All the reasons house prices will keep rising until we wake up

Contrary to popular opinion, the cost-of-living crisis will pass. But the housing crisis will go on worsening unless politicians – federal, state and local – try a mighty lot harder than they have been.

The cost of home ownership took off – that is, began rising faster than household incomes – about the time I became a journo 50 years ago, and is still going. Even the (unlikely) achievement of Anthony Albanese’s target of building 1.2 million new homes by 2029 probably wouldn’t do more than slow the rate of worsening affordability for a while.

You’d think there must be some kind of limit to how much harder it becomes to afford a home of your own, but considering how long it’s been running, it’s difficult to see just how it will come to an end.

It’s the advent of the Bank of Mum and Dad that’s making the rise in prices seem self-sustaining. Housing prices keep rising, but this makes the existing home owners wealthier, giving them greater wherewithal to help their kids afford the higher prices, which keeps those prices rising, rather than falling back to a level young people could afford without a special leg-up.

Small problem: we end up with a country divided between those born into the wealthy, home-owning class and those born into the class where generation after generation has never been able to afford to own the home they live in. Is that the Australia we want to live in?

How on earth did we allow housing prices to rise faster than household incomes for the past five decades, with little reason to hope this gap won’t get ever wider?

By allowing the slow but steady decline in the rate of home ownership – which began in the mid-1970s – to be a problem we’d worry about later. Or worse, to be a problem the politicians only pretended to care about.

I call this the Howard Effect. John Howard takes the credit because he’s the polly who most clearly hinted at the political class’s true lack of concern about declining home ownership.

He was always repeating the line that he had yet to meet a home owner who thought rising house prices were a bad thing. Get it? The number of happy home-owning voters far exceeded the number of unhappy young couples unable to join the club.

But the rise of the Bank of Mum and Dad has changed this calculus. It’s proof of home owners’ dawning realisation that rising house prices are a two-edged sword. They’re not a problem only if you don’t give a crap about your kids.

It’s probably housing’s big part in the cost-of-living crisis that’s finally broken the dam of politicians’ disinterest in housing affordability. What is of lasting significance about the Albanese government’s efforts to speed up the rate of home-building is its shift to seeing blockage on the supply side of the housing market as the key to progress.

Until now, those seeking to do something about the decline in home ownership have focused on the way special tax breaks and pension exemptions add unhelpfully to the demand for housing.

But the misguided notion that its plan to reform negative gearing and the capital gains tax discount played a significant part in Labor’s loss of the 2019 federal election put paid to demand-side solutions.

The great strength of Albanese’s plan is its focus on reforming local government planning and zoning restrictions on the supply of medium and high-density housing in our capital cities.

Tax and pension problems are the responsibility of the feds. Planning and zoning restrictions are the responsibility of the states. As ever, the only way for nationwide state-level problems to be fixed is for the feds to take the lead. And, as ever, the only way for the feds to get the states to make changes is to flash the federal chequebook.

The state governments – NSW in particular – are making genuine efforts to overcome the long-standing NIMBY resistance to higher-density housing.

Great. But if you think fixing the density problem will stop housing prices rising faster than household incomes, you’re deluding yourself. Just as fixing negative gearing wasn’t a magic answer, nor is fixing density.

No problem as big and long-lasting as declining home ownership could be anything other than multi-faceted. Yes, we need to fix the supply side. But yes, we need to fix the demand side as well. And there’s more to the supply side than density, just as there’s more to the demand side than negative gearing.

Last week’s report of its Review of Housing Supply Challenges, by the NSW Productivity Commission, should be read by people in all states.

The report says local councils should lift their game in reducing the inordinate delays in accepting development approvals and in reducing unreasonable demands on builders.

I think government agencies are monopolies and, like all monopolies, they rarely resist the temptation to put their own convenience ahead of their customers’ needs.

As federal Treasury’s sermon on the housing challenge in this year’s budget papers also made clear, the NSW report notes that part of the problem is the inadequacy and inflexibility of our housing industry.

It’s simply not capable of expanding to meet the surge in demand for homes – something that, I suspect, doesn’t worry it greatly. It’s content to respond by “rationing by [higher] price”, a mechanism I explained in last week’s column.

But the NSW report says the housing industry simply doesn’t have enough tradespeople to increase its production. Workers have been lost to the major construction projects, thanks to the surge in state government spending on infrastructure.

This is no doubt right, as far as it goes. It’s certainly true that state governments would do better (and cheaper) if they timed their investment spending to fit with the ups and downs of private sector major construction spending.

But I think the ability to meet shortages of skilled workers simply by bringing workers from overseas when you need them has led the industry to neglect training sufficient apprentices to meet future needs.

Neither this report nor Treasury’s budget sermon acknowledges another possible supply-side problem, the one highlighted by the economists’ great alternative thinker on housing, Dr Cameron Murray. He argues that the developers keep house prices rising by limiting the release of land to fit.

When you look at the broader causes of ever-rising house prices, even the Reserve Bank doesn’t escape responsibility. The central bankers have always argued that housing prices are a consequence of the interaction of the demand for housing and its supply, so nothing to do with them.

Again, that’s true as far as it goes. But it sidesteps the more behavioural possibility that whacking interest rates up and down engenders an “irrational” FOMO – fear of missing out – that helps keep house prices rising when rates are falling and even when rates are rising and could rise further.

If so, that’s yet another reason why the economists need to come up with a better way of limiting demand than just screwing young people with big mortgages.

There’s more to ever-rising house prices than has ever crossed the minds of most economists.

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Economists have a glaring problem: themselves

By MILLIE MUROI, Economics Writer

Economists don’t often get the chance to look at themselves. They spend their lives keeping a close eye on the actions, behaviours and motivations of others: people like you and me. But the self-reflection they have done recently points to a glaring issue.

When I was first getting my bearings in economics nearly 10 years ago, there were four giant posters at the front of my classroom. The heads of four economists, including Adam Smith, Milton Friedman and John Maynard Keynes, stared smugly down at me as I took notes on all the important things: demand, supply and how to pass my economics exams.

The profession looks a little different now, although maybe not as different as we would like to think. It remains disproportionately pursued by one gender – and those who are relatively well-off.

It’s a sentiment shared by Treasurer Jim Chalmers who said in a speech to high school students last week that we still need to strike a better gender balance, starting with school and university enrolments.

“The economics profession will need to reflect the diversity of our country – I’m thinking especially of attracting more women into these roles,” he said.

Why does this matter? Because the people who study economics are the ones who go on to make some of our most important economic decisions: the governor of the Reserve Bank, the chair of the Productivity Commission, and the head of the Department of Finance to name a few.

All three of these positions are now occupied by women for the first time: Michele Bullock, Danielle Wood and Jenny Wilkinson.

Gender is just one of the diversity metrics we need to monitor. But it has a big impact.

A survey of professional economists in the US showed that while there wasn’t much difference in the perspective of women and men when it came to economic methodology, there were notable ones on policy. Women, for example, were 32 percentage points more likely to agree that income should be distributed more equally.

As Wood wrote in 2018, teams of people who are too similar – in terms of gender, race, age and class – perform poorly because of their narrow range of perspectives and because they are more likely to lapse into “group think” where bad ideas go unchallenged.

“Study after study has demonstrated that more diverse teams make better decisions,” she wrote.

So, what is the state of the economics profession? It’s a question that Jacqui Dwyer, head of the Reserve Bank’s information department, has probed – and it starts at high school.

First, there has been a dramatic fall in the size of the economics student population. Over the past decade, year 12 economics enrolments have been sitting about 70 per cent lower than in the early 1990s.

“Most of the fall occurred during the mid-1990s, with enrolments then drifting down before persisting at relatively low levels for the past decade,” Dwyer said. Part of this is because of the introduction of business studies in the early 1990s, which has become a substitute for economics that students see as easier to learn with clearer career prospects – and which teachers see as easier to teach.

This has, in turn, led to fewer schools offering economics as a discipline. Government schools in particular have dropped off. While almost every school in NSW across the government and non-government sectors offered economics in the 1990s, only about 30 per cent of government schools now offer the subject.

This has led to less uptake of economics by students from less advantaged backgrounds, while the share of advantaged students picking up the subject has grown.

There’s also been a stark fall in female participation. Male and female students accounted for roughly equal shares of year 12 economics enrolments in the early 1990s. Since then, female participation has fallen off: males now outnumber females, two to one.

These numbers are crucial because they feed into the economics student populations at universities. While enrolments have grown in fields such as management and commerce, STEM and banking and finance since the 1990s, the number of economics students has flat lined.

Another factor weighing on economics enrolments at university is the perception that economics is a “riskier” subject to study with a less well-defined career path than other disciplines.

That’s despite economics graduates having among the highest average earnings (only beaten by engineering graduates) and one of the widest array of employment options, in terms of industry and occupation.

Economics students do, however, face some challenges in landing their first job out of uni. The unemployment rate of economics graduates is higher than disciplines such as health, education and business, especially just after graduation (although, as Dwyer notes, it’s a similar rate to those in science and information technology).

The fall in the number of economics students also impacts economic literacy in the broader population. This is important because those who are economically literate make more informed economic choices, better understand the world around them and can influence public discussions and government action.

They can also make public policy more effective by aligning their expectations or behaviour with its intended purpose.

