Our falling real wages will help control inflation

The media always portray an increase in interest rates as terrible news – and it’s hardly surprising that’s how Anthony Albanese sees it – but Scott Morrison is right in saying rising interest rates are a sure sign of a strong economy.

Rates fall or stay low when the economy is weak, but rise when the economy’s strong growth threatens to give us a problem with high and rising inflation – which is where we are now.

One of the main things we want from a strong economy is lots of jobs, which is just what we’ve been getting. So many jobs have been created over the past two years – almost all of them full-time – that the rate of unemployment has fallen to a very low 4 per cent, and the proportion of working-age people with jobs is higher than it’s ever been.

What could be wrong with that? Well, just that the wages people have been earning from all those jobs haven’t been keeping up with the cost of living. Last week’s news that consumer prices rose by a massive 5.1 per cent over the year to March has made that much worse.

If you want to blame Morrison for that, well, he’s actually right in saying most of its causes – supply disruptions arising from the pandemic; high petrol prices caused by Russia’s war on Ukraine – have nothing to do with our government.

But wages have been struggling to keep up with prices for all the time this government’s been in office. There are things it could have been doing to encourage higher wages, but it’s failed to do them. That’s the legitimate criticism of Morrison’s economic management.

Getting back to interest rates, the truth is that a rise in rates cuts both ways. It’s bad news for people with home loans, but good news for older people living on their savings and for young people saving for a deposit on a home.

Did I mention that nothing’s ever black or white in the economy? Almost everything that happens has advantages for some people and disadvantages for others.

But leaving aside whether individuals gain or lose from higher interest rates, where does the jump in prices leave the economy? How much of a worry has inflation become? Will rates have to rise so high they threaten the recovery? Could we even end up back in recession?

This time last week some business economists were sounding pretty panicky. “The inflation genie is well and truly out of the bottle”, some assured us. Others claimed the economy was “overheating” and, since the Reserve Bank had left it so late to start raising rates, they’d have to rise a long way to get inflation back under control.

But when Reserve governor Dr Philip Lowe announced on Tuesday that the official interest rate – aka the “overnight cash rate” – had been increased by 0.25 percentage points to 0.35 per cent, warned that further rises in rates will be needed “over the period ahead”, and explained how he saw the problem and how it could be fixed, many economists seem to have calmed down.

Implicitly, Lowe refuted the claim that the economy was overheating. Even at 5.1 per cent, our inflation rate was lower than the other rich countries’, and our wage growth so far had been much lower.

So the rise in inflation “largely reflects global factors” – that is, not of our making – but “domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices”.

That is, we don’t have as big a problem as that 5 per cent figure could make you think, but the economy’s growing so strongly we could get a problem if we kept interest rates so low.

Many retailers and other firms have gone for years trying to hold down their costs, including by finding ways to save on labour costs, and avoid passing those costs on to customers, but the rise in their pandemic and Ukraine-related costs – plus the media’s incessant talk of rising prices – has emboldened them to start increasing their own prices.

Now, as Lowe explains, even if petrol and pandemic-related costs don’t fall back down, they won’t keep rising. So in time the inflation rate will fall back of its own accord, provided it doesn’t lead to our firms putting their prices up too high and giving their workers pay rises big enough to fully cover their higher living costs.

If that does happen, the once-only rise in prices coming from abroad gets into the wage-price spiral and the inflation rate stays high.

This is why Lowe has started raising the official interest rate and may keep raising it by 0.25 percentage points every month or so until, by the end of next year, it’s up to maybe 2.5 per cent (which, not by chance, is the mid-point of the Reserve’s 2 to 3 per cent inflation target).

Note that, if 2.5 per cent is roughly equal to the “neutral” interest rate - that is, the rate that’s neither expansionary nor restrictive – this would only involve withdrawing the “extraordinary monetary support” put in place to help us through the pandemic. It would take the Reserve’s foot off the accelerator, not jam on the brakes.

According to Lowe’s estimations, the resulting reduction in mortgagees’ disposable income, plus the likelihood that most workers’ wage rises wouldn’t be sufficient to cover the 5 per cent rise in their living costs, thus reducing their wages in real terms, would limit firms’ ability to raise their prices and so help to get the inflation rate back to the top of the 2 to 3 per cent target range by 2024.

