Climate change: we can't stop it by refusing to change

After Donald Horne's book in the 1960s, we all know we live in the Lucky Country. What we've forgotten until now, however, is the qualification Horne added: "Australia is a lucky country run mainly by second-rate people." We haven't been feeling so lucky this burning, smoky summer. But our present leader, Scott Morrison, has certainly been looking second rate.

This summer we've had our Pearl Harbour moment. Just as the Japanese bombing of Hawaii in 1941 stopped Americans viewing World War II as some distant threat, so our season of unprecedented drought, heatwaves, bushfires and smoke haze has woken us up to the present reality of global warming.

There we were thinking climate change would be a problem for our children and grandchildren – who, we hoped, wouldn't remember our refusal in 2013 to pay a bit more for electricity so as to reduce greenhouse gas emissions.

Now we realise it's a problem – a frightening problem – for us. One likely at least to continue for the rest of our lives at its present level of harm and unpleasantness, and more likely get much worse in the years ahead unless something decisive is done by all the major economies, including us, to reduce net emissions to zero over the next 30 years and stop us cooking.

It's a wake-up moment not just for us, however, but for the entire rich world. They've been watching in fascinated horror as global warming has punished the Aussies for their repeated refusal to take it seriously.

Ostensibly, Morrison has realised we need to change course. "We want to reduce emissions and do the best job we possibly can and get better and better at it," he said when it dawned on him we were holding him responsible for the fires regardless of what the constitution says about them being a state responsibility.

"In the years ahead, we are going to continue to evolve our policy in this area to reduce emissions even further," he said. But then he started adding qualifications. "We're going to do it without a carbon tax, without putting up electricity prices and without shutting down traditional industries upon which regional Australians depend for their very livelihood."

Really? Sounds like he's promising us all the benefits without any of the costs. Nothing needs to change to make things much better. Which, in this age of cynicism and distrust of our lengthening string of second-rate leaders, makes you fear all that's changed is the marketing spiel.

What we need is a leader great enough to seize our Pearl Harbour moment and turn it into a Port Arthur moment – the moment when a prime minister exercises true leadership and uses the horrible reality of death and destruction to win public support for big changes to stop such things becoming regular events.

John Howard, Morrison's role model and mentor, saw such an opportunity and seized it. He did so not because it offered political gain, but because it was a leader's duty to deliver something great for those he led. He did so knowing it would prompt great resistance from within the Coalition. But with the public behind him and his political opponents unlikely to oppose him, that was a risk he was prepared to take.

Just the same conditions apply to Morrison's decision on whether to turn us from laggards to leaders in the global effort to halt the rise in average temperatures to less than 2 degrees. Has he the courage to stand up to the noisy minority of climate change deniers in the Coalition, who are now so badly out of step with public opinion?

There's a central lesson to be learnt from this appalling summer. The dichotomy Morrison has so far relied on – the environment versus the economy – is false. "We'd love to help the environment, but not if that involves a cost to the economy."

Sorry, since the economy sits within the natural environment, anything that damages the environment also imposes loss – of property, businesses, jobs, wellbeing, lives and health – on the economy and the humans who constitute it.

It follows that, in our obsession with the cost of fighting climate change, we can no longer ignore the far greater cost of not fighting it. The one option that's not available is no change. We can refuse to change, but nature will change things whether we like it or not.

The economy is always changing, as some industries expand and other contract. Jobs are continuously being lost in some fields and created in others. This is the very process by which we've become far more prosperous over the past two centuries.

So the notion that our steaming coal industry can be preserved in aspic is laughable. Its days are numbered. But we don't have to kill it, the rest of the world will do that for us as – like us – they increasingly turn to renewable energy and away from fossil fuels. Business can see that; Morrison professes not to.

Second-rate leaders throw in their lot with those who fear losing from change, letting the rest of us suffer while they attempt to resist the irresistible. First-rate leaders seek out ways we can benefit from that change, restoring the luck of the Lucky Country. How? Watch this space.

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RBA should stop pretending there's any more it can usefully do

Every institution – even, as we’ve learnt to our sorrow, the Christian church – is tempted to put its own interests ahead of its duty to the greater good. Now it’s time for the Reserve Bank to examine its own conscience. If it cuts interest rates again in a fortnight’s time, in whose interests will it be acting?

Many of the Reserve’s immediate customers in the financial markets expect it to cut the official interest rate at its meeting early next month and then again a few months later, at which point the rate will be down to its "effective lower bound" – 0.25 per cent – and it will be time for it to move to using purchases of government bonds to lower the risk-free rate of interest more widely in a program of "quantitative easing".

That’s what its market customers expect of it and it will be tempted to comply, showing it’s still at the wheel, in charge of steering the economy, doing all it can to get things moving and keeping itself at the centre of the macro-economic action.

What could be wrong with that? Just that it’s unlikely to do any good, and could do more harm than good. It’s hard to see that yet another tiny interest-rate cut will do anything of consequence to stimulate spending.

Rates are already so exceptionally low it’s clear that it’s not the cost of capital that’s making businesses reluctant to invest in expanding their production capacity. Whatever their reasons for hesitating, cutting rates further won’t change anything.

Moving to households, the record level of household debt does much to discourage them from borrowing to buy goods and services and so boost economic activity. Interest-rate movements mainly affect discretionary spending on household durables (cars, white goods, lounge suites etc), but sales of these are in the doldrums despite already super-low rates. So, again, another cut is unlikely to change that.

In justifying recent rate cuts, the Reserve has relied heavily on the expected consequent fall in our exchange rate, which should stimulate the economy by making our export and import-competing industries more price competitive internationally.

And the reverse is also true: if we leave our rates well above the low levels of the big advanced economies, the dollar will appreciate and make our industries less price competitive. However, that argument’s of little relevance by now, and we shouldn’t be encouraging a beggar-thy-neighbour game of competitive devaluations.

But even if further rate cuts, and quantitative easing after that, will do little to boost demand, surely they couldn’t do any harm? Don’t be too sure of that. They’d hurt those who rely on interest income from financial investments – though bank interest rates could hardly fall any further.

Speaking of banks, the closer interest rates get to the floorboards, the more their profits are squeezed. If you don’t see that as a worry, you should: when lending becomes unprofitable banks become reluctant to lend. Sound good to you?

There may also be some truth in the argument that whereas in normal times news of an interest-rate cut boosts the confidence of consumers and businesses, at times like this they’re a sign the economy isn’t travelling well and new commitments should be delayed.

But here’s the biggest reason further rate cuts would do more harm than good: the clear evidence that, since the cuts began and prudential supervision was relaxed, house prices in Melbourne and Sydney have resumed their upward climb.

This is an appalling development. Getting our households even more heavily indebted is a cheap price to pay for scraping the last bit of monetary stimulus off the bottom of the barrel? Making first-home ownership even more unaffordable for our young people is just something we have to live with?

The one thing we know is that while "monetary policy" has lost its ability to stimulate demand for goods and services, its ability to stimulate demand for assets - such as houses, commercial property and shares - most of it fuelled by rising debt, continues unabated.

When in the 1970s we switched from using the budget to using interest rates to manage demand, we little realised that the serious side-effect of monetary stimulus was rising asset prices and rising debt.

Essentially, Australians buy and sell our houses among ourselves, bidding up the price of that little-changing stock of houses. Then we tell ourselves we’re all getting richer. Why is this anything other than damaging self-delusion? Why should the Reserve Bank be one of its chief promoters?

It’s time for Reserve governor Dr Philip Lowe to stop doing more harm than good and turn the management of demand back to the people we elected to run the economy.

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Populist revolt around the world making economists rethink

It’s often said that the failure of conventional economics revealed by the global financial crisis has prompted no serious effort to find a new economic theory that actually works. Look closer, however, and you see economists stirring themselves to lift their game.

That’s the view of a noted American economist and critic of his profession, Professor Dani Rodrik, of Harvard, in an article published this week by Project Syndicate.

Rodrik says the populist backlash sweeping the advanced economies in recent years – think Trump, Brexit and Pauline Hanson – has produced some soul searching in the discipline. It is, after all, a backlash against the austerity policies, free-trade deals, financial deregulation and labour market deregulation that economists urged on the politicians (and only in retrospect realised how naive they’d been and how misused by pollies with other agendas).

In consequence of this rethink, “the economics profession is gradually changing for the better”, according to Rodrik. But the transformation extends beyond thinking about economic policy.

Within the discipline there’s finally a reckoning with the hierarchical practices (reverence for seniority and high-status universities) and the macho seminar culture (where anyone who says something silly or unorthodox is brutally shot down) that have produced an inhospitable environment for women and minorities.