Unfortunately, diversity issues continue into university. Unlike at high school, the gap between female and male participation has always existed, recently sitting at a similar ratio to what we see in high schools.

Even worse, there’s been a sharp worsening of diversity in socioeconomic status. “Economics has become a socially exclusive subject, with a higher share of students from advantaged backgrounds than is the case for most other disciplines,” Dwyer said.

More than half of university economics students are from high socioeconomic backgrounds, whereas only about 7 out of 100 were from the bottom 25 per cent.

The economics discipline is often criticised for its shortcomings: flawed predictions, incorrect assumptions and policy blunders.

While it will always be an imprecise science, If we want to improve public policy and the questions and discussions shaping them, the state of the economics discipline must change, reflecting the diversity of the people it studies.

As Chalmers has pointed out: “numbers are very important. But the main reason we study economics is not numbers, it’s people.”

If we want economics to serve people, we need the faces at the front of that classroom, and in the classroom, to reflect a wider set of perspectives that better mirror how our economy – and its people – work. That’s step one of improving the state of the discipline.

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Our gambling obsession is doing great harm to addicts and their families

I grew up in a strict, Salvation Army household where there was no drinking, smoking or gambling. My parents wore their uniforms everywhere they went. Women wore no makeup or jewellery. Young boys like me weren’t allowed to go to the pictures.

My parents were strict, but loving. I had no problem with any of this except the ban on movies. We kids played cards, but not with ordinary playing cards. Why not? Because people might think we were gambling. So we played Snap, and Happy Families, with cards depicting Mr Bun the baker and his family.

After I left home I gave up these old-fashioned strictures. But they left me convinced of the damage that addiction to alcohol and gambling can do to people and, especially, their families, often deprived of enough money to live on.

So when the last act of the late Peta Murphy, a Victorian federal MP, was a parliamentary inquiry calling for greater control over the modern scourge of online betting, I was happy to join the cause. It’s way past time we stopped allowing businesses and even the members of licensed clubs to benefit from the harm done to addicts and their families.

As the Grattan Institute and its chief executive Aruna Sathanapally reminded us in last week’s report, Australia has a gambling problem unmatched by other, more sensible rich countries. Our annual gambling losses exceed $1600 per adult. That’s twice what people lose in America or Britain, and almost three times what our Kiwi cousins shell out.

Why are our gambling losses so much greater? Not because of the romantic delusion that Aussies would gamble on “two flies crawling up a wall”, but because our governments have done less than others to protect us from people who just want to make a buck at our expense.

Grattan tells us that, in total, Australians lose about $24 billion a year on gambling. Half of this comes from poker machines and another quarter from betting on sport and racing. Lotteries, scratchies and casinos make up the rest.

By far the most addictive are pokies and fast-growing online betting, so these are the ones to worry about. When it comes to politicians failing to protect us from having our susceptibilities exploited, successive NSW governments take the cake.

They were the first to let licensed clubs become addicted to revenue from pokies, then let hotels have them too. But eventually, the malady spread to other states. NSW has 14 pokies per 1000 adults, ahead of Queensland on 11.

More sensible Victoria has just six machines per 1000 adults, but Western Australians manage to live normal, happy lives with just 0.7 per 1000.

Poker machines were once called “one-armed bandits”. Now they’re just bandits. Although Australia has only about 0.3 per cent of the world’s population, it has 18 per cent of the world’s pokies. NSW accounts for about half of that.

As for online betting, its ubiquitous ads make it the most noticeable. It’s a safe bet it will grow to be a bigger problem than today. But so far, it’s of little interest to women, with young adult men by far the most susceptible.

Now, the vast majority of people who gamble do so in moderation, and do themselves no harm. But a small minority of pokie players and online betters become addicted. Grattan quotes data from debit card use showing that 5 per cent of gamblers account for 77 per cent of the spending.

That’s what makes pokies and betting so exploitative. Addiction can harm people’s financial security, health and broader wellbeing. Addicts can lose their jobs, smash their marriages, commit family violence, engage in fraud, be declared bankrupt and take their own lives.

I’m unforgiving of business people and club members who want to benefit from gambling – and politicians who lack the courage to hold them back – while turning a blind eye to all the human suffering gambling causes.

Grattan wants the feds to ban all gambling advertising and inducements, while state governments reduce the number of pokies over time.

It wants the feds to establish a national, mandatory “pre-commitment system” for all online gambling. Each state should introduce a similar pre-commitment scheme for pokies.

Pre-commitment schemes were invented by behavioural economists to allow us, in our more sensible moments, to impose limits on our own behaviour when we’re acting in the heat of the moment.

Grattan wants such commitments to be compulsory for all people that start using clubs, pubs or online betting sites after the scheme starts. You choose the limits you want to set on your spending per day, per month and per year. You can lower those limits any time you wish, but can raise them only after a delay of at least a day. The scheme would also impose maximum limits of say, $100 a day, $500 a month and $5000 a year.

Most gamblers would be unaffected by this scheme, but for others it would stop them ruining their lives. The clubs and pubs and big online betting companies will tell us it would destroy the economy. Don’t believe them.

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If there's no 'price gouging' how come interest rates are so high?

The nation’s economists have a dirty little secret. They all believe that what the punters denigrate as “price gouging” is actually a good thing, part of the mechanism by which a market economy returns to “equilibrium” (balance) after it’s been hit by an inflationary shock.

But they have a visceral hatred of terms such as “price gouging” and “profiteering”, and are always producing graphs and calculations purporting to prove that the recent surge in inflation – the worst in about 40 years – has produced no increase in company profits.

What they don’t seem to have noticed, however – or maybe are hoping none of us have noticed – is that you can’t argue that demand has been growing stronger than supply and so causing price increases, thus justifying using higher interest rates to slow down demand, and at the same time claim there’s no evidence that profits have risen.

Sorry, guys. You can’t have it both ways. If you claim there’s been no noticeable rise in profits, you’re contradicting the Reserve Bank’s main justification for its 13 increases in the official interest rate since May 2022. (Which is funny, considering the Reserve has been prominent among those seeking to deny that profits have risen.)

That main justification has been that much of the worsening in the rate of price increases has been caused by “excessive demand”, thus necessitating higher interest rates to discourage us from spending so much.

But how exactly does excessive demand lead to higher prices? It’s simple. When there are more people wanting to buy my product than I and my suppliers can keep up with, I could leave the price I’m charging unchanged, in which case it won’t be long before my shelves are empty, and I have nothing to sell.

That’s not the way it works in practice, however, nor the way it works in economic theory. I take advantage of strong demand to raise the price at which I’m selling the item. Why do I do this? Because, like all business people, I’m trying to maximise my profit.

The higher price means I won’t be selling my stock as fast as I was – so it will take longer for my shelves to empty – but I’ll still be better off.

Economists say that when demand exceeds supply, the stuff still available has to be rationed, one way or another. One way to ration supply is simply to keep selling at an unchanged price until everything is sold. After that, everyone who comes later misses out.

But when the seller raises their price, economists call this “rationing by [higher] price”. They believe this is always the better solution to the rationing problem because it does so in a way that uses the “market mechanism” to fix the problem.

The higher price encourages would-be buyers to reduce their demand – by wasting less of the product, or finding a cheaper substitute – while encouraging suppliers to produce more of the now-more-profitable product.

So because the higher price reduces demand while increasing the supply, the price mechanism causes the price of the item to fall back towards what it first was. Brilliant. Another win for market forces.

But this means a (possibly temporary) rise in prices is an essential part of the price mechanism. So a consequent rise in profits is also an inevitable part of the mechanism.

It’s gone out of fashion but, long ago, economists would say there were two causes of inflation: “cost-push” and “demand-pull”.

Sometimes firms raise their prices because they’re passing on the higher costs they’re paying for their inputs. At other times they’re raising their prices simply because the high demand for their product allows them to.

We now know from the work of behavioural economists that ordinary consumers accept it’s OK for businesses to raise their prices because of their higher costs. But they regard raising your prices just because shortages in supply let you get away with it as exploitative. (The classic example is charging more for umbrellas on rainy days.)

This dual, supply caused and demand-caused, explanation for inflation fits well with the Reserve’s analysis of the origins of the great surge in prices – in all the developed economies – in late 2021 and 2022.

Part of it was from disruptions to supply caused mainly by the COVID-19 pandemic, but also the Ukraine war, which pushed up the cost of building materials, various manufactured goods, shipping and oil and gas. But part of it was caused by the excessive stimulus applied to the economy by governments and central banks during the pandemic and its lockdowns, which had caused the demand for goods and services to run ahead of the economy’s ability to produce them.

Increasing interest rates can do nothing to increase supply, and the end of the lockdowns would see supply gradually return to normal, the Reserve reasoned. But higher rates could dampen the excess demand caused by all the extra government spending and rock-bottom interest rates that was applied to ensure the lockdowns didn’t lead to a lasting recession.

See how this analysis is undermined by claims there’s no sign of firms earning higher profits in the post-pandemic period? It implies that there’s no sign of excess demand, suggesting the surge in prices must have come only from supply disruptions and other cost increases.

In which case, the justification for maintaining high interest rates is greatly weakened. It implies that demand hasn’t been growing excessively and, rather than waiting for the supply problems to resolve themselves, we’re going to batter down demand to fit.

