How and why the tide of globalisation has turned

Politicians banging on about “security” should always be suspected of having ulterior motives, but when you to see the secretary to the Treasury giving a speech on security, that’s when you know the world has changed radically.

That’s what Treasury secretary Dr Steven Kennedy did last week. It was a sign of how much the distinction between economic issues and defence and foreign affairs has blurred as rivalry between the United States and China has grown.

We used to think of “Australia in the Asian century” as one big opportunity for us to make a buck but, Kennedy says, “we are facing a more contested, more fragmented and more challenging global environment, where trade is increasingly seen as a vulnerability as much as an opportunity”.

“In light of these challenges, it is incumbent on Australian policymakers to work together to develop sound policy frameworks and institutional arrangements that match the times. That take the long view and protect both economic and strategic interests,” he says.

We must strike a fine balance, he says. “If we fail to adequately adapt and respond to the new reality we face, we risk exposing our economy and our country to excessive risk...”

But “if we over-correct and adopt a zero-risk approach, shutting ourselves out of global markets and seeking to be overly self-sufficient, we will quickly undermine the productivity, competitiveness and dynamism of our economy,” he says.

Our economy benefited from decades of rising prosperity as international economic integration – globalisation – flourished under a stable, rules-based international order.

At the same time, economic reforms opened our economy to global competition by cutting tariffs (import duties), floating the exchange rate and deregulating the financial system.

But now, “tectonic shifts in the global economic order are underway” as the engines of global growth have shifted from west to east. China has gone from accounting for about 6 per cent of growth in the global economy in 1981, to more than 25 per cent today.

The United States’ share of growth has fallen from 26 per cent to 13 per cent.

However, this move to a more multipolar global order has brought with it “a sharpening of geostrategic [country versus country] competition and a far more contested set of global rules, norms and institutions,” Kennedy says.

As Treasurer Jim Chalmers has said, we are facing “the most challenging strategic environment since World War II” after a difficult decade and a half punctuated by the unmistakable signs of climate change, a pandemic and a European war, which exposed fragilities in our supply chains.

In this changing world, economic resilience – the capacity to withstand and recover quickly from shocks to the economy – is an essential component of assuring our national security.

The trade wars between the US and China during the Trump years have sharpened into an overt strategic rivalry and a contest for global influence.

The US has said it is not seeking to decouple from China – due to the significant negative global repercussions of a full separation – but is “de-risking and diversifying” by investing at home and strengthening linkages with allies and partners around the world.

In this new paradigm, Kennedy says, economic and financial tools are being deployed much more aggressively to promote and defend national interests.

According to the International Monetary Fund, more than 2500 new policies were introduced last year in response to concerns about supply chains, the climate and security. Since 2018, measures restricting trade flows have outnumbered measures that liberalise trade by about three to one.

Our primary economic and strategic (defence) partners are no longer the same. China now accounts for 30 per cent of our two-way (exports plus imports) trade, whereas the G7 countries combined account for just 26 per cent. China is now a larger trading partner than the US for more than 140 countries.

In the new world of greater rivalry, there is a small set of our systems, goods and technologies that are critical to the smooth operation of our economy and to the security of our country. Systems that are vulnerable to interventions and where a disruption could impact lives and threaten our national interest in a time of conflict.

In these parts of the economy there’s a clear role for government in regulating their operation and their ownership. This approach is called the “small yard, high fence” strategy, where a strong set of protections are put around a few critical economic activities.

But the key challenge in these types of reforms is to prevent overreach. The risk of foreign disruption has to be balanced in such a way that economic activity is not unnecessarily curtailed.

And there’s also a different kind of risk: that these types of regulatory regimes could be used as a form of industry protection, or to respond to community pressure, rather than to address genuine security risks.

Whereas our security and intelligence agencies are best placed to understand the vulnerabilities in our systems and the methods most likely to be used to exploit those vulnerabilities – including as part of the foreign investment screening process – they need to be in partnership with economic experts, such as Treasury.

We can’t afford to take the attitude that there should be zero risk of problems, nor dismiss the long-term economic costs of these restrictions.

There should be a high bar for what government puts inside the protected yard and each decision should be carefully weighed, we’re told, with both benefits and costs considered.

As for supply chain problems, it’s often argued that countries should build sovereign capability in areas of risk. This is often argued with little consideration of other ways of solving the problem, or of the cost of doing so.

But as Treasurer Chalmers has made clear, a Future Made in Australia cannot mean pursuing self-reliance in all things. That would undermine our key economic strengths and leave us less able to exercise strategic weight, not more.

Security, it turns out, is too important to be left to diplomats and generals.

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It's time to dig deep - but not deeper than the taxman expects

I have a request to make of all Australian taxpayers: please give more to charity because you’re making me look bad. Like a cheat, in fact. I’ll explain shortly, but first, a self-interested public service announcement. Hurry, hurry, hurry. You have only the rest of this week to make a tax-deductible donation if you want to get some of it back in your next tax refund.

June 30, the biggest day of the year for the nation’s accountants, is fast approaching. It’s also the most important time of year for the nation’s charities. If you’ve ever made a donation to any of them, I bet they sent you a letter in the last few weeks reminding you how good it would be if you did so again ASAP.

But, as we were reminded by a strategically placed story last week, this is likely to be a bad year for charities. Why? Because in a cost-of-living crisis many of us decide that charity begins at home.

According to polling by academics at the University of Queensland, 78 per cent of people have reduced their donations because of the crisis facing their own budgets.

This is particularly bad timing for those charities that help people having trouble affording food and other necessities, such as the Salvos. The demand for their services has jumped for the same reason people are finding it harder to give. (Yes, the Salvos have “reached out” to me lately. And as I did myself in my uniformed youth, they waved a collection box under my nose.)

Perhaps it’s the accountant in me that makes me particularly attracted to donations that are tax-deductible. As everyone soon learns, you can’t make a profit out of tax deductibility. You can only reduce a cost.

But I like it because it lets me send a bit of taxpayers’ money in a direction chosen by me, not the politicians. The pollies mightn’t give a stuff about the wellbeing of refugees and asylum seekers, but I do. And to some small extent, I can make them kick the tin.

Also last week, purely by chance, I’m sure, we were reminded that, though Australians like to think of themselves as generous, we’re actually tighter than people in other English-speaking countries. Even the Kiwis are more giving than we are.

Which brings me to my beef about donations. Now, I’ve long been a defender of the Tax Office. It does an important job in making sure we pay as much tax as we should. One reason I got out of accounting was because I decided the only interesting part of it was giving tax advice, but I didn’t want to spend my life helping the well-off avoid doing their duty to the community.

But a few weeks ago, I got a letter from the Tax Office, via the myGov website, naturally, that was the strangest I’ve ever had from them. And it really pee’d me off.

The standard form letter said they’d happened to notice that my claim for donations was a lot higher than other people’s, and they were just wondering whether I might possibly have made some mistake.

They hoped I knew you could only claim for donations to outfits that had been awarded tax deductibility. And they hoped I knew I shouldn’t be claiming for any donation for which I couldn’t produce a receipt.

If, on reflection, I realised I had made some terrible “mistake”, I was free to amend my return and thereby, they hinted without saying, avoid possible further investigation and penalty.

But, failing that, there was no suggestion I do anything about their veiled accusation, except, presumably, sit there shivering, waiting for the taxman’s knock on the door.

It may be true, as coppers always say, that if you’ve done nothing wrong you’ve got nothing to fear, but that doesn’t stop you resenting an unwarranted insinuation that you’re dishonest.

What gets me is that, knowing my claim was large, I would have happily included a detailed list with my return, but the taxman made no provision for me to do so. Nor, when he sent his accusatory letter, did he invite me to explain or substantiate my claim.

And I get the feeling that the taxman’s algorithm just found an outsized number and dispatched a letter without further consideration. Did he know that I always make a big claim? Did he allow for the likelihood that people on high incomes can afford to be more generous? Did he note that I’d been a tax agent for many years and so didn’t need reminding of the rules?

Well, I know the taxman doesn’t want to be burdened by any extra information from me, but I’ll give him a heads-up anyway. My claim for this financial year won’t be as big as last year’s, but the one for next year will be a whopper. I’m thinking of setting up a charity of my own. All above board, naturally.

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Yikes! Our tiny manufacturing sector makes us rich but ugly

At last, the source of our economic problems has been revealed. Our economy is badly misshapen, making it unlike all the other rich economies. Did you realise that our manufacturing sector is the smallest among all the rich countries?

Worse, our mining sector’s almost five times as big as the average for all the advanced economies and our agriculture sector’s twice the normal size.

Do you realise what an ugly freak this must make us look to all the other rich people in the world? We’re like the millionaire who made his pile as a rag and bone man with a horse and cart. Yuck.

It’s something about which we should be deeply ashamed and very worried, apparently.

How do I know this? It’s all explained in an open letter signed by about 70 academics who, because they’re banging on about economic matters, have been taken to be economists. But they don’t sound like any economist I know.

Indeed, they devote most of their letter to explaining why some of the most fundamental principles of economics are not only wrong, wrong, wrong, but sooo yesterday.

They condemn “outdated ‘comparative advantage’ theories of trade and development – according to which, countries should automatically specialise in products predetermined by natural resource endowments” which theories, they assure us, “have been abandoned” by other rich countries.

Rather, “there is new recognition that competitiveness is deliberately created and shaped, through proactive policy interventions that push both private and public actors to do more than market forces alone could attain”.

Get it? When you’re trying to make a living in a market economy, it’s a mistake to worry about what you’re good at, or to think you’ll sell something you’ve got that they don’t. No, with the right policies, governments can make you “competitive” without any of that.

You may think we’ve done pretty well among the other rich countries but, in truth, we’ve been getting it all wrong. When those Europeans were sailing round the South Pacific looking for an island they could take from its local inhabitants, their big mistake was to pick Australia.