According to a survey of its members conducted last year by the American Economic Association, nearly half of female economists felt discriminated against or treated unfairly on account of their gender. Nearly a third of non-white economists felt they’d been treated unfairly because of their ethnicity.

Rodrik, an Egyptian American, thinks the bad policy advice and the inhospitality towards anyone not an old white male may be related. “A profession that is less diverse and less open to different identities is more likely to exhibit groupthink and hubris,” he says.

“If it is to generate ideas to help society achieve inclusive prosperity [and so not push outsiders into the arms of populist politicians with no real answers to the problems being reacted against] it will have to start by becoming more inclusive itself.”

The new face of the discipline was on display at its annual meeting in San Diego early this month. The sessions that attracted the greatest attention were the more than a dozen focusing on gender and diversity.

Also discussed was a new book by the Nobel laureate Angus Deaton and Anne Case, Deaths of Despair. Their research shows how a particular set of economic ideas privileging the supposed “free market”, along with an obsession with material indicators such as aggregate productivity and gross domestic product, have fuelled an epidemic of suicide, drug overdose and alcoholism among America’s (often jobless) working class.

Capitalism is no longer delivering for these people (many of whom switched their votes to get Trump over the line) and economics is, at the very least, complicit, Rodrik observes.

In a panel session at the annual meeting that Rodrik helped organise, Economics for Inclusive Prosperity (note that buzzword inclusive), several new strands of thinking were discussed that are, he claims, “taking over the discipline”.

One was the need to expand economists’ focus from average levels of prosperity (which often look okay) to the distribution of that increased income between top, middle and bottom (which often doesn’t).

Another strand of thought was the non-economic dimensions that are equally fundamental to wellbeing – such as dignity, autonomy, health and political rights – damage to which economists have tended to ignore.

“How economists talk about, say, trade agreements or deregulation may well change when they take such additional considerations seriously,” he says.

“This will require new economic indicators. One proposal that goes part of the way is for government agencies to produce distributional national accounts [something our Australian Bureau of Statistics has been working on].”

Mainstream economists have long claimed their theories and models to be “value-free”. This is self-delusion on a grand scale. In a paper presented to the panel session by Professor Samuel Bowles, of the Santa Fe Institute, and Professor Wendy Carlin, of University College, London, they boldly stated the bleeding obvious.

They argued that every policy paradigm has embedded within it not just a theory about how the economy works, but also a set of ethical values about what the good life entails. Neo-liberalism, for instance, presumes individualistic, amoral individuals and a free market that delivers efficiency, thanks to “complete contracts” (those that leave the other party no room to cheat you, but such contracts don’t exist) and few instances of “market failure” (where, for various reasons, the market fails to work the way the theory says it will).

Clearly, such assumptions go a long way towards explaining why economists failed to foresee that deregulation of the financial system and permissive supervision of it would lead eventually to collapse and deep recession.

Bowles and Carlin said what we needed was a new theory that integrates egalitarian, democratic and sustainability “norms” of acceptable behaviour (the ethical side) with a model of the economy as is really operates today (that is, which would incorporate the insights of behavioural economics).

Such a paradigm would place the community alongside the economists’ conventional dichotomy between the market and the government. And it would include policies such as wealth taxes, broader access to insurance to reduce people’s exposure to risks, workplace rights, reform of corporate governance (none of the convenient fiction that shareholders’ rights trump all others), and a substantial weakening of intellectual property rights (which have devolved from a device to encourage innovation to a prime source of big business rent-seeking).

Professor Luigi Zingales, of Chicago University’s business school, criticised economists for foisting their own preferences on the public. They tended to place greater value on certain outcomes (such as economic efficiency) rather than others (such as the distribution of income) and they fall prey to groupthink and to fetishising particular economic models over others.

I can’t say I’m convinced a revolution in economists’ thinking is imminent, but it’s a start.

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Is Morrison the man who killed the Aussie summer?

This is the summer from hell. I can’t imagine anyone is enjoying their break – not with the quadruple whammy of drought, heatwaves, bushfires and smoke haze we’re experiencing. If it happens again next summer – or the one after – as it very well could, can you imagine the political doghouse Scott Morrison and his Coalition parties will be in?

Morrison is already bearing most of the ire of people displaced by the fires. So much so that he’s learned not to show up to offer his commiserations. But is it really his fault? No. Just one of the six prime ministers we’ve had over the past two decades can hardly take all the blame.

In any case, Morrison is right to protest that nothing Australia could have done by itself could have stopped the deterioration in climate we’re seeing. The only solution is global, so all the big, rich economies – particularly the Americans, less so the Europeans – must share the blame for the continuing rise in average temperatures.

And even the biggest developing economies – China and India, particularly – could have done more to reduce the intensity of their emissions (emissions per dollar of GDP) without abandoning their efforts to raise their living standards to some higher fraction of those we have long enjoyed.

But Morrison doesn’t escape the responsibility of leadership as easily as that. For one thing, it’s his side of politics that’s done most to sabotage the limited and belated efforts Australia has made, since the defeat of the Howard government, to contribute to the global effort to reduce greenhouse gas emissions.

And you have to go back to John Howard’s refusal to ratify the Kyoto agreement of 1997 to find an instance of Australia actively disrupting efforts to reach international agreement on stronger action, to match the shamefully destructive contribution Angus Taylor made at the conference in Madrid last month by insisting that Australia be allowed to use an accounting trick to shirk its responsibilities.

For any Australian leader to claim, hand-on-heart, to have done all they reasonably could to reduce global warming, they have to be able to say they committed us to a disproportionate reduction in our emissions, so as to have the moral authority to press the bigger players to do more. None of our leaders can say that, least of all Howard and Morrison.

And then there’s the law of politics that says if it's fair enough for the government of the day to claim the credit when things go well – even when the seeds of that success were sown by an earlier administration – it’s equally fair for the government of the day to cop the blame when the neglect of earlier administrations finally hits the fan, as it has this summer.

Not Morrison nor any of his predecessors can honestly claim to have been caught unawares by what’s happening before our eyes and noses. The CSIRO has been warning for at least a decade of just this concurrence of adverse and costly events – in lives and health, as well as property – as the planet warms.

At last year’s election, the climate change deniers demanded to be told the economic cost of stepping up our contribution to reducing global warming. The more sensible among us should have been demanding to be told the economic cost of allowing global warming to roll on. We’re finding that out as we speak, but doing so the hard way.

It’s tempting to wonder whether, in his heart of hearts, Morrison is himself a climate-change denier. But that hardly matters. These days, what politicians truly believe doesn’t have much bearing on what they do and say. Conviction politics is dead. These days, politicians seek out the position that, while sitting easily with their heartland supporters, is likely to give them the greatest short-term advantage over their political opponents.

Whatever he believes, Morrison is too cagey to come out as a denier. Like Malcolm Turnbull before him, he’s bound hand-and-foot by the deniers in his own party and the Nationals. So, until now, his safest position has been to say he accepts the science, while falsely claiming to be comfortably on target to reach the (inadequate) emissions reduction we committed to in the Paris agreement.

There are two approaches to the “wicked” problem of global warming: mitigation (reducing emissions) and adaptation (changing in response to whatever warming we get). The greenies have seen these as in conflict and frowned on efforts to adapt. But Morrison and his predecessors have been so bound up by their deniers that they haven’t wanted to talk about even such issues as getting set to cope with much worse bushfire seasons. No excuses for that, Scott.

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how we caught the economic growth bug, but may shake it off

Do you realise that the great god of mammon, Gross Domestic Product, has really only been worshipped in Australia for 60 years last month? Its high priests at the Australian Bureau of Statistics have been celebrating the anniversary.

Sixty years may see a long time to you, but not to me. And not when you remember that the study of economics, in its recognisable form, started with the publication of Adam Smith’s Wealth of Nations in 1776.

GDP is the most closely watched bottom line of the "national accounts" for the Australian economy.

So what do GDP and the national accounts measure, where did they come from and are they as all-important as our economists, business people and politicians seem to think, or is GDP the source of our problems, as many environmentalists and sociologists seem to think?

What GDP measures can be described in several ways. I usually say it measures the value of all the goods and services produced in Australia during a period.

But because workers and businesses join together to produce goods and services in order to earn income, it’s equally true to say that GDP is a measure of the nation’s income during a period.

And since income is used to buy things, it’s also true that GDP measures the nation’s expenditure (but only after you subtract our spending on imports and add foreigners’ spending on our exports).

Now some qualifications.

GDP measures the value of goods and services bought and sold in the market place, plus the goods and services supplied by governments but paid for by our taxes. This means GDP doesn’t include the (considerable) value of all the goods and services – meals and so forth – produced in the home without money changing hands.