If so, that would be a very painful solution to a temporary problem. And, unlike the inflation problem we suffered in the 1970s, there’s no way this inflation surge can be blamed on excessive growth in wage costs.

Real wage growth had been weak long before the pandemic arrived. And in 2020, many workers were persuaded to skip an annual wage rise in the belief that we’d entered a lasting recession. As we subsequently discovered, government handouts to business meant many businesses sailed through the pandemic with few scratches.

Why so many economists want us to believe that, despite decades of increased market concentration – more industries dominated by just a few huge firms – and despite excessive monetary and budgetary stimulus, profits never increase, I’m blowed if I know.

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Our economy has turned into a tortoise. The RBA will be pleased

By Millie Muroi, Economics Writer

Most of us know the age-old saying: slow and steady wins the race. Numbers released into the wild on Wednesday show the Australian economy is definitely a tortoise – but it should make the Reserve Bank pretty happy.

The national accounts – data gathered and shared every three months by the Australian Bureau of Statistics – gives us one of the most detailed pictures of how our economy has been tracking. The numbers always run slightly behind where we are because all the information has to be collected, crunched and spat out into a digestible clump. This week’s data drop was for the three months to June.

So, how did we go? There’s not much that should come as a surprise. Economists have long known the economy has been slowing. And most of the household data points to trends you’ve probably seen and lived yourself less spending, less disposable income and less of our income being put away for a rainy day.

Economic growth – or gross domestic product (GDP) – was weak, expanding 0.2 per cent in the June quarter for the third quarter in a row. But economic growth per person, which matters more when assessing our living standards, has tumbled … again. It fell 0.4 per cent – the sixth back-to-back quarter of shrinkage.

Will this worry our decision makers? Probably not. The focus is almost always on the total, not what’s happening on an individual level. It’s also much simpler to talk about GDP than GDP per capita – and much easier to fit in a headline!

The Reserve Bank, for one, won’t be worried by Wednesday’s figures. In fact, it’s probably quite happy. Why? Because its decisions are made at an aggregate level: it looks at the big picture, not the finer details.

There’s always a risk the bank will push the economy too far down the drain.

The bank’s forecasts for certain sections of the national accounts might have fallen on the wrong side of the fence: disposable income (how much people have to spend or save after taxes) for example, came in 0.3 per cent lower over the year, compared with the bank’s expectations for a 1.1 per cent increase.

But the Reserve Bank has one thing at the front of its mind: pushing inflation back into the 2 per cent to 3 per cent target range. In June, annual inflation was still sailing in at 3.8 per cent.

Sure, the bank also wants to keep Australians employed. But with the number of jobs still growing, and the unemployment rate (at least the headline measure) staying low by historical standards, it’s inflation that the bank is worried about.

As you know, inflation is determined by the balance – or imbalance – between demand and supply. There’s not much the Reserve Bank can do about supply (except shout from the sidelines about the importance of boosting productivity), so its focus is on demand.

From the bank’s perspective, it doesn’t matter where that demand comes from, or who exactly is doing the demanding. Its mission is to dampen demand when inflation is high, and give it a boost when inflation is low and the economy is slow.

There’s always a risk the bank will push the economy too far down the drain. We know GDP is only just managing to keep pace and the Reserve Bank has one tool – interest rates – which it’s not afraid of holding high until there’s a clearer sign it has inflation under its thumb.

After all, it doesn’t want inflation running high and finishing first, unless finishing means an end to high inflation.

For this to happen, the bank needs demand to slow down. That means less spending – at least until we figure out a way to pump out more goods and services with the limited people, machinery and materials we have.

It’s clear households are feeling more pressure. The proportion of households’ income that they were able to save dropped to 0.6 per cent in the June quarter, compared with 1.7 per cent at the same time last year. That’s despite households also cutting their spending.

Household consumption, at more than half of GDP, is the single biggest driver of economic growth. But with household spending down, it was government spending (which contributed 0.3 percentage points to growth) that helped keep the economy expanding. Investment spending on new homes, business equipment and building had no impact this time around, while net trade (the difference between exports and imports) contributed 0.2 percentage points, largely thanks to international students and all the spending they did in our economy.

Overall, there’s little in the national accounts to spook the Reserve Bank. Treasurer Jim Chalmers copped some heat this week for a tweak in his language when he said interest rates were “smashing” the economy. But Chalmers and the bank know that without a miracle or a slowing economy, it’s hard to see inflation being reined in anytime soon.

If anything, the national accounts show the economy is moving the way the bank wants. That means both an interest rate cut and rise are unlikely for the time being. The Reserve Bank doesn’t want the economy to stall, but it needs any increase in demand to run behind growth in supply, for inflation to come down.

Right now, our country is still running too hard down the shopping aisle for suppliers to keep up, meaning we’re putting upwards pressure on prices. That’s where the government needs to strike a fine balance. Spend too little and, as our figures showed, we could slip into recession. But spend too much and inflation could stick around for longer.

Anyone who runs knows it’s impossible to sprint all the time. Going slow is not always fun, but until we build up the stamina, muscle and skill, we have to make sure not to push ourselves too hard for too long in case we sustain an injury.

It’s a similar story for the economy. The demands we put on it have to grow alongside our ability to cater for them. The Reserve Bank is like a coach making tough calls because it thinks we’re pushing too hard.

Our economy is slowing, and it’s a fine balance to strike when jobs are on the line. But as long as we’re not running backwards, and with the jobs market so strong, the bank will be happy to stay the course with our tortoise economy.

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Albo’s quiet quest: stop wasting so much taxpayers’ money

If you’ve gained the impression that Anthony Albanese’s government is one that knows what it should be doing to fix our various problems, but lacks the courage to do anything that might be controversial – even just including questions in the census about people’s sexual orientation – I can’t tell you you’ve got the wrong idea.

What people outside Canberra often don’t realise is how obsessed governments, of either colour, become with how their opponents will react to anything they do or say. Albo seems to have a bad case of this.

It’s something economists understand from their study of the behaviour of duopolies. Albanese has forgotten the golden rule of competition laid down by the social psychologist Hugh Mackay: to compete successfully, focus on your customers, not your competitors.

But while Albo’s lack of courage keeps hitting the headlines, it’s not the whole story of this government. Behind the scenes, it’s gearing up to do a better job of ensuring that the many billions of taxpayers’ money it spends each year are more effective in improving our lives.

Governments don’t deliberately waste our money. Almost all of it is spent with the intention of making us safer, improving our health, adding to our education, ensuring we don’t starve because we can’t find a job or are too old to work, or just to help us travel from A to B more easily.

But while almost all government spending is done with good intentions, a surprising amount of it does little to achieve its stated objectives. Why? Because we’re spending on things we’ve always spent on, doing things the way we’ve always done them. Because we’re spending on new things just in the fond hope this will make things better. And because our spending choices are guided by ideology, anecdotes or – and this one’s a favourite – because it’s spending you know will give voters the impression things are improving.

After decades of pursuing the quest of making government smaller – by privatising government-owned businesses and paying private businesses to deliver government-funded services – Albanese and Treasurer Jim Chalmers are on a quest to make government better.

They’ve set up within the Treasury the Australian Centre for Evaluation, which will co-operate with other departments in assessing government spending programs to see how well they are achieving their objectives. The goal is to build a body of evidence of what spending works and what doesn’t. Spending programs should be based on such evidence, not on hunches and hopes.

Last week, Treasury secretary Dr Steven Kennedy gave a long speech outlining his department’s commitment to “evidence-informed policymaking”.

For many years, the medical profession has been committed to using “randomised controlled trials” to evaluate the effectiveness of medicines and medical procedures. These involve experiments where subjects are divided into two groups selected at random. One group is given the pill or the procedure, then compared with the “control” group to see what difference it made.

Now the econocrats want to use this technique to evaluate government spending. And on Tuesday Dr Andrew Leigh, the assistant minister for competition, charities and treasury, gave a speech on evidence-based policing.

Controlled experiments have been used to study the effectiveness of police behaviour in America for many years. For instance, it’s widely believed that the use of body cameras will improve the way police treat members of the public.

But a study involving more than 2000 police officers in Washington DC found that wearing cameras had an insignificant effect on police use of force and on civilian complaints. Their benefit was in providing better evidence in court.

In Australia, the Queensland community engagement trial tested the effect of training in “procedural justice” on citizens’ views of the police. Traffic police were taught to use a script when speaking to drivers stopped for random breath testing.

The study found it improved drivers’ views of the police, though they were no more likely to obey officers’ directions. (But I doubt if many people disobey the coppers, no matter how impolite they are.)

Many randomised trials involving the police are being conducted in Victoria. One seeks to reduce the number of people who fail to appear in court after being summonsed.

It tests the effect of providing simpler information, replacing a 2200-word, seven-page document with a 60-word statement and links to support services from Victoria Legal Aid and the Victorian Aboriginal Legal Service.

The initial results show that the shorter document leads to better court attendance, and thus fewer arrests and incarcerations of people who don’t turn up. The results of many more experiments are on the way.

Meanwhile, the Brits have set up a What Works Centre for Crime Reduction, and Leigh hints that we may do something similar in Australia.

Policing is just one example, of course. It all seems pretty laborious, but if it leads to less ineffective spending and better government it’s a worthwhile endeavour. And not before time.