They thought our island would have a lot of good farmland. And surely somewhere in all that space there must be some gold or other valuable minerals. But this turned us into hewers of wood and drawers of water.

Worse, some of us became the lowest of the low, digging stuff out of the ground and shipping it off somewhere. We turned our country into a quarry. And there’s only one thing lower than running a quarry: providing “services” to other people. You know, being a cleaner or chambermaid or waiter.

All of which tempted us away from the one honest, noble way to earn a living: making things. And if only our island hadn’t been good for farming and mining, making things would have been the only way left to make a living.

Really? As the independent economist Saul Eslake has said, this isn’t economics, it’s the fetishising of manufacturing. It’s the one worthy occupation. All the rest are rubbish.

Now, I’m sure the open letter-signers would protest that they’re only arguing for a big manufacturing sector, they’re not saying we shouldn’t have farmers, miners or servants.

Trouble is, as Eslake points out, all the parts of an economy can’t add to more than 100 per cent of gross domestic product or total employment. If some parts’ shares are bigger than others, the other bits’ shares must be smaller.

When you think about it, this is just an application of the economists’ most fundamental principle: opportunity cost. You can’t have everything you want, so make sure what you pick is what you most want.

To anyone who’s been around a while, it’s clear the letter-signers are on the left. Nothing wrong with that. At its best, the left cares about a good deal for the bottom, not just the top. But for some strange reason, a lot of those on the left see themselves as linked to manufacturing by an umbilical cord.

The joke is, few if any of the letter-signers would ever have worked in manufacturing – or ever want to. (My own career in BHP’s Newcastle coke ovens lasted two days before I scuttled back to the comfort of a chartered accountants’ office.)

Academics, more than anyone, should understand that the future lies in services, not manufacturing. The good jobs come from what you know, not what you can make.

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The RBA has squeezed us like a lemon, but it's still not happy

Let me be the last to tell you the economy has almost ground to a halt and is teetering on the edge of recession. This has happened by design, not accident. But it doesn’t seem to be working properly. So, what happens now? Until we think of something better, more of the same.

Since May 2022, the Reserve Bank has been hard at work “squeezing inflation out of the system”. By increasing the official interest rate 4.25 percentage points in just 18 months, it has produced the sharpest tightening of the interest-rate screws on households with mortgages in at least 30 years.

To be fair, the Reserve’s had a lot of help with the squeezing. The nation’s landlords have used the shortage of rental accommodation to whack up rents.

And the federal government’s played its part. An unannounced decision by the Morrison government not to continue the low- and middle-income tax offset had the effect of increasing many people’s income tax by up to $1500 a year in about July last year. Bracket creep, as well, has been taking a bigger bite out of people’s pay rises.

With this week’s release of the latest “national accounts”, we learnt just how effective the squeeze on households’ budgets has been. The growth in the economy – real gross domestic product – slowed to a microscopic 0.1 per cent in the three months to the end of March, and just 1.1 per cent over the year to March. That compares with growth in a normal year of 2.4 per cent.

This weak growth has occurred at a time when the population has been growing strongly, by 0.5 per cent during the quarter and 2.5 per cent over the year. So, real GDP per person actually fell by 0.4 per cent during the quarter and by 1.3 per cent during the year.

As the Commonwealth Bank’s Gareth Aird puts it, the nation’s economic pie is still expanding modestly, but the average size of the slice of pie that each Australian has received over the past five quarters has progressively shrunk.

But if we return to looking at the whole pie – real GDP – the quarterly changes over the past five quarters show a clear picture of an economy slowing almost to a stop: 0.6 per cent, 0.4 per cent, 0.2 per cent, 0.3 per cent and now 0.1 per cent.

It’s not hard to determine what part of GDP has done the most to cause that slowdown. One component accounts for more than half of total GDP – household consumption spending. Here’s how it’s grown over the past six quarters: 0.8 per cent, 0.2 per cent, 0.5 per cent, 0.0 per cent, 0.3 per cent and 0.4 per cent.

A further sign of how tough households are doing: the part of their disposable income they’ve been able to save each quarter has fallen from 10.8 per cent to 0.9 per cent over the past two years.

So, if the object of the squeeze has been to leave households with a lot less disposable income to spend on other things, it’s been a great success.

The point is, when our demand for goods and services grows faster than the economy’s ability to supply them, businesses take the opportunity to increase their prices – something we hate.

But if we want the authorities to stop prices rising so quickly, they have only one crude way to do so: by raising mortgage interest rates and income tax to limit our ability to keep spending so strongly.

When the demand for their products is much weaker, businesses won’t be game to raise their prices much.

So, is it working? Yes, it is. Over the year to December 2022, consumer prices rose by 7.8 per cent. Since then, however, the rate of inflation has fallen to 3.6 per cent over the year to March.

Now, you may think that 3.6 per cent isn’t all that far above the Reserve’s inflation target of 2 per cent to 3 per cent, so we surely must be close to the point where, with households flat on the floor with their arms twisted up their back, the Reserve is preparing to ease the pain.

But apparently not. It seems to be worried inflation’s got stuck at 3.6 per cent and may not fall much further. In her appearance before a Senate committee this week, Reserve governor Michele Bullock said nothing to encourage the idea that a cut in interest rates was imminent. She even said she’d be willing to raise rates if needed to keep inflation slowing.

It’s suggested the Reserve is worried that we have what economists call a “positive output gap”. That is, the economy’s still supplying more goods and services than it’s capable of continuing to supply, creating a risk that inflation will stay above the target range or even start going back up.

With demand so weak, and so many people writhing in pain, I find this hard to believe. I think it’s just a fancy way of saying the Reserve is worried that employment is still growing and unemployment has risen only a little. Maybe it needs to see more blood on the street before it will believe we’re getting inflation back under control.

If so, we’re running a bigger risk of recession than the Reserve cares to admit. And if interest rates stay high for much longer, I doubt next month’s tax cuts will be sufficient to save us.

Another possibility is that what’s stopping inflation’s return to the target is not continuing strong demand, but problems on the supply side of the economy – problems we’ve neglected to identify, and problems that high interest rates can do nothing to correct.

Problems such as higher world petrol prices and higher insurance premiums caused by increased extreme weather events.

I’d like to see Bullock put up a big sign in the Reserve’s office: “If it’s not coming from demand, interest rates won’t fix it.”

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It's slowing the spin doctors' spin that keeps me busy

Do you remember former prime minister John Howard’s ringing declaration that “we will decide who comes to this country and the circumstances in which they come”? It played a big part in helping him win the 2001 federal election. But it’s only true in part.

The job of economic commentators like me is supposed to be telling people about what’s happening in the economy and adding to readers’ understanding of how the economy works.

But the more our politicians rely on spin doctors to manipulate the media and give voters a version of the truth designed always to portray the boss in the most favourable light, the more time I have to spend making sure our readers aren’t being misled by some pollie’s silken words.

These days, I even have to make sure our readers aren’t being led astray by the economics profession. For the first time in many years, I’ve found myself explaining to critical academic economists that I’m a member of the journos’ union, not the economists’ union.

Like many professions, economists are hugely defensive. And they like to imagine my job is to help defend the profession against its many critics. Sorry, I’m one of the critics.

My job is to advise this masthead’s readers on how much of what economists say they should believe, and how much they should question.

It’s not that economists are deliberately misleading, more that they like to skirt around the parts of their belief system that ordinary people find hard to swallow.

And then there’s the increasing tendency for news outlets to pick sides between the two big parties, and adjust their reporting accordingly. My job is to live up this masthead’s motto: Independent. Always.

So, back to Howard’s heroic pronouncement. It’s certainly true that “we” – the federal government – decide the circumstances in which people may come to Australia. If you turn up without a visa, you’ll be turned away no matter how desperate your circumstances. If you come by boat, your chances of being let in are low.

But if you come by plane, with a visa that says you’ll be studying something at some dodgy private college when, in truth, you’re just after a job in a rich country, in you come. If we’ve known about this dodge, it’s only in the past few weeks that we’ve decided to stop it.

No, the problem is, if you take Howard’s defiant statement to mean that we control how many people come to this country, then that’s not true. We decide the kinds of people we’ll accept, but not how many.

There are no caps because, for many years, both parties have believed in taking as many suitable immigrants as possible. It’s just because the post-COVID surge in immigration – particularly overseas students – has coincided with the coming federal election that the pollies are suddenly talking about limiting student visas.

But remember, the politicians have form. Knowing many voters have reservations about immigration, they talk tough on immigration during election campaigns, but go soft once our attention has moved on, and it’s all got too hard.

It’s a similar thing with Anthony Albanese’s Future Made in Australia plan. Polling shows it’s been hugely popular with voters. But that’s because they’ve been misled by a clever slogan. It was designed to imply a return to the days when we tried to make for ourselves all the manufactured goods we needed.

But, as I’ve written, deep in last month’s budget papers was the news that we’d be doing a bit of that, but not much. It’s just a great slogan.

On another matter, have you noticed Treasurer Jim Chalmers’ dissembling on how he feels our pain from the cost-of-living crisis, which is why he’s trying so hard to get inflation down?

What he doesn’t want us thinking about is that, at this stage, most of the pain people are feeling is coming not from higher prices, but from the Reserve Bank’s 4.25 percentage-point increase in interest rates.

Get it? The pain’s coming from the cure, not the disease. The rise in interest rates has been brought about by the independent central bank, not the elected government, of course. But when Chalmers boasts about achieving two successive years of budget surplus, he’s hoping you won’t realise that those surpluses are adding to the pain households are suffering, particularly from the increase in bracket creep.

And, while I’m at it, many people object to businesses raising their prices simply because they can, not because their costs have increased. This they refer to disapprovingly as “gouging”.

