending – mainly on plant and equipment – grew by 1.4 per cent during the quarter and by 3.6 per cent over the year. It will need to grow a lot faster than that if it’s to be a big part of the growth story.

The quarter saw the share of national income going to wages continuing to fall, while the share going to profits rose to a record high of 31.1 per cent.

On the face of it, that says the workers are being robbed. But the factors moving the respective shares are more complicated than that. For instance, all the growth in company profits during the quarter was from the mining industry. Coal, gas and iron ore commodity prices have jumped.

But a much less debatable indication that businesses are doing well at the expense of their employees comes from the 2 per cent fall in “real unit labour costs” – real labour costs per unit of production – during the quarter, and by 6 per cent since the start of the pandemic.

An economy whose strength comes from cutting its workers’ wages won’t stay Strong for long.

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Why Albanese will bring public servants in from the cold

The election was so much about getting rid of Scott Morrison that few but the party faithful turned to Anthony Albanese with great hope and enthusiasm. He’s not the most charismatic bloke you could meet. Yet almost everything we’ve heard from him so far has been encouraging.

From his victory speech on, he’s said everything you’d want him to say. He made a promise which, to be fair, his predecessor never made and so never broke: to govern for all Australians.

Morrison was in the divide-and-conquer mould. He was the most tribal prime minister I can remember. My tribe, your tribe; us and them; good guys, bad guys; lifters and leaners.

Kevin Rudd had to be strong-armed by his colleagues to give the job of ambassador to the US to his vanquished party predecessor, Kim Beazley, a job for which he was highly qualified.

Rudd wanted to prove his magnanimity by giving it to a Liberal worthy – a gesture that John Howard, nor his protege Morrison, would never have made. To them, the spoils of office went solely to the winners.

I remember when “jobs for the boys” was considered a strictly Labor vice. Morrison has filled the Administrative Appeals Tribunal with Liberal cronies. The Libs have pretty much appointed only people from the employer side to the Fair Work Commission. The convention used to be 50/50.

Albanese said he wanted to bring Australians together. “I want Australia to continue to be a country that, no matter where you live, who you worship, who you love or what your last name is, places no restrictions on your journey in life.”

Of course, grand election-night declarations are like New Year’s resolutions: a lot easier to make than to stick to, day after day, as old habits try to reassert themselves.

As we wonder what kind of PM Albanese will make, two things are worth remembering. First, unlike the Liberals, Labor sees itself as the unnatural party of government, the boys and girls from the wrong side of the tracks.

If the Libs have a superiority complex – if they act like they own the place and can make their own rules – Labor is the opposite. As outsiders to power, they tend to be on their best behaviour in the Big House, to worry about using the right fork.

Paradoxically, they’re more likely than the Libs to stick to the conventions rather than overturn them, more likely to consult widely – the unions come back into the tent, but business stays in – and more likely to seek, and take, advice from officials.

Second, as Julia Gillard demonstrated, prime ministers from Labor’s left faction try to prove they’re not really left-wing by being surprisingly right-wing in the policies they pursue. She was fawning towards the Americans, did too little to reverse the anti-union excesses of Howard’s WorkChoices – did someone say we had a chronic problem with weak wage growth? – and her effort to lift schools’ performance by using the publication of metrics to encourage greater competition between the public and private sectors was a faddish idea that didn’t work.

But, against those two positives, remember this. Whenever a government lowers standards, its opponents always promise to restore them. Nevertheless, the two major parties are obsessed with each other and determined the other side won’t gain an advantage.

So, the moment the new government is criticised for some behaviour and replies that it’s only what the last lot did, you’ll know the game is lost.

Recent Coalition governments have seen the public service as an enemy – the voting figures show Canberra is very much a Labor town – and have progressively cut back admin costs and public service numbers. Morrison went further, telling public servants he didn’t need their advice on policy matters. Much policy expertise has been lost in consequence – as witness, the administrative fumbling of the vaccine and RATs rollouts.

On coming to office, both Howard and Tony Abbott sacked many department heads they considered had been too close to the previous Labor government. There’s little doubt this was also intended “to encourage the others”, making them fearful of losing their own jobs should they be judged as less than fully co-operative.

Nothing could be better calculated to ensure ministers are surrounded by yes-persons. It takes a wise and strong manager to see the benefit of having around them people game to say, “Are you sure that’s a good idea, boss?” when considered necessary.

Albanese has promised not to sack any public servants, and he hasn’t so far. Replacing the head of his own department is, by modern convention, an entitlement of the new prime minister.

Politicians are prone to paranoia. Labor is right to trust the public servants. In my decades of speaking to them privately on policy issues, I can’t remember when they’ve expressed to me any criticism of government policy or lack of confidence in the government of the day. To do so would be unprofessional.

Public servants aren’t omniscient. But I’d rather have a government listening to their advice than trying to wing it.

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Why the political duopoly is losing market-share

If you hadn’t noticed, economic policy and politics are closely entwined. And economic journalism is a just specialty within political journalism. But some parts of economics – agency theory and industrial organisation, for instance – are surprisingly useful in understanding how politics works.