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GDP is going backwards. That doesn't mean your life is, too

By Millie Muroi, Economics Writer 

If gross domestic product – better known by its nickname GDP – were a perfect reflection of our quality of life, we would be in trouble.

It’s a rough measure of how much we produce, earn and spend, and it grew a measly 0.1 per cent in the first three months of this year. If our population hadn’t boomed at the same time, Australia would be in recession. In fact, in per-person terms, we’ve actually been going backwards for an entire year.

GDP is a go-to gauge for politicians, pundits and journalists when it comes to our standard of living. Generally, if it’s growing, that’s a good thing. It means we’re producing more, making more money and getting to consume more: all signs of a happy, healthy economy, right? Not necessarily.

GDP reflects the monetary gains from economic activity. But it’s basically blind to any destruction we might cause to the natural environment as we pursue profits and make purchases. And it tells us nothing about how those monetary gains – or income – are shared among the rich and poor.

It also fails to account for all the other things that make life worth living: safety, a sense of belonging and how healthy (not just wealthy) we are, to name a few.

While it’s important to keep an eye on traditional economic indicators, they don’t give us a well-rounded picture of many of the things that matter. Metrics such as GDP, unemployment and inflation can help the Reserve Bank and government make informed choices when steering the economy.

But relying on these indicators alone is like driving down a highway with broken mirrors and shattered headlights. You might be able to see some things, but you’ll miss (and hit) a lot – with some pretty big consequences.

It’s part of the reason the Labor government has been copping heat this week after it decided not to add questions on topics such as sexuality in the 2026 census. Deputy Prime Minister Richard Marles said it was to avoid “divisive” community debate, but many members of the LGBTQ community understandably felt they were being overlooked.

Without solid data, it’s difficult to make policy decisions, particularly for groups that are vulnerable and facing particular challenges. This was a chance to fill one of those gaps.

But the Coalition has no clean record either when it comes to data collection. Shadow Treasurer Angus Taylor has said the government needs to zone in on lower inflation and lower interest rates. Fine. Except that he wants to scrap the government’s “Measuring What Matters” framework to do so.

But the Measuring What Matters framework … matters. It tracks our progress towards a more healthy, secure, sustainable, cohesive and prosperous Australia. That may sound fluffy and abstract. But those five adjectives frame 50 key indicators that make up the wellbeing dashboard, covering everything from air quality to how secure we feel and how healthy we are. It’s a toolkit we can use to fix at least some of the broken mirrors and headlights on our car and develop a more holistic view of our economy.

While it’s important to keep an eye on traditional economic indicators, they don’t give us a well-rounded picture of many of the things that matter.

It’s all about getting the economy to work for people and the planet rather than the other way around.

Dr Cressida Gaukroger, wellbeing government initiative lead at the Centre for Policy Development, says the data doesn’t often swing massively (perhaps one reason why the wellbeing report was largely glossed over by the media last week).

But it’s important because it gets us thinking about the long term, specifically “the changes we should be making now and the investments that we should be making now,” Gaukroger says. This way, we can save ourselves from longer-term problems that might otherwise be ignored in the frenzy around the latest GDP number, for example.

“Without that kind of long-term vision of what we should be aiming for, it makes it very difficult when we’re stuck with short-term election cycles and politicisation of government spending,” Gaukroger says.

So, what did the latest update on this data tell us? Let’s look at the bad news first.

Female health-adjusted life expectancy has dropped. Normally, Gaukroger says, we don’t see much movement in the average number of years a person can expect to live in “full health”. But chronic health conditions are crippling more people. About half of Australians lived with a chronic health condition in 2022 – up from 47 per cent in 2018 and 42 per cent in 2002, with women more likely to be grappling with one.

When it came to the environment, biological diversity worsened. From 1985 to 2020, the abundance of threatened and near-threatened species plummeted by roughly 60 per cent. Biodiversity is important because it ensures balanced and functioning ecosystems.

Some measures of cohesiveness have also deteriorated. In 2023, our sense of belonging fell to a value of 78 – the lowest it has been since 2007, when the measure was benchmarked at a score of 100.

But it’s not all doom and gloom. Other measures have improved, highlighting the areas we are thriving in.

We’re feeling safer walking through our neighbourhoods at night, and more than three-quarters of people in 2023 agreed with the statement that “accepting immigrants from many different countries makes Australia stronger” – up from 63 per cent in 2018.

Gaukroger says another positive development is the decline in “material footprint” per person, meaning fewer raw materials such as fossil fuels and minerals are being extracted to satisfy our demand. While the amount of raw materials being used to fulfil our wants and needs was 37.6 tonnes a person in 2010, the amount fell to 31 tonnes in 2023.

That means we’re working towards a circular economy, which reduces waste by, for example, sharing, reusing, repairing, and recycling things and designing materials that are less resource-intensive to make in the first place. This is a win for the environment.

The Measuring What Matters dashboard is not perfect. As Treasurer Jim Chalmers admitted last week, some of the data is too old, and there are still holes that need to be patched up. But it’s still well worth the investment.

Focusing too heavily on one thing comes at a cost. If we want a well-rounded gauge of our wellbeing and effective policy to drive us to our desired destination, we need to look beyond GDP.

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How GPT (not that one) could help fix our inflation problem

By Millie Muroi, Economics Writer

ChatGPT is not the answer to Australia’s productivity problem. At least, not yet.

But I asked ChatGPT what its chances were of productivity improving in Australia – if it was a betting man. The answer? 70 to 80 per cent.

Productivity growth excites economics nerds, like those at the Reserve Bank ... and just about no one else. But it matters for everything from your mortgage to the prices you pay at shops and the quality of your life.

Why? Because productivity growth means being able to make more with what we have, which is the best solution to the biggest economic issue of our time: inflation.

After all, there are two sides to this inflation problem: too much demand and too little supply. Instead of the Reserve Bank beating down our appetite for goods and services through ramping up interest rates, wouldn’t it be nice if businesses could simply produce more with the workers and equipment they already had, therefore keeping prices in check?

We could work longer hours and maybe even put our machines under more strain, but we can only do that for so long: it would be like trying to run a marathon at sprinting speed.

That doesn’t mean we should abandon all hope.

Instead, to curb price rises, and to lift our living standards over time, we need to improve productivity. Like a marathon runner improving their running technique, we need a way to get faster or better at what we do. A crucial way of doing this is through discovering and using new technology that helps us pump out more, or better quality, goods and services, in a way that can be maintained.

The most influential of these tools (those that have transformed the way we live) are called General-Purpose Technologies – or GPTs for short. The steam engine, cars, electricity and the internet all count as GPTs, because they were widely adopted and became crucial pieces of technology which dramatically yanked up our productivity.

We may not consciously think about it. But imagine what our lives would look like today without electricity, internet and cars. We would be slower, have much less information at our fingertips and would find it harder to work once the sun sets.

As Andrew Leigh points out in his book The Shortest History of Economics, the journey to create the electric bulb itself shows how our productivity has improved. In prehistoric times, producing as much light as a regular household lightbulb using wood fire would have taken our ancestors about 58 hours of foraging for wood. Today, it takes less than a second of work to earn enough to flick a household light bulb on for an hour.

ChatGPT is an example of a tool that could become a general-purpose technology. But the “GPT” in its name actually stands for “generative pre-trained transformer”: a fancy way of saying a piece of software trained using huge amounts of data to offer up human-like answers to questions like mine.

During the pandemic, there was a short-lived surge in the take-up of cloud computing (IT services that businesses can use without owning or running the physical servers, hard drives and networks required themselves). But generally, Australian businesses are behind the curve when it comes to adopting new technologies – and we don’t develop much of it ourselves.

That doesn’t mean we should abandon all hope. Instead, we need to think about the drivers of, and barriers to, adopting technologies such as cloud computing and artificial intelligence: two GPTs in the making.

Kim Nguyen and Jonathan Hambur at the Reserve Bank say these technologies could alter the way we do business. But knowing how to use and make the most of them also requires highly skilled and educated workers.

A website called ChatGPT is raising questions about the role of artificial intelligence in our education, work and relationships.

Nguyen and Hambur’s research involved trawling through the annual reports, job ads and earnings calls of Australian businesses to figure out how much workers’ and managers’ skills matter when it comes to successful adoption of GPTs.

Here’s what they found. Firms which had snagged a board member with experience in the IT industry were 30 percentage points more likely to adopt a GPT. While there were certainly businesses which took up GPT without a technologically skilled board member on their team, these firms generally failed to see much improvement in their profitability after putting a GPT in place.

Basically, having board members with relevant technological experience has been linked to more profitable use of GPT. Of course, the authors point out this could be because firms that appoint technology-savvy board members tend to be more focused on IT in the first place, and therefore more likely to be able to adopt GPT in a way that increases profitability.

But firms with technologically skilled board members were also more likely to look for workers with GPT skills, indicating those workers might also play an important role in profitable GPT adoption. Whatever the exact link, uptake of GPT is linked to higher demand for skilled workers, meaning education and training will be key to nailing the use of these technologies.

While the Reserve Bank’s toolkit is limited to setting interest rates (and, informally, jawboning) the less painful solution to getting inflation under control is to improve our productivity, and therefore the amount of goods and services to go around.

