The outlook for house insurance is much worse than we're being told

The big news on house insurance this week was the response of the insurance industry’s peak body to a parliamentary committee’s extensive criticisms of its treatment of people claiming on their policies after the massive floods of 2022.

The Insurance Council of Australia accepted some of the committee’s recommendations, announced an “industry action plan” and generally promised to be good boys in future. But the consumer groups were unimpressed.

Drew MacRae, of the Financial Rights Legal Centre, said the insurers “have a long way to go to restore trust and confidence in a sector that systematically failed customers during the 2022 floods. Today’s announced plan to get there is welcomed, but ‘trust us’ just won’t cut it.”

Meanwhile, in their pre-election campaigning, Anthony Albanese and Peter Dutton are as one in portraying our insurance problem as a matter of misbehaving insurance companies.

Asked if he accepted a journalist’s claim that the companies had doubled premiums in recent years, “had plenty of money” and “are ripping us off”, Albanese flatly agreed. “We will certainly hold the insurance companies to account,” he added.

Dutton’s response was to threaten to split up the big insurance companies – until wiser heads in his team calmed him down.

Sorry, all this is delusional for some and, for others, a knowing attempt to mislead us on the seriousness of the problem. Have the insurance companies been behaving badly? Yes. Should they be forced to treat their customers fairly? Of course.

But will that fix the problem? No. Have the companies been ripping us off, putting up premiums just to increase their profits? No. They’ve been grappling with a problem they know they can’t solve: you can’t insure against climate change.

The cost of house insurance has been rising rapidly for several years because more bushfires, cyclones, storms and floods have led to more claims. We know that continuing climate change will cause extreme weather events to become more frequent and intense.

So the great likelihood is that house insurance premiums will just keep rising rapidly. The outfit that’s doing most to alert us to the deep trouble we have with insurance is the climate campaigning Australia Institute. Its recent national poll of 2000 people found that while 78 per cent of home owners said their home was fully insured, 15 per cent said they were underinsured and 4 per cent said they were uninsured.

As house insurance premiums rise, more people will become underinsured – many with no insurance against flood damage, for instance – and more will be uninsured. Many of the latter will be people whose homes the companies have refused to insure.

The insurance companies know what’s coming, as do the banks and the government. They know what’s coming, but they don’t want to talk about it before it happens, mainly because they don’t know what to do about it.

Remember, insurance is an annual contract. So if I’m confident there’s little chance of your house being destroyed in the next 12 months, I’m happy to give you the assurance of insurance. But when, sometime in the future, I decide you’re a bigger risk, it will be a different story.

The point is, there’s no magic in insurance. It can do the possible, but not the impossible. The way insurance works is that, if I can gather a “pool” of many thousands of home owners, each with only the tiniest risk of having their house burn down, I can promise all of them that, in return for a modest premium, they’re all fully covered in the event of a major mishap.

A few of them will have such a mishap, but I can pay them out from the pool of premiums and still have enough left to make it worth my while being in the insurance business.

Once the risk of your home coming to grief becomes less than tiny, however, the game changes. When more than a few people in the pool make claims, I make no profit, or maybe a loss. So I can start by making owners with bigger risks pay more than those with low risks, but once your risk is too high, I can either charge you a premium that’s impossibly high, or just refuse you insurance.

Because of their ever-growing record of claims, the insurance companies are well-placed to make a reasonably accurate assessment of how risky it is to cover your house – even to the point of charging more in some parts of a suburb than others.

This means, of course, that home owners in some parts of the country will be charged far more than others. Premiums will be highest in northern Australia, where cyclone risk is higher, but also in areas where flooding or bushfires are likely. And even people living well away from harm in the inner city will be paying more to help out.

All this is why we should be doing more – and have been doing more this long time – as our part in the global effort to limit climate change. But what should we do to reduce the damage that’s arrived or is on its way?

Well, certainly not having the government subsidise insurance. That would just encourage people to keep doing what they should stop doing. Taxpayers’ money should be used only to help people get away from the risk of fires and floods.

Just as fighting a fire is easier than fighting a flood, bushfires are less difficult to get away from than floods. We must start by preventing anyone else building in risky areas.

Then we need to move people off the flood plain. As for Lismore, the whole town needs to be moved to higher ground.

But here’s a tip. Don’t hold your breath waiting for Albanese or Dutton to raise these issues in the election campaign. That’s not the way losers behave. Much easier to shift the blame to the greedy insurance companies.

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Argy-bargy on the way to next week's off-again, on-again budget

According to the business press, Anthony Albanese was desperately hoping for an early election so he could avoid next week’s budget and the drubbing he’ll get when Treasurer Jim Chalmers is forced to reveal projections of a decade of budget deficits.

If you think that, you don’t know much about budgets. But, more to the point, nor do I expect to believe the budget’s forecasts for the economy in 2025-26.

The first reason I don’t believe Albanese was living in fear of having to reveal a decade of deficits is that, although the business press may be shocked and appalled by budget deficits, the voters have never been. That will be particularly so at a time when all they care about is the cost of living.

The business press and the rest of the partisan media will make a great fuss, but the punters won’t care – just as they didn’t when, in the previous government’s last budget of March 2022, treasurer Josh Frydenberg revealed his own projections of a decade of deficits.

Funnily, I don’t remember the business press making a big fuss back then, perhaps because it only feels a need to worry about deficits when a government of the wrong colour is in power.

But if you’re wondering why, three years later, we still face a decade of deficits, I’ll give you a clue: what the two projections have in common is the stage 3 tax cuts. If all you care about is balancing the budget, the tax cuts were unaffordable then, and they’re still unaffordable now.

Of course, the “Trumpist” logic of big business is that tax cuts are always responsible, whereas increased government spending, for any purpose, is always irresponsible.

Another reason for doubting that Albanese thought having an economic statement rather than a full budget would allow him to avoid admitting to the prospect of a decade of deficits is the requirement under the Charter of Budget Honesty for the secretaries of Treasury and Finance to produce a PEFO – a pre-election economic and fiscal outlook statement. That statement would have revealed. . . the projected decade of deficits.

What the press gallery seems not to know is the reason for the modern practice of governments providing an economic statement immediately before announcing an election – unless, of course, the election is called immediately after a budget’s been delivered, as will happen next week for the third election in a row.

Why must the officials’ PEFO always be preceded by a government economic statement in some form? So an excitable media won’t leap to the conclusion that any deterioration in the budget balance since the previous government statement represents the econocrats revealing something their political masters were hiding.

Guess what? The politicians’ statement and the PEFO a week or two later are always almost identical. (And I bet it was the econocrats who suggested the idea to the pollies. The last thing the bureaucrats want is to embarrass the duly elected government of the day.)

But enough already on the politics of budgets. Better get to some actual economics. I don’t expect to believe the economic forecasts we see in next week’s budget. Why not? Because they’re highly likely to be wrong. Economists are hopeless at forecasting even just a year ahead because the models they rely on – whether mental or mathematical – are so woefully oversimplified.

That being so, the forecasters’ rule of thumb is to predict “reversion to the mean”. If last year was below average, this year growth will be up; if last year was above average, this year growth will be down.

As well, when times are tough, official forecasts tend to err on the optimistic side. (This is no bad thing when, to some extent, their forecasts tend to be self-fulfilling; the last thing we need is the government predicting death and destruction.)

But I’m under no such constraint. And I can’t see the economy getting out of second gear in the financial year ahead. The obvious reason for expecting further weak growth is the effect of all Trump’s antics. But this factor is easy to overestimate. Unlike some countries, we don’t do much trade with the US.

The media have tended to exaggerate the likely effect on us of all Trump’s off-again, on-again tariffs to make it a better story. The ultimate effect on us will come mainly via China, our biggest export destination, but the Chinese have their own ways of protecting themselves in the unending tussle with the Yanks for the title of top dog.

What’s likely to have a bigger effect on us is the uncertainty about how Trump’s craziness will play out. Uncertainty has real effects when it prompts businesses and even households to delay investment decisions until the prospects are clearer.

So there will be some adverse effect on our economic growth. Even without Trump, however, it’s too easy to sound wise by making a big thing of what’s happening in the rest of the world. Never forget that roughly three-quarters of all the goods and services we produce are bought by Australians, while roughly three-quarters of all the goods and services we buy are made by Australians.

On the positive side for economic growth, it can’t be long before the Reserve Bank cuts interest rates back to their normal or “neutral” level. But that suggests a total cut of only 1 percentage point or so. It won’t set the world on fire.

Similarly, the parties’ many election promises will add to government spending and act as a stimulus to the economy and private spending. But again, don’t let the modern practice of exaggerating the significance of government policy measures by quoting their expected cost “over four years” mislead you.

From the perspective of the budget’s immediate effect on economic growth, it’s only the cost of the measure in the first year that matters. And, because we’re measuring annual growth, it’s only any increase on the first year’s spending that matters.

The fancy mathematics economists indulge in is overrated, but simple arithmetic isn’t.

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Fixing the economy is like training for a marathon: not much fun

By MILLIE MUROI, Economics Writer

It used to completely baffle me how addicted runners seem to be to their sport. My dad, who has run nearly 200 marathons, used to drive my brother and I to park runs at the crack of dawn as kids. Not my idea of fun.

But the more I think about it, the more I realise running is like competition reform: often a pain in the glutes, but a habit that’s rewarding (and actually a bit enjoyable) if you stick the course. In August, I’ll be attempting – if all goes to plan – my first marathon.

Running is what Dr Andrew Leigh, former economics professor and now assistant minister for competition and treasury, would class as “type one” fun. Following him on Strava – Facebook for fitness buffs – is proof of this: for Leigh, running is intrinsically fun.

For me, it has long been “type two” fun: unpleasant in the moment but satisfying after the fact – much like competition reform for economists, as Leigh points out in a speech he gave to the Economics Society of Australia in Perth this week. “It’s no policy paradise or island stroll, but it’s no data desert either,” he says of reform: it’s hard work at the time but worth the effort.

