Albo's economic report card: Must try harder on energy transition

Can Anthony Albanese’s government walk and chew gum at the same time? Should be able to, provided it stops trying to work both sides of the street.

As I wrote on Wednesday, the most urgent economic and political issue facing the government is the cost-of-living crisis.

But let’s get real. Everyone may be up in arms about the cost of living, but fixing it is standard stuff for the managers of the economy. We can be sure it will be fixed soon enough.

As we know from our own lives, we often let the urgent take priority over the more important, and that’s what this government has been doing.

What could be more important than easing my cost-of-living pain? All the different kinds of pain – the heatwaves, droughts, bushfires, floods and cyclones – that are coming our way unless the world does what’s needed to stop further global warming.

A big achievement at last year’s federal election was to get rid of a government of closet climate-change deniers only pretending to want to do something, and replace it with a government that did accept the scientists’ advice and did want to act on it.

But although Climate Change and Energy Minister Chris Bowen has been busy setting up the frameworks for reducing greenhouse gas emissions – fixing the “safeguard mechanism”, producing a hydrogen strategy and developing a critical minerals strategy, and, last month, announcing a scheme to underwrite the risk of investing in new renewable energy generation and storage – few new projects have begun or are in the offing.

That’s the trouble: actual progress is happening too slowly. Albanese’s game plan for this term seems to be softly, softly catchee monkey. Make sure you don’t offend any powerful interests, get comfortably re-elected and then think about getting tough.

There’s not enough sense of urgency. The longer it takes us to make the transition to renewable energy the more pain we’ll suffer in the process.

The Grattan Institute’s energy and climate change expert, Tony Wood, wants us to realise that this transition will be harder than anything we’ve had to achieve outside of wartime.

“We must manage the decline of the fossil fuel extractive sectors, transform every aspect of our energy and transport sectors, re-industrialise much of manufacturing, and find solutions to difficult problems in agriculture,” Wood says.

Note that the challenge comes in two parts. First, make the domestic shift from fossil fuels to renewables. Second – since the world will soon enough no longer want to buy our massive exports of coal and gas – find something else we can sell abroad.

Get it? If we don’t want to become a lot poorer, we’ve got to get weaving. Labor does get that to secure our future we must seize this limited-time opportunity to turn Australia into a renewable energy superpower.

Treasurer Jim Chalmers will tell you the government has already invested about $3 billion in the superpower project. But, again, we’re being too slow in getting on with it.

Nothing Australia can do by itself will halt climate change. That will take concerted, decisive action by all the big carbon-emitting nations. That will happen eventually, even if happens too late to prevent a lot more warming.

So, if we don’t mind being lasting losers from the eventual transition – the country that used to make a good living as an energy exporter – we can stay as laggards, waiting for America, China and Europe to do the heavy lifting.

If we want to stay winners, however, we have to get ahead of the others. We have to get to net-zero emissions before everyone else. We have to build a renewables industry so big it can meet our domestic needs, with at least as much energy to spare for export to countries less well-placed than us.

Most of our exported renewable energy would be “embodied” in green steel, green aluminium and other resources. This would be all to the good, allowing us to set up new manufacturing industries to further process our resources before selling them.

To achieve this unprecedented transformation will involve the government leading the way, funding research on how basic science can be commercialised, funding pilot projects, and reducing the risks for investors in renewables and storage.

This is challenging stuff for conventionally trained economists. They’re used to telling governments to let private firms pursue our “comparative advantage” by exploiting the nation’s “natural endowment”. They tell politicians never to try to “pick winners”.

But these are unprecedented times. Global warming has just torn up our comparative advantage in mining, rendering our natural endowment of huge remaining stocks of fossil fuels of little future value.

As Professor Ross Garnaut was the first to point out, however, in the new world where renewable energy is king, part of our natural endowment we formerly thought to be of little value is now our comparative advantage: relative to other countries, we have abundant supplies of sun and wind.

But waiting for private enterprise to turn our industrial structure on its head without government leadership is delusional. And, as we ought to have learnt by now, if you dissuade governments from picking winners, they end up backing losers: helping firms and workers who did well in the old world try to stop the clock.

That’s what’s wrong with the government’s softly, softly, all-things-to-all-persons approach to climate change. It’s working both sides of the street, taking an each-way bet: encouraging the move to renewables while retaining fossil fuel subsidies and allowing investment in new coal mines and gas projects.

It says a lot about the discombobulation of conventional economists that none of them beat the Australia Institute’s Dr Richard Denniss to pointing out the obvious: taking an each-way bet flies in the face of opportunity cost.

Allowing the established players to continue investing in fossil fuels deters them from investing in renewables. It also allows them to bid scarce skilled labour away from renewables and from rejigging the electricity grid. Sorry, the government must try harder.

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With luck, we’ll escape recession next year, but it will feel like one

What we’ve come to call the “cost-of-living crisis” has made this an unusually tough year for many people as they struggle to make ends meet. It’s likely to get worse rather than better next year. Which won’t help Anthony Albanese’s chances of being comfortably returned to government in early 2025.

Everyone hates rapidly rising prices and demands the government do something. But I’m not sure everyone understands the paradoxical nature of the usual ways central banks and governments go about fixing the problem. They make it worse to make it make better.

In a market economy, when our demand for goods and services exceeds the economy’s ability to supply them, businesses solve the problem by putting up their prices. The economic managers then seek to weaken our demand by squeezing households’ finances so that they can’t spend as much.

As our spending weakens, firms are less able to keep raising their prices without losing sales.

The main way the Reserve Bank puts the squeeze on household spending is by engineering a rise in mortgage interest payments, leaving people with less money to spend on everything else.

A shortage of rental housing has allowed landlords to make big rent increases. Employers have helped the squeeze by ensuring they raise wages by less than they’ve raised their prices. And Treasurer Jim Chalmers has helped by allowing bracket creep to take a bigger tax bite out of wage increases.

All this is why so many people have been feeling the financial heat this year. But even if there are no more interest rate rises to come, the existing pressures are still working their way through the economy, with little sign of relief.

Consumer prices rose by 7.8 per cent over the year to last December, but the annual rate of increase slowed to 5.4 per cent in September. That’s still well above the Reserve’s target of 2 per cent to 3 per cent.

If the Reserve has accidentally hit the economy harder than intended, we could slip into recession next year, causing a big jump in the number of people out of a job, and thus hitting them much harder.

But with any luck, it won’t come to that. And the crazy-lazy way the media define recession – a fall in real gross domestic product in two successive quarters – means that growth in the population may conceal the hip-pocket pain many people are feeling.

Consider the case of someone on the very modest wage of $45,000 a year in September 2021. If their wage rose in line with the wage price index, it would have risen by $3300 to $48,300 in September this year.

However, bracket creep, plus the discontinuation of the low and middle income tax offset, raised the average rate of income tax they pay from 9.8¢ in the dollar to 14.2¢. So their tax bill would have grown by $2460.

Now allow for the rise in consumer prices over the two years, and the purchasing power of their disposable income has fallen by about $5290, meaning their “real” disposable income is $4450 a year less than it used to be.

Can you imagine that person being terribly happy with the way their finances have fared under the Albanese government? My guess is, there’ll be growing disaffection with Labor as next year progresses.

To help him win last year’s federal election, Albanese made Labor a “small target” by promising very little change, including no change to the stage three income tax cuts, legislated long before the pandemic, to start in July next year.

His game plan had been to spend his first term being steady and sensible, keeping his promises and being an “economically responsible” government. This would get him re-elected with an increased majority and able to implement needed but controversial reforms.

But, through no great fault of his own, he’s had to grapple with the worst surge in the cost of living in decades. If there’s a low-pain way to get inflation back under control, I’ve yet to hear about it.

The trouble set in well before the change of government, and the Reserve Bank began its long series of interest rate rises during the election campaign.

My guess is that Albanese’s hopes of storming back to power at an election due by May 2025 are dashed. But it’s hard to see Peter Dutton winning the election unless he can win back the Liberal heartland seats that went to the teals, which seems doubtful.

So, it’s not hard to see Albanese losing seats and reduced to minority government, dependent on the support of the Greens and teals.

There is, however, one thing he could do to cheer up many voters: rejig the coming tax cuts so the lion’s share of the $25 billion they’ll cost the budget goes not to the high-income taxpayers who’ve had the least trouble coping with living costs, but to those on lower incomes who’ve the most.

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How full employment has changed the economy

This may be the first time you’ve watched the managers of the economy using high interest rates and a tighter budget to throttle demand to get inflation down. But if it isn’t your first, have you noticed how much harder they’re finding it to catch the raging bull?

It explains why both the previous and the new Reserve Bank governor have been so twitchy. How, after they seem to have made as many interest rate rises as they thought they needed, they keep coming back for another one.

The economy isn’t working the way it used to. Have you noticed that, although consumer spending stopped dead in the September quarter, and overall growth in the economy slowed to a microscopic 0.2 per cent, there’s been so little weakness in the jobs market?

Although there’s no doubt about how hard most households have been squeezed over the course of this year, how come the rate of unemployment has risen only marginally from 3.5 per cent to a still-far-below-average 3.9 per cent in November?

And if the economy’s been slowing for the whole of this year, how come the budget balance is getting better rather than worse, with Treasurer Jim Chalmers achieving a surplus last financial year and hoping for another in the year to next June?

There are lots of particular things that help explain these surprising results – world commodity prices have stayed high; some parts of the economy change earlier than others – but there’s one, more fundamental factor that towers over all the others: this is the first time in 50 years that we’ve been trying to slow a runaway economy that’s reached anything like full employment.