Productivity growth is difficult to measure, and quarter-to-quarter movements can be rocked by things that have little to do with anything. But it has flattened out in recent months, and without productivity growth to match, wages, which have begun to pick up in recent times, will worry the Reserve Bank and may build the case for the Reserve Bank to keep interest rates higher for longer.

ChatGPT has hit the headlines over the past year: from students using it in a bid to boost their marks and to some media companies relying on it to churn out AI-generated content. While it’s yet to join the ranks of coveted general-purpose technologies, ChatGPT is an example of innovation which could turn out to be a game-changer.

Right now, it’s an imperfect tool being put to use by an inexperienced user (me). But I asked ChatGPT if it could write a better opinion piece, and faster than I could. The answer? “I’d love to give it a try!” 

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Think you've snagged a bargain online? It's you who's been snagged

By Millie Muroi, Economics Writer 

In a cost-of-living crisis, I’m sure I’m not the only bargain hunter who has put giant e-commerce sites Temu, Shein and Wish to the test.

I’ve heard all the arguments against shopping online, and like most of my generation, I’ve shrugged off most of them, too. It’s how we do things when money is tight. Get with the program, or get old.

One friend splashed cash on a giant stuffed pig from Temu for my birthday, and another told me their “mate” (sure, sure) had tried buying some “weird stuff” from Wish, including weapons and sex toys. By weapons, they meant pepper spray. I didn’t press on the sex toys.

“Verdict?” I asked. “Worth someone switching suppliers?”

“Feel free to trust the online reviews,” they replied. “I can’t speak for it myself.”

You might think you’ve bagged a bargain, or something you wouldn’t buy in person, when using these sites. And in some cases, you probably have. But whether you’re stocking up on knock-off essentials, or chasing a quick hit of retail therapy, there are some risks to keep in mind.

First, there’s the good chance you’re spending more than you bargained for. Sneaky sales tactics have been used by bricks-and-mortar shops for decades. Switching up the floor plan every few weeks or months, for example, forces customers to spend more time in the store and discover products they may not have noticed before on their well-worn path.

But online shopping is a different ball game, and has ushered in a raft of new sneaky techniques. One of these strategies is gamification: where e-commerce sites turn shopping into a game-like experience. Hop onto Temu, for example, and you might mistake it for an online casino.

Timers count down how long you have before you’ll miss out on a deal. And when a roulette wheel of discounts and store credit pops up with tantalising rewards (and seemingly no possibility of losing), it would seem silly not to give it a shot, right?

The dopamine hit from activities like spinning a wheel and landing a discount help reel us in, keep us engaged, and get us invested in making use of our reward, which, of course, means spending. The countdowns, meanwhile, fuel a sense of scarcity and urgency which compel us to act now (often impulsively), rather than abandon our cart.

Gamification, of course, is not just an online phenomenon. McDonald’s, for instance, runs its Monopoly promotion every year, encouraging customers to collect tokens, some of which can be exchanged instantly in-store for discounts.

But there are few e-commerce sites which have used these tactics so heavily, and converted so many people into customers. Despite only launching in 2022, Temu has become the fifth most popular online retail brand in Australia, with an estimated 1.2 million Australians checking out on the platform, and $1.3 billion spent by them annually.

Of course, part of this comes from the hundreds of millions of dollars the company has splashed each year on advertising. This includes money spent to flood social media platforms with ads and, in the US, even a spot at the most sought-after marketing opportunity: the Super Bowl.

Since Temu’s debut, its Chinese parent company Pinduoduo has seemingly gone from strength to strength. In the first three months of this year, it raked in nearly $5.4 billion in profit, triple its earnings from the same period last year.

Apart from its mammoth marketing budget, Temu has probably also benefited from launching at a time when inflation pressures, especially across developed economies, have driven customers to intensify their hunt for bargains.

Amazon, the US behemoth which launched back in 1994 as an online bookstore, still holds the top spot in e-commerce when it comes to profits and sales globally. But companies such as Temu have come under particular scrutiny because of a Chinese intelligence law which allows Beijing to access sensitive information held by Chinese firms.

While information on the $2 phone case you bought from Temu might not be too consequential, there are suspicions the Chinese government could be accessing personal information which could expose customers to fraud or cyberattacks.

And while misbehaviour by multinationals isn’t an issue unique to Chinese companies, regulation and compliance in China can be looser. Temu, for instance, has been accused of selling products built with slave labour. And authorities in Seoul this month found women’s accessories sold by companies including Shein, Temu and AliExpress contained toxic substances, some at hundreds of times above the legal limit.

There are also wider economic implications of shopping with these platforms. A tactic often used by new companies is to temporarily sell at loss-making prices; that is, they sell their goods for less than it costs to make and ship them.

It can’t be done forever, but businesses with money to burn can use these aggressive strategies to drive smaller competitors into the ground or steal customers away from bigger rivals. Consumers benefit, for a little while, from cheaper prices, but competing businesses may suffer and so, eventually, will consumers.

Then, there’s the issue of sharing data. The internet has made it easier for companies to collect personal and minute behavioural information at an unprecedented scale.

While this can be beneficial when companies can match you with products you actually need, at prices that can’t be beaten, it can also help them take advantage of our weaknesses and play to our psychology in ways that make us spend more than we should.

There’s little doubt heavy use of gamification on sites such as Temu is already hooking us in. But by engaging with these tactics in the first place, we’re also feeding into the algorithms they use, and helping these companies figure out what makes us tick.

Temu’s tagline is “shop like a billionaire”, but unless we stay alert to the risks and tactics used by these e-commerce giants, it will be their pockets we end up lining.

While new and competitive businesses are a good thing for consumers looking for a bargain, we should keep a careful eye on these firms. After all, they’re keeping a close watch on ours.

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RBA worries too much about expectations of further high inflation

Other central banks have started cutting interest rates, yet our Reserve Bank is declining to join them because, as governor Michele Bullock explained on Friday, it doesn’t expect our rate of inflation to fall back to the mid-point of its target range “in a reasonable timeframe”.

Its latest forecasts don’t see the “underlying” (that is, smoothed) annual inflation rate returning to 3 per cent until the end of next year, and reaching the mid-point of 2.5 per cent until late in 2026.

Clearly, the Reserve doesn’t see such a timeframe as reasonable, so it’s keeping interest rates high for longer, until it can see inflation returning to target much earlier. And, Bullock warns, should the inflation outlook get worse, she won’t hesitate to raise rates further.

Obviously, the longer interest rates stay high, the greater the risk of forcing the economy into recession, with much higher unemployment and business failures, something Bullock swears she wants to avoid.

But what’s the hurry? Why is taking another two years to get inflation down an unreasonable timeframe? (Another question is, what’s so magical about 2.5 per cent? Why would 3 per cent or 3.5 per cent also be unreasonable? But I’ll leave that for another day.)

The hurry comes from central bankers’ longstanding fear that, should the inflation rate stay high for too long, the people who set prices and wages will come to expect that inflation will stay high rather than return to where it used to be.

Why do their expectations matter? Because, many economists believe, when enough people expect inflation to stay high, they act on their expectations and so make them a reality. Workers and their unions demand higher wages, and businesses pass their higher costs on to customers in higher prices.

This is the much-remarked “wage-price spiral”. It’s important to remember, however, that inflation expectations and wage-price spirals aren’t a longstanding tenet of either neoclassical or Keynesian economics.

They’re just a bit of pop psychology some economists came up with to explain why, in the mid-1970s, the developed economies found themselves beset by “stagflation” – both high inflation and high unemployment.

So how much we should worry about inflation expectations is an empirical question: is the idea borne out by the facts and figures?

In 2022, Dr John Bluedorn and colleagues at the International Monetary Fund conducted a study of the historical evidence for wage-price spirals in the developed economies, concluding that a jump in wage growth shouldn’t necessarily be seen as a sign that a wage-price spiral is taking hold.

Bluedorn elaborated on these finding at the Reserve Bank’s annual research conference last September. The discussant for his paper was Iain Ross, former president of the Fair Work Commission and now a member of the Reserve’s board.

Ross (and leading labour market economists, such as Melbourne University’s Professor Jeff Borland) readily agree that Australia experienced a wage-price spiral in the 1970s. But both men conclude that our circumstances 50 years later are “very different”, which means it should be possible to sustain steady wage growth without initiating a wage-price spiral.

In mid-2022, Borland listed three respects in which our present circumstances are different. First, upward pressure on wages is being limited on the supply side by employers’ ability to give extra hours of work to part-time workers who’d prefer more hours, and by drawing more participants into the jobs market.

Second, changes in the “institutional environment” since the 1970s have reduced the scope for people to get wage rises based on the principle of “comparative wage justice” – “Those workers have had a pay rise, so it’s only fair that we get the same.”

And third, a decline in the proportion of workers who are members of a union, and a range of other factors, have reduced workers’ bargaining power, thus limiting the size of wage increases likely to be obtained.

There could hardly be anyone in the country better qualified than Ross to explain how the institutional arrangements governing the way wages are set have changed over the decades. He told the conference that “these changes have been profound and substantially reduce the likelihood of a wage-price spiral”.

The central difference was that, in the 1970s and 1980s, the institutional arrangements facilitated the transmission of wage increases bargained at the enterprise level – usually by unions in the metal trades – to the relevant industry sector and then ultimately to the broader workforce.