Economists (and economic journalists) make so much fuss about the quarterly ups and downs of GDP – is the economy growing or contracting, is it growing faster or slower? – it’s easy to assume that economic growth is something they’ve always obsessed about.

In truth, it’s a relatively recent preoccupation – suggesting it’s a habit we may one day grow out of. You see this more clearly when you consider the origins of GDP and the national accounts it springs from.

The 60-year anniversary is of the move to quarterly estimates of the growth in GDP in September quarter, 1959. It’s hard to be obsessive about something when you don’t get regular reports on how it’s going.

Fact is, until the Great Depression of the 1930s, economists were preoccupied with studying how markets worked ("micro-economics") and gave little thought to how the economy as a whole worked ("macro-economics"), let alone how fast it was growing.

In his recent history of the federal Treasury, Paul Tilley noted that it was just a department full of bookkeepers until the upheavals of the Depression caused its political masters to ask questions about what they should be doing that it couldn’t answer. That’s when Treasury became macro-economists.

It was the failure of "neo-classical" economics to provide an effective response to the Depression that led to the ascendancy of an Englishman who did have answers, John Maynard Keynes. At the heart of the ensuing the "Keynesian revolution" in economics was the notion that there was such a thing as the macro economy and that it was the responsibility of governments to "manage" that economy, ending its slump and getting workers back to work.

Once you started thinking like that, it became obvious that, to manage the economy effectively, you needed to measure it and track the changes in it over time.

The first economists to start developing a systematic and internally consistent way of measuring the economy, in the early 1930s, were Simon Kuznets in the United States and Colin Clark in Britain. Clark, a disciple of Keynes, moved to Australia in 1938 and spent the rest of his life as an adviser to the Queensland government.

For some years after World War II, our Treasury issued annual, out-of-date estimates of the size of GDP and its components.

The Keynesian economists’ preoccupation then was not with growth as such, but with keeping the economy at "full employment" – in those days defined an unemployment rate of less than 2 per cent – which, admittedly, did require it to be growing pretty quickly. In those days, however, GDP was used more as an aid to the short-run stabilisation of the business cycle – "demand management".

Paul Samuelson’s legendary introductory textbook, first published in 1947, which "brought Keynesian economics into the classroom", didn’t have an entry for "growth" until its sixth edition in 1964.

It was only about then that people became preoccupied with economic growth, as indicated by the growth in GDP.

The critics are right to point out the many respects in which GDP falls short as a measure of human wellbeing. But, though it’s true many people treat GDP as though it is such a measure, it was never designed to be used as such.

I agree with the critics that there’s more to life than economic growth and that politicians and economists should give less attention to growth and more to the many less tangible, less well-measured social factors that also affect our wellbeing.

It’s true, too, that GDP was developed before we became conscious of the need for economic activity to be ecologically sustainable – which the present hellish summer reminds us it certainly isn’t at present. In this sense, GDP is no longer "fit for purpose".

It’s wrong, however, to conclude that continuing growth in GDP is incompatible with ecological sustainability. People say that because they don’t understand what drives the "growth" that GDP measures (hint: improved productivity).

We can have unending growth in GDP and sustainable use of natural resources (which is what the environmentalists care about) by changing the way economic activity is organised – including by getting all our energy from renewable sources.

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Government on the cheap leaves us burningly reliant on charity

As the cast were taking their bows at the end of a show before Christmas, one of them stepped forward to say that, as we left, we’d be approached by people with buckets collecting for the NSW Rural Fire Service. Normally I’d reach for my wallet – I’d done so a few weeks earlier when they were collecting for an actors’ charity – but this time I declined.

Like Victoria’s Country Fire Authority, the RFS is staffed by volunteers. Why did they need donations? Presumably, to help cover the cost of needed equipment or incidental expenses. Really? What’s happened to the state government’s cheque book? And don’t I remember hearing that the RFS had had its funding cut?

No one believes every worthy cause should be funded by the government so that private charity becomes redundant. And it’s true the federal government partially subsidises donations by making them tax-deductible. But where do you draw the line between what the government should cover and what can be left to the generosity – or otherwise – of private citizens?

The more I think about it, the more I realise that, as part of their commitment to Smaller Government and lower taxes, governments have been quietly shifting the dividing line between what the government pays for and what should depend on charity.

All governments have been doing it. State governments, for instance, have long left country (but not city) fire-fighting to volunteers. And have long underfunded the upkeep of public schools, believing parents and citizens can be left to make up the shortfall. But it’s been a particular trick of the federal Coalition government as it struggles to return its budget to surplus when there are expensive, vote-buying tax cuts to be covered.

If you’re wondering why, despite his contrition at having taken an overseas break his spin doctors tried to keep secret, and his freely dispensed “thoughts and prayers”, Scott Morrison remained adamant for so long that all that was needed was already being done to help the firefighters, it’s because he knows that too much generosity on the feds’ part could see his precious budget surplus whittled down to nothingness.

Since its election in 2013, this government has been insistent that the budget should be returned to surplus by cutting government spending, not by explicit increases in taxes (hidden tax increases caused by bracket creep are okay, of course, because the punters don’t notice ’em).

Its first budget in 2014 was a long-term plan to improve the budget by what the bureaucrats call “cost-shifting”. Much of the cost of health and education was to be shifted onto the states’ budgets. Some was to be moved to your household’s budget via the $7 charge for visits to the doctor.

That budget was so badly received most of those plans were reversed. But Finance Minister Mathias Cormann and his accountants have continued to limit the growth in government spending by penny-pinching in ways that voters wouldn’t notice or object to.

They’ve got welfare dependency to “its lowest level in 30 years” not by getting the unemployed into jobs, but by using petty excuses to suspend people’s dole payments. How do these unfortunates live without money to live on? They fall back on their families or go cap-in-hand to the Salvos or Vinnies. Get it? The feds are cost-shifting to charities – the same community groups whose grants they’ve cut back.

According to a recent survey of its members’ staffs by the Australian Council of Social Service, 76 per cent of staff dealing with housing the homeless reported an increase in demand, as did 71 per cent of those providing financial counselling and support (aka money). Respondents to the survey said the unmet demand naturally had adverse impacts on the community. Where people fall through the cracks they can end up in hospitals or the justice system (cost-shifting to the states).

I’ve been reading about how many small country towns are relying on newly formed charities for their supply of water. More broadly, the desire to limit government spending encourages politicians to ignore reports warning of looming troubles and push problems off into the future. Some of the foreseen problems fail to materialise, but many eventually reach crisis point and can no longer be ignored.

The aged care royal commission is revealing the shocking results of one attempt to keep government small by relying on for-profit providers, underspending on the provision of home-care packages and on policing institutions’ adherence to the rules.

Which brings us back to our truly heroic volunteer firefighters. Morrison’s reluctant decision to pay them $300 a day for a maximum of 20 days is the least he can do to acknowledge their loss of income (or annual leave) while serving their communities.

His reluctance – and anxiety to emphasise it’s not a payment of wages – is understandable, however. Behavioural economics is clear that paying people to do what they formerly did without payment can kill the motivation to donate your services for noble reasons. Morrison has stressed that this response to a problem of unprecedented severity shouldn’t be seen as setting a precedent.

Good luck with that. If climate change is making drought, heatwaves and bushfires bigger and more frequent, the horrific events of this summer will become a regular occurrence – meaning the days of leaving bushfire fighting to unpaid volunteers are numbered.

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Living in the post-inflation era turns out to be no fun

It’s Christmas shopping time, when the bills mount up and your money never goes far enough. So how come people are saying the inflation rate should be higher? I thought inflation was meant to be a bad thing?

It’s a good question when one of those people is Reserve Bank governor Dr Philip Lowe. He keeps saying we need to get unemployment lower and inflation back up into the 2 to 3 per cent target range. (At last count the annual rate of increase in consumer prices was "only" 1.7 per cent. I can remember when, for a brief period in the 1970s, it was 17 per cent.)

The short answer is that Lowe doesn’t see higher prices as a good thing in themselves. Rather, he sees them as a means to an end. Or better, as a symptom or by-product of something that is a good thing.

Why do prices rise? Because the demand for goods and services – the desire to purchase them – is growing faster than the supply of them – our businesses’ ability to produce them. So the rate of price inflation is a symptom or sign of strong demand.

And strong demand for goods and services is a good thing because it means the economy is growing and so is employers’ need for workers to help produce more goods and services. Employment increases and unemployment falls.

So Lowe wants to see higher prices simply because they’re a means to the end of lower unemployment. What’s more, increased employer demand for labour relative to its supply makes labour – particularly skilled labour – scarcer and so puts upward pressure on its price, otherwise known as wages.