It turns out that throttling an economy that’s fully employed is much harder to do. Households are more resilient and, after a period when it’s been hard to get hold of all the workers they need, businesses have been far less inclined to add to the slowdown by shedding staff.

Remember that we reached full employment by happy accident. Between the unco-ordinated stimulus of state as well as federal governments, plus the Reserve cutting rates to near-zero, we (like many other rich economies) hit the accelerator far too hard during the pandemic.

This was apparent after the pandemic had eased and before the Morrison government’s final budget in March last year. But there was no way Scott Morrison was going to hit the budget brakes just before an election.

So the econocrats in the Reserve and Treasury resigned themselves to second prize: an unemployment rate much lower than what they were used to and felt comfortable with.

Because the pandemic had also caused us to close our borders and thus block employers’ access to skilled and unskilled immigrant labour, the econocrats got far more than they expected: unemployment so low we hit full employment.

The jobs market is getting less tight, with the number of job vacancies having fallen a long way, but last week’s figures for November showed how strong the labour market remains.

Sure, unemployment rose a fraction to 3.9 per cent, but this is no higher than it was in May last year. And the month saw total employment actually grow, by more than a remarkable 61,000 jobs during the month.

After all this slowing and all this pain, the rate at which people of working age are participating in the labour force by either having a job or actively seeking one has reached a record high.

And almost 65 per cent of the working-age population has a job – a proportion that’s never been higher in Australia’s history.

Employment is still growing strongly, partly because of the rebound in immigration, with foreign students in particular filling part-time job vacancies.

But also, it seems, because more hard-pressed families are trying to make ends meet by taking second jobs. In past downturns, those jobs wouldn’t have been there to be taken.

To force households to spend less, they’re being hit with three sticks. Obviously, by raising mortgage interest rates. Also by employers, taken as a group, raising the wages they pay by less than they’ve raised their prices (have you noticed how Chalmers avoids referring to the cut in real wages by just blaming “inflation”?).

And, third, by the government allowing bracket creep to take a bigger bite out of what pay rises the workers do manage to get.

But there’s another factor that’s been working in the opposite direction, adding to households’ ability to keep spending: over the year to November, the number of people with jobs rose by more than 440,000. That’s a full-employment economy.

All the extra people with jobs pay income tax. All the part-time workers able to get more hours pay more tax. All the people getting second jobs pay more tax. Add the bigger bite out of pay rises, and you see why Chalmers’ budget’s so flush.

But note this: the many benefits of full employment come at a cost – “opportunity cost”. As a coming paper by Matt Saunders and Dr Richard Denniss of the Australia Institute will remind us, “opportunity cost makes it clear that when resources are used for one purpose, they become unavailable for other purposes”.

So when we’re at or close to full employment, any developer, business executive or politician seeking our support for any project because “it will create jobs” should be laughed at. Where will the workers come from to fill the jobs? You’ll have to pinch them from some other employer.

This is especially true when the jobs you want to create are for workers with specialist skills.

According to a federal government report, in October last year there were 83 major resource and energy projects at the committed stage, worth $83 billion. But about two thirds of these were for the development of fossil fuels, including the expansion of nearby ports.

Really? And this at a time when the electricity grid needs urgent reconfiguration as part of our move to a low-carbon economy, but projects are being deferred because you can’t get the workers?

As Saunders and Denniss conclude, “With rapid population growth and the stated need to transform our energy system, the real cost of spending tens of billions of dollars building new gas and coal projects is the lost opportunity to invest in the infrastructure and energy transformation the Australian economy needs.”

I think Jim Chalmers needs to explain the iron law of opportunity cost to his boss. And make sure Climate Change and Energy Minister Chris Bowen’s in the meeting.

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Chalmers finds a better way to get inflation down: fix the budget

There’s an important point to learn from this week’s mid-(financial)-year’s budget update: in the economy, as in life, there’s more than one way to skin a cat.

The big news is that, after turning last year’s previously expected budget deficit into a surplus of $22 billion – our first surplus in 15 years – Treasurer Jim Chalmers is now expecting this financial year’s budget deficit to be $1.1 billion, not the $13.9 billion he was expecting at budget time seven months’ ago.

Now, though $1.1 billion is an unimaginably huge sum to you and me, in an economy of our size it’s a drop in the ocean. Compared with gross domestic product – the nominal value of all the goods and services we expect to produce in 2023-24 – it rounds to 0.0 per cent.

So, for practical purposes, it would be a balanced budget. And as Chalmers says, it’s “within striking distance” of another budget surplus.

This means that, compared with the prospects for the budget we were told about before the federal election in May last year, Chalmers and Finance Minister Katy Gallagher have made huge strides in reducing the government’s “debt and deficit”. Yay!

But here’s the point. We live in the age of “central bankism”, where we’ve convinced ourselves that pretty much the only way to steer the economy between the Scylla of high inflation and the Charybdis of high unemployment is to whack interest rates up or down, AKA monetary policy.

It ain’t true. Which means Chalmers may be right to avoid including in the budget update any further measures to relieve cost-of-living pressures and, rather, give top priority to improving the budget balance, thereby increasing the downward pressure on inflation.

The fact is, we’ve always had two tools or instruments the managers of the economy can use to smooth its path through the ups and downs of the business cycle, avoiding both high unemployment and high inflation. One is monetary policy – the manipulation of interest rates – but the other is fiscal policy, the manipulation of government spending and taxation via the budget.

This year we’ve been reminded how unsatisfactory interest rates are as a way of trying to slow inflation. Monetary policy puts people with big mortgages through the wringer, but lets the rest of us off lightly. This is both unfair and inefficient.

Which is why we should make much more use of the budget to fight inflation. That’s what Chalmers is doing. The more we use the budget, the less the Reserve Bank needs to raise interest rates. This spreads the pain more evenly – to the two-thirds of households that don’t have mortgages – which should be both fairer and more effective.

Starting at the beginning, in a market economy prices are set by the interaction of supply and demand: how much producers and distributors want to be paid to sell you their goods and services, versus how much consumers are willing and able to pay for them.

The rapid rise in consumer prices we saw last year came partly from disruptions to supply caused by the pandemic and the Ukraine war. There’s nothing higher interest rates can do to fix supply problems and, in any case, they’re gradually going away.

But another cause of the jump in prices was strong demand for goods and services, arising from all the stimulus the federal and state governments applied during the pandemic, not to mention the Reserve’s near-zero interest rates.

Since few people were out of job for long, this excessive stimulus left many workers and small business people with lots to spend. And when demand exceeded supply, businesses did what came naturally and raised their prices.

How do you counter demand-driven inflation? By making it much harder for people to keep spending so strongly. Greatly increasing how much people have to pay on their mortgages each month leaves them with much less to spend on other things.

Then, as demand for their products falls back, businesses stop increasing their prices and may even start offering discounts.

But governments can achieve the same squeeze on households by stopping their budgets putting more money into the economy than they’re taking out in taxes. When they run budget surpluses by taking more tax out of the economy than they put back in government spending, they squeeze households even tighter.

So that’s the logic Chalmers is following in eliminating the budget deficit and aiming for surpluses to keep downward pressure on prices. This has the secondary benefit of getting the government’s finances back in shape.

But how has the budget balance improved so much while Chalmers has been in charge? Not so much by anything he’s done as by what he hasn’t.

The government’s tax collections have grown much more strongly than anyone expected. Chalmers and his boss, Anthony Albanese, have resisted the temptation to spend much of this extra moolah.

The prices of our commodity exports have stayed high, causing mining companies to pay more tax. And the economy has grown more strongly than expected, allowing other businesses to raise their prices, increase their profits and pay more tax.

More people have got jobs and paid tax on their wages, while higher consumer prices have meant bigger wage rises for existing workers, pushing them into higher tax brackets.

This is the budget’s “automatic stabilisers” responding to strong growth in the economy by increasing tax collections and improving the budget balance, which acts as a brake on strong demand for goods and services.

There’s just one problem. Chalmers has joined the anti-inflation drive very late in the piece. The Reserve has already raised interest rates a long way, with much of the dampening effect still to flow through and weaken demand to the point where inflation pressure falls back to the 2 per cent to 3 per cent target.

We just have to hope that, between Reserve governor Michele Bullock’s monetary tightening and Chalmers’ fiscal tightening, they haven’t hit the economy much harder than they needed to.

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Why populism hasn't taken off in Australia

One good thing about taking a break from work is that it gives you time to let your mind wander from all the pressing concerns of our fast-moving world – the preoccupation with this “crisis” and that “crisis” – to less immediate but more important problems. And it helps if you’ve used the time to read a good book or two.

On my recent long break – soon to be followed, I fear, by my summer holiday – I read The Crisis of Democratic Capitalism, by Martin Wolf. Wolf is the chief economics commentator of the Financial Times in London, and the global doyen of my tiny profession of economics editors.

Wolf has two worries. Democracy isn’t working well and neither is capitalism.

He sees many signs that faith in democracy is declining and voters are turning to authoritarian demagogues peddling populist solutions to difficult problems.

You can see that in the election of Donald Trump and the even more remarkable possibility that this self-serving con man could be given another turn at the wheel. You see it in Britain’s self-harming decision to leave the European Union.

And you see the rise of right-wing populism in an ever-growing number of European countries – from Hungary to the Netherlands, not to mention in South America – much of it involving resentment of immigrants, particularly Muslims, and the search for scapegoats.

Turning to capitalism, there is much dissatisfaction with the evident failure of “neoliberalism” – the doctrine that less government and more freedom for business is the path to prosperity.

The privatisation of government-owned businesses has often made things worse rather than better. The contracting of private businesses to provide government services hasn’t helped. Nor has the use of private consultants rather than the public service.