But few economists would use that word. Why not? Because they believe it’s right and proper for businesses to charge as much as they can get away with.

Why? Because they think it’s part of the way that market forces automatically correct a situation where the demand for some item exceeds its supply. In textbooks, it’s called “rationing by price”.

Rather than the seller allowing themselves to run out of an item, they sell what’s left to the highest bidders. What could be better than that?

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No one's sure what's happening in the economy

Treasury secretary Dr Steven Kennedy let something slip when he addressed a meeting of business economists last week. He said it was too early to say if the economy was back in a more normal period, “perhaps because no one is quite sure what normal is any more”.

This was especially because “unusual economic outcomes are persisting,” he added.

Actually, anyone in his audience could have said the same thing – but they didn’t, perhaps because they lacked the authority of the “secretary to the Treasury”.

No, standard practice among business economists and others in the money market is to make all predictions with an air of great certainty. Forgive my cynicism, but this may be because their certain opinion changes so often.

Often, it changes because something unexpected has happened in the US economy. Many people working in our money market save themselves research and thinking time by assuming our economy is just a delayed echo of whatever’s happening in America.

If Wall Street has decided that America’s return to a low rate of inflation has been delayed by prices becoming “sticky”, rest assured it won’t be long before our prices are judged to have become sticky as well.

But predicting the next move in either economy has become harder than we’re used to. Kennedy noted in his speech that, in recent years, the global economy, including us, had been buffeted by shared shocks, such as a global pandemic, disruptions to the supply of various goods, and war.

One factor I’d add to that list is the increasing incidence of prices being disrupted by the effects of climate change, particularly extreme weather events, but also our belated realisation that building so many houses on the flood plain of rivers wasn’t such a smart idea.

All these many “shocks” to the economy have knocked it from pillar to post, and stopped it behaving as predictably as it used to. But, as we’ll see, not all the shocks have been adverse.

Right now, the change everyone’s trying to predict is the Reserve Bank’s next move in its official interest rate, which most people hope will be downward.

Normally, that would happen just as soon as the Reserve became confident the inflation rate was on its way down into the 2 to 3 per cent target range. And normally, we could be confident the first downward move would be followed by many more.

But since, like Kennedy, the Reserve is not quite sure what normal is, and Reserve governor Michele Bullock says she expects the return to target to be “bumpy”, it may delay cutting rates until inflation is actually in the target zone.

If so, and remembering that monetary policy, that is, interest rates, affects the economy with a “long and variable lag”, the Reserve will be running the risk that it ends up hitting the economy too hard, and causing a “hard landing” aka a recession, in which the rate of unemployment jumps by a lot more than 1 percentage point.

Kennedy was at pains to point out that the rise in the official interest rate of 4.25 percentage points over 18 months is the “sharpest tightening” of the interest-rate screws since inflation targeting was introduced in the early 1990s.

He also reminded us how much help the Reserve’s had from the Albanese government’s fiscal policy, which has been “tightened at a record pace”. Measured as a proportion of gross domestic product, the budget balance has improved by about 7 percentage points since the pandemic trough. Add the states’ budgets and that becomes 7.5 percentage points.

That’s a part of the story those in the money market are inclined to underrate, if not forget entirely. Kennedy reminded them that, since 2021, our combined federal and state budget balance has improved by more than 5 percentage points of GDP. This compares with the advanced economies’ improvement of only about 1.5 percentage points.

So, has our double, fiscal as well as monetary, tightening had much effect in slowing the growth of demand for goods and services and so reducing inflationary pressure?

Well, Kennedy noted that, over the year to December, households’ consumption spending was essentially flat. And consumer spending per person actually fell by more than 2 per cent.

When you remember that consumer spending accounts for more than half total economic activity, this tells us we’ve had huge success in killing off inflationary pressure. And this week, when we see the national accounts for the March quarter, they’re likely to confirm another quarter of very weak demand.

So, everything’s going as we need it to? Well, no, not quite.

Last week we learnt that, according to the new monthly measure of consumer prices, the annual inflation rate has risen a fraction from 3.4 to 3.6 per cent over the four months to April.

“Oh no. What did I tell you? The inflation rate’s stopped falling because prices are “sticky”. It’s not working. Maybe we need to raise interest rates further. Certainly, we must keep them high for months and months yet, just to be certain sure inflation pressure’s abating.”

Well, maybe, but I doubt it. My guess is that a big reason money market-types are so twitchy about the likely success of our efforts to get inflation back under control is the lack of blood on the streets that we’re used to seeing at times like this.

Why isn’t employment falling? Why isn’t unemployment shooting up? Why are we only just now starting to see news of workers being laid off at this place and that?

It’s true. The rate of unemployment got down to 3.5 per cent and, so far, has risen only to 4.1 per cent. Where’s all the blood? Surely, it means we haven’t tightened hard enough and must keep the pain on for much longer?

But get this. What I suspect is secretly worrying the money market-types, is something Kennedy is pleased and proud about.

“One of the achievements of recent years has been sustained low rates of unemployment,” he said last week. “The unemployment rate has averaged 3.7 per cent over the past two years, compared with 5.5 per cent over the five years prior to the pandemic.”

Our employment growth has been stronger than any major advanced economy over the past two years, he said. Employment has grown, even after accounting for population growth.

And we’ve seen significant improvements for those who typically find it harder to find a job. Youth unemployment is 2.6 percentage points lower than it was immediately before the pandemic.

So, what I suspect the money market’s tough guys see as a sign that we haven’t yet experienced enough pain, the boss of Treasury sees as a respect in which all the shocks that have buffeted us in recent times have left us with an economy that now works better than it used to.

And Kennedy has a message for the Reserve Bank and all its urgers in the money market.

“It is important to lock in as many of the labour market gains as we can from recent years. This involves macroeconomic policy aiming to keep employment near its maximum sustainable level consistent with low and stable inflation,” he said.

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Australia's future to be made under Treasury's watchful eye

The Albanese government’s Future Made in Australia has had a rapturous reception from some, but a suspicious reception from others (including me). In a little-noticed speech last week, however, one of our former top econocrats gave the plan a tick.

Rod Sims, former chair of the Australian Competition and Consumer Commission, and now chair of Professor Ross Garnaut’s brainchild, the Superpower Institute, has been reassured by the plan’s “national interest framework”, prepared by Treasury and issued with the budget.

But first, the budget announced that the government would “invest” – largely by way of tax concessions – $22.7 billion in the plan over the next decade.

Treasury’s framework will be included in the planned Future Made in Australia Act. It will “clearly articulate” how the government will identify those industries that will get help under the act, to “impose rigour on government’s decision-making on significant public investments, particularly those used to incentivise private investment at scale,” according to Treasury.

So, Sims is reassured by the knowledge that the framework – and Treasury – will ensure that “sound economics has been applied”. “In my view, [the plan] represents a growth and productivity opportunity every bit as bold as seen under previous governments,” he says.

Some of those giving the plan a rapturous reception believed it was “a welcome return to activist industry policy and making more things and value-adding in Australia,” Sims says. But “despite what has been said for political reasons, this is not the logic driving [the plan] as described by Treasury”.

Sims says we don’t need to revisit old and tired debates about protectionism. But as it happens, he notes, making more things in Australia will be an outcome of the plan.

Some said the plan represented the end of “neoliberalism” and a return to interventionist thinking. “It is not that either,” he says. “[The plan] relies on sound economics, and any change in economic thinking is a return to the application of sound economics.”

The way I’d put it is that to intervene or not to intervene is not the question. A moment’s thought reveals that governments have always intervened in the economy. (One of the most incorrigible interveners is a crowd called the Reserve Bank, which keeps fiddling with the interest rates paid and received in the private sector.)

No, as we’ll see, the right question is usually whether the intervention is adequately justified by “market failure” – whether, left to its own devices, the market will deliver the ideal outcomes that economic theory promises.

Others have approved of the plan because it’s about encouraging some local production in necessary supply chains. Sims admits there’s an element of this, as local battery and solar panel manufacture are mentioned, but they are a small part of the program.

Similarly, some move to make supply chains less at risk of disruption may be involved, but it’s not the driving logic of the plan.

Yet others have said the plan is copying the United States and its (misleadingly named) Inflation Reduction Act. “This is incorrect,” Sims says. The Americans’ act “spreads money widely, whereas [the plan] is targeted to Australia’s circumstances”.

The US act “also has many destructive features that we will not copy, such as its protectionist approach.”

But, to be fair to the sceptics, he adds, “the policy’s introduction was poorly handled. It was linked to making solar panel modules, when they can be purchased much more cheaply from China, and then there was the announcement of $1 billion for quantum computing.”

“It helps neither global mitigation [of climate change] nor Australian development to force manufacture here, if the final products are produced most cost-effectively elsewhere.”

So, if the plan isn’t mainly about protectionism, what’s its main purpose? Achieving the net zero transition and turning Australia into a renewable energy superpower.

Treasury’s national interest framework says the net zero transition and “heightened geostrategic competition” (code for the rivalry between the US and China) are transforming the global economy.

“These factors are changing the value of countries’ natural endowments, disrupting trade patterns, creating new markets, requiring heightened adaptability and rewarding innovation,” the framework says.

“Australia’s comparative advantages, capabilities and trade partnerships mean that these global shifts present profound opportunity for Australian workers and businesses.” We can foster new, globally competitive industries that will boost our economic prosperity and resilience, while supporting decarbonisation.

In considering the prudent basis for government investment in new industries, the framework will consider the following factors: Australia’s grounds for expecting lasting competitiveness in the global market; the role the new industry will play in securing an orderly path to net zero and building our economic resilience and security; whether the industry will build key capabilities; and whether the barriers to private investment can be resolved through public investment in a way that delivers “compelling public value”.