And, as he’s often said, Lowe would like to see employers paying higher wages than they are, because consumer spending – consumer demand – is so weak at present mainly because wages are hardly growing faster than consumer prices, and real wages are the main thing that drives consumer spending.

All that make sense? Good – because now I’ll give you the more complicated answer. Surely, although strong demand is good for the economy, it would be better if supply was just as strong, meaning we could have growth in jobs and living standards without any inflation?

That makes sense in principle, but not in practice. The managers of the macro economy believe we need some inflation, though not too much. For two reasons. First, though you’ll find this hard to credit, economists are sure our consumer price index (like other countries’ CPIs) overstates inflation.

That’s because the official statisticians are unable to pick up all the cases where prices rise not simply because the firm’s costs have risen, but because the quality of the product has been improved. If so, aiming for a measured inflation rate of zero would require you to crunch the economy hard enough to make actual inflation less than zero – that is, prices would be falling.

The second reason is that sometimes, when the economy is growing too strongly, wages rise too much, prompting firms to lay off workers. Trouble is, workers hate having their wages cut. But if you’ve got a bit of inflation in the system, you can cut wages in real terms simply by skipping an annual pay rise, which workers find less unpalatable.

When the Reserve Bank set its target for inflation in the early 1990s, it settled on 2 to 3 per cent a year ("on average over the medium term"). It thought such a range would overcome both problems and insisted such a target range constituted "practical price stability".

But things in our economy and all the advanced economies have changed a lot since the 1990s. Demand has been chronically weak relative to supply since the global financial crisis and, in consequence, inflation rates have been below-target everywhere.

Some people have suggested we move to a lower, more realistic target range, but Lowe has resisted, arguing that to do so would lower firms’ and workers’ expectations about inflation, making our weak-demand problem even worse. He may be right.

But now try this thought. Inflation is 1.7 per a year, while wages are growing by 2.2 per cent and workers aren’t at all happy. I’ve had several top economists agree with my contention that, if we could wave a magic wand and raise both inflation and wages by, say, 2 percentage points, so that wages were growing by 4.2 per cent, workers would be a lot less discontented.

Why? Because of a phenomenon that economists used to talk about a lot in in the 1960s, but rarely mention today, called "money illusion". People who aren’t economists keep forgetting to allow for inflation. If so, the era of very low inflation isn’t proving to be much fun.

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Don’t bank on budget surpluses this year or in future

This week’s mid-year budget update has changed the fiscal outlook markedly. It’s now a lot clearer that neither in this financial year nor those following is a budget surplus assured.

Whether he knows it or not, by staking so much of his political and economic credibility on getting back to surpluses, Scott Morrison has taken an enormous gamble. When the reality of this “courageous decision, minister” finally gets through to him, I won’t be surprised to see him perform a backflip to go down in history.

Since the election of the Coalition in 2013, there’s been a great debate about the causes of our economy’s continuing sub-par performance. While some economists have argued its roots lie mainly in changes to the structure of the economy (and thus lasting), the econocrats have insisted the causes are cyclical and thus temporary.

So Treasury and the Reserve Bank have gone on, budget update after budget after budget update, predicting that, although the latest indicators show the economy remaining sub-par, it will soon return to the trend growth we were used to before the global financial crisis.

Until now. The mid-year update represents the first stage in the econocrats’ quiet shift from cyclical to structural as the predominant cause of the economy’s weakness. And the first hint it was on its way came in late November, when Reserve Bank deputy governor Dr Guy Debelle pronounced that annual wage rises of between 2 and 3 per cent were “the new normal”.

By far the most significant revisions to the budget forecasts were made to annual growth in the wage price index. With the actual for last financial year coming in at 2.3 per cent rather than 2.5 per cent, the prediction for this year was cut by 0.25 percentage points to 2.5 per cent. The following three years were cut by 0.75 points to 2.5 per cent, by 0.75 points to 2.75, and by 0.5 points to 3 per cent.

This would be the main factor explaining why, after consumer spending grew by just 1.2 per cent over the year to September, the forecasts for consumer spending were cut by 1 percentage point to 1.75 per cent for this financial year, and by 0.5 points to 2.5 per cent for next year.

Despite offsetting changes to other components of gross domestic product, these major downward revisions to wages and consumer spending do most to explain why the forecast for real GDP growth for this financial year was cut by 0.5 percentage points to 2.25 per cent – but nothing to explain why growth the following year was kept unchanged at 2.75 per cent (but see below).

The major cuts to wages and consumer spending forecasts do most to explain why, after just eight months, the government’s been obliged to slash the budget’s estimate of tax collections and other revenue over the budget year and the three “forward estimates” years by a total of – amazingly — $33 billion.

Partly offsetting this, however, are its net cuts in estimated government spending over the four years of $11.5 billion. How is this possible when, in the time since the budget, the government has announced additional spending of $8.2 billion over the period on drought support, aged care and accelerated spending on infrastructure?

It’s possible because the lower predicted growth in wages and inflation will save the budget money on indexed welfare payments and, more particularly, because the fall in long-term interest rates will save it big money on interest payments on the net public debt. An expected gross saving on the spending side of $19.7 billion.

See what a difference less optimistic forecasts for the economy make to the budget?

Slashing revenue estimates by $33 billion, less the net saving on spending of $11.5 billion, means the expected budget surpluses over the four years have been slashed by $21.5 billion, from $45 billion to $23.5 billion. The expected budget surpluses have almost halved in the space of eight months.

This means the expected surplus for this financial year has been cut to $5 billion, or just 0.3 per cent of annual nominal GDP. Do you see how, in a budget worth $500 billion, such a small sum could disappear with just the smallest overestimate of revenue or underestimate of spending?

It’s the same for the revised predictions for surpluses in the following years: $6 billion (0.3 per cent of GDP), $8 billion (0.4 per cent) and $4 billion (0.2 per cent).

As former top econocrat Dr Mike Keating has argued, with no fall in unemployment expected until a modest improvement in 2021-22, the revised forecasts offer no convincing reason why annual wage growth will recover from its present rate of 2.2 per cent to a projected 2.75 per cent in 2021-22 and 3 per cent the year after.

Amazingly, the budget update papers imply this will happen because the budget’s projection methodology requires it to. Same with the return to (pre-crisis) trend GDP growth of 2.75 per cent next financial year. (This is a sign the econocrats have some way to go in fully accepting that structural changes will stop us ever returning to the “old normal”.)

But just as hard to believe as the out-year growth projections is the budget’s assumption that, having so far succeeded in limiting average real growth in government spending to 1.8 per cent a year, the government will now limit it to 1.3 per cent a year over the next four years.

As Keating has noted (and peak welfare group ACOSS’s Dr Peter Davidson before him), this implies real government spending per person will actually be falling.

Unsurprisingly, the Parliamentary Budget Office has warned it’s hard to believe such a degree of restraint could be maintained over such a long time.

Even Morrison’s secret weapon, aka hollow log – the budget’s highly conservative assumption on future world iron ore prices – rests on a gamble that iron ore prices will remain abnormally high. It would be so much less risky just to have some fiscal stimulus.

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Orana to Christmas, summer and the chance to go bush

Out on the plains the brolgas are dancing
Lifting their feet like war horses prancing
Up to the sun the woodlarks go winging
Faint in the dawn light echoes their singing
Orana! Orana! Orana to Christmas Day

To me one of the nicest bits of Christmas is a chance to sing the Australian carols of the old ABC’s William G. James, including Carol of the Birds. Orana, by the way, means welcome.

I don’t like to boast, but one of my achievements this year was to see a brolga. Several, in fact. Flying rather than dancing but, even so, one to cross off my bucket list. I’ve also seen jabirus, magpie geese, comb-crested jacana, osprey, white-bellied sea eagles, red-tailed black cockatoos and crocodiles, fresh and salty.

I’ve also seen Timorese ponies, Asian buffalo and – more surprising – Indonesian banteng cattle. By now the banteng are endangered in Indonesia, but going strong in northern Australia.

All during a 12-day tour of Arnhem Land, bouncing along unsealed roads in a truck converted to a bus, to visit remote Aboriginal communities (complete with permits) and cave paintings. An unforgettable experience, one moneyed Baby Boomers should consider before they jet off on yet another exploration of other people’s homelands.

Actually, I sometimes wonder whether the day is coming when – because of the damage it does to the atmosphere – we will look back with amazement and envy on the relatively brief golden age when flying for tourism was not only permitted but dirt cheap, so we roamed the globe whenever we could get away.

It’s a terrible thought. Let’s hope it never happens, thanks to some technological advance in aircraft fuel. But while it lasts, let’s not forget what a privileged generation we are.