The Hilmer reforms in the 1990s are a good example. While the process took nearly a decade and there was plenty of disagreement, the pay-off was massive. Leigh says it permanently boosted average annual household incomes by roughly $5000.

Just as you might be pushed to perform better in a race against other people, greater dynamism and competition is generally a good thing for a more productive economy.

One lesson from those reforms was that money talks. Much like a promise agreed to (but not yet fulfilled) by my parents to pay me $5 for every second I take off my “per kilometre” pace, incentives matter. Turns out I can run much faster when I’m financially compensated for it.

In the late 1990s, the Australian government made national competition policy payments to states and territories based on their populations – but only if they made satisfactory progress on their reform commitments. This helped push through changes such as removing restrictions on retail trading hours, setting up the national electricity market and abolishing controls on the price of milk.

Today, Leigh says the Australian economy faces different challenges. And while reform may not be anyone’s idea of “type-one” fun, it can make us better at what we do.

That is, the easier it is to switch jobs, and the less dominated an industry is by a fistful of firms, the better it is for our economy. Why? Because it keeps businesses on their toes, pushes them to work harder and smarter, and allows workers to move more easily to jobs that are a better fit.

And as Leigh points out, we’ve become better at crunching the numbers. “Using bigger datasets, better econometric techniques and updated theories, economists have provided new insights on trends in market concentration and the relationship between competition and productivity,” he says.

This is important because it’s difficult to make improvements (in running and in economics) without data.

We know from economists Dan Andrews (not that one) and David Hansell’s look at firm-level data, for example, that job switching rates have dropped in recent years. And we see from Jonathan Hambur’s look at tax data that Australian industries dominated by a handful of big players have tended to increase their prices the most.

The hard work, of course, is making the changes we need. Tracking my running form during runs has been weirdly fun. Actually fixing my technique? A bit tedious.

Last year, the government ramped up the country’s merger reforms so that businesses above a certain size as measured by their turnover – or buying a business over a certain size – would have to (from January 2026) notify the Australian Competition and Consumer Commission whenever they wanted to merge. That is, notification would no longer be voluntary.

This was partly thanks to a database built by the Treasury’s Competition Taskforce, the Reserve Bank and the Australian National University, which found about 1500 mergers were happening every year, many involving big firms. Yet only about one in five were voluntarily notifying the competition watchdog.

Enforcement and the paperwork required for all the additional notifications might be a bit cumbersome. But the hope is that keeping track of big (or serial) mergers will help keep concentration in check.

And the fun doesn’t stop there. Leigh says there’s currently work underway on a tool to identify parts of the economy where there are only a few big businesses. Using geographic data from the Australian Bureau of Statistics, the tool will help to zero in on concentration hot spots: regions or segments of the economy where further merger activity could pose the greatest risk to competition.

Then, there’s “non-compete clauses” which handcuff more than one in five Aussies according to economic research institute e61. These sneaky clauses are written into employment contracts to restrict an employee from joining a competitor, or starting their own business to compete with their ex-employer, usually for a set time or within a geographic area.

Non-competes can protect intellectual property, but their use in sectors like childcare, Leigh says, shows they’re probably also being used unreasonably to stop workers moving to more desirable jobs, too. This, he says, is “type three” fun: that is, no fun at all.

The Productivity Commission reckons reforming non-compete clauses could permanently boost Australia’s productivity and output by allowing workers to move more easily to higher value jobs and making it easier for new businesses to challenge old ones.

It’s one of 19 potential reforms under a new National Competition Policy signed last year, which the commission reckons will increase the income of every Australian household each year by up to $5000.

It might not be easy to execute, but the commission says these reforms would ease cost of living pressures, pushing down prices by between 0.7 to 1.5 per cent over the long term.

Leigh says work is already underway on the 10-year reform agenda, starting with changes like streamlining commercial planning and zoning and making it easier for care workers to move around. In a modest nod to the Hilmer reforms, there’s also a $900 million National Productivity Fund which will pay state governments to implement reforms.

Like training for a marathon, competition reform requires focus, commitment and some sacrifice. The “runner’s high” is still an elusive phenomenon for this amateur runner. But if I can make it through that finish line in August, I’m optimistic the nation can hit the ground running with more of the reform we need for a better-performing economy in the long run.

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How many more cyclones before our leaders finally do something?

Forgive me for being hard-headed while everyone’s feeling concerned and sympathetic towards those poor flooded Queenslanders and people on NSW’s northern rivers, but now’s the time to resolve to do something about it.

As the rain eases, the rivers go down, the prime minister flies back to Canberra and the TV news tires of showing us one more rooftop in a sea of rushing water, the temptation is to leave the locals to their days and even months of getting things back to normal, while we go back to feeling sorry for ourselves over the cost of living and waiting impatiently until the federal election is out of the way, and we stop hearing the politicians’ endless bickering.

But speaking of politics, let’s start with Anthony Albanese. He’s been forced to abandon his plan for an April 12 election because calling an election in the middle of a cyclone would have been a very bad look.

“I have no intention of doing anything that distracts from what we need to do,” he told the ABC. “This is not a time for looking at politics. My sole focus is not calling an election, my sole focus is on the needs of Australians – that is my sole focus.”

Ah, what a nice bloke Albo is. Convinced? I’m not. You don’t get to be as successful a politician as Albanese unless your sole focus is, always and everywhere, politics. It’s because his sole focus is politics that he knows now’s not the time to look political. “Election? Election? If I don’t make out I don’t care about the election at a time like this – I could lose it.”

One thing I’ve learnt from watching prime ministers is that, though they all make mistakes – buying a holiday beach house during a cost-of-living crisis, for instance – they never make the same mistake that helped bring down their predecessor.

Every pollie knows Scott “I don’t hold a hose” Morrison’s greatest mistake was to persist with his Hawaii holiday during the Black Summer bushfires of 2019-20. The ABC has helpfully dug up footage of people in the affected area refusing to shake Morrison’s hand after he turned up late.

Now do you get why Albanese’s been doing so much glad-handing up in the cyclone area?

The election campaign that’s already begun is between two uninspiring men, neither of whom seem to have anything much they want to get on and do. You’re going to fix bulk-billing, are you? Wow. Anything else?

But, perhaps in an unguarded moment, Albanese did say something impressive. He seemed to elevate climate change as a major election issue, saying all leaders must take decisive action to respond to global warming because it is making natural disasters such Cyclone Alfred worse and more expensive to recover from.

Actually, this is the perfect opportunity to make this an election worth caring about. You’ve got a Labor Party that cares about climate change but is hastening slowly, versus a Liberal Party that only pretends to care and whose latest excuse for doing nothing is switching to nuclear power. This would take only a decade or two to organise so, meanwhile, we can give up on renewable energy and abandon Labor’s commitment to cut emissions by (an inadequate) 43 per cent by 2030.

Both sides are likely to lose more votes to the two groups that do care about climate change – the Greens and the teal independents. Labor is delaying announcing its reduction target for 2035 until after the election. If Albanese had the courage, he’d promise a much more ambitious target and make it a central issue in the election.

The point is, Alfred is hardly the last cyclone we’ll see. Extreme weather events – including heatwaves, droughts and floods - have become more frequent and more intense. How many more of them will it take to convince us we need to do more to reduce our own emissions, as well as taking responsibility for the emissions from the coal and gas we export to other countries?

What’s different about Alfred is it hit land much further down the coast than usual. Reckon that’s the last time this will happen? Modelling by scientists at UNSW’s Climate Change Research Centre suggests that weakening currents may lead to wetter summers in northern Australia.

Other researchers from the centre tell us “our climate has changed dramatically over the past 20 years. More rapid melting of the ice sheets will accelerate further disruption of the climate system.”

A big part of our problem is the longstanding human practice of building towns near a good source of water, such as a river. Rebecca McNaught, of Sydney University, tells us Lismore is one of the most flood-prone urban centres in Australia.

Dr Margaret Cook, of Griffith University’s Australian Rivers Institute, reminds us that, until recently, 97 per cent of our disaster funding was spent on recovery, compared with 3 per cent invested in mitigating risk and building resilience.

That’s all wrong and must be reversed. Armies of volunteers – plus defence forces – emerge after disasters to help mop up. But Cook argues for an advance party that arrives before a disaster to help prepare by moving possessions, cleaning gutters and drains and pruning trees.

She advocates advanced evacuation, permanently relocating flood-prone residents, raising homes and rezoning to prevent further development in flood-prone areas.

“We must improve stormwater management, adopt new building designs and materials, and educate the public about coping with floods,” she says.

As we saw at the weekend, the defence forces have become a key part of the response to natural disasters. Great. Except that, according to a review in 2023, the Australian Defence Force is not structured or equipped to act as a domestic disaster recovery agency in any sustainable way.

It could be so structured, of course, though it might take a bob or two. And that’s before you get to the problem of houses that are uninsurable and insurance policies that are merely unaffordable.

The more you think about climate change, the more you realise it’s going to cost taxpayers a bundle.

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Maybe the inflation surge didn't happen the way we've been told

According to Reserve Bank deputy governor Andrew Hauser last week, we’ve entered a world characterised not just by volatility, complexity and uncertainty, but also by “ambiguity” – a world where “you don’t know the model”, meaning that “judgment and instinct are as important as formal analysis”.

At last, someone is talking sense.

Academic economists may be locked into their maths and econometric models, but practising economists know it ain’t that simple. Economics is as much an art as a science.

Economics would be much easier if only human consumers and businesspeople behaved like rational automatons, reacting automatically and mechanically to known incentives, as you implicitly assume they do when you use a set of equations to guide you through the inevitable uncertainty caused by the lamentable truth than the humans who constitute the economy are . . . human.

Keynes reminded his fellow academics of the need to take account of people’s “animal spirits”. Anyone familiar with markets knows they tend to alternate between periods of optimism and pessimism. I prefer to say that maths without psychology will usually get it wrong.