So, that’s quite a few hurdles you have to jump before the government starts giving you tax breaks. And proposals will be divided between two streams: the net zero transformation stream and the economic resilience and security stream. We can only hope that a lot more of the money goes to the former stream than the latter.

To justify government intervention, the framework requires evidence of “market failure” such as “negative externalities” that arise because the new clean industry is competing against fossil fuel-powered industries which, in the absence of a price on carbon, haven’t been required to bear the cost to the community of the greenhouse gases they emit.

Another case of market failure are the “positive externalities” that arise when the first firms in a new industry aren’t rewarded for the losses they incur while learning how the new technology works, to the benefit of all the firms that follow them.

Politicians being politicians, I doubt whether Treasury’s policing of its national interest framework will ensure none of the $22.7 billion is wasted. But we now have stronger grounds for hoping that Treasury’s oversight will keep the crazy decisions to a minimum.

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The pollies have twigged that our crazy housing game can't go on

Last week, a fairly ordinary place in our street, similar to ours, sold for $4.7 million. I suppose I should be congratulating myself on how well I’ve done in the capitalist game. And it’s only fair since I’ve “worked hard all my life”. In truth, all we’ve done is pay the exorbitant price of $180,000 for our place, then hung around for 40 years. This makes sense? Surely, this crazy game can’t keep going onward and upward forever.

It’s now been two weeks since Treasurer Jim Chalmers delivered his budget, but I’ve only just realised its main content is not the one-year $300 electricity bill rebate we’ve obsessed over, it’s the evidence the government has finally accepted our housing system is dysfunctional and must be fixed. The budget papers include a long statement spelling out what’s wrong with housing with a candour I’ve not seen before.

The hard truth is that, until now, the pollies on both sides have only pretended to care about how hard the young were finding it to afford a home of their own. Why? Because the number of voters who own a home – whether outright or still with a mortgage – greatly exceeds the number who’d merely like to become a homeowner. As John Howard used to say, he’d never heard any homeowner complain about the rising value of their property.

All the things pollies do in the name of helping first-home buyers – such as cutting stamp duty on the purchase price – don’t actually help, and probably aren’t intended to. When they claim to be helping you afford the high price, they’re really helping to keep it high. If they helped you and no one else you’d be advantaged. But when they also help the people you’re bidding against, it’s actually the seller who benefits.

It’s the same with the Bank of Mum and Dad. The more parents help their kids afford the high prices – as I have – the higher those prices will stay. Again, the sellers benefit.

When the value of the oldies’ homes just keeps going up, this constitutes a transfer of wealth from the younger to the older generation. The Bank of Mum and Dad transfers some of the wealth back to the youngsters. The losers, however, are those kids who didn’t have the sense to pick well-off parents.

But what makes me think the Albanese government has seen the light?

Well, for a start, it makes more political sense than it used to. Not only are younger people having trouble affording their first home, they’re being hit with big jumps in rent thanks to an acute shortage of rental accommodation.

The budget statement admits that the median price of dwellings in the eight capital cities has more than doubled since the mid-noughties. So have advertised rents. It now takes more than 11 years to save a 20 per cent deposit on a house.

Politicians have been favouring the old at the expense of the young for decades, but the young are getting restive. Labor has more than its share of the votes of young adults. It risks losing those votes if it doesn’t start delivering for the younger generation.

Labor sees that house prices and rents are rising because the supply of homes has failed to keep up with growth in the population. Part of the reason for this is what the statement admits has been a “long-term, chronic under-investment in social housing”.

Why all these frank admissions? Because the Albanese government has decided to do something big to ease the problem. The budget announced new measures worth $6 billion which, added to those already announced, amount to a $32 billion plan to deliver 1.2 million new, well-located homes in the five years to June 2029. This would be equivalent to a city the size of Brisbane.

As with so many of our problems, the feds have most of the money needed to fix the nation’s housing, but the actual responsibility for housing rests with the states and even local government. The plan’s attraction is that it’s been agreed with the states and includes monetary incentives for them to co-operate.

The words “well-located homes” are code for many of them involving medium and high-density housing in the capital cities’ “missing middle”. It requires the states to take on their local government NIMBYs (see monetary incentives above).

It would be wrong, however, to see this plan as the simple solution to a housing system that’s been performing poorly for decades. It will be some years before it makes much difference, and experts have questioned whether so many new homes can be built in just five years.

It’s an advance to see the new emphasis on improving the system’s ability to supply more houses, but the vexed question of fixing the distortions to demand caused by misguided tax concessions remains to be faced.

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Politicians don't control migrant numbers, and usually don't want to

Suddenly, everyone’s talking about high migration and the way it’s disrupting the economy. Why is the government letting in so many people, and why hasn’t it turned off the tap?

Short answer: because, the way we run immigration, it has little control over the tap.

But, at times like this, that’s not something either side of politics wants to admit. The truth is, they could exercise more control over immigration, but neither side has particularly wanted to.

Usually, the pressure on them to keep immigration high greatly exceeds the pressure to keep it low. The upward pressure comes from business, which finds it easier to increase profits when it has a continuously growing market.

For many years, business’s main interest was in getting more factory fodder. More people to buy the products of our highly protected manufacturing industry and give it a little of the economies of scale it lacked.

This was why it had to be protected from imports from overseas manufacturers with much bigger domestic markets. As well, our manufacturers needed a steady supply of less-skilled workers to staff their production lines.

In more recent decades, the emphasis has switched from factory fodder to preferring those immigrants with the skills we particularly need to fill shortages as they arise. This, I fear, has allowed our employers to take less interest in ensuring they were always training up enough locals to meet their industry’s future needs.

Another change has been from focusing on permanent migration to encouraging people to come here for a while on temporary visas: workers with skills coming to see what it’s like, students coming to gain further education and young people coming on working holidays, aka backpackers.

We’ve become quite dependent on this huge inflow and outflow of temporary migrants, which far exceeds people coming on permanent visas. Businesses often want their temporary skilled workers to stay on.

The sale of education to overseas students has become one of our biggest exports, one on which our universities have become heavily dependent. Our hospitality industries rely on the casual employment of overseas students and backpackers. And farmers and country towns rely on backpackers for fruit picking and other unskilled work.

On top of all that, federal governments have become reliant on high migration to make our GDP growth figures look better. They often boast about how well our growth compares with the other rich countries, without ever mentioning that most of this is explained by our faster population growth.

And right now, of course, the economy’s growth is so weak we’d be in recession if not for the recent immigration surge.

All these are the reasons successive federal governments want to maintain strong immigration, despite the public’s longstanding reservations. Former prime minister John Howard did a great line in diverting the punters’ attention to resentment of some uninvited arrivals by boat, while he ushered in visa-wielding immigrants arriving by the plane load.

It’s only when high immigration becomes an issue before elections, as now, that the pollies make noises about slowing the inflow. It’s true that, since we reopened our borders following the lockdowns, our “net overseas migration”, people arriving minus people departing, but not counting those on brief visits, leapt to 528,000 in 2022-23, more than double what it was in 2018-19. And it may exceed another 400,000 in the financial year just ending.

This surge does seem to have contributed to the present acute shortage of rental accommodation and the big jump in rents, but Opposition Leader Peter Dutton is drawing a long bow in blaming the recent surge for the unaffordability of buying a home, which has been worsening for decades.

The telltale sign that Dutton is fudging is his plan to make more homes available by cutting the government’s permanent migration program from 185,000 a year to 140,000.

The government does control the size of this program, and often moves it up or down a bit, but the size of the program makes little difference to what matters most for the economy: annual net overseas migration.

The trick is that about 65 per cent of the permanent visas go to people who are already here on temporary visas. Changing their visa status makes no difference to net overseas migration.

At times like this, the pollies would like you to think they have the power to move immigration up or down according to the economy’s needs at the time.

But they don’t. For the most part, the level of net migration is, as economists would say, “demand determined”. And, as the demographers will tell you, net migration tends to go up and down with the state of our economy.

When the economy’s booming, migrants are keen to come to Australia, and our employers are keen to have them, particularly if they have skills. What’s more, locals and former immigrants are more likely to want to stay here than go overseas.

It’s a different story when our economy’s weak. Employers are less keen to bring in people and migrants are less keen to come.

Now, our present circumstances don’t fit that long-established cyclical pattern. But that’s mainly because the economy’s been returning to normal after the end of the pandemic. This is particularly true of the people most disrupted by the pandemic, and who’ve done most to account for our recent downs and ups in net migration: overseas students.

Most students went back home during the lockdowns, but now many of them, and many newbies, are coming back in. We’ve had a lot more students than expected because, to encourage their return, the Morrison government removed the limit on how much paid work they could do. It took the Albanese government too long to wake up and end the concession.

If you find it hard to believe the government has little control over the number of immigrants it lets in, note this. To be given a temporary visa, you have to fit one of the many categories the government wants: skilled, student, backpacker and so on. But there are no limits on the number of applicants accepted in each category.

Until now. Because it’s the students who’ve contributed most to the recent surge, the government is planning to impose caps on how many it will admit. The opposition is promising something similar.

Remember this, however. The economy is weak – and it is forecast to remain so for a year or two – so it’s reasonable to expect that, even without the caps on overseas students, net migration will fall back soon enough.

But an election is coming. Voters are unhappy about high migration and the high cost of housing, and both sides want to be seen doing something about it. How much the winner actually bothers to do after the election, may be a different matter.

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Treasury tells all: how the housing market is so stuffed up

Would you believe that our ever-rising house prices are a sign there’s something badly wrong with our housing market? Would you believe our housing arrangements are worse than in the other rich countries?

Well, I would when that’s what Treasury is admitting in the annual sermon it tacks onto the budget papers. This year it’s about meeting our housing “challenge”.

In a well-functioning economy, its industries can respond to the increase in demand for their good or service by increasing their supply without much delay. Of course, it takes a lot longer to build a new house or apartment than it does to churn out more ice-creams or haircuts.