But what of ecotourism? Is it as virtuous as we wilderness wanderers like to imagine, or will the new age puritans put the kybosh on that, too?

Well, I’ve been checking what the academic experts are saying – courtesy of my second-favourite website, The Conversation – and, though you can find the killjoys if you look, I think ecotourism gets a qualified tick.

It’s true that, in an ideal world, we’d all stay at home admiring nature from afar and insisting the politicians keep the outback – and other continents’ backblocks – locked up and in pristine condition. Where damage had already been done, we’d happily pay high taxes to compensate farmers, miners and tour operators for closing their businesses, and to restore the land to its former state.

No, not going to happen. Those who live in far-flung parts aren’t going to renounce the material ambitions that drive the rest of us. They’ll continue finding ways to make a buck. If so, ecotourism – whatever its downsides – will do a lot less harm than many other ways for bushies to earn a living.

Dr Guy Castley and two other researchers at Griffith University find ecotourism can contribute to conservation or adversely affect wildlife, or both. Attitudes of local communities towards wildlife influence whether they support or oppose poaching. Income from ecotourism may be used for conservation and local community development, but not always.

But for seven of the nine threatened species they studied – the great green macaw in Costa Rica, Egyptian vultures in Spain, hoolock gibbons in India, penguins, wild dogs and cheetahs in Africa, and golden lion tamarins in Brazil – ecotourism provided net conservation gains.

This was achieved through establishing private conservation reserves, restoring habitat or by reducing habitat damage. Removing feral predators, increasing anti-poaching patrols, captive breeding and supplementary feeding also helped.

For orang-utans in Sumatra, however, small-scale ecotourism couldn’t overcome the negative effects of logging. And for New Zealand’s sea lions, ecotourism only compounded the effects of intensive fishing because it increased the number of pups dying as a result of direct disturbance at sites where the sea lions came ashore.

Michele Barnes and Sarah Sutcliffe, of James Cook University, studied the effect of a shark education and conservation tour off the coast of Oahu, Hawaii. Sharks are crucial to our marine ecosystems, yet many shark populations are in decline because of fishing (particularly for shark-fin soup), fisheries bycatch, habitat destruction, and climate change.

Sharks have a PR problem. They are feared by many, demonised by the evil media, treated as human-hunting monsters, and cast as the villains in blockbuster movies. In many places, governments cull sharks in the name of beachgoers’ safety.

The researchers found that the program gave participants significantly more knowledge of the ecological role of sharks and a more favourable attitude towards them. It also had a significantly positive effect on people’s intentions to engage in shark conservation behaviour. This remained true even after allowing for the participants’ greater initial positive attitudes towards sharks than the public generally.

Even when not off somewhere exotic, my family almost always ends up holidaying in or near some national park. But what about all the damage done to parks to accommodate the needs of tourists?

Dr Susan Moore, of Murdoch University, and others from Southern Cross University, argue sensibly that parks need visitors to get vital community and political support.

“We need people in parks because people vote and parks don’t,” they say. “Strong advocacy from park visitors for environmentally friendly experiences, like wildlife viewing, photography, hiking, swimming, canoeing and camping, can counterbalance pressures for environmentally destructive activities such as hunting and grazing.” Amen to that.

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Letting things get worse so we're well placed to fix them later

If you've been feeling the pinch of a massive mortgage and minuscule pay rises and resolving to keep your spending tight this Christmas, Scott Morrison has good news. You will be relieved to hear the federal budget is still on track to reach a surplus this financial year and stay in surplus as far as the accountants' eyes can see.

Although many economists have been panicking over the economy's weak state – and the panickers were joined this week by the International Monetary Fund – Morrison is sticking to his resolve to keep his foot on the budget brake rather than move it to the accelerator.

This, his Treasurer Josh Frydenberg assured us in the mid-year budget review, will bring great
economic benefits, providing "the stability and certainty that households and businesses need to
plan for the future, giving them confidence to spend and invest knowing that the government can
keep taxes low and guarantee funding for essential services".

Hasn't worked so far, but it's bound to kick in soon.

Admittedly the economy's growth is weaker than he predicted it would be before the election in
May, so Frydenberg has had to cut the expected surplus this financial year by $2 billion to $5 billion (not all that much in a $500 billion budget) and by $5 billion next year.

This is mainly because the government has been obliged to abandon the confident prediction it has been making throughout its time in office that wage growth would soon return to something much healthier.

The bad news from the update is that Frydenberg is not expecting pay rises to average as much as 3 per cent a year until the second half of 2022 at the earliest.

But if that makes you fear the budget may not stay in surplus for long, Morrison has more good news. Much of the budget's recent strength despite a slowing economy is explained by the huge taxes our mining companies will be paying because a mining disaster in Brazil has pushed the world price of iron ore way up.

The trick is they've built themselves a hollow log. The budget's figuring is based on the assumption that the iron ore price collapses to $US55 a tonne. Should that not happen, Morrison can use the difference to prop up his budget if the panickers are right and the economy stays weak rather than speeding up, as he's sure it will.

On a separate matter, remember the Future Fund, set up in the early years of the resources boom when the Howard government was running budget surpluses so big they were embarrassing? According to Frydenberg's latest figuring, the income from all the shares the fund's money was invested in will account for most of the budget surpluses the government is expecting to run.

Now that's the "responsible fiscal management" we have come to expect of the Coalition. And it must surely comfort you to know that, should the worst come to the worst, the government will be well placed to launch a few life boats. On a user-pays basis, of course.

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Your antidote to Frydenberg’s budget-update talking points

At a time when the Prime Minister is refusing to accept that our weak economy needs a boost rather than a drag from the budget, stand by for loads of look-over-there spin from his unfortunate Treasurer Josh Frydenberg when he unveils the mid-year budget update today.

That was Frydenberg’s way of bluffing his way round the news earlier this month that the economy had grown by a disappointing 1.7 per cent over the year to September. So it wouldn’t be surprising to see some of those talking points get another run today.

He started with the line that, despite a result that laughed at his forecasts made only eight months earlier, the economy remains “remarkably resilient in the face of significant global and domestic economic headwinds”.

That’s a spin doctor’s way of saying “it could have been even worse”. Arithmetically true, but cold comfort. Since Frydenberg is boasting about our strong growth in exports, it’s hard to see much evidence of the global headwinds he claims are holding us back. And the domestic headwinds we’re suffering are home-grown and all too evidently a sign of poor economic management.

But Josh has more: “While other major developed economies like Germany, the United Kingdom, South Korea and Singapore have experienced negative economic growth, the Australian economy is in its 29th consecutive year of economic growth.”

Yes, but at present almost all our growth is coming from high immigration-fed population growth, not rising prosperity. As AMP Capital’s Dr Shane Oliver has noted, our annual growth in gross domestic product per person is just 0.2 per cent, compared with America’s 1.4 per cent, Japan’s 1.6 per cent and even the Eurozone’s 1 per cent.

In the first of his look-over-there arguments, Frydenberg boasts that we’ve maintained our AAA credit rating from three leading US rating agencies. Since these agencies’ lapse in ethical standards contributed significantly to the global financial crisis, this isn’t a recommendation I’d be skiting about. Any government that lets those disreputable characters dictate its budget policy lacks the courage of its convictions.

Next, we’ve seen our current account on the balance of payments “return to surplus for the first time in more than 40 years”. Not sure whether this boast is a sign of our Treasurer’s economic illiteracy, or his assessment of ours. Only the same people who think now’s a good time for the budget to take more out of the economy than it puts back – that is, return to surplus – would be foolish enough to think a current account surplus was a sign of economic strength.

It’s actually a sign that business investment is so unusually weak that our households, companies and governments are saving more than is needed to fund our national investment in new productive assets. Our usual current account deficit would be a much better sign of strong investment in future expansion.

Then we’re told that “welfare dependency is at its lowest level in 30 years”. With the unemployment rate at 5.3 per cent and the under-employment rate at 8.5 per cent, that’s not because they’ve all got jobs, it’s because of the government’s greater use of excuses to cut people off the dole and make them reliant on charity for their survival. Talk about reversion to the mean.

In a breathtaking case of Orwell’s Newspeak, Frydenberg claimed “growth has been broad-based with household consumption, public final demand and net exports all contributing to GDP growth”.

This is the very opposite of the truth. Since growth in consumer spending was a negligible 0.1 per cent during the quarter, the vast private sector of the economy actually went backwards, with what little growth we got coming from the much smaller (and despised) public sector and from net exports.

Growth in the September quarter was weaker than expected because Frydenberg’s repeated assurances that his middle-income tax offset would boost consumer spending failed to happen. Talk about chutzpah. He changed his line to “whether spent or saved, the tax cuts are putting households in a stronger economic position, making them more financially secure with more money in their pockets” without a blush.