Wolf argues that the poor performance of the economy is the main explanation for the rise of populism in the rich democracies.

The global financial crisis of 2008 led to much disillusionment. Particularly in America, deregulation of the banks left them free to make many bad loans, but when the house of cards collapsed and plunged the advanced economies into the Great Recession, billions of taxpayers’ dollars had to be used to bail out the banks, but the bankers escaped unpunished.

Leaving aside the temporary disruption of the pandemic, the advanced economies have never since returned to healthy growth and rising living standards.

Then there’s globalisation. It has moved much manufacturing activity from America and Europe to China and other Asian countries, to the great benefit of consumers of manufactured goods throughout the rich world.

It lifted many millions of workers out of poverty in Asia, while robbing many American workers of their well-paid jobs in manufacturing.

Governments could easily have used their budgets to require those of us who benefited from cheaper cars, clothing and all the rest to compensate and help those who lost their jobs but, in the era of neoliberalism, they didn’t bother.

It was the decisions of the former blue-collar workers of the rust belt states to move their votes from Democrat to Trump that pushed him across the line in 2016.

Wolf says, “people expect the economy to deliver reasonable levels of prosperity and opportunity to themselves and their children”. When it doesn’t fulfil those expectations “they become frustrated and resentful”.

“Instead ... it has generated soaring inequality, dead-end jobs and [economic] instability.”

Whether you look at politics or the economy you see we’re moving to a plutocracy – government by the rich and powerful. You see powerful – but often harmful – industries buying favourable treatment with generous donations to political parties.

And you see the way our chief executive class has increased its remuneration out of all comparison, while holding down the wages of their fellow employees.

But Wolf’s story applies more fully to America, Britain and Europe than it does to us. While it’s true that living standards in Australia have hardly risen for the past decade, things here haven’t been as bad.

Our one great would-be populist saviour, Pauline Hanson, hasn’t got far. Our two big parties’ problems have been with the Greens and teals.

And while our incomes have become more unequal over the decades, they haven’t worsened much in the past two decades – except at the very top.

Part of that lack of deterioration is owed to our system of regularly – and fairly generously – increasing minimum award wages.

Another saviour has been the Labor governments’ umbilical cord to the union movement, something not matched by America’s Democrats.

Anthony Albanese hasn’t seemed terribly brave on many issues, but last week he pressed on with closing the legal loopholes employers have long been using to chisel their workers, against ferocious opposition from the (big) Business Council, the Mining Council and the employer groups.

According to them, Labor’s changes will destroy many jobs and kill the economy. Don’t stay up waiting for it to happen.

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Why it's doubtful we need another interest rate rise

There’s nothing the media likes more than an interest rate rise on Melbourne Cup day. It’s surprising how often it’s happened, and many in the financial markets have convinced themselves that’s what we’ll get next Tuesday. And the good news is that, despite the radical reform of moving to a mere eight board meetings a year, the Reserve Bank has ensured that meetings on cup day will continue.

What I’m not sure of is whether, if we do get a rate rise next week, it will be happening by accident or design. In central banking, getting your timing right is just as important as it is in a comedy routine.

It was no surprise last week when new Reserve Bank governor Michele Bullock used her first big speech to make sure everyone noticed her bulging anti-inflation muscles. “There are risks that could see inflation return to target more slowly than currently forecast,” she warned.

“The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation,” she said. She added some qualifications but, predictably, neither the markets nor the media took much notice of them.

Any new governor would have said the same in their first speech. Trouble is, her tough statement about not being willing to return to the 2 to 3 per cent inflation target “more slowly than currently forecast” came just the day before publication of the consumer price index for the September quarter.

And while it showed the annual rate of inflation continuing to fall from its peak of 7.8 per cent at the end of last year to 5.4 per cent nine months later, it also showed the quarterly inflation figure rising from 0.8 per cent to 1.2 per cent.

This was 0.2 percentage points or so higher than the markets – and, they calculate, the Reserve – were expecting. Bingo! Rate rise a dead cert. All the big four banks are laying their bets accordingly.

But the main reason for the slightly higher number was a rise in petrol prices, which contributed 0.25 percentage points of the 1.2 per cent. This rise comes from insufficient supply: the higher world price of oil, forced up the OPEC oil cartel and others trying to increase the price by restricting their supply.

It does not come from excessive Australian demand – which is the one factor the Reserve can moderate by increasing interest rates. Similarly, the next-biggest price increases, for newly-built homes (imported building materials), rents (surge in immigration) and electricity (Ukraine war) aren’t caused by anything a rate rise can fix.

So I think the case for yet another rate rise is weak. As Bullock clearly demonstrated elsewhere in her speech, the Reserve’s single, crude instrument, raising interest rates, delivers most of its punishment to the quarter or so of households with big mortgages.

Too many of these people are really hurting, and the full hurt from rate rises already made has yet to be felt. The economy is slowing, consumer spending is hardly growing, real income per person is falling.

And, as Treasury secretary Dr Steven Kennedy noted in a speech last week, last financial year’s budget surplus of $22 billion shows the budget’s “automatic stabilisers” are working hard to help the Reserve restrain demand – a truth that’s been completely missing from the Reserve’s commentary. That’s gratitude for you.

But if, having thought hard about such a small change to the “outlook for inflation”, Bullock decides a further rate rise isn’t warranted, what are the money market punters (and I do mean people making bets) going to think, considering all her chest-beating? That she speaks big but carries a soft stick?

There are a few things she – and her urgers in the financial markets (most of whom have never in their lives had reason to worry about the cost of living) – need to remember.

First, at this late stage in the game, we really are into fine-tuning. And acting because a revised forecast means we’ll return to target later than we had expected suggests you’ve forgotten what every governor needs always to remember: as with all economists, the Reserve’s forecasts are more likely to be wrong than right.

They can be wrong by a lot or wrong by a little. Worst, they can prove too optimistic or too pessimistic. If your previous forecast was wrong, what makes you so sure your next one will be right? When it comes to forecasts, the person making the actual decisions needs to be the biggest sceptic.

Second, the Reserve’s previous forecast was for inflation to be back to the top of the target range by the first half of 2025. If its latest forecast pushes that out to the second half, what’s so terrible about that? How much extra pain for young people with huge mortgages does that justify?

Ah, says the Reserve, the reason we can’t wait too long to get inflation back to target is that, the longer we leave it, the greater the risk that business’ and workers’ expected rate of inflation rises above the target range.

If that happened, we’d need much higher interest rates and much more pain to get expectations back down to the only range we’ve decided is acceptable.

This is true in principle but, in practice, it’s mere speculation. The fact is, the world’s central bankers have no hard evidence on how long it takes for inflation expectations to adjust – a few years or a few decades.

I’m old enough to remember that when inflation returned, in the late-1960s and early-’70s, it took a decade or two for expectations to adjust. The smarties used to advise youngsters to borrow as much as anyone would lend them. Why? Because real interest rates were negative.

But when a decade or two of tough inflation fighting eventually got expectations down to what became the target range, after the recession of the early ’90s, they’ve shown zero sign of moving for 30 years. Not even during the present inflation surge.

So when nervous-nelly governors decide to err on the safe side, they’re deciding to beat young home buyers even further into the ground. Either sell your house or starve your kids.

Finally, in her answers to questions last week, Bullock implied that the risk of rising inflation expectations was now so great that the Reserve could no longer afford the nicety of distinguishing between supply-side shocks and price rises driven by excessive demand.

Whatever the cause, continuing delay in getting inflation back to target presented such a threat to expectations that rates would have to keep rising regardless.

This means that if our return to target is delayed by supply-side problems – mismatches in the transition to renewable energy, leaps in meat and veg prices caused by extreme weather, or higher oil prices caused by worsening conflict in the Middle East – the home buyers cop it.

In this era of continuing supply shocks, failure to distinguish between the causes of price rises would be a recipe for deep recession. The Reserve’s professed “dual mandate” – full employment – would be out the window.

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Paying tax is good and, for better government, we should pay more

On Friday, a former top econocrat did something no serving econocrat is allowed to do, and no politician is game to do: he set out the case for us to pay higher, not lower, taxes.

For years, politicians have sought our votes by promising smaller government and lower taxes. This often helped get them elected, but it hasn’t worked as promised.

They’ve reduced the size of government by privatising government-owned businesses and outsourcing the provision of many government-funded services. But though they’re always announcing tax cuts, the hidden tax of bracket creep means there’s been no real reduction in the tax we pay. Great.

The man advocating a radically different approach is Dr Mike Keating. He laid out the case for bigger government and higher taxes in a speech to the Australia Institute’s revenue summit at Parliament House in Canberra.

The pollies seeking election by promising lower taxes take it as obvious that taxation is a bad thing – a “burden” which, like all burdens, needs to be minimised.

But Keating says we should remember the purpose of taxation. It’s to pay for a wide range of services that governments provide to us either directly (education, healthcare, child care, aged care, pensions and payments) or collectively (defence, law and order, roads). Some services we get while we’re young, some when we’re middle-aged, and many when we’re old.

Keating says there’s a wide consensus among Australians about the things we expect the government to do for us. “We recognise that all Australians are entitled to basic levels of education, healthcare, income support and shelter, and that governments have a responsibility to ensure the provision of these essential services,” he says.

Recent Coalition governments promising us lower taxes always added the promise that this could be done without reducing “essential services”.

Keating says there’s now widespread acknowledgement that these services that we pay for collectively are critical to building our community and to our sense of community.

So taxation reflects our mutual obligation to one another as citizens. Taxation underpins an inclusive society and is an efficient way of paying for those services that are consumed collectively. Many of the services paid for by taxation add to our quality of life.