Contrary to the assumption of the simple model that dominates the thinking of almost all economists, humans are not rugged individualists who decide for themselves the best thing to do, then do it without regard to what anyone else is doing.

In reality, consumers and businesspeople are heavily influenced by what other people are doing. We’re susceptible to herd behaviour, fads and fashions. And we live in a permanent state of uncertainty.

In their landmark book, Radical Uncertainty: Decision-making Beyond the Numbers, John Kay and Mervyn King say it’s not true, as economists assume, that businesses are “profit maximising”. That’s not because they wouldn’t like maximum profits, but because they don’t know the magic price to charge that would do the trick.

As the punters often forget, when a firm raises its price, it’s taking a risk. It’s taking a bet that what it gains in higher revenue won’t be cancelled out by the sales it loses from customers unwilling to pay the higher price.

In the real world, firms feel their way with price increases, hoping to avoid going over the top and ending up worse off. But get this: they feel a lot more comfortable putting up their prices when everyone else is putting up theirs. You know, like our firms were doing a year or two ago.

Hauser says that, at present, “we don’t know the model” but, in fact, the Reserve and everyone else are using the same orthodox, mainstream model to explain why, after staying low for almost 30 years, the annual rate of inflation took off in late 2021 and reached a peak of 7.8 per cent by the end of 2022.

As I’ve written incessantly, this first inflation surge in three decades was caused by the COVID-19 pandemic (with a little help from Russia’s attack on Ukraine). The pandemic caused worldwide disruptions to supply, in turn causing the prices of many goods to leap. The second factor was the massive monetary and budgetary stimulus the authorities let loose to keep the economy alive during the lockdowns.

This conventional wisdom is easily accepted because it blames most of the problem on the government. Inflation surged because the authorities cut interest rates and increased government spending by far more than proved necessary. All of us borrowed more and spent more, causing demand to run ahead of supply and prices to rise.

But I’ve long suspected this isn’t the whole story, or even the main story. So, since even the Reserve Bank isn’t sure we’ve got the right model to explain what’s happening in the economy, let me show you my model, which puts most emphasis on psychological factors.

When people in many countries were confined to their homes, they could still use the internet to buy goods, but they couldn’t spend on personally delivered services. So spending on goods surged to levels far greater than businesses were used to supplying. And, since most manufactured goods are imported, we got shortages of ships and shipping containers to go with shortages of cars, silicon chips, building materials and much else.

When Russia’s invasion of Ukraine caused oil and gas prices to soar as well, the media went for weeks with stories of how much prices would be rising. Reporters would go to industry lobby groups, whose shills would regretfully affirm that, yes, prices would be rising hugely. The ABC gave much publicity to some wiseguy claiming the price of a cup of coffee would jump to $8. Great story; pity it was BS.

I could see what was happening at the time. Businesses were using the media to soften up their customers for big price rises. They were setting up a self-fulfilling prophecy.

Only in recent times have academic economists begun to understand the important role played in the economy by “signalling” – a role not captured by their equations. Not only were firms signalling to customers that, due to causes entirely beyond their control, big price rises were unavoidable, they were signalling to all their mates that now would be a great time to whack up their own prices.

But my alternative explanation doesn’t start there. Remember that, for seven whole years before this latest price surge, the inflation rate was stuck below the bottom of the 2 to 3 per cent target range, despite the Reserve’s efforts to get it up.

Why was inflation unacceptably low? My theory is it was another self-fulfilling prophecy. Businesses weren’t game to raise their prices because no other businesses were raising theirs. Everyone was waiting for some inflationary event to give them some cover, but nothing turned up.

Until the pandemic’s supply disruptions and the Russia-induced jump in oil and gas prices turned up. As soon as it did, everyone breathed a sigh of relief and began wondering how big an increase they could get away with.

The irony is that the pandemic-induced supply disruptions – and even, to an extent, the oil and gas price rises – proved temporary and were reversed. Leaving all the unrelated price rises to stand.

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Our jobs market is booming, but the RBA needn't be so worried

Despite the economy only just popping its head up after 21 months of “per-person recession”, our jobs market has been going gangbusters. How can it possibly be so strong? It’s this strength that has made the Reserve Bank so reluctant to cut interest rates.

This week we learnt from the “national accounts” that the economy – real gross domestic product – grew by a princely 0.6 per cent during the three months to the end of December. This caused its annual rate of growth to jump from a very weak 0.8 per cent to a not-quite-so-weak 1.3 per cent.

Trouble is, until now, the economy’s growth hasn’t been enough to keep up with the growth in our population. So real GDP per person fell by 1.7 per cent over the seven quarters to last September, but – thank heavens! – rose by 0.1 per cent during the December quarter.

If we’re lucky, GDP per person will now keep going forward rather than backward in 2025.

But the weakness in economic growth – caused by the Reserve keeping its foot on the interest-rate brakes since May 2022, as it fought to get inflation down – simply doesn’t fit with our roaring jobs market.

Professor Jeff Borland, of the University of Melbourne, is probably the nation’s top expert on the labour market. So I asked him to explain this paradox.

To show just how strong the jobs market has been, Borland notes that, although the total number of people in Australia with jobs grew at a rate averaging about 2 per cent a year over the previous two decades, it grew by 3.5 per cent over the year to this January. It grew almost as fast over the past two years.

Of course, the rate at which the number of jobs increases is normally closely related to the rate at which the economy’s growing. Borland calculates that, had the usual relationship between the two held, you’d expect employment to have grown by 3.4 per cent since the end of 2021. Get this: the actual growth is 9.5 per cent. That’s gangbusters.

But why has employment been growing at such an extraordinary rate? Borland says it’s all to do with growth in the “non-market” part of the economy, which covers public administration and safety; healthcare and social assistance; and education and training.

Now, if you were Donald Trump or Elon Musk, you’d think this meant a massive increase in public servants sitting round drinking tea and not doing anything of any use to anyone.

If you had more sense, you’d know it’s mainly the growth in the “care economy” we keep hearing about. More people being employed in aged care, disability care and childcare. You’d know these women work their butts off helping our oldies, our kiddies and our disabled cousin.

The care economy’s growing because of the ageing of the population, because we need our women in the paid workforce not at home minding kids, and because we’ve decided the disabled should no longer be hidden away being looked after by some poor rello.

You’d remember the various royal commissions exposing the scandalously poor treatment of people in care, how neglected they were by the previous Liberal federal government, and how much the Albanese government has had to spend trying to catch up. (Note, “non-market” means many of these workers deliver a service you don’t pay for over the counter. But most of the extra workers would be working for private sector providers.)

Borland calculates that, had non-market sector employment grown at the same rate as the market sector, total employment would be almost 700,000 lower than it is.

But why hasn’t this massive growth in the workforce led to higher wage rates as workers were bid away from other employers? Borland says one reason is that there’s been a downward shift in the level of wage inflation for any given degree of tightness in the labour market. (Reserve Bank please note.)

He says workers in the non-market sector don’t push for pay rises the way workers in mining or the utilities or construction did in earlier times.

But for so much growth in employment to be possible, there has to be a supply of extra workers available. This extra supply means workers don’t need to be bid away from their present employer.

Guess what? Since the pandemic, we’ve had strong growth in the population due to high immigration. Borland calculates that population growth explains about half the employment growth from late 2021 to late 2022, all the employment growth from late 2022 to early last year, and since then, it’s been about three-quarters of the story.

What can’t be explained by population growth is explained by people already in Australia who didn’t have paid employment deciding that, since so many new jobs were available, they’d take one and make some money.

It’s no surprise that many of these extra workers are women. What’s surprising is there are now more blokes working in the care economy.

Further delving by Boland finds that a lot of the extra jobs have gone to people under 24, suggesting many education-leavers have been finding it easier to find work.

Cost-of-living pressures may have prompted people to take a job. And the rise of working from home seems to have enabled more people to take a paid job or work more hours.

And get this: older people have been more inclined to keep working or even return to the workforce from retirement. Since the early noughties, the proportion of people over 64 who are still working has risen from 6 per cent to 15 per cent (don’t look at me).

The Reserve Bank has made no secret of its reluctance to cut interest rates when the jobs market is so “tight”. It worries that, if the economy starts growing more strongly, we might soon run out of workers, which would set inflation off again.

But I think you could just as easily conclude from our recent experience that the economy has shown its ability to find all the extra workers it needs.

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Our home-building industry is going nowhere fast

You may think that a newly built home or unit looks pretty swish. But what no one’s noticed until now is that our home building industry is clapped out. Gone to pot. It’s going nowhere fast. While most of our industries have improved greatly over the past 30 years, the housing industry hasn’t. If anything, it’s getting worse.

As I’ve mentioned before, now that the ever-worsening affordability of home ownership has reached a crisis point, our politicians – federal and state – have finally started taking affordability seriously.

It’s such a tough problem it will only be solved by fixing all the bits of the system that aren’t working as they should. So, for the first time in living memory, it occurred to someone – someone in Treasury, I suspect – that maybe we should take a quick look at the home building industry to make sure it’s ticking over OK.

The recent report by the Productivity Commission has revealed that the musclebound blokes in shorts and work boots – and their bosses – have yet to be introduced to the lovely Miss Productivity. They drive the latest monster SUV utes – all with names like the Bronco, the Wrangler, the Grunt, the BigOne and the BallScratch – but that’s where modernity ends.

According to the report, our home builders have clocked up “decades of poor performance”. It examined the whole building process, from site preparation and project management to the installation of fixtures and fittings.

Over the past 30 years, the productivity of the industry’s workers – the value they create per hour of work – has fallen by 12 per cent. This takes account of the increase in the size and quality of new homes over the decades. And this while all our other industries’ productivity improved by 49 per cent. The report calculated that, had all our industries performed as badly as housing, our average income would now be about 40 per cent lower than it is.