Finally, it’s the drought’s fault – and you surely can’t blame the government for that. “Farm GDP is 5.9 per cent lower through the year to the September quarter and falling in four of the past five quarters. Rural exports fell by 2.8 per cent in the quarter,” Frydenberg said.

Arithmetically correct, but calculated to mislead. What he hopes you won’t remember is that, these days, agriculture accounts for only about 2 per cent of GDP, meaning the drought shaved only 0.1 percentage points off growth in the quarter, and 0.2 points over the year.

All this is the balderdash we get when pollies give politics priority over policy.

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Why the government's forecasts are always way off

Just to warm you up for the mid-year budget update on Monday, let me ask you: why do you think Treasury and the Reserve Bank have gone for a least the past eight years forecasting more growth in the economy than ever transpired?

Kieran Davies, a respected economist from National Australia Bank, has been checking. He says their mistake has been failing to allow for the decline in our “potential” growth rate since the global financial crisis in 2008.

Actually, Davies has checked only the Reserve’s forecasting record, not Treasury’s. But the two outfits use similar forecasting methods and use a Joint Economic Forecasting Group to ensure their forecasts are never very different.

An economy’s “potential” growth rate is the average rate at which its capacity to produce goods and services is growing each year. This is determined by the average rate at which the Three Ps are growing – population, participation (in the labour force) and productivity (output per unit of input).

Sometimes (as now) the economy’s annual demand for goods and services doesn’t grow as fast as its potential to supply those goods and services is growing. This creates an “output gap” of idle production capacity, including unemployed and under-employed workers.

When demand picks up, the economy can grow faster than its potential growth rate for a few years until the idle capacity is fully taken up and the output gap has disappeared. Once that’s happened, the potential growth rate sets the speed limit for how fast the economy can grow. If demand’s allowed to grow faster than supply, all you get is inflation.

We know from the fine print in the budget papers that Treasury’s estimate of our present potential growth rate is 2.75 per cent a year. You can be sure the Reserve’s estimate is the same. This is often referred to as the economy’s forward-looking “trend” (medium-term average) rate of growth.

Treasury’s projections of growth over the rest of the next 10 years are based on the assumption that, once the economy has returned to its trend rate of 2.75 per cent, it will then grow by 3 per cent a year for several years until the idle capacity is used up, when it will revert to 2.75 per cent. (This projection of perfection is what allows the budget papers to include an incredible graph showing the budget surplus going on forever and the government’s net public debt plunging to zero by June 2030.)

Now, here’s the trick. Because the Treasury and Reserve forecasters have no more knowledge of what the future holds than you or I do, they rely heavily on a long-established statistical regularity called “reversion to the mean”. That is, if at present the variable you’re forecasting is above its average performance, the greatest likelihood is that it will move down towards the average. If it’s below average, it’s likely to move up towards the average.

So now you know why, for at least the past eight years, Treasury has forecast that, though growth in the economy is weak at present, within a year or two it will return to trend, and then go higher. When it turns out that didn’t come to pass this time, it’s still the best bet for next year. Fail and repeat. Although the Reserve revises its forecasts every quarter, it follows the same method.

Davies’ examination of the Reserve’s forecasting record found that, since the financial crisis, it had persistently overestimated growth in real gross domestic product in the year ahead, and had nearly always overestimated growth over the next two years.

Why? Because it failed to take account of the decline in the potential growth rate since the crisis. It’s a safe bet the Reserve has stuck with 2.75 per cent. But Davies says the Reserve’s own econometric model of the economy, MARTIN, finds that potential growth has declined from 3.1 per cent in 2000 to 2.7 per cent in 2010 and 2.4 per cent in 2019.

In other words, when your forecasting method relies so heavily on reversion to the mean, if your estimate of potential growth is too high, it’s hardly surprising you’ll forecast more growth than you ever get.

But what’s wrong with the econocrats’ estimate of the potential growth? It could be in one or more of their estimates of growth in its three P components, but Davies’ checking shows it’s not population or participation, but productivity.

Davies says the MARTIN model shows that trend growth in productivity has slowed from 2 per cent a year in 2000, to 1.3 per cent in 2010 and to 1.1 per cent in 2019. This slowdown is not peculiar to Australia, but has occurred across the advanced economies.

Taking the median rate for those other economies, he estimates that the annual improvement in their productivity of labour per hour worked has slowed from 1.9 per cent in the 10 years before the crisis, to 0.8 per cent in the years since the crisis.

Davies’ equivalent estimates for us are similar: from 2.1 per cent to 1.2 per cent.

Okay, so why has productivity improvement slowed? Labour productivity has two components: “capital deepening”, where investment in more capital equipment per worker makes workers more productive, and “multi-factor productivity”, which is the improvement that can’t be explained by anything but technological progress (not more equipment so much as better equipment, plus improvements in the way factories and offices are organised) and reforms to the structure of the economy (“micro-economic reform”).

Davies finds the overall decline is mainly explained by the weakest rate of improvement in multi-factor productivity in decades – that is, little technological progress, here or overseas – but also by investment in the stock of non-mining physical capital that’s only just keeping up with the growth in the supply of labour (which, I imagine, hasn’t been helped by our need for “capital widening” to provide equipment to all the extra migrant workers).

What Davies’ digging has really exposed, of course, is the econocrats’ refusal to accept that our economy’s caught in former Bank of England governor Mervyn King’s “low-growth trap”.

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How Morrison is putting politics ahead of policy

If you think Scott Morrison’s been busy doing not very much since the election in May, you are much mistaken. In truth he’s been very busy doing stuff of not much interest to you. But sometimes it pays to take an interest in things that don’t seem of interest.

For instance, I wouldn’t expect you to have taken much interest in the reshuffle of government departments he announced on Friday. But I’ve been reading up on it and been amazed – or appalled – by what I’ve learnt.

It’s said to be the most dramatic overhaul of the federal public service since 1987, cutting the number of departments from 18 to 14 while creating four new mega-departments and removing five department secretaries, three of them women.

Morrison said it was not a cost-saving measure, but had been done to “better align and bring together functions within the public service so they can all do their jobs more effectively and help more Australians”.

So be very clear on that: it’s been done to ensure you and I get better service from the public service. Specifically, the number of departments was shrunk so as to “ensure the services that Australians rely on are delivered more efficiently and effectively”.

I just have one problem: that’s what they all say. If Morrison had increased rather than decreased the number of departments, he would still have assured us it would make the public service more efficient and effective.

This is hardly the first time departmental arrangements have been changed. They’re changed after every election and often several times more. Changes are so common bureaucrats have a name for them: MoG – changes in the “machinery of government”.

According to calculations by Bob McMullan, former Labor minister turned academic, more than 200 changes have been made since 1993-94. “In 2015-16, machinery of government changes involved the movement of 8000 staff in 21 separate changes. Changes following the 2013 election, which involved the movement of 12,000 staff, cost an average of $14 million per agency.”

Governments everywhere do it, but research by academics at UNSW’s Canberra campus suggests Australian governments do it far more than others. “Even governments with an emphasis on ‘cutting red tape’ [such as this one] have undertaken extreme and costly MoG changes,” they say.

So why are the latest changes said to be the biggest since 1987? Because that’s when the Hawke government introduced the idea of merging departments into mega-departments. Paul Keating reversed some of those changes and John Howard undid much of the rest. Get it? It’s time to mega up again.

When the changes cause the name of some function to drop out of the ever-longer titles of departments, the interest group invariably sees red. A few years ago it was the scientists, this time it’s the arts. Actually, the arts have never had their own department, but have been shunted from one department to another.

Since Bob Hawke’s day they’ve gone from Environment to Communications, back to Environment, then Regional Development, Prime Minister and Cabinet, back to Regional Development, then Attorney-General’s, back to Communications and now to the new mega Department of Infrastructure, Transport, Regional Development and Communications.

So many MoG changes involve moving functions from one department to another that McMullan has christened them “merry-go-round decisions”. “Responsibility for childcare, aged care and Indigenous affairs (to name a few) have all been the subject of multiple shifts in the past decade. In some cases, the functions have moved out of one department only to return to their original home a few years later,” he says.

He adds that “disentangling financial structures, IT support structures, property responsibilities and HR systems from old organisations and reintegrating them into new ones takes considerable time and effort”.

Former boss of Prime Minister’s Terry Moran’s comment on the latest changes is blunter: “There’ll be turmoil in many departments for a significant period."

So why do the changes keep happening? Partly to create the appearance of progress – “reform”. Sometimes I think the pollies are trying to convince themselves as much as us. But mainly to indulge the preferences, prejudices and professed priorities of the prime minister and his or her ministers.