But, even so, our housing industry has been too slow to respond to the increased demand for housing. This comes from our rising population which, thanks to continuing high levels of immigration, has grown faster than most of the other rich countries.

Figures from the Organisation for Economic Co-operation and Development, a group of mainly advanced economies, show that our number of dwellings per 1000 people increased only from 403 to 420 between 2011 and 2022. This compared poorly with most other countries.

In 2011, our level of housing supply was just 92 per cent of the OECD average. And by 2022 it had fallen to 90 per cent. This was behind countries such as Canada, the United States and England.

Our completions of new private dwellings reached a peak of more than 200,000 a year in 2018-19 but have since fallen to about 160,000 a year. This has left us with an acute shortage of properties available to buy or rent.

Nationwide, the number of homes being offered for sale has fallen since 2015, while the number offered for rent has been falling since early 2020.

Speaking of renting, Treasury says the rental market is considered to be in balance – meaning renters have little trouble finding a place and landlords have little trouble finding a tenant – when the vacancy rate is about 3 per cent. In cities such as Sydney and Melbourne it’s now down to about 0.5 per cent. Ouch.

Not surprisingly, when demand grows faster than supply can keep up with, prices rise. The rise in the cost of newly built homes, and the cost of renting, have contributed significantly to the general cost-of-living crisis.

So, why has our housing industry become so slow to respond to increased demand? Treasury says the causes are “multifaceted, complex and affect all stages of the housing construction process, including all levels of government and industry”.

One way to improve the market’s response to greater demand is to accelerate the construction process. But Treasury says that completion times for apartments, townhouses and detached houses actually worsened by 39 per cent, 34 per cent and 42 per cent respectively over the 10 years to June 2023.

Calculations (or, if you want to sound more scientific, “modelling”) by a federal government agency says that, over the next six years, the nation’s existing unmet demand will never be satisfied unless completion times are speeded up. In six years’ time, we’ll still have a backlog of about 39,000 dwellings.

Treasury says the expectation that churning out homes faster will help to lower house prices is supported by empirical research. One study found that those OECD countries that built more housing over the 15 years to 2015 experienced lower real growth in house prices.

Another study showed that adding an extra 50,000 homes a year for a decade could reduce house prices by up to 20 per cent.

So, what can be done to increase the housing industry’s annual output? Treasury says planning and zoning restrictions can limit the speed at which land is made available.

Delays in approving development applications by local councils can be excessive. I think councils and government departments are monopolists and, like all monopolists, they take advantage of the lack of competition.

Private sector monopolists whack up their prices and don’t worry about the quality of the service they provide. Public monopolists make you jump through hoops that aren’t strictly necessary, and they fix your problem in their own good time.

I wonder whether, over all these years, those outfits have ever had much pressure on them to lift their game. If that changed, I’m sure we could get more homes built per year.

Treasury says average times for the approval of development applications vary by state, with Victoria and NSW experiencing the longest waiting times early this month of 144 and 114 days, respectively.

It shouldn’t surprise you that Treasury wants housing to be delivered in well-located areas where the demand is greatest.

Dense development in the “missing middle” of major cities, where households can reside closer to jobs in areas with higher quality amenities and infrastructure, has been limited by planning and zoning restrictions and slow release of infill land, Treasury says.

Global supply constraints and price shocks on imported building materials associated with the pandemic have added to the cost of construction, driving up the price of newly built homes. Although prices aren’t rising as fast as they were, they haven’t fallen back.

Shortages of building labour have also increased the prices of newly built homes and slowed the pace of construction. The growth in non-dwelling construction activity has drawn labour away from home building. The productivity of labour in construction has not improved since the early 2000s.

The industry blames these shortages on the drop-off in rates of skilled migration during the pandemic. But I wonder if the deeper problem is that the former ready availability of imported labour tempted the industry to save money by failing to train as many apprentices as they should have.

So, what’s the Albanese government doing about this mess? It’s finally grasped the nettle and is spending big – $32 billion, including $6 billion in this month’s budget – to “address historical underinvest in the housing system” and build 1.2 million new, well-located homes. We’ll see how they go.

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We need to talk (sense) about immigration

It’s a safe bet there’ll be much talk about immigration between now and the next federal election, due this time next year. Peter Dutton has seen to that. Trouble is, much of it will just be hot air, much of it will be misleading and much will reflect the vested interests of the person doing the talking.

And some of it will reveal us at our worst: our tendency to blame incomers for all our ills. The more ignorant among us will shout abuse at some poor soul they see on the street whose clothing or skin colour looks different.

But none of that says our immigration policy isn’t a legitimate subject for sensible debate. Personally, I’d like to see it a lot lower.

You know strange things are happening when the leader of the Liberal Party says he wants to slash immigration. The Libs are, and have always been, the party of high migration.

But they’ve fallen on hard times with the loss of so many heartland seats to the teals, and Dutton figures his best hope of winning is to pick up seats in the outer suburbs, where their social class says people should vote Labor, but their social values give them greater affinity with the conservatives.

It’s because many immigrants gravitate to the outer suburbs that the locals find it easier to blame them for traffic congestion and other overcrowding, rather than governments’ failure to build enough infrastructure.

Ordinary Australians have always tended to think there’s been too much immigration. But the Liberals support it because it’s what business wants. The easiest way to increase profits is to sell into a growing market. Consider what you’d want if you were in the business of building new homes.

In recent times, Labor has supported high immigration too, mainly because it doesn’t want to get offside with business.

Almost all economists support strong immigration. I suspect that’s because their obsession with economic growth makes them susceptible to the fallacy that bigger is always better. Not if it comes at the expense of quality.

The economists do have one sensible point to make. Many people fear the migrants will take all the jobs. But the dismal scientists refute this. The newcomers and their families add about as much to the demand for labour to produce more goods and services as they add to the supply of workers.

All this – the gap between voters’ doubts about immigration and the pressure on governments to keep it coming – helps explain what seasoned political observers know: the pollies professed enthusiasm for cutting immigration is a lot stronger during election campaigns than it is after an election’s become a receding memory.

As for Dutton’s proffered solution, it doesn’t amount to much and would do little to fix the problems he claims he wants to fix. By the same token, the government’s claims that his plans would hasten the end of the universe are exaggerated.

Here’s a tip. Any pollie banging on about what they intend to do to the “permanent migration” program either doesn’t know what they’re talking about or, more likely, is pretty sure you don’t. What affects the economy’s workings is not permanent migration so much as “net overseas migration”, which is arrivals minus departures (ignoring people coming or going on short visits).

This actually went negative when we closed our borders during the pandemic, but soared after we reopened them. Net migration exceeded 520,000 in the year to June 2023, and over the year to this June may be as much as 400,000.

This huge surge is what’s causing the fuss. A lot of the swing is explained by incoming overseas students, which the universities will tell you is a wonderful thing. It’s one of our biggest export earners, and the unis have come to rely on this income to fund much of their research work.

I have some sympathy for them. Successive federal governments have made them more dependent on overseas students by using this as an opportunity to limit the support the unis get from the budget.

Even so, it seems clear that the inflow of students needing somewhere to live has contributed to the recent acute shortage of rental accommodation and added to the jump in rents.

The Albanese government wants to see a big drop in net migration and, to this end, is talking about imposing caps on how many overseas students the unis can admit.

The unaffordability of home ownership is a good issue for the election campaign, but Dutton is drawing a long bow in linking it to immigration. Homes have become harder to afford over several decades for various reasons. The recent immigration surge won’t have made much difference.

What’s true is that the more people we let in, the more capital investment – in the form of homes, business equipment and public infrastructure – we need to meet their needs. When this investment fails to keep up with the growth in the population, problems arise and the benefits to the economy that the advocates of high immigration have promised don’t happen.

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How the budget was hijacked by a $300 cherry on the top

Talk about small things amusing small minds. It looked like a textbook-perfect exercise in budget media management by Anthony Albanese’s spin doctors. Until it blew up in the boss’s face. Trouble is, it wasn’t just the tabloid minds that got side-tracked. So did the supposed financial experts.

Budget nights are highly stage-managed affairs, as the spinners ensure all the mainstream media are focused on the bit the boss has decided will get the budget a favourable initial reception.

You pre-announce – or “drop” to a compliant journo – almost all the budget’s measures, big or small, nice or nasty. This time they even revealed the exact size of the old year’s surplus. But you hold back one juicy morsel, knowing the media’s obsession with what’s “old” and what’s “new” will guarantee it leads every home page.

I call it the cherry on the top. And this time it was the $300 energy rebate going to all households. A prize for everyone (except the pensioners, who last year got $500) and proof positive that Jim Chalmers feels their cost-of-living pain. (It would have been much better to announce the rejig of the stage 3 tax cuts, of course, but Albo had to play that card early, to help with a dicey byelection.)

How were the spinners to know the punters would be incensed when they realised it would even be going to Gina Rinehart? And get this: if a billionaire owned, say, 10 investment properties, they’d be getting 11 lots of $300. Outrageous.

The way some tabloids tell it, the punters were so offended they were rioting in the streets, demanding Chalmers stick their $300 up his jumper. It was the Beatles returning their MBEs.

Why wasn’t the rebate means tested? Perfectly good reason: because that would have been more trouble and expense than it was worth. Don’t bother mentioning: because, apart from being a popular giveaway, the rebate’s other purpose was to help reduce the consumer price index by 0.5 of a percentage point, and means testing it would have reduced the reduction.

How so many shock jocks and journos could get so steamed up about such a small thing is hard to explain. But what’s much harder to explain is why so many otherwise sensible economists got so steamed up about the wickedness and counterproductive wrongheadedness of it.

I think it’s a perfectly sensible device to hasten progress in getting inflation down to the target zone, and by no means the first time governments have used it. The temporary energy rebate will cost $3.5 billion over two years and the continuing increase in the Commonwealth rent allowance for people on social security will cost $880 million over its first two years.