Of course, the industry’s productivity differs by housing type. Productivity in the building of actual houses has fallen by 25 per cent, whereas productivity in higher-density housing – building townhouses, units and apartments – has increased by 5 per cent.

The report admits the many reasons it’s difficult to make housing construction more efficient. For a start, you can’t pump out houses the way you produce cars on an assembly line. Each one has to be built at its own location; locations can be different, and there are many different sizes and styles of houses.

As well, house building is sequential; everything has to be done in a certain order. You can’t polish the floors or put down the tiles until the roof’s on, for instance. So, if there’s a delay in completing a particular stage, all the subsequent stages have to wait.

Then there are significant safety and quality issues to be considered. The plumbing must be of a standard that doesn’t disrupt the sewerage system; the electrical work must minimise the risk of electrocution; in these days of global warming, homes should be built with energy efficiency in mind; does its location mean the place needs to be cyclone-proof? And that’s before you get to houses built on a floodplain.

Next, unlike most industries, there’s been little pursuit of economies of scale. Housing construction is one of our least concentrated industries. The combined market share of the largest four firms is only about 12 per cent. Not exactly Woolies and Coles or Qantas and Virgin, eh?

The average firm in the home building industry has only two employees. Everyone’s a subcontractor. Even so – or perhaps because of this – the industry struggles to attract and retain skilled workers. Apprenticeship commencements and completions have stagnated. Training pathways can be restrictive and inflexible. And the higher density housing builders have to compete for skilled workers with big construction companies building expressways and suchlike.

What stands out, the report says, is the housing industry’s lack of innovation. Few of the industry’s bosses put much effort into searching out and trying new ways of doing things.

To be fair to the industry, however, it does have to do battle with a huge load of government regulation of its affairs. The local government development and construction approval process can be cumbersome, with inexcusable delays in issuing approvals.

Regulation can stretch the timeline for an apartment complex or new housing estate out to 10 years or more, the report says. Often, only a small part of this is time to actually do the building work.

The report identified four ways that government regulation reduces productivity. First is the sheer volume of regulation, with all three levels of government getting in on the act. The national construction code – which should have been a great means of reducing overlap and overload – has been allowed to grow to more than 2000 pages.

Second, approval processes can be unduly slow and poorly co-ordinated. Third, there can be inconsistencies between the levels of government, creating unnecessary confusion, duplication and delay.

And finally, excessive, unthinking regulation can discourage and even prevent innovation, deterring businesses from finding better ways to do things.

Now, I’ve long been sceptical of business lobbies demanding we get rid of “red tape”. Too often, what they’re really saying is, “I should be free to make my own decisions on how safe this needs to be and how it will affect the neighbours and the natural environment. I need to create jobs and make profits now, and we’ll worry about our grandkids later.”

But by the same token, government departments are monopolies and misbehave accordingly, making unreasonable demands and putting through approvals in their own sweet time.

So, if we want a lower-cost, faster-finishing building industry, we must wake up and put a huge amount of effort into rationalising our regulation of the industry while insisting the bureaucrats get approvals processed without unnecessary delay. Never again should we ignore the industry’s performance.

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The real truth on productivity: the bosses aren't trying hard enough

At last, some sense on the causes of our poor productivity performance. For ages, we’ve been told it’s the government’s fault – maybe even the voters’ fault – for failing to make economic reforms. But last week the econocrats finally set the record straight: the problem is, our businesses have stopped doing the things that make us more productive.

For about a decade, we’ve had little improvement in the economy’s productivity – its ability to produce more goods and services from an unchanged quantity of inputs of labour and capital. That is, to be a bit more efficient this year than we were last year. Most of the other rich economies have the same problem, but ours seems worse than most.

It’s by increasing our productivity that we’ve become so much more prosperous than our great-grandparents. For instance, in 1901 it took 18 minutes of the average worker’s time to afford a loaf of bread, while today it’s just four minutes.

It’s remarkable the way the nation’s economists have stayed silent while vested interests such as the (Big) Business Council have sought to use this problem to press the government for favours that would make them more profitable without having to try any harder.

Until now, and except for former top econocrat Dr Michael Keating, no economist has pointed out how far the politicking over productivity has strayed from Economics 101. To hear the rent-seekers talk, you’d think that one of the main things governments are responsible for is producing and distributing productivity.

Nonsense. Because the private sector produces the great majority of the economy’s goods and services, it’s overwhelmingly the job of businesses – big and small – to gradually increase the productivity of their activities. So, when productivity’s lagging, the first place you look is in businesses’ backyard.

Next, every high school economics student knows that the main way businesses increase the productivity of their workers’ labour is by giving them more and better machines to work with. When they remember to mention it, economists call this “[physical] capital deepening”.

So, how have we been going with increasing business investment in buildings and plant and other equipment over the past decade or so? Short answer: not well.

Really? Really? Business investment has been weak for a decade but, when you preached your last sermon on the need for greater productivity, you didn’t see a need to mention this small fact?

There’s most of the problem right there. The productivity of labour hasn’t increased much because business hasn’t been spending much on labour-saving equipment. Mystery solved.

Almost to a person, economists are great believers in high rates of immigration. Immigration, they keep telling us, is great for economic growth. It’s true. There’s no easier way to grow an economy than to increase the number of people in it.

Businesses love high immigration because it gives them a bigger market to sell to. But whether that kind of economic growth leaves the rest of us better off is a different matter. As all the economists were taught at uni but keep forgetting to mention to the punters, the claim that immigration raises our material standard of living – which is the oft-stated benefit of economic growth – comes with a big proviso.

Which is? Productivity. If you get more people, but fail to provide them with the same capital equipment as the rest of us have – extra machines for the extra workers, extra houses for the extra families, and extra roads, public transport, schools and hospitals for the extra families – everyone’s standard of living goes down, not up.

In economists’ jargon, you have to ensure immigration doesn’t cause a decline in the “capital-to-labour ratio”. As well as the spending on “capital deepening” needed to raise our productivity, you also need spending on “capital widening” merely to stop our productivity worsening.

Guess what? We’ve had years of high immigration without the increased capital spending to go with it. Part of the problem is that the level of government with control over immigration, the feds, is not the level of government with responsibility for ensuring adequate additional investment in public infrastructure, the states.

As for the additional investment in machines to cover the needs of the bigger workforce, that’s down to the nation’s businesses. Guess what? They haven’t bothered. Our ratio of capital to labour is actually a little lower than it was a decade ago.

And surprise, surprise, we’ve had little improvement in productivity over the same period. Who knew? Why didn’t somebody tell me? Well, the business lobby was busy covering its backside by blaming it all on the government. And the economists have been so busy with their maths and models that they’ve got a bit rusty on the economic basics.

But here’s the news: last week, the econocrats got their act together and showered us with much-needed sensible analysis. The Reserve Bank’s Dr Michael Plumb gave the best-written and most informative speech to come out of the Reserve in yonks. He delivered it to a meeting of the Australian Business Economists, and boy did they need the tutorial. It’s required reading.

Plumb blamed the problem on the slow improvement in the amount of (physical) capital available to each worker and, to a lesser extent, little improvement in our firms’ ability to combine labour and capital more efficiently (known to economists as “multi-factor productivity”).

As well, the Productivity Commission issued a more technical paper by Lawson Ashburner and Vincent Wong examining multi-factor productivity, Learning but not always doing. Focusing on businesses, it found that “a creeping inefficiency and failure to push the boundaries of innovation has contributed to Australia’s poor productivity performance”.

So why have our businesses done so little to improve their productivity? Rod Sims, former boss of the Australian Competition and Consumer Commission, answers the last part of the puzzle.

He says that increasing productivity is just one way for a business to increase its profits. I think our guys have found it much easier to increase their profits by using legal loopholes such as casualisation and labour hire to screw down their wage costs.

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Women still being kept in the home, but not by what you think

By MILLIE MUROI, Economics Writer

It’s a topic that, despite its horrific consequences, makes us avert our eyes, close the tab, and turn the page.

Usually, sadly, it’s only when there’s a death that readers – and the click-hungry media – pay attention. But before I lose you, I want to reassure you that it’s not all bad news. And I want you to hear from people who have defied the odds.

We already know domestic violence kills one woman every 11 days in Australia.

But for the first time, Dr Anne Summers, domestic and family violence professor at UTS, has put cold, hard numbers on the effects of domestic violence in Australia on women’s careers and how likely they are to finish their uni degrees.

When you think about it, the effect isn’t surprising. But Summers’ research exposes the gap between women who endure violence and those who don’t: it’s costing not just lives but our economy.

We’ve come a long way in getting women into work and pursuing university degrees. In 2024, three in five women were working or looking for work. Compare that to just one in three 60 years ago.

Similarly, only 8 per cent of young women had walked across the stage at a graduation in 1982. Today, that figure exceeds 50 per cent.

But those numbers should be higher, Summers says.

She looked at women born between 1989 and 1995 and found there was a nearly 15 percentage point difference between women who had experienced domestic violence and those who hadn’t when it came to the proportion who had finished a university degree by the time they hit 27.

For Laura McConnell, getting a degree was especially difficult after enduring family violence. “Even getting through required incredible resilience,” she says. “But I couldn’t afford to fail because I would have to go back to an abusive family.”

McConnell is now a co-founder of the social enterprise GoKindly, which supports women experiencing housing stress, but she left an earlier career at a big four consulting firm after she found they were unable to support her with her complex background.

“The fallout of coming from violence just follows you through your career,” she says.

While McConnell moved away from her abusive family, Summers says it’s also common for abusers, particularly partners, to prevent women from studying or cause them significant stress – a leading reason for dropping out.

“It’s no accident that employment and education, the pathway to better employment, are targeted by perpetrators,” Summers says. It’s a prime way to crush a woman’s ability to be financially self-sufficient and keep her under her partner’s thumb.