It’s notable that these extensive changes to the bureaucracy – including the sacking of five department heads – involve no changes to the ministry. The new mega Department of Agriculture, Water and the Environment will now contain three Cabinet ministers, co-equal in power and glory.

What particular preferences and prejudices of Morrison do the latest changes reveal? I think it reveals this government’s disdain for public servants. It’s the revenge of the ministerial staffers (which many ministers started their political careers as). Who needs public servants giving ministers advice when it’s the staffers who understand the politics of the matter?

This is Morrison surrounding himself with the top public servants he knows and likes, replacing the ones who want to keep talking about policy with can-do men and women who don’t argue.

Morrison has repeatedly expressed his belief that he doesn’t need policy advice from public servants. They should just be getting on with implementing the policies the government gives them.

I think this is Morrison perfecting the hermetic seal of his personal Canberra bubble. He already knows what’s on his to-do list and he doesn’t want news from the outside world delaying or deterring him from his purpose.

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Please, no more Pollyanna impressions in the budget update

The mid-year budget update we’ll see next Monday presents the government and its econocrats with a threshold question: can their battered credibility withstand one more set of economic forecasts based on little more than naive optimism?

Or won’t it matter if first the industry experts, and then the Quiet Australians in voterland, get the message that budgets are largely works of fiction - based on political spin, with forecasts crafted to fit - and so are not to be believed?

Last week’s national accounts confirmed five successive quarters of weak growth in the economy and left Reserve Bank governor Dr Philip Lowe’s lovely thought of the economy reaching a “gentle turning-point” looking pretty ragged.

Maybe if you squint you could see a pattern of improvement, with the economy’s weakness concentrated in the last two quarters of 2018 (growth in real GDP of 0.3 per cent and 0.2 per cent), and strength returning in the first three quarters of this year: 0.5 per cent, 0.6 per cent and now 0.4 per cent.

Trouble is, that ain’t economics, it’s numerology: looking at a pattern of numbers without troubling your head with the varying factors that are driving them. Look at what’s driving those numbers and the illusion is dispelled.

Every part of the private sector is weak: consumer spending, home building and business investment, so much so that, as a whole, it’s actually contracting. That consumer spending is weak and getting weaker – despite the tax cut and three cuts in interest rates – is hardly surprising when you remember how weak the growth in wages has been.

It’s a great thing that public sector spending is providing most of what little growth we’re getting while the private sector goes backwards, but it doesn’t count as a sign the economy’s getting back on its feet.

As for the contribution from net exports, it would be more encouraging if it weren’t for the knowledge that a fair bit of it comes from the fall in imports you’d expect to see when domestic demand is “flat to down”.

But for a disillusioning summary statistic, try this: real household disposable income per person – a good measure of average material living standards - has essentially been flat since the end of 2011. So the Quiet Australians have nothing to show for eight years of toil. The rest is a conjuring trick where high population growth is passed off as growing prosperity.

Three quarters into our run of five weak quarters, Scott Morrison fought the election on a claim to have delivered a Strong Economy. The two subsequent sets of national accounts have destroyed that masterpiece of the marketer’s art.

But Morrison’s misrepresentations came bolstered by Treasury forecasts and projections showing the economy would quickly recover from weakness to strength, whereupon it would enter a five-year period of above-trend (3 per cent) annual growth before reverting to trend for the rest of a decade.

This flight of back-of-an-envelope fancy not only appeared to be Treasury’s endorsement of Morrison’s unfounded claims about strong growth, they supported the government’s claim that the budget could easily afford to double the tax cuts announced in the previous year’s budget – taking the cumulative cost to revenue to $300 billion over a decade – and still achieve healthy annual surpluses, eliminating the government’s net public debt by June 2030.

Just eight months later, these fearless forecasts aren’t looking too flash. They had the economy returning to trend growth of 2.75 per cent this financial year and inflation returning to 2.5 per cent by June 2021.

Most wonderful of all, they had annual wage growth accelerating to 2.5 per cent by June (actual: 2.3 per cent, falling to 2.2 per cent following quarter), to 2.75 per cent by June next year, then to 3.25 per cent by June 2021 and 3.5 per cent by June 2022 and in all subsequent years.

Wages are such a central driver of the economy, this triumph of hope over experience was essential to any forecast recovery in consumer spending and economic growth, not to mention any return to (bracket-creep-fuelled) budget surpluses despite tax cuts.

See the problem Treasurer Josh Frydenberg and his troops face in preparing next Monday’s mid-year budget update? Do they keep playing the budgetary version of the with-one-bound-our-hero-broke-free game and leave themselves open to growing derision, or do they stop pretending, offer plausible forecasts and adopt a more defensible projection methodology, and start on the long road back to being respected and authoritative?

But if the days of Treasury being game to give the boss (Morrison) forecasts he won’t like are long gone, that raises a courage question for the Reserve heavies: when will they stop ensuring their forecasts tick-tack with Treasury’s and start telling us what they really think?

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Sorry, the economy can't grow much without higher wages

I usually pooh-pooh all alleged recessions that have to be qualified with an adjective. With recessions, it’s the whole economy or nothing. But I’ll make an exception for the "household recession" – which tells you why this week’s news of continuing weakness in the economy provides no support for Scott Morrison’s refusal to stimulate it.

Households are only part of the economy, of course, but they’re the part that matters above all others. Why? Because they contain all the people. And because all the other parts – the corporate sector, the public sector and the "external" sector of exports and imports – exist solely to serve we the people.

The economy’s "national accounts", issued this week by the Australian Bureau of Statistics, showed weak growth for the fifth quarter in a row, with real gross domestic product growing by just 0.3 per cent in the September quarter of last year, 0.2 per cent in the December quarter, 0.5 per in March quarter this year, 0.6 per cent in the June quarter and now a disappointing 0.4 per cent for this September quarter.

That took the annual growth in real GDP up from a (revised) 1.6 per cent over the year to June, to 1.7 per cent over the year to September. Morrison needed a lot better than that to convince anyone bar his my-party-right-or-wrong supporters that a response to the Reserve Bank’s repeated pleas for budgetary stimulus could be delayed until the budget in May.

To see how weak that is, remember our economy’s estimated "trend" or average rate of growth over the medium term is 2.75 per cent a year – about 0.7 per cent a quarter.

But let’s get back to households and their finances. Their spending on consumption grew by an almost infinitesimal 0.1 per cent in real terms during the latest quarter, or by 0.5 per cent before taking account of inflation.

Sticking to before-inflation figures (even though all the other national-account figures I quote are always inflation-adjusted), the quarter saw households’ main source of income – wages – grow by 1.1 per cent, which other, lesser income sources shaved to growth of 0.8 per cent in total household income.

However, the amount households had to pay in income tax fell by 6.8 per cent, thanks mainly to the arrival of the government’s new middle-income tax offset. This meant that households’ disposable income grew by a much healthier 2.5 per cent.

But something led most households to save rather than spend the tax break, causing their total saving during the quarter to jump by 80 per cent and their ratio of saving to household disposable income to leap from 2.5 per cent to 4.8 per cent. That’s why their consumer spending grew by only 0.5 per cent, as we’ve seen.

It’s possible people will get around to spending more of their tax cut but, with household debt at record levels after years of rising house prices, and continuing weak wage growth, it’s not hard to believe they’re too worried to spend up at a time when the economy's hardly onward-and-upward.

They may be intending to pay down some debt, just as it’s likely many people with mortgages have allowed the fall in the interest rates they’re being charged just to speed up their repayment of the loan.

Whatever, the faster consumer spending Morrison and his loyal lieutenant assured us their tax cut would bring about hasn’t materialised. And it’s noteworthy that what little consumer spending we’ve seen has been on essentials rather than discretionary items.

One discretionary spending decision is whether to buy a new car. Separate figures show new car sales in November were down 9.8 per cent on November last year.

So if the biggest part of the economy has done next to nothing to generate what little growth we’ve seen, where’s it coming from?

Well, not from the business end of the private sector. Spending on the building of new homes was down 1.7 per cent in the September quarter and by 9.6 per cent over the year to September. Business investment spending was down 2 per cent during the quarter and by 1.7 per cent over the year.

All told, the private sector – consumer spending, home building plus business investment – fell for the second quarter in a row and is 0.3 per cent lower than a year ago.

By contrast, public sector spending – the thing Morrison & Co profess to disapprove of – is going strong, with government consumption spending up by 0.9 per cent in the quarter, and 6 per cent over the year, mainly because of the continuing rollout of the National Disability Insurance Scheme.

Public investment in infrastructure – mainly by the state governments – grew 5.4 per cent in the quarter, to be 2.1 per cent up on a year earlier. All told, growth in the public sector accounted for most of the growth in the economy overall in the September quarter.