There were four important respects in which the present rules are very different. First, the new “modern awards” operate as a minimum safety net and the circumstances in which minimum wages may be adjusted are limited. In effect, there is no scope to adjust minimum award rates to reflect the outcome of collective bargaining at the enterprise level.

Second, the Fair Work Act limits the general adjustment of all modern-award minimum wage rates to one annual wage review conducted by the Fair Work Commission.

Third, enterprise agreements need to be approved by the commission before they acquire legal force. The length of agreements averages three years, during which time employees covered by that agreement can’t lawfully engage in industrial action in pursuit of further wage rises.

Fourth, the sanctions against engaging in such industrial action are, Ross said, “readily accessible and effective”.

Ross noted that the proportion of all workers who are members of a union has fallen dramatically since the 1970s. From a little above 50 per cent, it has fallen to 12.5 per cent. And in the private sector it’s down to 8.2 per cent.

The manufacturing sector and its unions were central to the wage-price spiral of the 1970s. But manufacturing’s share of total employment has fallen from 22 per cent to 6 per cent, while the proportion of union members in manufacturing has fallen from 57 per cent to 10 per cent.

Whereas the annual number of working days lost to industrial disputes was about 800 per 1000 employees during the 1970s, these days it’s next to nothing.

Ross said the present enterprise bargaining arrangements operate as a shock absorber by constraining the bargaining capacity of employees subject to an agreement. “To date there is no evidence of the emergence of a wage-price spiral in the present circumstances and recent data suggests such an outcome is unlikely,” he concluded.

My point is, there’s no reason for the Reserve to live in fear of an imminent worsening in inflation expectations if workers and their unions’ ability to turn their expectations into higher wages is greatly constrained. That being so, we shouldn’t allow impatience to get the inflation rate back to target to worsen the risk we’ll end up in a recession, the depth and length of which could greatly impair our return to full employment.

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Why the Reserve Bank thinks it's too soon to cut interest rates

By Millie Muroi, Economics Writer 

When the Reserve Bank’s second-in-command – recently appointed deputy governor Andrew Hauser – took shots at his closest observers this week, he ruffled plenty of feathers.

“It’s a world of winners and losers, gurus and charlatans, geniuses and buffoons,” he proclaimed. Then he wagged a finger at those confidently commentating from the sidelines on the direction of the economy. “It’s a dangerous game,” he warned.

We know economists – including those at the Reserve Bank – are notoriously bad at knowing exactly what we (and therefore the economy) will do. So, why was Hauser so mad at those confidently making their own calls?

Brash statements made by the media, government and economists have real-world consequences. People often rely on that information to make decisions, from taking out mortgages to negotiating wages.

“What about Phil Lowe?” you may ask. Didn’t the former RBA governor promise in 2021 that interest rates would not go up until 2024? Well, sort of. It was actually couched in caveats which many people glossed over.

The Reserve Bank generally treads carefully because the words of its bosses can shift behaviour: a hidden weapon beyond its interest rate-setting superpower.

RBA governor Michele Bullock often declares she is “not providing forward guidance” when fielding questions from journalists trying to get a steer on interest rates. But last week, she gave the closest thing to guidance in a while: people’s expectation for rate cuts in the next six months doesn’t align with the RBA board’s feeling, she said. At least, “not at the moment.”

In doing so, Bullock flexed the bank’s hidden bicep. She signalled for all of us to rein in our expectations of a rate cut and, she would have hoped, our inflation expectations.

This is important because what people believe can become reality. If we expect inflation to stay high, this belief can feed into the wages we ask for, and the prices businesses charge.

That’s not to say the Reserve Bank doesn’t believe its own thinking. The only medicine it can explicitly prescribe is the level of interest rates, but the central bank busies itself with a lot of data gathering, discussions and number crunching to diagnose the state of the economy.

Core to the Reserve’s thinking is its observation that, collectively, we are consuming more than we can produce for an extended period of time. Sure, young people and mortgage holders have been tightening their belts as housing costs surge. But that’s been more than offset by older, affluent Australians splurging on things such as travel, by population growth and by government spending.

Now, the government has bones to pick with any suggestion that its spending is contributing to inflation. And Government Services Minister Bill Shorten this week trashed RBA chief economist Sarah Hunter’s assessment that the economy is “running a little bit too hot”.

However, it is important to note Hunter’s view isn’t necessarily that Australians are doing too well, or that the economy is bubbling along. It’s more a reflection of the limited spare capacity we have to cater for the spending – however little or much of it we may be doing.

We’re spending “too much” mostly by comparison to the limited resources we have to keep up with it: the people making our coffee in the morning and machines they use to brew it for us, for example.

Unless we become more productive, making more with the things we already have, the more we strain people and machines to meet our demands, and the pricier things will be to produce.

Productivity is especially difficult to improve for sectors such as hospitality, which rely heavily on people rather than machines (there’s only so many ways your barista can brew a coffee faster and better). And it’s why services inflation is proving so much more stubborn than goods inflation.

How does the Reserve Bank know how much spare capacity we have (and therefore how much pressure we might expect on prices)? It looks at something called the output gap: the difference between how much we’re producing and how much we could produce without putting too much pressure on prices.

Heaven for the Reserve Bank would be an output gap of zero. Any lower means we’re not using our resources as intensively as we could – including people who want to work, but can’t find jobs, or machines sitting idle.

Any higher, and we’re using our resources too intensively. This can be OK for a short period, but as workers demand higher wages, machines are run into the ground and businesses compete for a shrinking pool of resources, prices rise. For the past few years, this is the state the Reserve Bank thinks our economy has been in.

Measuring the output gap is tricky. We can’t really see it, and our capacity can change over time as our population changes, or we find better ways to do things. So, how does the RBA measure it?

How much the economy is producing is measured through statistics such as Gross Domestic Product. The trickier task is pinning down how much the economy could produce without adding to inflation. To do this, the Reserve Bank uses economic models which spit out results based on things such as what’s happened in the past and the data plugged into them: relatively straightforward numbers such as population, as well as educated assumptions about other factors influencing the economy.

The bank also asks businesses about their capacity usage through surveys and by chatting with them through its liaison program. Then, there’s also the inflation figure itself.

While the output gap is just one gauge, it is given considerable weight in the Reserve Bank’s decisions. So far, the gap is narrowing, the bank says, but it’s likely we’re still pushing our resources past the ideal level to pull inflation back into line.

There’s not much the central bank can do to increase potential output, or capacity, in the economy, which is why it is instead focusing on weakening our demand, or spending.

While a rate cut now would be like an iron infusion for an anaemic economy, help preserve jobs, and bring mortgage holders relief, the bank is clearly on the warpath against its public enemy number one: inflation.

Keep in mind, though, no one is perfect. The Reserve Bank is careful to stress that the output gap, like most of its other measures, is “subject to considerable uncertainty.”

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What does sharemarket turmoil tell us about our economy? Not a lot

 

By MILLIE MUROI, Economics Writer

When the Reserve Bank board walked into their two-day interest rate meeting in Sydney this week, most of their key numbers were locked in.

By the time they closed their laptops and zipped up their bags on Monday, the Australian sharemarket had shed close to $100 billion in one day: the biggest single-day drop since the pandemic came knocking. The Reserve Bank board “discussed it, obviously,” governor Michele Bullock told the media on Tuesday, but the turmoil didn’t play a role in the bank’s final decision to keep interest rates on hold.

So why didn’t the central bank care when panic swept across financial markets earlier this week? In short: because the sharemarket isn’t the economy – or a good indication of it. “It was a bit of an overreaction,” Bullock said. “It was one number.”

That number – a jump in the US unemployment rate – rattled investors because it signalled the world’s biggest economy could be closer to recession than people had thought. But why did it hit the Australian sharemarket so hard? And what does it tell us about our economy, if anything?

First, volatility in financial markets – where people buy and sell financial assets – doesn’t necessarily relate to the “real economy” with its goods, services and people. “Financial volatility does affect sentiment, and incentives for households and businesses to invest,” Bullock said at an address in her hometown of Armidale on Thursday. “But it isn’t the economy.”

Second, financial markets around the world have become increasingly intertwined. When something happens, especially in US markets, it’s certain to have a knock-on effect for Australia. And with so many large investors holding similar views, there was probably a “mechanical response” by markets, according to Westpac chief economist, and former RBA chief economist, Luci Ellis.

By that, she means a lot of people’s investment strategies changing course at the same time. “If large parts of financial market investors change their mind about the outlook for interest rates in the US, for example, they’ll all be trying to do the same thing at once,” she says.

There’s also a thing called “herd mentality bias” in finance, which refers to investors’ tendency to follow and copy what other investors are doing. A rhetorical question most of us get asked when we’re young and want to do something because our friends are, is: “if your friend jumped off a cliff, would you do the same?” When it comes to the sharemarket, the answer is often yes.

But this means when the tide starts to turn, there’s often a big shift in markets, with people hopping onto (or off) the bandwagon and copying what their peers are doing. As share prices start to fall, often the panic feeds on itself, and manifests in a big stock-selling frenzy, regardless of what started it.

It’s hard to pinpoint exactly what markets were thinking, and what factors fed into their reaction earlier this week. But the clear feeling sweeping through it was nervousness. When investors are nervous, they tend to sell shares, and move into “safer” investments such as bonds.