More than 280,000 women, or 5 per cent of the female population aged 18 to 64, have had a partner who has controlled or tried to control them from studying through everything from forced pregnancies to destroying school supplies, stalking them or making them feel guilty about their academic efforts.

This can jeopardise a woman’s career and financial future because a university degree increases the odds of landing a job by about two and a half times and boosts lifetime earnings by as much as 41 per cent. Abuse can also leave them saddled with student debt that they may never earn enough to repay, shrinking their borrowing power.

Endurance athlete Amanda Thompson, who runs her own financial planning business, Endurance Financial, has worked with women experiencing abuse but never thought she’d go through it herself.

Thompson endured emotional abuse for some time before an out-of-the-blue display of physical aggression ended with a triple-zero call.

But it was the year after the scars and bruises healed that was worse.

“It was a year from hell trying to run my own business and keep up with clients,” she says. “I was diagnosed with PTSD, which makes you exhausted all the time. Your body goes into spending all its energy on protecting you.”

Thompson said specialist support and counselling were key to her recovery but that there needed to be more funding for these services and more education on exit strategies.

“In my work, I’m actually getting more and more women coming to me confidentially, saying, financially, where do I need to be to leave,” she said.

Women who have endured abuse in the past five years are less likely to be working. About three-quarters were employed compared to more than four in five for women who hadn’t faced an abusive partner.

While younger women tend to pull back on the hours they work, for older women, most of the fall in employment is driven by them leaving the labour force altogether.

With 1.6 million women having experienced economic abuse by a partner since the age of 15, these proportions significantly dent the workforce.

A form of violence called “economic abuse” has an especially destructive effect. The difference in employment rates between women who have experienced it and those who haven’t is nearly 10 percentage points.

Economic abuse is when a person controls their partner through, for example, preventing a partner from going to work, making frequent disruptive phone calls to them at work, and saddling a partner with debt.

It can also include cunning tactics like hiding transport cards or keys, damaging clothing, or changing calendar appointments so that they get a reputation for being unpunctual.

When a woman stops working, it’s harder for her to plan an escape from her violent partner as she’s not likely to have enough individual income.

This leaves the affected partner tired and stressed, embarrassed from constantly being late for work, or unable to concentrate on their work.

Even if the abuse doesn’t push a woman out of work completely, one in three who experience violence while holding down a job take time off work. The likelihood increases if they have dependent children or if the violence is very frequent.

This can lead to job loss, a significant fall (averaging about 9 per cent) in the woman’s income and a lower superannuation balance in retirement.

These consequences can affect their decision to stay or leave a violent relationship. Fear of ending up in poverty is a major roadblock to women leaving violent relationships, and women who have experienced domestic violence report much higher rates of financial distress, with 44 per cent facing a household cash flow issue.

When a woman stops working, it’s harder for her to plan an escape from her violent partner as she’s not likely to have enough individual income. Working is also a safeguard against domestic violence because it offers women support networks at work.

The most recent comprehensive estimate of the costs of domestic violence, prepared by KPMG, puts the dollar figure at up to $26 billion a year, including the cost of pain, suffering, premature death, reduced productivity and increased demand on the justice system.

There’s plenty that could be done to fight against domestic violence, but ANU research fellow Kristin Sobeck, who worked on the report with Summers, says it starts with collecting more data.

“It’s really been a struggle to quantify the impact of domestic violence on women’s lives because there’s a dearth of data,” she says. “The first thing that shows you care about something is that you measure it.”

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To make Medicare healthy again, the pollies must fix its symptoms

I don’t know if you noticed, but the federal election campaign began on Sunday. The date of the election has yet to be announced – it may be mid-April or mid-May – but hostilities have begun. And they began with an issue that’s been big in election campaigns for 50 years: Medicare.

On Sunday, Anthony Albanese revealed his election masterpiece, the knockout punch that would send Peter Dutton reeling, something Albo has had up his sleeve since December. You know how hard it’s getting to find a doctor who bulk-bills?

Well, Labor will fix that. Remember Bob Hawke’s famous election promise that “by 1990, no Australian child will be living in poverty”? Albo’s topped that. He’s promising that, by 2030, nine out of 10 GP visits will be bulk-billed. And all that for a mere $8.5 billion over four years in extra spending.

Politically, it was brilliant. Health is important to Australians, and they love being able to see a doctor without coughing up, so to speak. Poll after poll shows that when in comes to healthcare, Labor’s the party voters trust. And fixing bulk-billing ticks another box: cost of living.

It gets better. Dutton has form on bulk-billing. Do you remember when Tony Abbott won government in 2013? He’d promised not to cut various classes of government spending, but in his first budget he was making savings everywhere. He was going to introduce a “patient co-payment” of $7 a pop on visits to GPs.

There was so much public uproar and opposition in the Senate that most of the planned nasties were dropped. Guess who was minister for health at the time?

What a fabulous political tactician Albo is. A whole election campaign discussing the need to restore bulk-billing. Sorry, great move – not gonna fly. Within a few hours, Dutton had matched Labor’s offer “dollar for dollar”. The man who told us the Albanese government was “spending like a drunken sailor” said “see you, and raise you”. He’d be spending $9 billion over four years, thanks to $500 million for an already announced improvement in mental health.

Dutton had no time to consider the detail of Labor’s proposal, nor how he’d pay for it. By the way, how would he pay for it? Don’t worry, he’ll tell you later. How much later? Didn’t say.

Remember all those election campaigns when we agonised over debt and deficit? Where the media kept count of the cost of all the promises, and parties struggled to find ways to pay for it all?

Not this time. Neither man has an accountant’s streak. If Albanese keeps producing measures to help with the cost of living, and Dutton keeps matching him, this will be a costly campaign.

And now that the question of Medicare and bulk-billing has been neutralised, I doubt we’ll hear much about them again. So, since they matter far more to our lives than the incessant politicking, let’s take a closer look while we can.

Medicare – first introduced as Medibank by the Whitlam government in 1975 – is Australia’s first system of universal health care, in which everyone who needs help gets it, regardless of their ability to pay. Every rich country has a universal system, except the United States.

Under Medicare, the federal government pays about half the cost of the states’ public hospitals. In principle, bulk-billing ensures everyone can see a doctor when they need one. If in practice that’s too expensive, you can always wait in a public hospital’s emergency department.

Trouble is, universal health care is expensive and getting more so, which is a problem when politicians like appearing to cut taxes, and never increase them or introduce new ones. However, the government’s accountants know there’s more than one way to skin a budget.

When the $7 patient co-payment got rejected, the feds solved the problem by freezing the Medicare rebates to GPs rather than adjusting them for inflation. As Australia’s leading health economist Professor Stephen Duckett explains, this slowly forced GPs to abandon bulk-billing and introduce their own patient co-payments as their practice costs increased but their rebates didn’t.

It’s said that by the time Labor returned to office in 2022, bulk-billing was in freefall. Labor restored the indexation of Medicare rebates, then tripled the special incentive for GPs to bulk-bill pensioners and holders of healthcare cards, children and people in rural and remote areas.

This helped, but the increased payments weren’t enough to eliminate the gap between the rebate and the fees GPs were charging in metropolitan areas. The present average out-of-pocket payment is $46 a pop. (Bit more than $7, eh?)

At present, less than half of people are “always” bulk-billed when they see a GP. A further quarter of patients are “usually” bulk-billed.

Co-payments hit poor people harder than the rest of us, and I think they can be a false economy. The medical problems of people who don’t see the doctor because they can’t afford it can get a lot worse, which is both tough on them and tough on the taxpayer when they have to be rushed to hospital for operations and a long stay.

Albanese’s new promise is to further increase the incentives for GPs to bulk-bill, as well as to extend those incentive payments to cover all patients, not just pensioners, children and the others. His third change is to introduce an additional 12.5 per cent “practice payment” to those medical practices that bulk-bill all their patients. The changes would take effect from November 1.

Of course, Medicare has more problems than just out-of-pocket payments. The standard fee-for-service way of paying GPs makes sense for people with acute problems, but not the growing number with multiple chronic conditions (like a certain ageing journo).

Fortunately, Duckett thinks the promised changes could “start the necessary transition” away from fee-for-service in general practice.

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RBA is lost in the frightening territory of full employment

The Reserve Bank’s behaviour last week can only be described as bizarre. It’s a sign that it’s lost its bearings and isn’t sure what’s happening in the economy or where it’s headed. What has caused its befuddlement? Our unexpected return to near full employment. Sheesh. Whadda we do now?

The way “monetary policy” – the Reserve’s manipulation of interest rates – normally works is that, when the rate of price inflation gets too high, it raises interest rates to discourage borrowing and spending. Then, when the demand for goods and services has weakened and the rate of inflation has started slowing, the Reserve starts cutting interest rates back to their normal level.

But that’s not what began last week. After raising the official interest rate by 4.25 percentage points to 4.35 per cent and keeping it there for 15 months, the Reserve cut by 0.25 points, but made it clear it wasn’t sure it should have cut, and warned us not to assume further cuts would follow.

It would wait and see what happened. It didn’t say so, but it left open the possibility that, should inflation start going back up, it would resume raising the official rate.

Huh? What on Earth are these guys playing at? Are rates coming down or aren’t they? It was a case of bureaucratic arse-covering. Hosts of people – those with mortgages, the financial markets and many economists – were demanding a rate cut, and the Reserve didn’t want to get the blame should Anthony Albanese get tossed out at the looming election.

So it sent a signal that rates were coming down, then said it wasn’t a signal. It’s obvious the government was desperate for a rate cut, but note this: at all times Albanese and Treasurer Jim Chalmers have stuck to the agreed etiquette of never publicly expressing any opinion on what the Reserve should or shouldn’t do.

It’s not the first time the Reserve has engaged in arse-covering. Governor Michele Bullock admitted last week that the central bank waited too long before starting to raise rates in 2022. But it made sure it got the first increase in before the May 2022 election, at which the Morrison government got tossed out.