Indeed, he says, history suggests that our demand for these services, such as education and health, tends to rise rapidly as economic growth causes our incomes to grow. They’re what economists call “superior goods”. The better off we get, the more of our income we devote to them.

The problem for governments – which politicians themselves have worsened – is the disconnect in people’s minds between our demand for government services and the taxation needed to pay for them. We refuse to join the dots.

“We want increased access to more and better services on the one hand, and less taxation on the other,” Keating says.

So, let’s stop kidding ourselves. If we want more and better services from government, we’ll have to pay for them with higher taxes, just as when we want more or better in a shop or a restaurant, we know we’ll have to pay more.

But assuming we accept that truth, why do we already want the government to be bigger and better?

One way the previous government sought to square the circle of maintaining “essential services” while cutting taxes – including next July’s stage-three tax cuts – is by underspending on those services and hoping no one would notice.

Keating has thought of no less than seven areas where there’s little doubt that we need to spend more.

First, although the previous government acted on the scandals exposed by the royal commission into aged care, and governments have spent more on childcare, both remain underfunded. What’s more, increases in the availability and quality of care services are likely to lead to higher costs because higher wages will be needed to attract the extra workers.

Second, the Albanese government’s increased spending on “social housing” (what in the olden days was called the housing commission) is widely considered to be much less than needed.

Third, federal government grants for public hospitals will probably have to grow a lot faster than presently expected to reduce excessive waiting times. And the Medicare payments to GPs are still too low, risking shortages of doctors, particularly in the country.

Fourth, federal funding for universities hardly grew in real terms over the nine years of the Coalition government, and actually fell per student. Labor will be pressured to make this up. As for vocational education and training – TAFE – the new National Skills Agreement requires the feds to cough up more.

Fifth, unemployment benefits – this week labelled JobSeeker, maybe something else next week – are very low compared with most other rich economies. And the recent leap in rents means the rent assistance paid to pensioners and others on benefits is now far too mean.

Sixth, it’s clear we’ll need to spend a lot more on the AUKUS nuclear submarines and other defence capabilities. This could increase annual defence spending by at least 1 per cent of gross domestic product over the next decade.

Finally, measures to reduce carbon emissions and to fully develop Australia’s potential as an exporter of renewable energy will almost certainly require greater funding than the government is presently planning.

The Grattan Institute estimates that if present tax arrangements aren’t changed to cover the expected additional growth in government spending, the “structural” (underlying) budget deficit will be close to 3 per cent of GDP in 10 years. Keating thinks it’s more likely to be 4 per cent – or $100 billion a year in today’s dollars.

Continuing deficits of this size would be quite unrealistic, he says. He suggests not another review of the tax system, but a major, authoritative inquiry to assess how much revenue is needed to adequately fund all government services.

When the public has a better understanding of what we’d get for our money, then maybe we’ll be more prepared to accept the need for higher taxes.

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Identity politics is destroying our public schools

When one of the most privileged and oldest private schools in Australia, The King’s School – home to the scions of the squattocracy – has to be ordered by the NSW government not to spend public money on a plunge pool at its headmaster’s residence, that’s when you know there’s something very wrong with the way federal and state governments are dividing their funding between public and private schools.

It’s a system where the less government help a school needs, the more it’s given, and the more a school needs the more likely it won’t be given enough.

Although the famous Gonski report of 2011 recommended that government funding of schools be based on the assessed needs of their mix of students, more than a decade later that hasn’t happened.

Why not? Partly because, unlike most other English-speaking countries, Australia has allowed the mainstream Christian churches to play a big role in the provision of primary and secondary education.

They had schools before the government decided to introduce compulsory public schooling, and were allowed to keep running them. To this day, they’re allowed to provide religious instruction in public schools where – despite our growing lack of religiosity – the churches fight against ethics classes being offered as an alternative.

Led by the Catholics, the private schools fought to stop the Gonski reforms reducing their funding and control over how it was spent. Anachronistically, our politicians remain wary of getting off side with the church vote.

But the other reason for the backsliding on Gonski is the much earlier decision of the Howard government to make parents’ choice of school – not student need – the highest priority for government funding.

John Howard got the states to licence many new private schools, most of them with some religious affiliation. This has changed the nature of Australian schooling in a way few people have noticed.

Have you heard of “identity politics”? It’s the modern tendency for voters to think of themselves not just as Australians, or even Labor or Liberal, but as part of an ethnic, religious or gender-preference group.

There was a time when almost everyone was educated at the local public or parish school. At school, you learnt to get along with people from many different social classes and backgrounds. These days, only a small majority of students go to public schools, and it’s now common for Jewish kids to go to Jewish schools, Muslims to Muslim schools, evangelical Protestants to “Christian schools” and so forth.

Sorry, this may be what many parents choose for their offspring, but I’m not sure if it will be good for national tolerance and social cohesion. Just as bad, it’s happening at the expense of public schools, left with too few resources to do justice to the more than 80 per cent of the nation's disadvantaged students – those of the lowest socio-economic status, Indigenous and the outback (not to mention misbehaving kids expelled from private schools).

Private schools can – and do – say no to kids with problems, but public schools can’t.

According to official figures collated by Trevor Cobbold, of Save our [public] Schools, combined annual federal and state funding grew by more than $2800 per independent school student over the nine years to 2020, after allowing for inflation. That compares with increases of almost $2500 per Catholic school student and just $830 a year per public school student.

Across Australia this year, combined government funding is estimated to have provided private schools (Catholic plus independent) with 106 per cent of the Gonski-inspired, officially calculated “schooling resource standard” needed to meet the particular needs of their students. Public schools will get just 87 per cent of what they need.

Add huge tuition fees, and you see why long-established independent schools have far more income than they need just to run the school. Many have never-ending construction programs moving round and round the cramped school campus, tearing things down and building new indoor swimming centres, music and drama centres, auditoriums and sporting facilities.

Casual observation suggests that independent schools get better academic results than Catholic schools and, particularly, public schools. But many studies show that, once you allow for the socio-economic status of the students’ parents, independent and Catholic schools do no better than public schools.

If governments keep over-funding private schools and underfunding public schools, however, a lot more parents will feel they need to pay up, so they can move their kids to private, leaving public schools with a much higher proportion of disadvantaged students that they’re inadequately resourced to help.

Doesn’t sound like a road we should want to travel.

After coming to office last year, the Albanese government postponed any changes to federal funding of schools for a year, so an expert panel could report on the National Schools Reform Agreement, the agreement between the feds and states on school funding.

The panel’s report is due this month. But even if it recommends big reforms, you wouldn’t be sure this bruised and battered government would be up for the fight with privileged schools and their parents.

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Want better productivity? Cut population growth

A simple reading of orthodox economics tells you that the urge to maximise profits leads businesses to continuously improve the productivity of their activities. But, as former competition tzar Rod Sims has often reminded us, improving productivity is just one way to increase profits, and there are other ways to do it that are a lot easier.

One other way is to increase your share of the market by having a better product. Or better, coming up with a marketing campaign that merely cons people into believing your product is better.

Another way to increase market share is to undercut your competitors’ prices. But in oligopolies dominated by only a few big players, which many of our markets are, the threat of mutually damaging retaliation is so great that price wars are rare.

(This why the big four banks were so shocked and offended when the Macquarie group, a huge financial group with deep pockets and a small bank, decided recently to get itself a slice of the lucrative home loan market by offering below-market interest rates.)

Another way to increase profits is to take over a competitor. This may or may not increase profitability – percentage return on the share capital invested in the business – to the benefit of shareholders. But the managers of the now-bigger business will have to be paid commensurately higher wages and bonuses.

But the simplest, easiest way to increase profits? Sell into an ever-growing market. And how do you do that? Persuade the government to maintain a high rate of immigration. This is a mission on which big business has had great success in recent decades.

Polling shows the public does not approve of high immigration. With some justification, the punters tend to blame it for road congestion and rising housing costs.

But the Howard government and its Coalition successors did a roaring trade in keeping the punters’ disapproval focused on poor people who arrived uninvited on leaky boats, while they were quietly ushering in all the immigrants that business was demanding. These people arrived by plane, and so drew no media attention.

Is it mere coincidence that productivity improvement has been weak during the period in which immigration-driven population growth has been so strong? I doubt it, though of course, I’m not claiming this is the only factor contributing to weak productivity improvement.

While it makes self-interested, short-sighted sense for businesspeople to be so untiring in their clamour for ever more immigration, the strange thing is that the virtue of rapid population growth goes almost wholly unquestioned by the nation’s economists.

Population growth is an article of faith for almost every economist. For a profession that prides itself on being so “rational”, it’s surprising how little thinking economists do about the pros and cons of immigration. There’s little empirical evidence to support their unwavering commitment to high immigration, but they don’t need any evidence to keep believing what almost all of them have always believed.

Before we get to the narrowly economic arguments, let’s start with the bigger picture. The primary reason for doubting the sense of rapid population growth is the further damage every extra person does to the natural environment.

As the sustainable population advocates put it: too many people demanding too much of our natural environment.

Economists have gone from the beginning of their discipline assuming that the economy and the environment can be analysed in separate boxes. This further assumes that any adverse interaction between the two is so minor it can be safely ignored.

In an era of climate change and growing loss of species, this is clearly untenable. The economy and the natural environment that sustains it have to be joined up. But when it comes to population growth, these are dots the profession hasn’t yet joined.

Even on narrowly economic considerations, however, economists long ago stopped checking their calculations. It’s obvious that a bigger population means a bigger economy, and since economists are the salespersons of economic growth, what more do you need to know?