So while it’s true that increased government spending adds to inflationary pressure, to argue furiously about $4.4 billion in an economy worth $2.7 trillion a year shows the lack of something the late great econocrat Aussie Holmes said every economist needed: “a sense of the relative magnitudes”. It’s chicken feed.

But the financial experts’ righteous indignation about what they see as an inflationary attempt to fudge the inflation figures seemed to utterly distort their evaluation of the budget and its effect on the macroeconomy.

The budget was a “short-term shameless vote-buying exercise” in which Labor abandoned all pretence of fiscal responsibility and went on a massive spending spree. The budget’s return to surplus had been abandoned, leaving us with deficits as far as the eye could see. We now had a permanent “structural deficit”. The hyperbole flowed like wine.

It’s true that the policy decisions announced in the budget are expected to add $24 billion to budget deficits over the next four years. But if, as the financial experts assert, getting inflation down ASAP is the only thing we should be worrying about, then it’s really what’s added in the coming year that matters most. Which reduces the size of Chalmers’ crimes to less than $10 billion.

It’s true, too, that the expected change in the budget balance from a $9 billion surplus in the financial year just ending, to a deficit of $28 billion in the coming year, is a turnaround of more than $37 billion. Clearly, and despite Chalmers’ denials, this changes the “stance” of fiscal policy from restrictive to expansionary.

But the financial experts seem to have concluded this development can be explained only by a massive blowout in government spending. Wrong. It’s mainly explained by the $23-billion-a-year cost of the stage 3 tax cuts.

Perhaps they were misled by the budget’s Table of Truth (budget statement 3, page 87) which, like everything in economics, has its limitations. The tax cuts don’t rate a mention. Why not? Because they’ve been government policy since 2018, and so have been hidden deep in the budget’s “forward estimates” for six years.

But whatever its main cause, surely this shift to expansionary fiscal policy puts the kybosh on getting inflation back down to the target range? Well, it would if shifts in the stance of the macroeconomic policy instruments were capable of turning the economy on a sixpence.

Unfortunately, the first rule of using interest rates to slow down or speed up the economy is that this “monetary policy” works with a “long and variable lag”.

The financial experts seem to have forgotten that managing the strength of demand – and fixing inflation without crashing the economy – is all about getting your timing right.

So is predicting the consequences of a policy change. Two years of highly restrictive monetary and fiscal policies won’t be instantly reversed by a switch to expansionary fiscal policy. As the new boss of the Grattan Institute, Aruna Sathanapally, has wisely noted, at the heart of the budget is the sad truth that the economy is weak, which is one reason inflation will fall.

The inflation rate peaked at just under 8 per cent at the end of 2022. By March this year it had fallen to 3.6 per cent. To me, that’s not a million miles from the Reserve Bank’s target range of 2 per cent to 3 per cent.

But the financial experts seem to have convinced themselves there’s a lot of heavy lifting to go. They even quote one brave soul saying the Reserve will need two more rate rises. I think it’s more likely we’ll get down to the target in the coming financial year, and that the move to expansionary fiscal policy will prove well-timed to help reverse engines and ensure the Reserve achieves its promised soft landing.

Chalmers’ decision to use the $300 rebate to reduce the consumer price index directly by 0.5 of a percentage point adds to my confidence. It’s particularly sensible if, as the financial experts have convinced themselves, the inflation rate’s fall is now “sticky”.

Those dismissing this decline as merely “technical” display their ignorance of how wages and prices are set outside the pages of a textbook. To everyone but economists, the CPI is the inflation rate. It’s built into many commercial contracts and budget measures.

It’s a safe bet this device will cause the Fair Work Commission’s annual increase in minimum award wage rates – affecting the bottom quarter of the workforce – to be about 0.5 of a percentage point lower than otherwise. And do you really think employers won’t take the opportunity to reduce wage rises accordingly? I doubt they’re that generous.

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Budget's message: maybe we'll pull off the softest of soft landings

When normal people think about the economy, most think about the trouble they’re having with the cost of living. But when economists think about it, what surprises them is how well the economy’s travelling.

It’s been going through huge ups and downs since COVID arrived in early 2020. By 2022, it was booming and the rate of unemployment had fallen to 3.5 per cent, its lowest in almost 50 years. Meaning we’d returned to full employment for the first time in five decades.

Trouble was, like the other rich economies, prices had begun shooting up. The annual rate of inflation reached a peak of almost 8 per cent by the end of 2022.

The managers of the economy know what to do when the economy’s growing too fast and inflation’s too high. The central bank increases interest rates to squeeze households’ cash flows and discourage them from spending so much.

The Reserve Bank started raising the official “cash” interest rate in May 2022, just before the federal election. It kept on raising rates and, by November last year, had increased the cash rate 13 times, taking it from 0.1 per cent to 4.35 per cent.

While this was happening, Treasurer Jim Chalmers was using his budget – known to economists as “fiscal policy” – to help the Reserve’s “monetary policy” to increase the squeeze on households’ own budgets, reducing their demand for goods and services.

Why? Because, when businesses’ sales are booming, they take the chance to whack up their prices. When their sales aren’t all that brisk, they’re much less keen to try it on.

The government’s tax collections have been growing strongly because many more people had jobs, or moved from part-time to full-time, and because higher inflation meant workers were getting bigger pay rises.

As well, iron ore prices stayed high, meaning our mining companies paid more tax than expected.

Chalmers tried hard to “bank” – avoid spending – all the extra revenue. So, whereas his budget ran a deficit of $32 billion in the year to June 2022, in the following year it switched to a surplus of $22 billion, and in the year that ends next month, 2023-24, he’s expecting another surplus, this time of $9 billion.

So, for the last two years, Chalmers’ budget has been taking more money out of the economy in taxes than it’s been putting back in government spending, thus making it harder for households to keep spending.

Guess what? It’s working. Total spending by consumers hardly increased over the year to December 2023. And the rate of inflation has fallen to 3.6 per cent in the year to March. That’s getting a lot closer to the Reserve’s target of 2 to 3 per cent.

The Reserve’s rate rises have been the biggest and fastest we’ve seen. Wages haven’t risen as fast as prices have and, largely by coincidence, a shortage of rental accommodation has allowed big increases in rents.

And on top of all that you’ve got the budget’s switch from deficits to surpluses. Much of this has been caused by bracket creep – wage rises causing workers to pay a higher average rate of income tax, often because they’ve been pushed into a higher tax bracket.

Bracket creep is usually portrayed as a bad thing, but economists call it “fiscal drag” and think of it as good. It acts as one of the budget’s main “automatic stabilisers”, helping to slow the economy down when it’s growing too quickly and causing higher inflation.

The Reserve keeps saying it wants to get inflation back under control without causing a recession. But put together all these factors squeezing household budgets, and you see why people like me have worried that we might end up with a hard landing.

Which brings us to this week’s budget. The big news is that in the coming financial year the budget is expected swing from this year’s surplus of $9 billion to a deficit of $28 billion.

This is a turnaround of more than $37 billion, equivalent to a big 1.3 per cent of annual gross domestic product. So, whereas for the past two financial years the “stance” of fiscal policy has been “contractionary” (acting to slow the economy), it will now be quite strongly “expansionary” (acting to speed it up).

Some people who should know better have taken this turnaround to have been caused by a massive increase in government spending. They’ve forgotten that by far the biggest cause is the stage 3 tax cuts, which will reduce tax collections by $23 billion a year.

The same people worry that this switch in policy will cause the economy to grow strongly, stop the inflation rate continuing to fall and maybe start it rising again. But I think they’ve forgotten how weak the economy is, how much downward pressure is still in the system, and how long it takes for a change in the stance of policy to turn the economy around.

Treasury’s forecasts say the economy (real GDP) will have grown by only 1.75 per cent in the financial year just ending, will speed up only a little in the coming year and not get back to average growth of about 2.5 per cent until 2026-27.

So, the rate of inflation will continue falling and should be back into the target range by this December. All this would mean that, from its low of 3.5 per cent – which had risen to 4.1 per cent by last month – the rate of unemployment is predicted to go no higher than 4.5 per cent.

That would be lower than the 5.2 per cent it was before the pandemic, and a world away from the peak of about 11 per cent in our last big recession, in the early 1990s.

So maybe, just maybe, we’ll have fixed inflation and achieved the softest of soft landings. Treasury’s forecasting record is far from perfect, to put it politely, but it is looking possible – provided we don’t do something stupid.

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Budget will make us better off now, but worse off later

It’s said you can tell a government’s true priorities from what it does in its budget. If so, the top priority of Anthony Albanese’s government is not to have any priorities.

Rather than focusing on fixing the most pressing of our many problems, his preference is to be seen doing a little to alleviate all of them. In this budget, (almost) every voter wins a prize.

Certainly, every powerful interest group gets something to placate it. Of course, when you’re handing out so many prizes, most of them aren’t all that big.

Unfortunately, it’s a strategy that works better politically – where every vote counts – than economically, where sticking to what you’re good at brings better returns.

Fortunately, however, this budget has been “back-end loaded”. Most of what’s likely to be wasteful spending will come sometime in the next 10 years. Most of the budgetary cost of the sensible decisions starts from the first day of the new financial year, in just seven weeks’ time.

So let’s start with the good half of the budget, and leave the bad stuff for later.

By far the greatest political pressure on the government is to ease the intense cost-of-living pressure that so many people are feeling. Since most of the pressure has been caused by rapidly rising prices, this is also the government’s most immediate economic problem.

The trouble for Treasurer Jim Chalmers is that the standard remedy for rapid inflation involves making the pressure worse to make it better. You use higher interest rates and a bigger tax bite out of people’s pay rises to make it harder for households to keep spending, which stops businesses from raising their prices as much.