The inflation problem fixed, without crashing the economy. Done at the expense of people with home loans and ordinary workers? Yep. No one said using interest rates to control the economy was particularly fair.

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Election bottom line: taxes will be going up, not down

Whichever side wins this election, it will be taking on a serious budget problem. Both sides are promising increased government spending on various worthy causes, while also promising that taxes will be cut rather than increased. This implies an ever-growing budget deficit. Do you think either side could get away with that? Only in their dreams.

Modern politicians are quite dishonest in what they tell us during election campaigns. They speak in loving detail about the expensive goodies they’re promising, but avoid mentioning any bad things they might have to do. They never present us with the bill.

And then we wonder why so many promises are broken.

Even before it thinks about the future, the new government will have to deal with unfinished business. The budget Treasurer Josh Frydenberg produced at the start of this campaign projected significant deficits for at least the next 10 years.

This despite the worst of the pandemic being over, and almost all the stimulus programs intended to keep the economy going during the lockdowns having been wound up. And despite the rate of unemployment being at its lowest in 50 years.

Economists know this profligacy will have to be corrected soon. Treasury secretary Dr Steven Kennedy has hinted as much. But that will require unpopular cuts in government spending or increases in taxes, or both.

Scott Morrison hasn’t been interested in doing any of that prior to the election. And economists have accepted that such nasty medicine is always administered after an election, not before.

The pollies won’t warn you of this, but I can. The longer the new government hesitates, the more the Reserve Bank will be obliged to compensate by raising interest rates higher than it otherwise would need to.

But that’s just the first of the budget problems the new government will inherit. The next part is that though – as the failure of its first 2014 budget demonstrated – the Coalition lacks the courage to make deep cuts in major spending programs, it has cut areas of spending that lack political support and kept a lid on spending in areas it hoped wouldn’t be noticed.

One of these tricks is to allow waiting lists and waiting times to blow out. Whenever you hear the word backlog – or spend ages on the phone waiting for “your call” to be so “important to us” that it’s actually answered – you know somebody somewhere is trying to save money by cutting the quality of the service you’re getting.

But penny-pinching is a game you can play for only so long before the worm turns. And after nine years, the pipsqueaks have started squeaking.

Did you catch the story just before budget night of the Minister for Veterans’ Affairs, Andrew Gee, who had to threaten to resign before the government relented and gave him extra funding to reduce the backlog in processing claims from veterans? (This from the guys always so sanctimonious on Anzac Day.)

High on the list of cost cuts is the public service. Who cares about all those shiny bums? Well, when you have trouble rolling out vaccinations, or getting hold of enough RATs, maybe you wonder whether it was smart to show so much knowledge and expertise to the door.

Overseas aid is another favourite for cost cutting, and we haven’t been as generous as we could be with our Pacific neighbours. Do you think, say, the Solomon Islanders might have noticed?

The diplomatic corps is another needless extravagance we’ve cut back on. More economic to wait until our relations with big neighbours deteriorate to the point where we need to spend infinitely more on defence preparedness.

Then there’s the notion that $46 a day is plenty for the unemployed to live on. How much longer do you think governments will be able to get away with that outright meanness? Especially when both sides are planning to give battlers like me a $9000-a-year tax cut in 2024.

It’s already clear the jig is up in one of the biggest areas where successive governments have tried to keep a lid on costs: aged care.

A fair part of those endless projected budget deficits is the $17 billion additional spending on aged care in last year’s budget, following the damning report of the royal commission. But there’ll need to be much further spending on care workers’ wages and training before standards are acceptable.

And that’s before you get to the big increases in spending on the National Disability Insurance Scheme and on defence.

Everything points to strong growth in government spending in coming years. And with budget deficits needing to be smaller rather than larger, this points to taxes that are higher.

Which taxes? Obvious candidates are reduced superannuation tax concessions for high earners like me, plus higher user charges for aged care. But the big one will be more bracket creep. Higher inflation equals higher income tax.

Don’t believe any politician who claims to stand for lower taxes. They can’t deliver.

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Our inflation problem isn't a big one - unless we overreact

I can’t remember a time when the arguments of all those bank and business economists claiming “the inflation genie is well and truly out of the bottle” and demanding the Reserve Bank raise interest rates immediately and repeatedly have been so unconvincing.