Does all this mean the Australian economy is in for an apocalypse? No, far from it.

When it comes to the fallout of the sharemarket plunge, there will probably be a slight impact on people’s wealth, at least over the short term, in what’s called the “wealth effect”. This is essentially the theory that people will tend to spend less when the value of their assets – such as their investments in the sharemarket – fall, and vice versa. The richer we feel, the more we’re likely to splurge.

But most Australian households don’t think too deeply about day-to-day movements in the sharemarket. A lot of our wealth, particularly when it comes to shares, are held in our superannuation funds, which most of us check on about as often as we change our tyres – only when we need to. And while the plummet this week may have caught our attention, we’re likely to have largely forgotten about it a few months down the line.

HSBC Australia chief economist Paul Bloxham points out it wasn’t just one number driving the movement.

On top of the weaker-than-expected jobs data from the US, there was also weaker manufacturing sentiment and Japan’s decision to hike interest rates, he says. Investors have been making the most of near-zero interest rates in Japan by borrowing money to invest in other countries such as the US: a strategy known as a “carry trade”. But the deadly combination of rising interest rates in Japan and signs of a slowing economy in the US suddenly made this trade unattractive, leading to a rapid pullback from these types of investments.

“When markets have a lot of participants all holding the same view, and it turns out that view isn’t right, when all of those people try to get out of that trade all at once, it can often be quite difficult, and you get more volatility,” he says.

While the Australian economy is closely connected to other countries, especially those in Asia, the choppy forces moving the Australian sharemarket often tend to be global.

By contrast, Bloxham says the biggest issue for the Australian economy remains inflation, which has become an increasing domestic issue.

“What matters more right now is that local inflation is still higher than it should be,” he says. “That matters more in terms of thinking about interest rates, and what it means for the local economy more generally, and that’s why the RBA is more focused on that than they are on the share market turmoil we’ve seen.”

To be clear, financial market movements can influence economic policy decisions from the RBA and the government, especially if they suggest there are problems around financial stability. During the global financial crisis, for example, the sharemarket crash reflected big losses in wealth and large numbers of people becoming financially distressed, which had a significant impact on the economic outlook. And a sluggish US economy would undoubtedly drag down overall global growth.

But sharemarket scares are frequent. And while the financial market, with all its fancy instruments can, on rare occasions, reflect the health of the economy, more often than not, it’s much ado about nothing. Don’t read too much into it.

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Misbehaviour thrives in our age of capitalism without capitalists

There’s a vital lesson to be learnt from the latest episode in the saga of former chief executive Alan Joyce’s ignominious departure from Qantas last year: these days, no one’s in control of the capitalist ship.

It seems clear that, in his last years in the job, Joyce decided to give the size of his final payout priority over the maintenance of good relationships with the company’s staff and customers. He left Qantas suddenly in September last year with what was to have been a package of $23 million, including his final-year salary and bonuses.

But by then, many customers were complaining and the company’s behaviour was under investigation by the Australian Competition and Consumer Commission. The board decided to retain the right to claw back much of the payout, pending a review of the airline’s management.

Meanwhile, the High Court found that the company had illegally sacked 1700 ground handlers.

Last week the company announced the results of the review by Tom Saar, a former partner in management consultants McKinsey. He found that Joyce’s tenure as chief executive directly contributed to the erosion of the airline’s relationships with its regulators and customers.

He also found the board did not adequately challenge its executives and failed to acknowledge non-financial risks. The group’s management contributed to a string of failures that resulted in “considerable harm to its relationships with customers, employees and other stakeholders”.

The board decided to dock more than $9 million from Joyce’s final payout. It also decided to reduce the short-term bonuses of all current and former executives who were part of the leadership team last year. This included the new chief executive, Vanessa Hudson, who served as the group’s finance chief.

I recount all this because it’s just an extreme example of the licence chief executives enjoy because they work for companies that are owned by everyone in general and no one in particular. We know of billionaire company owners such as Rupert Murdoch, Twiggy Forrest, Gina Rinehart and Clive Palmer, but these are the exceptions.

In legal theory, the job of company boards is to represent the interests of the shareholders. In practice, as the Qantas case well demonstrates, boards defer to executives because they’re drawn from the same fraternity of managers.

It’s noteworthy that the person the board chose to review Qantas’ management was himself a member of that fraternity. Its board emphasised that his report contained “no findings of deliberate wrongdoing” but that “mistakes were made by the board and management”.

Considering the damage done to the airline’s reputation, and the abuse of its position as the dominant player in Australia’s domestic aviation, Joyce wasn’t docked as much as he could have been. And merely cutting other executives’ short-term bonuses by a third lets them off lightly.

In the phrase coined by the Australia Institute’s Dr Richard Denniss, we now live in a capitalist economy without any capitalists. This is true of all the developed economies, but it’s particularly true of Australia because of the way almost all employees are compelled to contribute 11.5 per cent, soon to be 12 per cent, of their wages to superannuation funds.

Those super savings now total more than $3.9 trillion, with about 28 per cent of that invested in listed and unlisted Australian shares, plus 27 per cent in foreign listed shares. This means those of us with superannuation account for about 38 per cent of the value of shares listed on the Australian stock exchange.

So, what say do people with super have in the running of the companies whose shares they own? Next to none.

Their super funds are run by trustees. Do members have any say in who gets to be a trustee? No. The trustees are under no obligation tell members which companies’ shares their savings are invested in.

Of course, almost all shares carry the right to vote at a company's annual general meeting. And at those meetings, shareholders do get to vote for or against the company’s proposed remuneration to executives. So, do the owners of shares via their super get the right to vote at company meetings? No, of course not.

Well, who does get that? Maybe the funds’ trustees, or maybe the managers of the “managed investment funds” in which your super fund has invested.

And do those trustees or investment managers actually vote at company meetings? Maybe they do, maybe they don’t. Who knows? Super members aren’t told.

It follows that, when they do vote, we aren’t told which way they voted. Did your shares vote for or against the big pay rises the directors and executives intend to award themselves? Did they vote for or against further investment in fossil fuel projects?

See what they mean about us living in an age of capitalism without capitalists? We live in a time when big business is run by executives, with surprisingly little to constrain their freedom of action unless they come to our attention by, like Alan Joyce, going way over the top.

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We should stop using a blunt instrument to manage the economy

In the economy, as in life, it helps a lot if you learn from your mistakes. Or, if you’re in public life, from the mistakes of your predecessors.

Accordingly, the caning that former Reserve Bank governor Dr Philip Lowe got for his assurance that interest rates wouldn’t rise before 2024 does much to explain why his successor, Michele Bullock, has been so persistently cagey about the future of rates.

Even as she’s announced a decision that the official cash rate was to be left unchanged, she’s warned that it may need to rise in future. And indeed, that the case for raising it had been seriously considered.

But last week, with the herd sniffing in the wind the smell of rate cuts, she took her life in her hands and got a lot more specific – though not before muttering the incantation that she was not providing “forward guidance” (that was the crime Lowe was convicted of).

In a carefully rehearsed line, she said that a “near-term reduction in the cash rate does not align with the board’s current thinking”. Oh yes, and what does “near term” mean? The next six months, she said.

“Current” thinking. Get it? In other words, that thinking could change over, say, the next six months. Especially because, as she repeated, the board’s decisions would depend on what the economic indicators were telling it. And, as she keeps saying, “the outlook remains highly uncertain”.

It’s clear many people aren’t convinced the board’s thinking against cutting rates will stay unchanged for the next six months. Because the financial markets are so heavily into betting, their predictions are almost always based on what they expect the Reserve will do.

But there are plenty of other, simpler souls, whose emphasis is on what they believe the Reserve should do to ensure it avoids the recession it says it wants to avoid.

The other point about learning from your mistakes and adventures is the familiar problem that those who were around at the time of lesson-learning pass on, handing over to people who weren’t around to have learnt.

This is what worries me as the Reserve ploughs on, determined to ensure the inflation rate returns to the centre of its target range within a time that the Reserve itself judges to be the maximum time acceptable. This determination seems to be regardless of the source of the forces that are slowing the return to mid-target and making it “bumpy”.

When the Reserve was granted operational independence by the elected government in the mid-1990s, its bosses at the time understood a truth I’m not sure their successors still understand. When you’re not free of the politicians, you can leave the politics to them. But when you are free of them, you have to do your own politics.

Now, I’ve been a great supporter of central bank independence. It’s been one experiment that time has shown to be a big improvement on leaving interest rates to the pollies. But we, and the central bankers, must understand that central bank independence is an uneasy fit with democracy.

We now have a situation where the central bank has the most control over whether the economy is plunged into severe recession, but the only people the voters can punish for this are not the central bankers, but the government of the day.

So, to get specific, if the Reserve Bank decides inflation can’t be fixed without a recession or, more likely, miscalculates and leaves interest rates too high for too long, it won’t be Michele Bullock that voters punish, it will be Anthony Albanese and his government.

Guess what? Should that happen, Labor is likely to be angry and vengeful. And, as Bullock’s predecessors understood, should government pass to the Liberals, their strongest emotion is likely not to be gratitude, but a determination that the Reserve won’t be allowed to trip them up the way it tripped up Labor.

With independent central banks being the long-established convention throughout the developed world, would any government of ours be game to strip the Reserve of its independence? Probably not.