This explains Chalmers’ repeated but contradictory statement that he wants to ease the cost of living without weakening the efforts – by the Reserve Bank and his own budget surpluses – to get inflation down.

But this is where Albanese’s predilection for the each-way bet actually makes sense. Chalmers has found a way to do the seemingly impossible: ease living pressures a bit, while weakening the inflation fight only a bit.

He’s done this, first, by introducing a $300 power-bill rebate for all households, increasing the rent allowance paid to people receiving welfare benefits, and freezing the cost of prescriptions for two years.

This not only helps those people; it also reduces the rise in the consumer price index somewhat. And this, in turn, brings closer the day when the Reserve Bank starts cutting interest rates.

But second, by his rejig of the stage 3 tax cuts. This may be old news, but it’s by far the biggest measure in the budget. Most wage earners will realise how big it is – and how much it helps – when it increases their take-home pay at the start of July.

Albanese and Chalmers took a tax cut the previous government had intended to be of real benefit only to those on incomes well above the average, and changed it to ensure all taxpayers got something.

See? Everyone gets a prize. Everyone on incomes below about $150,000 a year gets more; everyone above that gets less than first intended. As a measure to ease living costs, it’s now far more effective.

Why won’t this $23 billion-a-year tax cut weaken the inflation fight? Because it has been government policy since 2018. It’s likely effect on households’ spending has been built into the Reserve Bank’s decisions to raise interest rates 13 times. Good stuff.

But it’s when we turn to the longer-term Future Made in Australia plans that you see the folly of Albanese’s efforts to stay friends with every interest group on every side.

By far the most important task Albanese must accomplish to secure our economic future is to achieve a smooth transition from fossil fuels to renewables – most of it done by 2030 – without blackouts and avoidable jumps in the cost of electricity.

But, more than that, he must ensure our continuing income from exports by establishing new green, further-processing industries exploiting our new-found strength of being among the world’s cheapest producers of renewable energy. This can be what will keep us prosperous when the world stops buying our fossil fuels.

The government spending needed to get these green industries started is included in the Future Made in Australia project. Trouble is, so is money for a lot of crazy ideas, such as setting up in competition with China as a producer of solar panels.

Albanese’s problem is he wants to say yes to everyone and everything, not just stick to the main chance. He’s saying he can turn us into a renewable energy superpower with one hand while, with the other, he lets the gas industry steam on to 2050 and beyond.

This does not fill me with confidence in the Albanese government’s capability. Quite the reverse.

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Labor's persistent refusal to fix the JobSeeker payment is shameful

Remarks by Treasurer Jim Chalmers seem to say there’ll be no one-off increase in the pitifully inadequate rate of unemployment benefits in Tuesday night’s budget. If this is wrong, I’ll be delighted to offer an abject apology. If it’s right, Anthony Albanese and his ministers should hang their heads in shame. They claim to be the good guys, but they aren’t.

And the unions – which, as recent changes in industry policy reveal, have great behind-the-scenes influence over Labor governments – should be ashamed of themselves as well, for their failure to get Albo and co. up to the mark. They claim to represent the interest of the workers, but it turns only those who have jobs. Those still looking for one are on their own.

Do you realise Australia has the lowest benefits for the short-term unemployed among 34 countries in the Organisation for Economic Co-operation and Development?

The lowest? Really? Does that make us the poorest of all those countries? No, of course not. We’d be comfortably among the richest.

So how’s it explained? Well, perhaps we don’t mind if people in other countries think of us as among the stingiest of the rich countries. The kind of person who’d walk past someone in trouble without offering them help. The kind who thinks anyone without much money must be lazy.

Australians tend to think of people on the age pension as poor, but a single pensioner gets $556 a week, which is $170 a week more than the single adult rate of the JobSeeker payment.

In 1996, the dole was about 90 per cent of the age pension, but it’s been allowed to fall steadily and now, despite two small one-off increases in recent years, is little more than two-thirds of what the oldies get.

To cut a long story short, this is because, since the early days of the Howard government, the pension has been indexed to wage growth, while unemployment benefits remain indexed to the consumer price index.

By now, the dole is 26 per cent below the OECD’s poverty line, set at 50 per cent of median (dead middle) income. There are other ways to measure poverty, but the dole’s below all of them.

A common argument for keeping unemployment benefits low is that we don’t want to discourage the jobless from going to the bother of doing a paid job. Talk about treat ’em mean to keep ’em keen.

But this is self-justifying nonsense. The single dole is now just 43 per cent of the full-time minimum wage.

A better argument is that benefits are so low people can be left unable to afford the fares and other costs involved in seeking a job.

Chalmers’ excuse for not increasing JobSeeker is that “we can’t afford to do everything”. But if you believe that, you haven’t thought about it.

Of course we can’t afford to do everything, but a rich country like ours, with a federal budget that will spend more than $700 billion next financial year, can certainly afford to do any particular thing it really wants to.

That’s the point: you can include it among all the things you’ll do if you really want to. Economists are great believers in “revealed preference”: judge people not by what they say, but by what they do.

Budgets reveal a government’s true priorities. What it spends on is what it most wants to do; what it “can’t afford” is something it doesn’t really want.

So the real question is why the government doesn’t want to fix JobSeeker. Well, it’s no secret. It might be the right thing to do, but there are no votes in it. Indeed, there may be votes to be lost.

It’s normal to envy those doing better than we are. But Australians suffer from the strange illness of “downward envy”. “I have to go out to work, while those lazy blighters sit around at home with their feet up, enjoying daytime television.”

And, of course, any money Labor spends helping one of the most deserving groups in society is money it can’t spend trying to buy the votes of the less deserving.

So, terribly sorry, love to help, but just can’t afford it.

If you’re looking for evidence that neither side of politics is up to much, you’ve just found some. I fear you’ll get more on Tuesday night.

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The economy is just the means to an end. So, is it working?

We spend a lot of time hearing, reading and arguing about The Economy, and we’ll be doing a lot more of all that after we’ve seen Tuesday night’s federal budget.

But while we’re waiting, let’s take a moment to make sure we know what we’re talking about. What’s the economy for? How does it work? What does it do? Who owns it? Who runs it?

Why am I suddenly so deep and meaningful? Because Dr Shane Oliver, AMP’s chief economist, has written a note saying the economy doesn’t seem to be giving us what we want.

As individuals, it’s easy to think of the economy as something that’s outside ourselves, something that does things to us, over which we have little control.

As individuals, that’s true. But if you take us altogether, it’s not true. Why not? Because if you took all the people out of the economy, there wouldn’t be an economy. What’s more, you wouldn’t need one.

You’d be left with a lot of homes and other buildings, roads, cars and machines that had been abandoned, were just sitting there and so were worthless.

So, in that sense, the economy belongs to all of us because it is us. It’s most of us getting up each morning, going to work and earning a living, and all of us spending what’s been earnt.

Most of us have paid work, some of us do unpaid work, while some of us are still getting an education and others are too old or sick to work. But all of us consume.

So don’t think of the economy as high finance beyond your understanding. It’s actually as basic as you can get. This is why it’s important to remember the economy is just a means to an end.

At its most elemental, the end we’re seeking is for the economy to provide us with food, clothing and shelter, plus a few luxuries. But all of us want to do more than barely subsist. We want our lives to bring us enjoyment.

Economists say we want all our earning and spending to bring us “utility”. A better word would be satisfaction. But it’s no stretch to say what we want from our lives is happiness. And it’s on happiness that Oliver finds we aren’t doing as well as we should be.

All this is why the best way to think about the economy is that it belongs to all of us. Legally, however, most of the capital – whether physical or financial – is owned by companies, big and small. So most of us are employed by companies.

Where does government fit in? Apart from employing a lot of workers, it owns most of the roads and other public infrastructure. It makes the laws that limit what businesses (and the rest of us) are permitted to do and the way we do it.

Governments discourage some business activities and – as we’ve seen with the Albanese government’s recent announcements – seek to encourage others.

But the central bank also uses its control over short-term interest rates to “manage” the strength of the private sector’s total demand for goods and services, encouraging it when unemployment is high, and – as now – discouraging it when inflation is high.

As well, the federal government uses its budget – government spending on one side, taxes on the other – to discourage or encourage private demand. Hence, all the fuss next week.

But how are we, and other rich countries, going in our efforts to use our economic activity – earning and spending – to keep us happy and getting happier? Not well, according to Oliver’s research.

For Australia, he finds that, though our real annual gross domestic product per person has increased fairly steadily over the past 20 years, the average score we give ourselves on our satisfaction with our lives (as surveyed by the World Happiness Report) has actually been falling over the same period.

It’s a similar story for the United States, where its real GDP per person has risen steadily since 1946, while the proportion of Americans describing themselves as “very happy” has fallen slowly over most of that period.

In particular, he finds that younger people in the US, Canada, Australia and New Zealand are the least happy age group. This is a major change from 20 years ago.

Why is this happening? We can all have our own theories, but I think the big mistake many of us – and certainly, most economists – make is to focus on improving our material standard of living: using our increasing income to buy bigger and better things. Homes, cars, smartphones, whatever.

Trouble is, our materialism puts us on a “hedonic treadmill”. We think buying a bit more stuff will make us happier and, at first, it does. But pretty soon the thrill wears off – we get used to our higher standard of living – and tell ourselves it’s actually the next new thing that will make us happy.

Many people use their pursuit of promotions and higher income to make them happier by raising their social status. But this, too, is a step up you can get used to. And, in any case, it’s a zero-sum game. If passing you on the status ladder makes me happier, why won’t being passed by me make you less happy?

Actually, as I explained in a book I wrote some years back, there’s a lot of evidence that what’s better at giving us lasting satisfaction is the quality of our relationships with partners, family and friends. Beats just buying more stuff or getting a promotion.