Had it waited until after the election, it would have been criticised for doing the Liberals a favour and, in the process, letting people think the inflation problem arose under Labor.

The point many otherworldly economists don’t get is that just because a central bank is independent of the elected government doesn’t mean it can escape politics. Why not? Because we live in a democracy.

The great contradiction of central bank independence is that, for the bank, it’s all care but no responsibility. If it stuffs up the economy, the governor doesn’t lose her job, the prime minister does. And that’s when the pollies – on both sides – tend to get vengeful.

When a central bank lacks independence, it can leave the politics to the pollies. But if it is independent, it has to do its own politics, which is what Bullock was doing last week.

But why is the Reserve so anxious about cutting rates when underlying inflation is heading down, isn’t far above the 2 to 3 per cent target range, and most economists think monetary policy should be eased? Short answer: because its boffins aren’t old enough to have lived in an economy that’s close to full employment.

Thanks to the excessive monetary and budgetary stimulus applied during the pandemic, the economy boomed and, just after the change of government, unemployment fell to 3.5 per cent, its lowest in almost 50 years. After more than two years of higher interest rates, it’s still only up to 4.1 per cent.

After the review of the Reserve Bank, it was decided to have the longstanding lip-service goal of full employment raised to equal status with the Reserve’s inflation target.

For the past five decades, we and the other rich economies have used a mathematical calculation called the “non-accelerating inflation” rate of unemployment, NAIRU, to give achieving low inflation priority over low unemployment.

This made it easy to get inflation down. You used interest rates to give the economy an almighty hit on the head, causing unemployment to shoot up and the rate of inflation to fall rapidly. Only small problem: you never got back to low unemployment.

This time, however, the Reserve sought to avoid a great worsening in unemployment by not hitting the economy too hard. The consequence has been a slower and less certain return to low inflation. And the jobs market has kept happily steaming along.

Despite flat consumer spending and weak business investment in capital equipment, employment’s still growing strongly and unemployment has risen only a little. The proportion of people with jobs is higher than ever, showing that supply has had no trouble keeping up with demand.

But this is scaring the pants off the Reserve’s boffins. With the labour market so “tight”, surely wages could take off at any moment, halting the fall in inflation – or worse, sending it back up. What’s unnerving them is an old ’70s-model NAIRU machine in the corner, with its red lights flashing and siren blaring. Panic stations. Assume the brace position.

This explains last week’s signal that the Reserve was cutting rates and not cutting them at the same time. When it says what it does next will depend on the data, it means “we’re not really sure what the hell’s going on”.

Trouble is, the world has changed a lot since the invention of the NAIRU machine in the 1970s. The unions used to be able to force excessive pay rises on their bosses, but globalisation, deregulation and the collapse in union membership have changed all that.

The Reserve’s boffins, however, have been so busy with their maths and modelling that they haven’t noticed how much the world has changed. They don’t even seem to have noticed that their regular forecasts of wage growth have been way too high for more than a decade.

No wonder they’re so worried. And until they get the memo, the Reserve will go on punishing everyone impertinent enough to have a mortgage.

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Why did profit-hungry banks act so quickly to cut interest rates

By MILLIE MUROI, Economics Writer

Like dominoes, the country’s big four banks moved briskly on Tuesday, pledging to knock down their interest rates – some within minutes of the Reserve Bank’s decision to cut the cash rate for the first time in more than four years.

The country’s oldest bank was the first to jump, one minute after the Reserve Bank’s rate cut. From March 4, Westpac’s variable home loan rates will fall by 0.25 of a percentage point, reducing the monthly repayment on an average $600,000 mortgage by about $100. Sixty seconds later, National Australia Bank said it would cut its variable home loan rates by the same amount – effective a week earlier, on February 28. Commonwealth Bank and, later in the day, ANZ followed.

The banks aren’t always so quick. In fact, they tend to jump at the chance to raise their rates (which fattens up their profits), but drag their feet when it comes to passing on decreases in the official interest rate. And this series of moves will eat into their profits. So, what made them move so quickly?

Treasurer Jim Chalmers says he picked up the phone to the big four bank bosses shortly after the Reserve Bank’s decision on Tuesday to talk about their pricing. But it wasn’t Chalmers who sealed the deal. The four major banks were already well on their way to passing on the rate cuts in full, he said.

Instead, Chalmers’ chats with the bosses were a clear-as-day signal of what the banks had already factored in: the political pressure they would face if they didn’t cut rates (not to mention the potential media storm and backlash from mortgage holders pushed to their limits in recent months).

The rate cut was a scenario all of them had considered well in advance of the decision.

It’s no secret that those with mortgages have been squeezed after 13 rate rises in three years. So the first rate cut was always going to be an attention-grabber.

As AMP chief economist Shane Oliver points out, there’s an especially strong focus on interest rates in Australia because of the large proportion of home owners with variable rate loans (in which the interest rate tends to move in line with the cash rate rather than being fixed at a set rate), and the increasing level of debt we tend to carry.

“It’s become a lot harder for banks to dilly-dally and take time with their decisions,” he says.

Then there’s the state of the home loan market, in which banks are still competing quite hard to attract and retain customers. This level of competition probably also put a flame under the backsides of banks when deciding whether to cut their interest rates.

The rapid movements were also partly a reflection of the banks’ size. Australia’s banking sector has had some new smaller and digital banks enter the equation, but it’s still what’s called an “oligopoly”: a handful of businesses with control over rather large slices of the market.

They’re not supposed to be able to collude (for example, by all agreeing to move prices by the same amount) because our competition laws prohibit that. But as John Storey, head of Australian bank research at UBS, points out, the nearly simultaneous movement is indicative of a fairly cosy oligopoly, where once one business breaks from the pack, others tend to follow quite quickly.

In a more competitive market (with more banks), Storey says, it’s possible the banks would act more independently. They might be more incentivised to break further away from their peers by, for example, cutting their rates by a deeper amount.

But in a market with only a few big competitors, each business closely watches the others, and their pricing decisions heavily influence the actions of competitors. A bank cutting its rates too much, for instance, might be met with retaliatory price cuts that just lead to lower profits for everyone.

As Morningstar banking analyst Nathan Zaia puts it, banks don’t want to unnecessarily drive down profit margins for the entire industry.

So, while there was pressure from consumers (and politicians) to pass on the full interest rate cut from the Reserve Bank, and all four banks quickly fell into line, there wasn’t as much incentive to slash rates any further.

There is bad news for savers. The banks will also almost certainly try to minimise lost profit by making similar cuts to interest rates on deposits. That means that although mortgage holders will be breathing a sigh of relief, savers will probably see a fall in interest they earn on their bank balances.

Finally, it’s worth understanding what exactly the “cash rate” targeted by the Reserve Bank is. It’s essentially the interest rate for banks borrowing from – and lending to – each other overnight. You might ask, what’s this mysterious nocturnal activity?

Basically, banks need enough cash every day to serve their customers – and a bit extra (called the “reserve requirement”) in case they suddenly face a wave of withdrawals they weren’t expecting. Depending on the amount of lending, depositing and withdrawing their customers do on any given day, banks might end up with more (or less) cash than they need.

So, at the end of every business day, the banks with more money than they need lend to banks facing a shortage. The Reserve Bank pushes banks to lend and borrow to each other at (or very close to) its cash rate target. How does it do this? By being a bank for the banks.

Basically, the Reserve Bank can hold onto deposits from the banks (called “exchange settlement balances”). The interest rate that banks can earn on these deposits is a bit lower than the cash rate target. That makes banks a lot keener to lend to each other, rather than depositing their extra cash with the Reserve Bank.

Meanwhile, borrowing from the Reserve Bank costs banks a bit more than the cash rate. So any banks needing money are much keener to borrow from their banking peers, which, remember, would rather lend their money out than leave it with the Reserve Bank.

By putting these parameters into place, the Reserve Bank basically creates a narrow “corridor” around the cash rate that determines the cost of banks moving their money around. These costs are then typically passed on to consumers. A lower cash rate for banks usually means lower interest rates for consumers, and vice versa.

The rapid response from the banks this week is certainly no promise of what we’ll see following future Reserve Bank decisions. What seems like a dent to the banks’ profits, and a win for customers, was almost certainly a calculated decision by the banks. They just weighed up the political, social and economic costs of dilly-dallying.

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Sorry, this isn't the day we stop feeling sorry for ourselves

I’m sorry to be the one to break it to you, but I very much doubt that this small cut in interest rates will be the circuit breaker everyone from Treasurer Jim Chalmers down has been hoping for. After our many months of longing for this moment, such a modest saving can only be an anticlimax.

I doubt this will be the reason the economy begins to recover as we all go out and shop. Nor will it be the sea change that secures another term in office for Prime Minister Anthony Albanese.

Consumers and voters are in a sullen, sour mood and have been for a year or two. We’re feeling so sorry for ourselves it will take a lot to lighten us up and make us forget our obsession with the cost of living. Even if things improve, our negativity may lift only slowly over many months.

Normally, a change of government would help a lot. New leaders get a honeymoon in which hope springs eternal. The taller and better-looking the new guy is, the better their chance of making a good impression.

But it’s hard to see a man whose specialty is making us feel angry or afraid being the bloke to cheer us all up.

For someone with a mortgage of $600,000, a rate cut of 0.25 percentage points is worth about $23 a week.

Do you remember Chalmers’ tax cuts last July? No one was terribly excited about them. But they were worth $34 a week for someone on $84,000 a year, and $54 week for someone on $122,000 a year.

There may be more cuts to come this year, of course, even a possible two more before an election held in mid-May. But from what the Reserve Bank is saying, I doubt it’s in a tearing hurry to keep cutting.

And though the Reserve raised interest rates by 4.25 percentage points over the 18 months to November 2023, I don’t expect it to cut rates by more than about 1 percentage point, leaving the official interest rate at about 3.35 per cent.

Why? Because its 4.25-point increase brought the rate up from its crisis level of almost zero during the pandemic and its lockdowns. Now the Reserve will be getting the rate back to normal, not crisis territory.