Well, you need to know that economic growth achieved merely through population growth leads to what the salespersons are promising the punters: a higher material standard of living. Simply, higher income per person.

If there is evidence higher population growth leads to higher income per person, I’ve yet to see it. I have seen a study by the Productivity Commission that couldn’t find any. And I have seen a study showing that the higher a country’s population growth, the lower its growth in gross domestic product per person.

But it doesn’t surprise me that the committed advocates of population growth don’t wave around any evidence they have to support their faith. What is well understood, though the advocates seem to have forgotten it, is that, whatever economic benefits immigration may or may not bring, it comes with inescapable economic costs.

Which are? That every extra person dilutes our existing per-person investment in business equipment and structures, housing stock and public infrastructure: schools, hospitals, police stations, roads and bridges, and much else.

In other words, every extra person requires us to spend many resources on preventing this population growth from diminishing our economic and social capital per head, and thereby making us worse off.

Economists call this “capital widening”, as opposed to “capital deepening”, which means providing the population with more capital equipment and infrastructure per person.

Trouble is, there’s a limit to how much the nation can save – or borrow from overseas – to finance our investment in housing, business equipment and structures, and public infrastructure. So resources we have to devote to capital widening, thanks to population growth, are resources we can’t devote to the capital deepening that would increase our standard of living.

Using immigration to raise our living standards is like trying to go up a down escalator. You have to run just to stop yourself going backwards. This is smart?

In practice, it’s worse than that. There’s a big government co-ordination problem. It’s the federal government that’s responsible for immigration levels, and that collects most of the taxes the immigrants pay, but it’s mainly the state governments that are lumbered with organising the extra housing and building the extra sewers, roads, transport, schools, hospitals and other facilities needed to avoid congestion and overcrowding.

Another thing to remember is that the easier you make it for businesses to get the skilled workers they need by bringing them in from abroad, the more you tempt them not to go to the expense and inconvenience of bothering with apprentices and trainees.

This is why so many businesses were caught short when, during the pandemic, their access to imported skilled labour was suddenly cut off. No wonder they were shouting to high heaven about the need to reopen their access to cheap labour. A lot of it was actually unskilled labour from overseas students, backpackers and others on temporary visas, who are easy to take advantage of.

Have you joined the dots? If giving business what it wants – high immigration to grow the market and provide ready access to skilled and unskilled workers – hasn’t induced business to increase the productivity of its labour, why don’t we try the opposite?

Make it harder for business to increase profits without improving productivity and investing in training our local workforce. Of course, this would require us to value productivity improvement more highly than population growth.

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How much government spending is wasted? Sorry, don't know yet

Hands up if you think a lot of the money the government spends is wasted. I think a lot of people would agree. But the question’s not as easily answered as you may think.

My guess is that many people’s impression of the amount of waste is exaggerated. When they see what they believe is wasteful spending they notice and remember it, whereas when everything seems to be going as it should, they don’t take note.

And what’s wasteful can be in the eye of the beholder. All the government money that comes my way is well spent, but the money it’s giving to people I don’t know or don’t like – or to causes I don’t care about – that’s waste. Well, maybe, maybe not.

Many people convince themselves governments waste massive amounts, in order to justify their objection to paying more tax, or their resentment of what they already pay.

Remember, no one in government just stands there tearing up banknotes. Some of the money can be spent on, say, fighter planes than don’t work properly, or roads that are rarely used, but almost all the money spent ends up in someone’s hands, not just as a pension or benefit, but as a payment for work they did for the government, either as its employee or the employee of a company that did something for, or sold something to, the government.

The people who get money from the government in this way don’t regard it as a waste. What do they do with it? They spend most of it. And when they do, this generates income for other people. The money goes round and round. It’s rare for government spending to benefit no one.

But that doesn’t mean the money was well spent. That it benefited the people it was supposed to benefit, or that they got as much benefit from it as intended. That can be particularly so when governments don’t just give people cash, but do things for them that are supposed to help them.

When you think of it like that, my guess is that a fair bit of the government’s spending is wasteful. But I can’t tell you how much. Why not? Because even the government doesn’t know.

Why not? Because governments don’t do nearly as much evaluation of their spending as they should. Australian governments have no culture of regularly and rigorously checking to see spending programs are achieving their stated objectives.

But here’s the news. The Albanese government has vowed to change this. In fulfillment of an election promise, it has allocated spending of $10 million over four years to set up the Australian Centre for Evaluation as a unit within Treasury. It’s the baby of assistant treasurer Dr Andrew Leigh.

The centre will improve the number, quality and impact of evaluations across the Australian public service, working together with evaluation units in other departments and agencies. “It will save taxpayers money and make government better,” Leigh says.

It will partner with other departments to conduct evaluations on mutually agreed priority programs. These evaluations will build momentum by helping to build departments’ capabilities and demonstrating the value of better evaluation across the government.

“Building the … public service’s evaluation capability is also an important step towards reducing the over-reliance on [outside] consultants” and cutting spending on them. Using consultants “is expensive and delivers inconsistent results”, Leigh said.

Last week, Leigh announced that the centre’s first evaluation, with the Department of Employment and Workplace Relations, would be of Workplace Australia, the latest name for the network of community and for-profit outfits contracted to provide “employment services” to people having a hard time finding a job.

Leigh says that making sure the Workplace Australia network’s employment services are achieving their stated objective – which is to reduce long-term and “structural” unemployment – is a key part of achieving the government’s commitment to full employment, as outlined in its recent white paper on employment.

Good. Because I’ll be amazed if the evaluation doesn’t find the Workplace Australia program has been a huge waste of money, doing amazingly little to help unemployed people with problems on their way to a decent job.

On one side, bureaucrats have used the tendering system to pay as little as possible for the services the government says it wants to be provided. On the other, the “providers” – even some of the community organisations that seem only in it for the money – have learnt all the ways to tick the boxes and be paid, while doing precious little to help people with problems.

In the era of robo-debt, it didn’t take the providers long to twig that the previous government was happy to pay them for punishing the jobless for minor or manufactured misdemeanours, rather than helping them.

The telltale sign that Workplace Australia was yet another example of the failure of outsourcing – looked good on paper; didn’t work in practice – is the number of times the bureaucrats have tried to fix it by giving it a new name. The old Commonwealth Employment Service became Jobs Services Australia, then the Job Network, then the one-word, lower-case jobactive, then Workforce Australia.

Leigh, a former economics professor, is a great believer in the wider use of the “randomised controlled trials” that the medicos have used so successfully to ensure the procedures and pills they prescribe are “evidence-based”.

This, he hopes, will make the evaluations more accurate in determining what works and what doesn’t.

I have to say there’s a reason that, to date, the evaluation and improvement of spending programs has been half-hearted to non-existent. It’s because ministers and their department heads aren’t keen to have people producing documentary evidence that they aren’t doing their job properly. And the last thing they’d want is for such a report to find its way to the public’s attention.

So Leigh’s is a worthy crusade. Let’s hope he gets somewhere. Actually, if evaluations became a regular thing, and led to regular improvements, ministers and mandarins would have a lot less to fear.

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Why your income tax refund is so much less than last year's

The political hardheads in Canberra are convinced much of the resounding No vote in the Voice referendum is a message from voters that they want the Albanese government fully focused on the cost of living crisis – which is really hurting – not wasting time on lesser issues.

I suspect they’re right. But if so, it’s the consequence of years of training by politicians on both sides that we should vote out of naked self-interest, not for what would be best for the country.

So, as the government switches to moving-right-along mode, expect to hear a lot from Anthony Albanese and Treasurer Jim Chalmers on how much they feel our pain and the (not so) many things they’ve done to ease the pain.

If that pain gets a lot worse – or just if the cries of anguish get a lot louder – expect to see the government doing more. If the Reserve Bank has miscalculated and, rather than just slowing to a crawl, the economy starts going backwards, expect to see the two of them spending, big time.

There’s no denying that, for most of us – though by no means everyone (see footnote) – it’s become a weekly struggle to make ends meet. Paradoxically, this is partly because of the post-lockdowns surge in many prices and partly because of the Reserve Bank’s efforts to stop prices rising so fast by ramping up interest rates.

Mortgage interest rates at present are not high by past standards. Two factors explain the pain from mortgages. First, thanks to higher house prices, the size of loans is much bigger than it used to be.

Second, after lowering interest rates to rock bottom during the lockdowns, the Reserve unexpectedly raised them by a huge 4 percentage points within just 13 months.

Households with big home loans, roughly a quarter of all households, have had their belts tightened unmercifully. Less usually, the third of households that rent have seen their rents rise by 10 per cent in the past 18 months; more than that in Sydney and some other capital cities (but not Melbourne, according to Australian Bureau of Statistics figures).

To this, add the big rises in the cost of petrol, electricity and gas, home insurance, overseas travel and various other things. Most people’s wages have not kept up with the rise in prices.

So yes, the cost of living crisis is no media exaggeration. And Albanese and Chalmers are full of empathy on all the elements I’ve listed. But there’s one other contribution to the crisis that many people will have stumbled across without understanding what was hitting them.

It’s below the radar because Albanese and Chalmers do not want to talk about it. Nor does the ever-critical opposition. As a consequence, most of the media have not woken up to it – with the notable exception of this august organ.

But according to Dr Ann Kayis-Kumar, a tax lawyer at the University of NSW, one of the most Googled questions in Australia in recent times is “Why do I suddenly owe tax this year?” A related question would be, why is my tax refund so much smaller than last year’s?