That leaves the external sector – aka "net exports" – making a positive contribution to overall growth during the quarter, with the volume of exports up 0.7 per cent while the volume of imports was down 0.2 per cent. (Falling imports, however, are a sign of a weak domestic economy.)

Another seeming bad sign – worsening productivity, with GDP per hour worked down 0.2 per cent in the quarter and 0.2 per cent over the year – wasn’t as bad as it seems, however.

When you’ve had the good news that employment has grown faster than you’d expect given the weak growth in output of goods and services, productivity – output per unit of input – falls as a matter of arithmetic. Does that make the employment growth a bad thing?

I’ll leave the last word to Callam Pickering, of the Indeed job site: "As long as wage growth remains so low, it will be difficult for the economy to return to annual growth of 3 per cent or higher. Quite simply, it is almost impossible to have a strong economy without a healthy household sector."

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Women are making themselves at home in the workforce

In the world of paid work, women still have a lot to complain about: unequal pay and promotion, still-inadequate childcare, and a tax and benefit system that discourages “secondary earners” from working more.

All true. But don’t let this conceal from your notice the success women are having at flooding into the long male-dominated workforce and slowly reshaping it to their needs.

In my never-humble opinion, for as long as girls continue making themselves better educated than boys, it’s only a matter of time before women are calling the shots.

Reserve Bank deputy governor Dr Guy Debelle highlighted women’s growing role in the labour market in a speech he gave last week.

You’ve no doubt heard the government boasting about how strongly the number of jobs has grown on its watch. It’s true. The rest of the economy hasn’t been doing well – wages, the standard of living, for instance – but employment has been growing at the disproportionately strong annual rate of about 2.5 per cent over much of the past three years. As a consequence, a near-record 62.6 per cent of all Australians aged 15 and over have a paid job.

But here’s what the pollies never mention, but Debelle noted: women accounted for two-thirds of the additional jobs in the past year.

This means the rate at which working-age females are participating in the labour force is now at its highest. So with female participation continuing to grow strongly over the decades, while male participation has fallen back, the gap between male and female participation is the narrowest it’s been.

Similarly, if you look just at the gender of those with jobs, women’s share is now above 47 per cent. Similar trends are occurring in all the advanced economies, of course.

Debelle says “changing societal norms and rising educational attainment have contributed to more women moving into ... employment outside the home. Female participation has also been influenced by the increasing flexibility of working-time arrangements, the availability and cost of childcare and policies such as parental leave.”

True. There was a time when most employers thought in terms of full-time workers and not much else – an attitude reinforced by the male-dominated unions. The increasing use of part-time employment has greatly added to the “flexibility” with which employers can deploy labour within their businesses, and no doubt helped to make them more profitable.

But the fact remains that the advent of part-time employment has been a boon, first, to women seeking a career as well as motherhood, then to full-time university students seeking income while they study, and now to many older workers seeking a mid-point between the extremes of full-time work and retirement. So the dread “flexibility” can benefit workers as well as bosses.

Debelle says that the participation rate of mothers with dependent children has kept increasing, rising by 10 percentage points since the early 2000s to 73 per cent. Over the past decade, the rise has been most pronounced for mothers with children aged up to 4.

Of those returning to work within two years after the birth of a child, an increasing majority are citing “financial reasons” as their main reason for doing so. Others returning to work cite “social interaction” or to “maintain career and skills” as their main reason.

Financial reasons could be capturing a number of considerations, according to Debelle, including low growth in wages, the rise in household debt or childcare costs.

Research suggests the cost and quality of childcare does have a significant effect on the willingness of women to do paid work, he says. According to the HILDA survey – of household income and labour dynamics in Australia – the share of households using (more expensive) formal childcare for young children has increased notably over the past decade.

Even so, access to childcare places and financial assistance with childcare costs remain “very important” issues for mothers not back at work.

Debelle says the rise in the level of mortgage debt owed by households in recent decades has “broadly coincided” with the increase in women’s rate of participation in the labour force. But which one’s causing what?

Are debt levels higher because more households have two incomes and so can afford to borrow more? (If so, that would suggest the increase in second incomes is helping to push up house prices.)

Or does the need to borrow more to afford the higher prices drive women’s decisions to go back to work? Maybe the low growth in wages in recent years has caused couples to have more debt than they anticipated and thus needing to work more to pay it down.

What little research evidence there is has usually found it’s the higher debt levels that lead to more women going back to work, but the evidence isn’t strong.

Looking beyond the continuing increase in participation by the mothers of young children and the ever-growing workplace role of prime-aged women – 25 to 54 years – of which it is part, women also account for a big part of the swing from early to later retirement.

Do you realise that 60 per cent of women aged 55 to 64 are taking part in the labour force? That compares with 20 per cent or so before the turn of the century. And the rising participation by women 65 and over isn’t all that much less than for men. Times change.

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Lowe should rescue a PM lost in the Canberra bubble

Dr Philip Lowe, governor of the Reserve Bank, is one of the smartest economists in the land. You don’t get a PhD from the Massachusetts Institute of Technology unless you’re super-sharp. But the question now is whether he has the courage to stand up to a wilful Prime Minister whose confidence far exceeds his comprehension.

Scott Morrison, as we know, is refusing to do what Lowe – with the support of the international agencies and most of our economists – has been begging him to do: use his budget to come to the rescue of monetary policy and its ever-feebler efforts to stop the economy slowing almost to stalling-speed.

Morrison is desperate to deliver a budget surplus. So desperate he’s convinced himself that failing to do so would cost him more political support than would allowing the economy to continue failing to lift voters’ living standards, and be so weak that a shock from abroad could push us into recession.

How any politician could come to such a self-harming conclusion is hard to fathom. Perhaps it’s that the 28 years since our last severe recession have robbed the latest generation of Liberal pollies of their economic nous.

Morrison’s so green he hasn’t learnt the first rule of politics: if you stuff up the economy, they throw you out. If that’s news to you, remember the 1961 credit squeeze, which brought Bob Menzies within a whisker of having his career cut short.

Remember how the 1975 recession dispatched with Gough Whitlam, the recession of the early 1980s finished Malcolm Fraser and the 1990 recession caught up with Paul Keating despite a one-term reprieve granted by Liberal fumbling of the 1993 election.

The question for Lowe is how he responds to the Prime Minister’s misreading of his own best interests (not to mention ours). Does Lowe stand back and watch an overconfident leader dice with political death by pretending that monetary policy hasn’t reached the end of its useful life and that blood can still be squeezed from the stone? Or does he announce he’s done all he sensibly can and turn the economy’s problem back to the one (elected) person who could fix it if he came to his senses?

Conventional monetary policy (interest-rate manipulation) has lost most of its power because household debt is at record levels, because the official interest rate is almost at zero, and because rates are already so low that another few cuts won’t make much difference.

Further, as Lowe explained in his speech last week, there’s little to be gained from deciding to progress to QE – "quantitative easing". It’s not capable of lowering rates much further and, in any case, comes at a cost.

As Lowe himself has acknowledged, it creates a moral hazard. For as long as Lowe pretends monetary policy is still effective, he’s running cover for the person who could do something effective, but chooses not to.

And it’s not just the absence of a positive, it’s also the continuation of a negative. Everything that causes the budget to take more out of the economy than it puts back in government spending causes private demand to be weaker.

Consider the way continuing bracket creep (only partly countered by the new middle income-earners’ tax offset) takes a bigger bite out of households’ wage income before they can spend it. Fiscal policy is actually counteracting monetary policy.

In his speech outlining the "limitations of monetary policy" and his lack of enthusiasm for unconventional measures, Lowe noted that their modest benefits needed to be balanced against their possible adverse side-effects.

Such as? First, they may change incentives in an unhelpful way. Providing the banks with ready liquidity during emergencies may encourage them not to bother holding their own adequate buffers, thus making further crises more likely.

Similarly, "the willingness of a central bank to use its full range of policy instruments might create an inaction bias by other policymakers [and] this could lead to an over-reliance on monetary policy," he said. But which policymakers could he possibly have in mind?

A second possible side effect is reducing the efficiency with which resources are allocated throughout the economy. Low interest rates and flattening the yield curve (pushing long-term interest rates down to the level of short-term rates) can damage banks’ profitability, leaving them with less capacity to lend.

There are also risks to the stability of the financial system when low interest rates cause the prices of property or shares (and borrowing) to boom at a time when the economy’s actually weak.

Finally, a third side-effect is a blurring of the lines between monetary policy and fiscal policy. "If the central bank is buying large amounts of government debt at zero interest rates, this could be seen as money-financed government spending," and so damage a country’s credibility internationally.

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