And while we’re all feeling so sorry for ourselves, don’t forget this. Normally, by the time the Reserve starts cutting interest rates the economy is in recession and unemployment is way up.

Our economy is becalmed, but in nothing like a recession. Right now, we have a higher proportion of the working-age population in jobs than ever before. At 4 per cent, our rate of unemployment is lower than it’s been in most of the past 50 years. Sound terrible to you?

Indeed, it’s the remarkable strength of our jobs market that’s the main reason the Reserve has been so reluctant to cut interest rates until now, and remains “cautious” about cutting them further.

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When does bipartisanship happen? When there's mutual self-interest

If you think Labor and the Liberals are always at each other’s throats and never agree on anything, you haven’t been watching closely enough. Sometimes – last week, for instance – they do deals with each other they hope we won’t notice.

When they’ve reached an agreement they don’t want seen, it’s because they’ve colluded to do something that advances their interests at the expense of the voters.

It reminds me of economist Adam Smith’s observation that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public”.

What do we want from our politicians? That they get on with fixing our many problems. When we discover the present lot isn’t doing that, we toss ’em out. In practice, however, it’s not that simple. We’ve long had a system of two-party government, which means that when one side’s no good, we turn to the other one. But what happens when it too proves to be no good? We have no alternative but to return to the first side, which we already know isn’t up to snuff.

That’s the position we’re in now. We tossed out Scott Morrison and replaced him with Anthony Albanese, only to discover he’s not game to do what it takes. So, does Peter Dutton strike you as the good leader we’re looking for? You’d have to be a terribly rusted-on Lib to think so. What now?

Actually, our loss of faith in the political duopoly isn’t new. It’s become clear that the two sides have just about fought themselves to a standstill. Neither side is game to do anything much, for fear of the scare campaign the other side would run.

This explains why voters have been groping towards plan B. In the 2022 federal election, almost a third of voters – a record proportion – gave their first-preference vote to candidates other than from the two majors. Many Labor voters have turned to the Greens, while the growing number of independents was boosted by the six teal independents taking over seats in the Liberals’ heartland. What’s the single biggest source of discontent with the duopolists? Their reluctance to get on with fighting climate change.

We’ve already come close to having a minority government, and there’s high chance we’ll get one at this year’s election. This gives the smaller parties and independents the balance of power, allowing them to achieve braver policies in return for keeping the minority government in power. Not such a bad arrangement.

But this is where last week’s passing of the electoral reform bill comes in. After doing a deal with the Coalition, Labor got it through the Senate despite the vehement opposition of the Greens and, particularly, the teal independents.

As Labor claims, the act involves the most comprehensive changes to the electoral system in four decades. And many of the changes are genuine reforms, limiting how much individuals can donate to candidates or parties, and tightening up rules on disclosing the identity of donors and the timeliness of that disclosure.

Labor claims its reforms will take the “big money” out of election campaigns. Don’t you believe it. It’s true it will stop the Clive Palmers from giving millions to a party, but that was never a big worry. Various loopholes will allow Labor to continue getting big bucks from the unions and the Libs getting much moolah from business and the secret funds in which money has been stashed.

In any case, the act makes up for any loss of donations by greatly increasing the money the parties and independent candidates get from the taxpayer. After an election, candidates who get more than 4 per cent of the votes get about $3.50 per vote. That will be increased to $5 – which you can double because we each cast two votes, for the House and the Senate.

And that’s before you get to a new payment to cover “administration costs” of $90,000 per election for members of the lower house, and half that for senators.

The point is, these old and new payments go to incumbents, giving them a huge financial head start over new people trying to get in. Even before you think of all the expensive advertising you’d like, setting up an office, staffing it, and paying for printing and stationery ain’t cheap.

But sitting members get an electoral office and a staff of five, plus transport and a generous printing budget they use to get themselves re-elected. So, would-be independents have to raise and spend a lot of money to have any chance against an incumbent member.

Which is where the act’s new limit on spending of $800,000 per candidate puts incumbents way ahead of newcomers. What’s more, political parties are allowed to spend $90 million each on advertising, which they can direct away from their safe seats to their marginals.

Get it? The two major parties have cooked up “reforms” that benefit them by stacking the rules against new independents. The Greens aren’t greatly disadvantaged because they’re a party and have incumbents. The existing independents don’t get the extra benefits going to a party, but do now have the advantage of incumbency.

But future independents – including further teals – will find it a lot harder to win seats than before. Why has Albanese done a deal that mainly benefits the Liberals, his supposed lifelong enemies? Because if independents can do over the Libs, next they can do over Labor.

When the chips are down, the duopolists must stick together and put their mutual interests ahead of the voters’ right to choose. If you want proof that our politicians put their own careers way ahead of their duty to the people who vote for them, this is it. I’ve never felt more disillusioned.

But note this: these changes won’t apply to this year’s election. This will be our last chance to register our disapproval.

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We may be short of leaders, but we're not short of false prophets

With this year’s federal budget supposedly brought forward to March 25, the seasonal peak in business bulldust has come early. Last week Canberra kicked off an annual ritual little noticed in real-world Australia, the call for “pre-budget” submissions on what the government should do in its budget.

I’ve never known any of that free advice to be acted on but, as all the participants in the ritual understand, that’s not the point. The point is that it’s a day out for Canberra’s second-biggest industry, the small army of business and industry lobby groups.

It’s an opportunity for them to send a signal to their fee-paying members back in the real world of Melbourne, Sydney and the other state capitals that they’re working their butt off, representing the industry’s interests, whispering in the politicians’ and econocrats’ ears trying to tone down any measures the industry doesn’t like, and rent-seeking as hard as they can go.

In their pre-budget submissions, you see the lobbyists demonstrating their greatest skill: taking their clients’ rent-seeking and repackaging it to make it look as though they want to fix the economy for us all. Consider last week’s first cab off the rank, from the Business Council.

It made five key points, the first of which was that the budget should “get government spending under control”. “High spending levels are contributing to higher inflation, including business costs, and the spending is unsustainable,” we’re told.

Translation: stop wasting money on the “care economy” – care of the disabled, aged care and childcare – including stopping the wages paid to the women who work in these mainly privately owned businesses being so low they can’t get enough workers. Why stop? So you can afford to cut business taxes.

Second, the budget must “cut red tape”. “We must be more aggressive in pursuing a deregulation agenda” like Donald Trump is doing.

Translation: business wants to be free to maximise its profits in any way it sees fit. Any government measures intended to stop business harming its workers, customers or bystanders is “red tape” which can be blamed for business’ failure to do all the wonderful things it keeps claiming it does.

And remember, any time the absence of regulation allows business to blow itself up – as in the global financial crisis – big business wants governments immediately on the job bailing us out at taxpayer expense. We must be allowed to be too big to fail. That is, we must be given a bet we can’t lose.

Third, the budget must “end the energy wars” caused by the “ongoing politicisation of energy”.

Translation: please forget the way business cheered when prime minister Tony Abbott abolished Labor’s carbon tax in 2014 and kicked off a decade of inaction. Similarly, please don’t mention how muted has been our criticism of Peter Dutton’s plan to abandon renewables and switch to Plan B, a government-owned nuclear system, which will take only a decade or two to get going.

Fourth, the budget should “fix our broken industrial relations system” which has “shifted the pendulum too far against employers, making it far less attractive to hire and grow”.

Translation: business liked it much better when the pendulum was too far against the workers and their unions. Everything was going fine in the economy until 2022, when Anthony Albanese began trying to even things up. This is why real wages began falling from June 2020 and the productivity of labour hasn’t improved for a decade.

Finally, the budget should “address our uncompetitive tax system” which is uncompetitive internationally and likely to become more so. This is “a major deterrent to attracting new investment”. We must have a tax system that “helps us rather than hinders us in bringing investment to our shores”.

Did I mention that a lot of the Business Council’s member companies are big foreign multinationals, including producers of fossil fuels? Our mining industry is about three-quarters foreign-owned.

So their local chief executives may speak with an Aussie accent but, on foreign investment and the wonders it will do for our economy, they’re batting for the other side.

The main reform the Business Council has long wanted is a cut in the rate of company tax, paid for by a hike in the rate of the goods and services tax. This, we’re told, would do wonders for the wellbeing of Australia’s punters.

The Business Council would never admit it, but the thing its members hate is our uncommon system of “dividend imputation and franking credits” designed to ensure that company shareholders don’t pay company tax.

Why do the chief executives hate it? Because only local shareholders get franking credits. Foreign shareholders don’t. Why not? Because we want to make sure that, when we allow foreign multinationals to make big profits from mining our minerals or whatever, we Aussies get our fair share of the spoils, including via the company tax they pay.

(That’s assuming they don’t use profit-shifting and other accounting tricks to minimise the company tax they pay. I remember when BHP’s marketing people kept reminding us it was The Big Australian. Their accountants told the Australian taxman it was The Big Singaporean. In truth, BHP is roughly three-quarters foreign-owned, mainly by Americans.)

When Paul Keating introduced dividend imputation in 1987 it was all the rage in other rich economies. But it fell out of fashion, allowing the big economies to follow a different fashion: cutting the rate of company tax to gain an advantage over the others.

The Business Council has gone on for years trying to con our government into joining this race to the bottom. It’s had no success, however, and isn’t likely to. Why? Because our Treasury isn’t that dumb. And because franking credits mean local shareholders (and voters) have nothing to gain from cutting the company tax rate.

And I can tell you this: should some future government be mad enough to do it, no one would ever bother to come back a few years later to see if, as promised, foreign investment had surged. No one’s ever game to audit the arguments for this or that tax “reform”. Why not? The letters BS come to mind.

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Maths or no maths? Ross Gittins and Richard Holden have it wrong

By MILLIE MUROI, Economics Writer

We’ve heard the old(er) boys argue over the optimal level of maths in economics, but they’ve delivered some imperfect information. Don’t know what I’m talking about?