I’ll tell you (and not for the first time). Preparing for former treasurer Josh Frydenberg’s last budget, just before the election in May 2022, the Morrison government decided to increase the “low and middle income tax offset” (dubbed the LAMIngTOn) from $1080 to $1500, but not to continue it in the 2022-23 financial year.

Frydenberg made much of the increase, but governments that decide not to do things aren’t required to announce the fact. So Frydenberg didn’t. And Chalmers, watching on, said nothing.

The tax offset was a badly designed measure and all the insiders were pleased to see the end of it. I was too but, as a journalist, felt it was my job to tell the people affected what the politicians didn’t want them to know: that, in effect, their income tax in 2022-23 would be increased by up to $1500 for the year.

The 10 million taxpayers affected have been getting the unexpected news in just the past three months or so, after submitting their tax returns and discovering their refund was much less than last year’s, or had even turned into a small debt to the Tax Office.

The full tax offset went to those earning between $48,000 and $90,000 a year, which was most of the 10 million. Our friendly tax lawyer notes that the median taxable income in 2020-21 was $62,600, leaving $90,000 well above the middle.

Disclosure: Having paid off my house decades ago, and being highly paid (as are politicians), I haven’t felt any cost of living pain. Which makes me think that, when the people who are feeling much pain see Albo and Jimbo giving people like me a long-planned $9000-a-year tax cut next July, while they get chicken-feed, they might be just a teensy weensy bit angry.

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Chalmers should give the RBA an employment target

My trouble is I’m too nice. I’m too reluctant to tell people when I think they’re not trying hard enough. If I had time over again, I’d be tougher on nice young Treasurer Jim Chalmers and his white paper on employment.

The Albanese government wants to revitalise our resolve to achieve full employment, but didn’t have the courage to put a number where its mouth is and nominate a numerical target for employment.

I’ve been convinced of this by my former colleague, friend and most worrying competitor, Peter Martin, now of the universities’ The Conversation website.

Chalmers says the white paper is “ambitious”, but Martin isn’t convinced. “A clearly ambitious statement would have specified a target for unemployment, ideally one that was a bit of a stretch,” Martin says.

He notes that the Keating government’s Working Nation statement did that in 1994. Released at a time when unemployment was almost 10 per cent, it specified a target unemployment rate of 5 per cent – an ambition that served as a beacon for decades.

With all the progress we’ve made in recent times, getting unemployment down to about 3.5 per cent for more than a year, Martin proposes setting a stretch target of 3 per cent, or even 4 per cent, as an aspiration.

Essentially, his argument for setting a target is that “what gets measured gets done”. And he’s dead right. This is not about economic theory, it’s about the practicalities of not just having ambitions, but making sure you have your best shot at achieving them.

In an ideal world, it would be enough to merely state your ambitions. But in a world of human fallibility, we need to impose on ourselves rules and targets to help us stick to our guns.

The target we’ve had for the rate of inflation – of 2 to 3 per cent, achieved on average over time – which we’ve had since 1996, has been no magic answer, but has been highly effective in leaving everyone in no doubt about whether we were on track or off track, and by how much.

But, as is widely agreed, in the day-to-day management of the economy, we have two objectives, not one: price stability (as measured by the inflation target) and full employment (as not measured by any target).

This lopsidedness leaves us constantly tempted to err on the side of low inflation at the expense of low unemployment. That’s the unspoken message the lack of a numerical target is sending the economic managers, particularly the Reserve Bank. As I’ve written before, this omission may secretly suit the interests of business.

So if the Albanese government’s professed determination to get full employment back up on its pedestal alongside price stability is to be meaningful, it must involve setting two targets, not one.

Last week, one of the nation’s leading labour market economists, Professor Jeff Borland of Melbourne University, joined this debate. He doesn’t agree that the white paper was the right place for the government to nominate a specific numerical target.

But he does believe the managers of the macroeconomy require a numerical target. To achieve what the white paper calls the “maximum sustainable level of employment”, he says, “you need to know what it is”.

Borland accepts the white paper’s criticism of the present way of estimating full employment, the NAIRU, or non-accelerating-inflation rate of unemployment, which “evolves over time, is difficult to measure, and does not capture the full potential of the workforce” – a reference to underemployment and “potential workers”, who want to work but aren’t actively seeking a job, and so aren’t counted in the labour force.

Borland adds another criticism, that “estimation of the NAIRU has become a ‘black box’, making it almost impossible to understand why it is at a particular level at any time.”

So Borland accepts the government’s argument that, rather than relying solely on estimates of the NAIRU, “policymakers need a broad suite of measures to gauge the extent of current underutilisation [of labour]” and whether the labour market is close to the current maximum sustainable level of employment.

This means Borland rejects Martin’s argument that unemployment can stay the measure of full employment because it moves in line with underemployment (having a part-time job, but not as many hours as you want).

“The rate of unemployment is no longer sufficiently informative about labour underutilisation – and labour underutilisation is what we should care about for policymaking,” Borland says.

However, he dismisses the claims of other critics that the new full-employment objective is bad news for keeping inflation under control.

He quotes what the white paper says on the matter. The objective is to “keep employment as close as possible to the current maximum sustainable level of employment that is consistent with low and stable inflation”.

The plain truth is that there has always been much potential for conflict between the goal of price stability and the goal of full employment. Life is full of such conflicts.

And a key teaching of economics is that when you encounter two conflicting but highly desirable objectives, the answer is never to fly to one extreme or the other, as humans are so often tempted to do.

No, economics teaches that what you should do is seek out the best available “trade-off” (combination) between the two, so you end up with as much of each as the circumstances allow.

The point is that making sure we have explicit targets for both is the best way to motivate the economic managers to find the best trade-off available. Both the white paper and the recent independent review of the Reserve Bank’s performance imply that, in recent years, we haven’t been finding the best trade-off between the two.

But there’s still time for Chalmers to nominate a numerical employment target. Although the Reserve’s act requires it to achieve full employment, the review recommended that, in the setting of interest rates, the full-employment objective be raised to the same status as the inflation target.

The place for this to happen is in the imminent “statement on the conduct of monetary policy”, the agreement between the treasurer of the day and the governor that the treasurer has newly appointed.

It was in the first of these agreements, in 1996, between Peter Costello and Ian Macfarlane, that the Howard government accepted the inflation target the Reserve had formulated as the government’s target.

In the upcoming agreement between Chalmers and new governor Michele Bullock, he could ask the Reserve to go away and come up with its own employment target.

But if he wants to be seen by the public as doing his job with diligence and the courage of his convictions, he will ask the new governor to accept an employment target the government has determined as the embodiment of the fine ambitions expressed in its white paper.

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Why our standard of living will be rising more slowly

You could call it gloom, or call it realism, but the likelihood is the economy will be growing more slowly from now on.

And we’re talking not just the next year or two – where the Reserve Bank’s rapid rise in interest rates means if we don’t go backwards, we’ll have been let off lightly – but the next maybe 40 years.

No one – not even economists – knows what the future holds, of course. But this long-term slowing is the considered guess of the secretary to the Treasury, Dr Steven Kennedy, who this week gave us his summation of the Treasury’s recent intergenerational report, which makes largely mechanical projections – not hard-and-fast forecasts – for the economy over the 40 years to 2063.

 Kennedy says the projections are “illustrative”. A key assumption on which they’re based, that present government policies don’t change, means the projections demonstrate “the longer-term implications of our current path”.

The report’s “aim is to avoid the risks projected … through ongoing improvement and reform of policy settings”.

Even so, I think we’re justified in concluding that the slower growth the report projects is more likely to eventuate than either unchanged or faster growth. That’s because so many of the factors likely to affect our future growth are beyond the government’s control.

The report projects that real gross domestic product – the nation’s total production of goods and services – having grown by an average of 3.1 per cent a year over the past 40 years, will slow to growth of 2.2 per cent a year over the coming 40 years.

How would this slowdown be explained? The Treasury’s standard way of analysing economic growth is to break it up into the three main drivers of growth – known as “the three Ps”: growth in the population, growth in the population’s participation in the labour force, and growth in the productivity of the workforce.

Notice how people-centred this way of chopping up economic growth is?

First. Population. Whereas our population grew at an average rate of 1.4 per cent a year over the past 40 years, it’s projected to grow by just 1.1 per cent over the coming 40.

These days, “natural increase” – births minus deaths – accounts for only about 40 per cent of the growth in our population, with “net overseas migration” accounting for the remaining 60 per cent.

The Treasury projects a further slow decline in our “fertility rate” – the number of births per woman – which has long been well below the 2.1 children “replacement rate” needed to hold the population steady over the years.

So we’ve long used high immigration to keep the population growing. Net migration fell sharply when we closed our borders during the pandemic. It has surged since the borders were reopened, but the Treasury expects it to fall back to 235,000 people a year once the surge has passed.

This level is what the Treasury projects for the rest of the years to 2063 – meaning that fixed number would fall as a percentage of the growing population. Even so, the population is expected to exceed 40 million in the early 2060s.

It’s just a projection, but I don’t have trouble believing immigration levels will decline rather than increase in the coming years. With all the rich countries – and China - having fertility rates well below the replacement rate, I can see far more competition for immigrants than there has been, especially since we only want skilled immigrants.

This expected slowdown in immigration means the overall size of the economy wouldn’t be growing as fast as it has been, but that doesn’t necessarily mean those of us who are already here will be worse off. That depends less on the economy’s overall growth and more in what’s happening to growth in GDP per person.

The report projects that, whereas real GDP per person grew by 1.8 per cent a year on average over the past 40 years, it will slow to 1.1 per cent a year over the coming 40.

Ahh. So, not just slower growth in the economy, but a much slower rate of improvement in our material standard of living. We’d still be getting more prosperous, but at a rate so small that it would be hard to notice.