And while it’s true that the economy, and our small role in it, can be seen as just a means to an end, it turns out that “extrinsic” benefits – such as wanting to earn money because of the nice things it buys – aren’t as satisfying as “intrinsic” benefits: such as finding a job you enjoy doing, not just do for the money it brings.

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When politicians talk of 'security', be on your guard

I doubt if you’re waiting with bated breath for next Tuesday night’s federal budget but, since it’s the big set-piece event of my year, I’ve started limbering up. I’ve set my bulldust detector to ping every time I see or hear the word “security”. May I suggest you do the same?

We’ve been hearing a lot of that word lately, particularly from Anthony Albanese and his treasurer, Jim Chalmers. It comes with many adjectives – energy security, food security and, of course, national security – and with many spooky euphemisms: risk, strategic, sensitive, critical and sovereign, not to mention the spookiest of them all, terrorism.

In Albanese’s landmark speech on A Future Made in Australia, he assured us that “strategic competition is a fact of life”. “Nations are drawing an explicit link between economic security and national security,” he told us.

“We must recognise there is a new and widespread willingness to make economic interventions on the basis of national interest and national sovereignty,” he said. His government would be guided by three principles, the second of which was that “we need to be more assertive in capitalising on our comparative advantages and building on sovereign capability in areas of national interest”.

His government would be “securing greater sovereignty over our resources and critical minerals”.

Indeed so. When Chalmers announced the government’s new foreign investment rules last week, they seemed to be all about security.

“By providing more clarity around sensitive sectors and assets,” Chalmers said, “our reforms will give businesses and investors greater certainty while safeguarding our national security.

“National security threats are increasing due to intensifying geopolitical competition and risks to Australia’s national interests from foreign investment have evolved at the same time as competition for global capital is becoming more intense.”

The reforms to our foreign investment rules would “boost economic prosperity and productivity, while strengthening our ability to protect the national interest in an increasingly complex economic and geostrategic environment.

“We are dedicating more resources to screening foreign investment in critical infrastructure, critical minerals, critical technology, those that involve sensitive data sets, and investment in close proximity to defence sites, to ensure that all risks are identified, understood and can be managed – balancing economic benefits and security risks,” Chalmers said.

And a bolstered foreign investment compliance team will use the minister’s “call-in power” to review investments that come to pose a national security concern.

My goodness. If you were the excitable type (which I’m not), you could wonder whether the economy’s being put on a war footing. Or maybe it’s that Treasury’s been taken over by Defence and Foreign Affairs. Or ASIO.

Of course, it may be that the government and its spooks know something terrible they’re not telling us. Perhaps some foreign enemy is, as we speak, preparing to do us in.

But if you’ve spent years studying the behaviour of politicians (which I have), you wonder if it’s something less life-threatening and more self-serving. Is there an election coming up, for instance? Do voters have complaints about the economy that you’d like to draw attention away from?

The independent economist Saul Eslake says that, as the government seeks to use “national security” and “economic security” as a rationale for a major shift in economic policy, two things concern him deeply.

First, the tendency to use “security” as a justification for a policy initiative opens the door to interventions that are, in the infamous phrase of former Treasury secretary Dr Ken Henry, “frankly, bad”. Decisions that, without the “security” label, wouldn’t pass muster.

Second, grounding a policy decision in “security” gives politicians an excuse to shut down any questioning of the justification for that decision.

“When governments say something is a matter of ‘national security’, they usually refuse to say why it is; that it would be wrong to allow grubby considerations of ‘cost and benefit’ to interfere with their judgments about ‘security’, or even that it is borderline unpatriotic to question a decision made on ‘security’ grounds,” Eslake says.

It’s not the first time Eslake has expressed such concerns. Here’s a quote from an article he wrote in this august organ in late 2011.

“If you want a government to do something that entitles you to some form of protection from competition (especially overseas competition), some kind of subsidy or tax break, or some other privilege not enjoyed by ordinary folk, but you know that your proposal wouldn’t pass any kind of rigorous, independent, arms-length scrutiny ... then your best chance of getting what you want is to succeed in portraying it as being somehow essential in order to enhance some form of ‘security’,” he wrote.

Sometimes I even wonder how AUKUS – the wisdom of which many defence experts quietly doubt – came about. How much of it was the Americans’ idea, and how much was ours?

What we do know is that, without any prior debate, Scott Morrison suddenly unveiled it as a fait accompli and great coup. Had Labor opposed it, we’d have been straight into a khaki election.

But Labor accepted it without demur and the costs or benefits we’ll discover over the next decade or two.

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Productivity isn't working, so why not try being more ethical?

Economists and business councils have been telling us for years that we must improve our productivity if we want to be more prosperous but, so far, they’ve had little success. Surely, there’s something else we could try?

As we’ll see, it’s something for Treasurer Jim Chalmers to ponder as he puts the finishing touches to next Tuesday’s budget.

Economists have many strengths, but they don’t win many prizes for thinking outside the box. Productivity is the obvious way to increase our prosperity but, despite all the admonition, for years it’s been hard to achieve, both here and in the other rich economies. It’s clear there’s a lot economists don’t know about how productivity is improved.

So, is there nothing else we could do to improve the way the economy works and the satisfaction it brings us? Of course there is – particularly when you remember this isn’t just about dollars and cents. Don’t you think life would be better if we could do all our earning and spending in an economy that generated less angst?

I’m indebted to Dr Simon Longstaff of the Ethics Centre for reminding me that behaving more ethically would be a good way to get better results from the economy.

Huh? How does that work? Let me tell you.

Ethics is a set of beliefs about the right way for people and organisations to behave, particularly in their relations with other people. Often, the right thing for us to do in particular circumstances is obvious.

It’s obvious, for example, that we should (almost) always obey the law. It’s just that obeying the law isn’t always convenient or inexpensive. And sometimes when our own interests are top of mind, it’s hard to see what’s obvious to everyone else.

In any case, because differing groups of people have differing beliefs and motives and objectives, ethical dilemmas – deciding what’s the right thing to do in all the circumstances – are common, particularly in business. That’s why we have a new profession of ethicists offering advice to organisations, of which Longstaff is the most prominent.

But what’s that got to do with the economy?

Well, let’s be clear. The only reason we should need to do the right thing is that it’s the right thing to do. And the only reward we should expect is being able to sleep well at night in the knowledge that we’re treating people justly, often at some cost to ourselves.

However, as Deloitte Access Economics has demonstrated in a report for the Ethics Centre, there is a strong “business case” for behaving ethically. A case that makes sense not just for individuals and businesses, but also for the treasurers and Treasuries responsible for improving the way the economy’s working.

The case rests on an obvious, but often forgotten truth: market economies rely on a high degree of trust. Trust between buyers and sellers. Trust that you’re not selling me a dud. Trust that your cheque won’t bounce.

Trust that you’ll let me return it if there’s a problem. Trust that you’ll honour your promise to service the thing for the next X years. Trust that you won’t pinch someone else’s bag from the airport carousel. Trust that you’ll repay the money I lent you.

Trust that if I let you check yourself out at my supermarket, you won’t slip in a few things you didn’t ring up. Trust that if I work for you, you’ll treat me fairly. Trust that the law will back me up if you do the wrong thing.

Point is, the more confident we are that we can trust each other – trust the businesses we deal with – the more smoothly and cheaply the economy runs and the more business gets done. When we have to spend a lot of money on security and making sure we’re not ripped off, the costs mount up, and we end up not doing all the transactions we could.

So, how do we get more trust into the economy? How do workers, employers and businesses get themselves a good reputation? By always behaving ethically. (I could say this also applies to politicians, but that would be pushing it.)

Research by Access Economics finds evidence that fewer unethical decisions lead to better mental and physical health for individuals. And evidence that unethical behaviour leads to poorer financial outcomes for business. And evidence that ethical behaviour results in higher wages.

But Access also reminds us of the evidence that our ethical standards could be a lot higher than they are. The World Values Survey finds that only a bit over half of Australians think most people can be trusted. The Governance Institute finds that, on a scale running from minus 100 to plus 100, Australia ranks at plus 45, or “somewhat ethical”.

Then there’s the string of royal commissions finding unethical or even illegal behaviour in institutional responses to child abuse, misconduct in the banking industry, and aged care. And that’s before we get to the epidemic of “wage theft” that so many otherwise respectable big businesses have had to admit to – all of it purely accidental, apparently.

OK, OK, we could do a lot better, with that producing tangible economic benefits. But how? Well, one approach would be for economists and econocrats to switch their sermonising from productivity to ethical behaviour.

Perhaps not. What would help is for ethical questions to get a lot more of our attention. As sociologists understand, but most economists don’t, businesses – like the rest of us – tend to want to do what others are doing. If we’re all being ethical, I don’t want to be seen as uninterested in ethical behaviour.

If we could give ethics a higher profile, we’d probably get more of it. If expert advice on ethical problems was more readily available, more would be asked for. If there were more training and meetings and conferences on the topic, more decisions would be examined for their ethical implications.

Longstaff’s Ethics Centre has a proposal to improve our “ethical infrastructure” by teaming up with the universities of Sydney and NSW to establish an Australian Institute of Applied Ethics, which would be open to receiving requests from governments and the private sector to report on major ethical questions facing the nation. It would be a bit like the Productivity Commission or the Australian Law Reform Commission, but it would not be a government body.

It would also contribute to education, training and leadership development, building the practical skills of good decision-making on ethical issues in the private and public sectors.

Copying the pattern used to establish the hugely successful Melbourne-based Grattan Institute, the proposal is for the federal government to contribute $30 million towards a $40 million one-off endowment. The new institute would be funded from the earnings on this endowment, plus earnings from providing education, training and other services.

We’ll learn on budget night whether Chalmers and his boss are acting on this sensible idea for achieving a better economy, or whether they will be content with more platitudes on the need for greater productivity.

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