Seven years after sitting my final high school economics exam, four years after farewelling university economics, and three years since exiting the economics profession (almost) entirely, I’ve been reflecting.

The reason? A clash between our economics editor Ross Gittins and UNSW economics professor Richard Holden. In the words of Dr Ray Da Silva Rosa, finance professor at the University of Western Australia, it’s the academic equivalent of the “beef” between rappers Drake and Kendrick.

Gittins last week ruffled some feathers when he said economists had lost the plot, becoming obsessed with maths and driving students away from the discipline. Holden’s response? “Shocker …even legends [like Gittins] can be wrong.” Maths, he said, is crucial to economics – and students shouldn’t be intimidated by it.

But let’s go back to why we’re talking about this in the first place: a proposed change to the NSW economics syllabus which would increase to about 35 the number of calculations a student is required to be able to perform.

And more importantly, Reserve Bank research by economist Emma Chow laying out the benefits and ways of boosting the size and diversity of the economics student population, which has plunged since the early 1990s.

Holden doesn’t think the size part is much of an issue (or at least not at crisis levels yet).

And Da Silva Rosa says it’s probably not: “Oddly, as experts who study markets, neither [Gittins nor Holden] considers that we may have about the right number of economists.” It is, he argues, simply a matter of the market allocating the optimal number through the incentive we know of as price: finance and commerce jobs tend to pay better.

But markets are far from perfect. We know – from economic theory – that prices aren’t always a good reflection of the value a good or service might provide to the wider community. That’s why, for example, the government subsidises things such as education and vaccinations (things which economics students might recognise as a “positive externality”).

Similarly, having greater economic literacy across the population comes with big benefits for society more broadly. We may not all become economists (or, in my case, stay one), but having a population with better understanding of economics leads to better policy debates and day-to-day decision-making.

There’s some merit, then, as to why we might want to boost economics student enrolments – just as we have for STEM (science, technology, engineering, maths) subjects in recent years.

I also have some doubts that financial prospects are as big a driver for students’ desire to study certain subjects in high school compared to university. In school, the focus tends to be on maximising marks or choosing the subjects that are easier or more enjoyable.

I don’t completely accept Holden’s view that students shouldn’t be intimidated by maths, either. It’s easy to say, but not always the reality. To his credit, he doesn’t necessarily think there should be more maths mixed into the high school economics curriculum.

The thing that drew me to economics for so many years – despite my lukewarm enthusiasm for maths – is just how relevant it can be to daily life (sunk cost fallacy, anyone?) and understanding the world around us (a certain US president could do with a refresher on tariffs).

Don’t get me wrong. Basic maths is a must-have for understanding economics. And I don’t buy Gittins’ argument that maths-obsessed academic economists have little regard for – or understanding of – how the economy works. As Holden points out, there’s been plenty of great research built on mathematical rigour.

But whether we need dozens of additional equations at a high school level is less certain. For me, being spared from memorising more complex formulas until second year university (and getting the choice at that point to focus more on the less maths-heavy units that interested me) kept me motivated and allowed me to specialise in areas I cared about and was good at.

And my fellow economics students who revelled in maths? They went further down the econometrics path. Economics is one of those disciplines where everyone from mathematicians to philosophers and historians can and do play a crucial role.

Would more maths in the high school economics curriculum have turned me off completely? Well, it certainly wouldn’t have had me jumping for joy.

And here’s something crucial neither Gittins nor Holden touched on. One of the key drivers of the fall in economics enrolments is the drop-off in female enrolments. I’ve spoken about why this is important last year: women economists think differently, and diverse teams simply perform better.

Maybe the quality of the economics discipline – often dismissed as the dismal science – is determined less by how much maths there is, and more by the people and perspectives missing from it. But we can’t separate that completely from the debate on the role of maths in economics.

Given the Reserve Bank’s observation that female high school economics students (who are under-represented in university economics enrolments and in the economics profession) tend to go on to preference disciplines like arts, health and law in university, there’s an argument that a heavier maths focus in high school could push more women away.

Women perform well in maths, yet tend to study it at lower rates than men. The bank suggests advocacy to females could emphasise that economists work on a breadth of social problems that are also seen in arts and social science.

One of the things I loved most was when my arts subjects would intertwine with my business ones. We can integrate economics with other disciplines, not just the obvious ones like finance, tying it more to those subjects that women have tended to favour.

Still think there should be more maths in economics? Why not turn the tables and include more economic principles in the maths curriculum?

Then there’s the need to continue to make economics – both as a career pathway and a discipline – more concrete. Among the biggest threats to high school economics enrolments is not “more maths versus less”, but the rise of business studies, which has increasingly eaten into the pool of possible economics students.

Why? The Reserve Bank says it’s partly the perception that business studies is easier to learn and teach than economics, has a lower workload and has clearer career pathways.

We need to better link economic theories, existing equations and the economics curriculum to the real world: current policy debates, trade wars and day-to-day life. Simply adding more maths at high school level risks plunging the discipline further into abstraction.

There also needs to be more connection between students and those using economics in their professional life. Through high school (and most of university) I had virtually no contact with the mythical creature I now know to be “the economist”.

Breaking down that barrier would bolster the confidence of could-be economists, inspire them to consider a career in economics, and keep economists in touch with younger generations which are often bursting with novel ideas.

I’m no longer an economist, but the things I’ve learnt – and continue to learn – have been invaluable. I’m hopeful we can find better ways to revive the discipline and attract the diversity needed to make it better. More maths wouldn’t have excited a younger me, but more connection to the real world – and to other disciplines – certainly would have.

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The nation is finally coming to grips with home affordability

Right now, the prospect of much improvement in being able to afford a home of your own isn’t bright. We don’t look like solving the problem any time soon. But I’ve been watching and writing about the steady worsening in housing affordability for the best part of 50 years, and I’m more optimistic today than I’ve ever been.

Why? Not because we’ve got the problem licked – and certainly not because mortgage interest rates will soon be coming down – but because it’s become so bad no one can go on ignoring it. At every level, from governments at the top to mums and dads and angry young people at the bottom, we’re realising that house prices just can’t be allowed to keep going up and up forever.

For the first time in my experience – and probably the first time since the housing crisis immediately after World War II – all of us are realising something must be done to turn things around. Politicians, treasuries, economists and parents are coming to grips with the problem. We’ve begun thinking hard about all the factors contributing to the problem and the many things that will need to change.

Until now, people have focused on fixing this favourite factor or that one. Now we’ve finally realised the problem is multi-faceted and needs to be attacked at every level from every angle. There’s no magic bullet.

Although affordability has been worsening for decades, the disruptions of the pandemic and its lockdowns – closing our border then reopening and having people flock in – have made the problem acute as well as chronic. It’s the same in other rich countries, but I bet ours is worse.

For many years, politicians on both sides and at both levels of government expressed sympathy for “first home buyers” but didn’t really care. That’s because voters who own their home far outnumber those who don’t, and home owners love seeing the value of their home going higher and higher.

But now home owners are joining the dots and realising their growing wealth comes with a major drawback. Their kids can’t afford a home without big withdrawals from the bank of mum and dad. Why is this a smart way to run the country?

People complaining about housing affordability tend to blame the federal government. In fact, it’s the state governments that have most influence over how many new homes are built, where they’re located and whether there’s enough higher-density housing in the parts of cities where people most want to live.

That’s why the Albanese government’s National Housing Accord with the states is a big advance. That’s true even though their agreement to deliver 1.2 million new dwellings over the five years to mid-2029 is running well behind schedule and may not be achieved.

The accord is important because it represents both levels of government accepting responsibility for housing affordability and being willing to co-operate in making progress. The time-honoured way to get the states pulling their weight is for the feds to pull out their chequebook. Which they have.

You don’t need an economics degree to see that if house prices keep rising it must be because the demand for homes is growing faster than their supply. That’s true, but it’s not that simple. For one thing, if all the extra houses are on the city’s fringe, people who want to live closer in will still be bidding up the prices of the better-located houses and units.

That’s why a big part of the deal with the states is for them to permit more better-located higher-density apartments. This switch of emphasis from doing things to reduce the demand for housing (by ending the tax breaks that help investors outbid first home buyers) to increasing the supply of well-located homes is a big step forward in the thinking of politicians, econocrats and economists.

But we’ll probably need to reduce demand as well as increase supply – so don’t think you’ve heard the last on “negative gearing”.

And don’t assume that if the NIMBYs have been beaten back and permission given for more middle-ring high-rise, they’ll start springing up in a few months’ time. Now the experts have their minds focused on housing, we’ve realised our home-building industry isn’t in tip-top shape. When demand surges, the businesses are much better at whacking up their prices than at building a lot more homes.

Right now, the industry’s discovered it can’t get the tradespeople it needs to expand its production. That’s why, at present, it’s building fewer homes than usual when it should be going flat-chat. We’re told it has lost a lot of its tradespeople to the construction of transport and other infrastructure for … the state governments.

Well, maybe. But my guess is the industry long ago gave up ensuring it was training lots of apprentices because they’d be needed in the next building boom. Similarly, the bureaucrats issuing visas to skilled immigrants don’t seem to have worried much about how their decisions would affect the building industry.

In the post-war years, state governments built and owned thousands of homes rented to people in need. But that went out of fashion decades ago, and now they own little social housing. Changing that will be another part of what’s needed to get housing affordability under control.

Finally, the Reserve Bank. The modest falls in mortgage interest rates we’ll see this year and next are unlikely to do anything lasting to improve housing affordability. When you’ve got a shortage of homes, making it a bit cheaper to borrow just allows someone to win the auction by paying more than the other bidders.

The Reserve has always denied that its use of the interest rate lever to keep inflation low has any lasting effect on housing affordability. But this assumes its ups and downs never cause borrowers to do crazy things for fear of missing out. Maybe the Reserve will need to change too.

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