And the problem must be coming from the other two Ps – participation and productivity improvement.

At present, the “participation rate” – the proportion of the working-age population that’s either in work or actively seeking it – is the highest it’s ever been, at 66.6 per cent, but the Treasury projects it will have fallen to 63.8 per cent by 2063.

Why? Because the proportion of the population aged 65 and over is projected to rise from 17 per cent to 23 per cent. So population ageing means more people will be too old to work.

But this will be countered to an unknown extent by more women of working age taking paid employment, and a healthier post-65 population choosing to keep working, even if only a few days a week.

However, most of the slowdown in GDP growth per person is explained by the expectation that the rate of improvement in the productivity of labour will be slower.

Whereas productivity improved at an average rate of 1.5 per cent a year over the past 30 years, it’s improved by only 1.2 per cent a year over the past 20 years – and that’s the rate the Treasury has projected over the coming 40 years.

There are plenty of reasons to expect productivity improvement will become harder to achieve. Just one is the greater share of GDP coming from the provision of labour-intensive services and the lesser share from the capital-intensive production of goods. It’s a lot easier to make machines more productive than do the same for people.

Finally, another reason for expecting population, participation and productivity to be weaker in coming decades is that various other rich countries’ experience is leading them to expect the same.

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Voting No? You may have this key assumption wrong

If you’re thinking of voting No in the Voice referendum because governments have been spending so much taxpayers’ money trying to “close the gap” without much sign of success, perhaps you need to reconsider. If the Voice to parliament of Aboriginal and Torres Strait Islander people is enshrined in the Constitution, obliging our politicians and bureaucrats to listen, chances are that money will be better spent.

But I can tell you now the message First Nations people will be trying to get across: we want the local spending on health and education and the rest to be administered by Indigenous-led local organisations.

Why? Because when you do it that way, the money’s spent by people with a much better understanding of what the problems are, and the best ways to go about fixing them. Because when the government’s being represented by Indigenous-run outfits, they get much more trust and co-operation.

I’ve realised this mainly by reading a report, Better Outcomes and Value for Money with a Seat at the Table, issued by the Lowitja Institute, a largely government-funded, Indigenous-controlled health research organisation, based in Melbourne.

Let’s start with some facts about government spending on Indigenous people.

According to the Productivity Commission’s most recent estimates, for the 2015-16 year, spending by all levels of government on Indigenous people totalled $33 billion, representing 6 per cent of those governments’ total spending of $556 billion.

Some mates of mine believe Aboriginal people get a lot of government money the rest of us don’t. Only $6 billion of that $33 billion was specifically targeted to Indigenous people. The remaining $27 billion was the share of ordinary spending on hospitals, education, aged care and, importantly, the justice system, used by Indigenous people.

Even so, that $33 billion represents average annual spending of $44,900 per Indigenous person, compared with $22,400 per non-Indigenous person.

Why are Indigenous people getting twice as much? Because they have more disadvantage than the rest of us, and so need more help. For instance, their burden of disease is 2.3 times that of non-Indigenous people, the report says.

Indigenous people “have survived centuries of systemic racism, economic and social exclusion, and intergenerational trauma. As a result, our peoples now die far earlier and experience a higher burden of disease, disability, poverty, and criminalisation than other Australians,” it says.

But here’s the upside. Because governments are spending so much, “slight improvements in the efficiency of the existing spend would generate substantial savings, both directly and through flow-on impacts to other policy areas,” we’re told. For a case study, read to the end.

The federal government first signed a statement of intent to work in partnership with Aboriginal and Torres Strait Islander peoples in 2008, to “achieve equality in health status and life expectancy … by 2030”.

This partnership was refreshed and strengthened in 2020 by a National Agreement on Closing the Gap, made between peak Indigenous community organisations and all federal, state, territory and local governments.

The agreement accepted four priority reforms: formal partnerships and shared decision-making, building and strengthening the community-controlled sector, transforming government mainstream organisations, and shared access to data and information at a regional level.

Are you getting the message? In practice, however, the report says, “these changes have been patchy and incremental despite increased investment from government”.

“An Aboriginal and Torres Strait Islander Voice could support more effective public investment in our wellbeing because our communities know what they need and how to deliver outcomes with the right support,” we’re told.

The report argues that government-run, top-down programs to close the gap haven’t worked as well as community-controlled initiatives.

Research indicates that Indigenous-controlled community health organisations “attract and retain more Aboriginal and Torres Strait Islander patients than mainstream providers, are more effective at improving our health, and see more significant health benefits per dollar of expenditure,” the report says.

It was Indigenous community health organisations that had the knowledge and expertise to rapidly respond to the especially great threat presented to their people by COVID-19.

Throughout the first year of the pandemic, just 147 cases of the virus were reported among Indigenous people, out of 28,000 total cases in Australia. There were no Indigenous deaths and no identified cases in remote Aboriginal communities.

In the second year, Indigenous community health organisations worked tirelessly to ensure their communities were vaccinated.

Turning to education, the report says the federal government’s “remote school attendance strategy”, begun in 2013, with total spending of more than $200 million over eight years, had seen falling attendance rates.

By contrast, the report argues, in 2017, the community-led Maranguka justice reinvestment project in Bourke achieved a 31 per cent increase in year 12 retention, a 23 per cent reduction in recorded rates of family violence incidents, and a 42 per cent reduction in adult days spent incarcerated.

These improvements were calculated to have saved the NSW economy $3 million that year – five times the project’s operating costs.

I’ve drawn my own conclusions from all this. So close to the vote, I leave you to draw yours.

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It's time for more sensible thinking on productivity

When will we tire of all the bulldust that’s talked in the name of hastening productivity improvement? We never do anything about it, but we do listen politely while self-appointed worthies – business people and econocrats, in the main – read us yet another sermon on the subject.

Trouble is, when the sermons come from big business – accompanied by 200-page reports with snappy titles – they boil down business lobby groups doing what lobby groups do: asking the government for special favours – aka “rent-seeking”.

You want higher productivity? It’s obvious: cut the company tax on big business, and give us a free hand to change our workers’ pay and conditions as we see fit.

When the sermons come from econocrats, they’re more like professional propagandising: calls for “reform” – often of the tax system – that are usually theory-driven and lacking empirical evidence that they really would have much effect on productivity.

What we get in place of genuine empiricism is modelling results. Models are a mysterious combination of mathematised theory, sprinkled with ill-researched estimates of elasticity and such like.

We’ve become so inured to all this sermonising that we’ve ceased to notice something strange: although in a market economy it’s the behaviour of business that determines how much productivity improvement we do or don’t get, any lack of improvement is always attributed to the government’s negligence.

This is where the business rent-seekers and the econocrat propagandists are agreed. The econocrats willingness to point at the government comes from the biases in their neoclassical theory, which assumes, first, that businesses always respond rationally to the incentives they face and, second, that government intervention in markets is more likely to make things worse than better.

Big business is happy to use this ideology to hide its rent-seeking. (If you wonder why neoclassical economics has been dominant for a century or two despite surprisingly little evolution, it’s partly because it suits business interests so well.)

The other strange thing we’ve failed to notice is that the modern obsession with the tax system and regulation of the labour market has crowded out all the economists’ conventional wisdom about what drives productivity improvement over the medium term.

But before we get to that wisdom, a health warning: there’s a famous saying in economics that the sermonisers have stopped making sure you know. It’s that, for economists, productivity is “a measure of our ignorance”.

Just as economists can calculate the “non-accelerating-inflation rate of unemployment”, and kid themselves it’s next to infallible, when you ask them why it’s gone up, or down, all they can do is guess at the reasons, so it is with calculations of productivity. Economists can’t say with any certainty why it’s up or why it’s down. They don’t know.

Even so, in the present opportunistic sermonising, all that the profession thought it knew has been cast aside.

Such as? That productivity improvement is cyclical and hard to measure. Recent quarterly results from the national accounts will probably change as better data come to hand, and the accounts are revised.

It’s true that the measured productivity of labour actually has fallen over the three years to June this year, but it’s likely this is, to a great extent, a product of the wild swings of the pandemic and its lockdowns. As Reserve Bank economists have argued, these effects should “wash out”.

It’s well understood that the main thing that improves the productivity of labour is employers giving their workers more and better machines to work with. But Australia’s level of business investment as a share of gross domestic product is low relative to other rich countries.

Growth in non-mining business investment has declined from the mid-2000s and stagnated over the past decade. It’s grown strongly recently, but it’s not clear how much of this is just tradies taking advantage of lockdown tax concessions to buy a new HiLux ute.

Point is, why do the sermonisers rarely acknowledge that weak business investment spending does a lot to help explain our weak productivity improvement?

Another factor that should be obvious is our recent strong growth in employment, the highest in about 50 years, with many people who employers wouldn’t normally want to employ, getting jobs. This will lower the workforce’s average productivity – but it’s a good development, not a bad one.

Again, why do the sermons never mention this?

Yet another part of the conventional wisdom it’s no longer fashionable to mention is the belief that productivity improvement comes from strong spending – by public and private sectors – on research and development. Have we been doing well on this over the past decade or so? I doubt it.

And, of course, productivity improvement comes from giving a high priority to investment in “human capital” – education and training.

So, why no sermons about the way we’ve gone for a decade or more stuffing up TAFE and vocational education, or the way school funding has given “parental choice” for better-off families priority over the funding of good teaching in public schools?

Too many of those sermons also fail to mention the small fact that all the other developed economies are experiencing similar weakness – suggesting that much of our poor performance is explained by global factors, not the failure of our government.