The big surprises in this election weren’t the election of Labor, but the steep decline in the two major parties’ share of the primary vote, and the emergence of climate action as the big vote-shifting issue, even though it got little attention in the campaign, especially compared with the focus on the cost of living.

Some decades ago, the two big parties’ share of the primary vote was 90 per cent. By the last election, the non-mainstream vote had risen to a quarter. But this time it jumped to a third, leaving the big guys sharing roughly a third each.

Despite its win, Labor’s third was its lowest since the 1930s, and amazingly low for the winning party. Though the Coalition’s share was bigger than Labor’s, it fell far more this time.

Why are fewer and fewer people prepared to vote for either of the two majors? Why is the two-party system in decline? The economists’ basic neoclassical model of markets assumes intense price competition between a large number of small firms.

In real life, many markets are characterised by “oligopoly” – they’re dominated by a small number of large firms. Many decades of firms pursuing economies of scale do a lot to explain why we see so many oligopolistic markets.

In the sub-discipline of “industrial organisation”, economists seek to explain why oligopolistic markets differ from that basic model of “perfect competition”. They’ve found that the few big firms are not so much competitors as rivals. Their huge size gives each of them “market power” – more control over the prices they’re able to charge – but they watch each other like hawks, and never make a move without considering what the other big firms might do in reaction to their move.

They live in fear of losing market-share. With only two huge firms – a duopoly – the rivalry is that much more intense.

Few people realise that, though our political duopolists paint themselves as poles apart ideologically, the main thing that influences the choices they make is what the other side’s doing. Governments are constrained by oppositions; oppositions are constrained by governments.

See what this does? It makes the rival parties more alike. When I see you behaving badly but getting away with it, I decide I’ll do the same. And if you’re not sticking your neck out on climate action, I decide I’d better not risk it either.

That’s why so many people complain the parties are “all the same”. An economist called Harold Hotelling formulated a rule that two firms serving an area – ice cream sellers on a beach, for instance – will tend to gravitate to the same central location. Why? Because they want to reduce the chance of the other side getting a bigger share of the market than they do.

This, of course, reduces the choice available to customers. So, does it surprise you that, as the two sides of politics become more similar – as they crowd around the political centre – more people set up fringe parties, and more people vote for them?

For many years, the Liberals used climate change as a stick to beat Labor over the head, making Labor more cautious in what it proposed. For years that’s mean Labor’s lost many first-preference votes to the Greens. But this time the Libs lost votes to the teal independents in Sydney, Melbourne and Perth, and both sides lost votes to the Greens in Brisbane.

Yet, just as commercial firms have become bigger over the decades, so politicians and their parties have changed. Economies of scale are one reason for fewer, bigger firms, but another technique we’ve used to get richer is “specialisation and exchange”. The more we specialise, the more efficient we get at doing whatever it is we do.

By now, we have specialties within specialties. We have experts who know more and more about less and less. Politics used to be a game for amateurs. People who’d done well in their careers, switched to politics to “give something back”.

These days, politics has become more professionalised, more a lifetime career where, upon graduating, you start at the bottom as a research assistant for a union or a minister, and work your way up, becoming an MP, then a minister, then who knows?

The more professional politicians become, the more they focus on advancing in the political game, and less on the things they got into politics to fix. They used to have to guess at what the voters wanted; now the majors spend a fortune on polling and focus groups. They’re more inclined to give the voters what they now know they want, and tell them what they know they want to hear.

Voters have shown less loyalty to a particular party the more they suspect the pollies are advancing their own cause, not the public’s. The minor parties and independents are more like the amateur politicians of old: they turned to politics after a career elsewhere and they did so because they cared about a few particular issues. A growing number of voters find these issue-driven politicians more attractive.

The main political parties have changed, too. They used to be grassroots, bottom-up movements with many members. Now, they have few members and those they retain tend to be a lot more hard-line than the people who just vote for the party.

With the professionalisation of politics, the two majors have become more top-down. Just as the interests of executives don’t always align with those of their shareholders and supposed masters, so it is with political parties. Economists see this as a principal-and-agent problem.

The two majors have become more like franchise operations. All the big decisions are made at the centre by the professional managers, leaving the franchisees to just flog the product. These days, the party’s policies are made at the top, with party members getting little say.

In the old days, the branches’ main right and function was to preselect the candidates who would represent them in parliament. They tend to favour candidates who are well-known and well-liked in the district – maybe a former mayor – who’ll work hard attending school fetes and advancing the electorate’s interests.

As we’ve seen in this election, leaders and people at the centre increasingly insist on parachuting in someone with a higher profile and greater leadership potential. The party faithful increasing resent this.

The people at the top must wonder why they still need branches at all. Short answer: they still need enough volunteers to door-knock and man the booths on election day.

We saw that Labor’s attempt to foist Kristina Keneally on some electorate cost it the seat. In the Liberals’ leafy heartland, I suspect the locals’ thought that they might see a lot more of an independent member contributed significantly to the teals’ success.

It’s not at all clear the teals will be one-term wonders. And it maybe the days of either major party ruling with a comfortable parliamentary majority are gone.

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