But politicians have other, less noticeable ways of bringing independent institutions to heel. The usual way – practised by the previous federal government with the Administrative Appeals Tribunal and the Fair Work Commission, and by Donald Trump with the US Supreme Court – is to stack appointments to the board with people who share the government’s predispositions.

So there will be a way for the politicians to pass the voters’ punishment on to the Reserve should it stuff up. This is why it does have to do its own politics.

And there’s another, far more positive way that could be used to clip the Reserve’s wings. This episode of tightening, much more than any previous episode since the day-to-day management of the macroeconomy was handed over to the Reserve in the 1980s, has revealed just how unfair and ineffective it is to make the manipulation of interest rates the dominant instrument for managing the strength of demand.

As research by Associate Professor Ben Phillips of the Australian National University has confirmed, the much-lamented cost-of-living crisis has been imposed on households with big mortgages far more than on any other households.

When you take account of the way rents actually fell during the lockdowns, renters haven’t been hard hit, while those who own their homes outright have been laughing. People on pensions or the dole have been protected by indexation.

So the reliance on interest rates to reduce demand is hugely unfair. But it’s also lacking in effectiveness. All of us have contributed to the excessive demand for goods and services, but only the minority of us with big mortgages have been pressed directly to pull back our spending.

This is why our management of the macroeconomy needs reform. We need another, much broader-based instrument that could be used as well as, or in place of, interest rates. Temporary changes in the rate of the goods and services tax are one possibility, but I’m attracted to the idea of temporary changes to the rate of compulsory superannuation contributions.

The two instruments – one interest rates, and the other budgetary – could be controlled by a new independent authority.

Despite all the Reserve’s apologies for having just a single, blunt tool and all the hardship it causes home buyers, we’ll wait a long time before it suggests sharing its power with a rival independent authority.

As well, the banks have ways of ensuring they benefit from rising interest rates, while financial markets want to keep betting at Reserve Bank race days.

So I’m tempted by the thought that only if the Reserve stuffs up and causes a severe recession are we likely to see the reform to macroeconomic management we so badly need.

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Our troubled universities have become the politicians' plaything

If it wasn’t for their sterling success in fattening their own salaries, I’d be tempted to feel sorry for the nation’s vice chancellors. They’ve been screwed around for years by federal governments of both colours, and the mess they’re in – some of which they try to cover up – gets ever deeper.

They’re another victim of our decades-long dalliance with “neoliberalism”. But now the task is to sort out this and other messes a misguided experiment has left us with.

Successive federal governments have engineered a kind of backdoor privatisation of our universities. They remain owned by the states and heavily regulated by the feds, but have increasingly been told to pay their own way.

The feds have sought to greatly increase the proportion of school-leavers going on to university, but limit the cost to their own budget. They’ve done this partly by requiring students to cover some of the cost of providing their degrees themselves, but mainly by encouraging the unis to attract overseas students and charge them full freight.

I’m happy to defend the fairness and good sense of the original HECS – the higher education contribution scheme – but successive governments have increased and distorted the fees in ways that can’t be defended. The most egregious is the Morrison government’s crazy “job-ready graduates” scheme, under which it reduced the fees for some degrees, but doubled them for arts and some others.

Last month the federal Education Department revealed that the cost of a three-year arts degree is likely to reach $50,000 for students beginning their studies in 2025. The alleged purpose of the increase was to discourage young people from taking courses that didn’t lead to jobs where the demand for workers was great. Predictably, it didn’t work. And only an ignoramus would regard an arts degree as of little value.

Last week the new vice chancellor of Western Sydney University, Professor George Williams, complained bitterly about this, saying young people were being priced out of their dreams and fearful of being left with a HECS debt for the rest of their lives.

No one understands better than the Albanese government that the fees charged for different degrees should be based on the graduate’s likely lifetime earnings. But characteristically, it is hastening at a snail’s pace, hoping to fix it one day.

Many problems have arisen from the universities’ ever-growing dependence on raising revenue from overseas students. The big eight unis devote much effort to finding ways to game the various league tables of the world’s universities, knowing a high rank will allow them to charge higher fees to overseas students.

But now The Guardian Australia has reported that many overseas students can’t speak basic English, yet were passing courses and being awarded degrees. Cheating and plagiarism is widespread, it’s been told. I’m sorry to say I have no trouble believing these claims. But I have more trouble sharing the universities’ alarm over the Albanese government’s intention to impose uni-by-uni caps on how many overseas students they may admit.

Although federal politicians are happy to share the credit for our unis’ high international rankings, and delighted to have them less reliant on the federal budget, they’re just as liable to turn on the unis when their dependence on overseas income becomes a problem.

The hard line the Morrison government took with overseas students during the pandemic and the closing of our borders contributed to the unexpected surge in overseas students after the borders reopened.

It’s idle for the universities to deny that the surge has contributed to the shortage of rental accommodation. And it’s understandable for the government to want to ease the pressure on rents. But the surge is likely to be temporary and the various measures the feds have taken to correct their own mistakes are likely to fix the problem without any need to resort to caps. Sometimes pollies wield big sticks without intending to use them.

Some economists have questioned the official estimates of the value of overseas students’ contribution to the economy – up to $40 billion a year – which the vice chancellors have used unceasingly to claim credit for being Australia’s third-largest export after iron ore and coal.

The calculation seems inconsistent with the way the value of other services exports are measured. On a more consistent basis, the $40 billion might be nearer to $20 billion. If so, it’s support for my conclusion that the pollies’ backdoor privatisation of the unis has left us with the worst of both worlds.

Academics complain that their uni seems to have more administrators than academics. But what would you expect when you take a government department and demand that it start behaving like a profit-making business?

Just as the chief executives of big businesses are hugely overpaid, so now are vice chancellors – who, admittedly, do run huge organisations. The employees at the top justify their high remuneration by their success in holding down the wages of the employees below them. But the most deplorable thing the unis have copied from the private sector is the way they’ve used casualisation to rob young academics of any job security.

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There's a good case for cutting interest rates ASAP

What a difference a number makes. For weeks, the money market’s macho men had been telling us interest rates needed to rise yet further to ensure inflation would keep falling. But last week, their case went up in smoke and now almost no one thinks the Reserve Bank board will do anything at its two-day meeting starting today.

The weeks of idle speculation came to an end when finally we saw the consumer price index for the June quarter. It showed underlying inflation falling to 3.9 per cent.

So, sighs of relief all round. But why had we allowed these misguided souls to cause us so much angst? Why had their intimations of death and destruction been given so much air time?

Short answer: because we find bad news more interesting than good news. But as last week’s abrupt turnaround reminds us, the bad news ain’t necessarily so. So maybe we should give a hearing to those urging the Reserve to do something nice rather than nasty.

Let me tell you about a briefing note from the economists at the Australian Council of Social Service, who remind the Reserve that its much-remarked “narrow path” to lower inflation without triggering a recession and high unemployment is narrow “because it’s rare for interest rate hikes of this scale and intensity not to trigger a serious economic downturn”.

The peak welfare organisation says the process of reducing demand and lowering inflation is already well under way and, since increases in official interest rates take up to two years to flow through to inflation and unemployment, it has called for the Reserve to start reducing interest rates immediately.

Those who focus on the slowdown in the fall of the inflation rate and conclude there’s a need for further tightening have failed to see how sharply job opportunities and living standards have fallen, even without a recession.

The council examines the data for the two years since the Reserve began increasing interest rates, from June 2022 to June 2024, and it finds a lot more evidence of downturn and pain than you may realise.

For a start, the number of vacancies for entry-level jobs has declined by almost a third. There are an additional 100,000 people unemployed, and almost as many extra people suffering underemployment (unable to find as many hours of work as they want).

If you know employment is still growing, get this: this has occurred only because of stronger growth in publicly funded jobs (particularly under the National Disability Insurance Scheme). The annual number of publicly funded jobs has grown from 210,000 to 326,000, whereas jobs growth in the market sector has collapsed from 321,000 a year to 6000 a year.

If interest rates stay high, jobs in the market sector are likely to decline, but the present growth in publicly funded jobs won’t last.

We have avoided a recession – an economy that’s getting smaller – so far only because of the surprisingly strong bounce-back in immigration since the reopening of our borders. This won’t continue.

But the real value of goods and services produced per person has been falling, meaning that living standards have been falling. Over the two years, average real income per person has fallen by 8 per cent, or about $5000 a year.

According to the council’s calculations, the stage 3 tax cuts, the energy rebate and increased rent allowance for people on pensions or benefits announced in the May budget will restore only about a fifth of this loss of real income to households.

So the macho men’s fear that the budget measures will add to inflation pressure is laughable. And the council doesn’t miss the opportunity to remind us that JobSeeker unemployment benefits remain a miserly $55 a day.

As for the macho men’s fear that a “price-wage spiral” could take off at any moment, the council says average wages have fallen by 2 per cent since June 2022, after adjusting for inflation.

Wages have started rising a fraction faster than inflation, but it will take many moons to make up that gap. Meanwhile, the collapse in consumer spending has been “precipitous”: a fall of 10 per cent in real spending per person since June 2022.

If the Reserve’s renewed commitment to maintaining full employment is to have any meaning, it will need to start cutting the official interest rate ASAP.

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