Related to this, the preachers usually compare our present performance with a much higher 30- or 40-year average, implying our weak performance is something new, unusual and worrying.

Or, we’re told that, whereas productivity improved at an annual rate of 2.1 per cent, over the five years to 2004, it worsened to 0.9 per cent over the six years to 2010, and improved only marginally to 1.2 per cent over the nine years to 2019, before the pandemic.

This is all highly misleading. The fact is that periods of weak improvement are more common than periods of strong improvement, which are rare.

Our period of unusually strong improvement from the late 1990s to the early noughties is paralleled by America’s strong period from 1995 to 2004, which the Yanks usually attribute to rapid productivity improvement in the manufacturing of computers, electronics and semiconductors.

We usually attribute our rare period of strong improvement to the belated effects of the Hawke-Keating government’s program of microeconomic reform. Maybe, but computerisation and the information revolution are a more plausible guess.

Either way, contrary to the sermonisers’ implicit claim that the present period of weak improvement is unusual, it may be closer to the truth that weakness is the norm, interspersed by occasional bursts of huge improvement, caused by the eventual diffusion of some new “general-purpose technology” – the next one likely to be generative AI.

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'Planetary boundaries' set the limits of economic freedom

One of the most important developments in economics is something in which economists had no hand: the identification of the environmental limits which humans, busily producing and consuming, cross at their peril.

Earth has existed for about 4 billion years and humans have lived on Earth for about 200,000 years. For almost all of that time we were hunters and gatherers, but 10,000 to 12,000 years ago we settled down, to farm and create civilisation.

It’s probably no coincidence that, for about that time, Earth has enjoyed a stable climate, with no more ice ages nor period of great heat, in which palms grew in Antarctica. This is the geological epoch called the Holocene, in which we live – although it may be ruled that we’ve moved to the Anthropocene, a new epoch in which the human species has made major alterations to the planet.

In its modern form, economics can be dated to 1776, when Adam Smith published The Wealth of Nations. Beliefs about how the economy works were well-defined by the time Alfred Marshall published Principles of Economics in 1890.

The point is that all economic activity – all the efforts of humans to earn a living – both depends on the natural environment and adversely affects it. By 1900, there were only about 1.6 billion humans on the planet, not enough to do much damage.

If we wrecked some area, we could just move to somewhere that hadn’t been wrecked, while the first bit gradually recovered.

So, at the time conventional economics was established, it was perfectly sensible to assume that the environment’s role in economic activity could be taken for granted. It was just there and it always would be. It was, as economists say, a “free good”.

When, from the 1700s, we started burning fossil fuel – coal, oil and gas – for heat, light and energy, we had no reason to worry that one day it might run out. It certainly never occurred to us that this might end up having an effect on the climate.

It took many decades before scientists began telling us that all the things we were doing to improve our lives – cutting down forests, damming rivers, drilling for water, ploughing, fertilising crops, fishing with nets – were damaging the soil, causing erosion, killing species, lowering the water table, and damaging the environment in other ways.

However, in just the past century or so, the world’s population has gone from 1.6 billion to 8 billion. Every extra human does a bit more damage to the environment. But that’s not the main thing. The main thing that’s changed is our use of advances in technology to hugely increase our standard of living and, in the process, massively increase the damage we’re doing to the environment.

Which brings us to “planetary boundaries”. In 2009, the Swedish scientist Johan Rockstrom and a scientist from the Australian National University, the late Will Steffen, with many helpers, established a framework listing the key categories of environmental damage, and estimating the amount of damage that could be done to each before the risk increased that “the Earth system” could no longer recover.

A second update of these estimates, led by an American oceanographer based in Copenhagen, Katherine Richardson, was released last month. With the ANU’s Professor Xuemei Bai, Richardson has written an article explaining the planetary boundaries.

There are nine boundaries. Three of them cover what we take from the ecological system: loss of biodiversity (extinction of species), loss of fresh water (pumping too much water from rivers and aquifers) and land use (deforestation).

Something economists didn’t know – or didn’t realise affected them – is that the laws of physics say we can never truly get rid of anything that exists on Earth.

All we – or the ecosystem – can do is change the form of the thing. Water can evaporate, but it’s still up in the clouds, for instance. We can cut down a tree, but as it slowly sinks into the dirt, it releases the carbon dioxide it had previously taken up.

This means that all our economic activity leaves in its wake a lot of waste. Not just landfill, but in many other forms.

So, the remaining six boundaries concern the waste our activity greatly adds to what would have occurred naturally. They are: greenhouse gases which cause climate change, ocean acidification (carbon absorbed by the sea), emission of chemicals that deplete the Earth’s ozone layer, “novel entities” (synthetic chemicals such as plastics, DDT and concrete), aerosols, and nutrient overload (nitrogen and phosphorus from fertilisers that wash into rivers and the sea, causing algae blooms, killing fish and coral).

Crossing any of these boundaries doesn’t trigger immediate disaster. But it does mean we’ve moved from the safe zone into dangerous territory. And the nine boundaries are interrelated and interacting, in ways we don’t yet fully understand.

In 2009, the scientists found we’d already crossed three boundaries: biodiversity, climate change and nutrient overload. By the 2015 update, a fourth boundary had been crossed: land use.

And by this year’s update, only three boundaries hadn’t been crossed: ocean acidification (but only just), aerosol pollution, and stratospheric ozone depletion – where an international agreement banning CFCs is slowly reducing the ozone hole we created.

Richardson and Bai say we’re now well into the danger zone, “where we – as well as every other species – are now at risk”. “We are eating away at our own life support systems,” they say.

One thing to be said for economists is that, unlike some, they don’t try to tell scientists how to do their job. Very few economists dispute the scientists’ evidence that climate change has been caused by human activities.

It was economists who developed the best means to reduce carbon emissions – emission trading schemes – which other countries have adopted, but Australia rejected.

When our governments decide to act on the other planetary boundaries, it will be economists who work out the best way to do it.

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We need economic growth to make us better off, right? Well, actually

For all our lives, worthies – our politicians, business people and economists – have assured us we need economic growth to make us better off. Almost everything I write assumes this to be true. But is it?

These days, there are more doubters than there used to be. Some people don’t believe that spending your life striving to own more stuff will make you happy. (Spoiler: they’re right.)

But a growing number of scientists tell us unending growth in the economy simply isn’t physically possible, and the more we keep growing the more we’ll damage the natural environment, to our great cost. Climate change is just the most glaring example of the damage we’re doing.

Historians remind us that our obsession with The Economy is relatively recent. It didn’t take hold until the middle of last century.

What we call “the economy” is all economic activity. It’s people getting up every morning, going out to earn a living, and then spending what they’ve earned. So it’s “getting and spending”, production and consumption. This is measured by gross domestic product – the value of all the goods and services produced during a period.

It was only when we started regularly measuring GDP in the mid-1950s that we began our obsession with whether it was growing and by how much. Or whether – God forfend – it was going backwards.

But these are just modern words and concepts. In truth, Australians have been preoccupied by what today we call economic growth since the day white people arrived. Their magic words were “settlement”, “progress” and “nation building”.

The recent arrivals saw a “new” nation where nothing had been done, but with huge potential for endless bush to be made to resemble the old country. They set about clearing the land, damming rivers, building houses, establishing farms and digging up minerals.

Why? To become more prosperous. They spurred themselves on with the belief they must “populate or perish” – be taken over by invading Asians.

So how do you achieve what we call economic growth? The easiest way is to grow the population. Have lots of kids and encourage (in those days, white-only) immigration. That gives you more people to work, but also more people needing to be fed, clothed, housed and entertained.

Bingo. A bigger economy. But while increasing the population makes the economy, GDP, bigger, it’s really only if the growth increases GDP per person that it can be claimed to make us better off, to have raised our material standard of living. And this doesn’t follow automatically.

The harder way to grow the economy is to increase the proportion of the population in paid employment, or to increase our investment in plant and equipment, and (well-chosen) public infrastructure. This does increase GDP per person.

But there’s another, more magical way to increase GDP per person. It’s to take the same quantity of resources – raw materials, labour and capital equipment – and use them to produce more output of goods and services than you did.

This is what people mean when they talk about increasing our “productivity”. It’s achieved, as economists keep repeating, by “working smarter, not working harder”.

How? By building a better educated and more skilled workforce, and by finding ways to make the organisation of factories and offices more efficient, but mainly by advances in technology that create better machines (and these days, computer programs) doing better tricks.

This is the bit scientists don’t get. When they hear the word “growth” they think of one thing: growth in humans’ exploitation of natural resources and all the damage we do to the environment in the process.

But that’s not what GDP measures. Economists know that most of the growth in GDP over the long term comes from increased productivity, not increased inputs of raw materials, labour and physical capital.

This means that, unless you believe there’s a limit to human ingenuity, it’s not true that continuing growth in GDP is impossible.

But when scientists say more clearly the kind of “growth” they’re referring to – growth in the use of natural resources and “ecosystem services” – it’s not possible to argue with the laws of physics.

While economists used to argue that the “limits to growth” weren’t as close at hand as some scientists had calculated, the possibility of the developing world enjoying the same profligate use of natural resources as the rich world is not credible. We expect the bottom 80 per cent to resign themselves to lives of relative poverty, while we in the top 20 per cent continue partying as though there’s no tomorrow.

So I accept that we and other rich countries will have to greatly constrain our use and abuse of the natural environment if the planet is to remain functional. A “circular economy” in which resources are so expensive that almost everything has to be repaired, reused and recycled? Sure.

But here’s the joke. It wouldn’t be the scientists who worked out how we could move to such an economy, it would be the economists.

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