At base, their problem is their unstated assumption that the era of globalisation means all the advanced economies have identical problems for the same reasons and at the same time.

If America has runaway inflation because successive presidents have applied budgetary stimulus worth a massive 25 per cent of gross domestic product at the same time as millions of workers have withdrawn from the workforce, Britain’s withdrawal from the European Union is causing havoc, and Europe’s problem is particularly acute because of its dependence on Russian oil and gas, we must be the same.

Business economists have put most of their energy into convincing themselves our problem is the same as everyone else’s, rather than thinking hard about how our circumstances differ from theirs and how that should affect the way we respond.

There’s also been a panicked response to a huge number – inflation of 5 per cent! – that says, “don’t think about what caused it, just act”. And since every other central bank has already started raising rates, what’s wrong with our stupid Reserve?

Too many economists have switched their brains to automatic pilot. We know from our experience of the 1970s and ’80s how inflationary episodes arise – from excessive demand and soaring wages – and we know the only answer is to jack up interest rates until you accidentally put the economy into recession. You have to get unemployment back up.

That stereotype doesn’t fit the peculiar circumstances behind this rise in prices, nor does it fit the way globalisation, skill-biased technological change, the deregulation of centralised wage-fixing and the huge decline in union membership have stripped employees of their former bargaining power.

The first thing to understand is that our price rises have come predominantly from shocks to supply: the various supply-chain disruptions caused by the pandemic, the war on Ukraine’s effect on oil and gas prices, and climate change’s effect on meat prices.

Various economists are arguing that price rises have been “broadly based” so as to show that price rises are now “demand-driven”, but the main reason so many prices have risen is that there have been so many different supply shocks coming at the same time, with so many indirect effects, ranging from transport costs to fertiliser and food.

Two thirds of the quarterly increase in prices came from four items. In order of effect on the index: cost of new dwellings (up 5.7 per cent), fuel prices (11 per cent), university fees (6.3 per cent) and food (2.8 per cent).

Of those, only new dwelling prices can be attributed mainly to strong demand, coming from the now-ended HomeBuilder stimulus measure. The rise in uni fees was a decision of the Morrison government.

America’s economy is “overheating”, but ours isn’t. It’s true our jobs market is very tight, and that much of this strength is owed to our now-discontinued stimulus measures.

But, paradoxically, the economics profession’s ideological commitment to growth by immigration has blinded it to the obvious: job vacancies are at record levels also because of another pandemic-related supply constraint: our economy has been closed to all imported labour (and we even sent a fair bit of it back home). This constraint has already been lifted.

The thing about supply shocks is that they’re once-only and not permanent. So, left to its own devices, without further shocks the rate of price increase should fall back over time. Petrol and diesel prices, for instance, have already fallen a bit but, in any case, won’t keep rising by 35 per cent a year year-after-year.

It’s sloppy thinking to think a rise in prices equals inflation. The public can be forgiven such a basic error, but professional economists can’t. A true inflation problem arises only when the rise in prices is generalised and is ongoing. That is, when it’s kept going by a wage-price spiral.

When a huge rise in prices, from whatever source, leads to an equally huge – or huger – rise in wages, which prompts a further round of price rises. That’s inflation.

In their panic, business economists have assumed that the loss of employee bargaining power we’ve observed in most of the years since the global financial crisis, which has done so much to confound the econocrats’ wage and growth forecasts, and caused inflation to fall short of the Reserve’s target range for six years in a row, has suddenly been transformed. Union militance is back!

Really? I’m sure employees and what remains of their unions will be asking for pay rises of at least 5 per cent this year, but how many will get anything like that much? They’ll all be on strike until they do, you reckon?

They’re safe to get more than the 2.3 per cent they got in the year to December, according to the wage price index, but the greatest likelihood is that real wages will continue to fall. And the cure for that is to raise interest rates, is it?

It is true that, if wages rose in line with prices, we would have an inflation problem, but how likely is that?

There’s been much concern about stopping a rise in “inflation expectations”, but this thinking involves a two-stage process: in expectation of higher inflation, businesses raise their prices. And in expectation of higher inflation, unions raise their wage demands.

All the sabre-rattling we’ve seen by the top retailers and their employer-equivalent of union bosses – so breathlessly reported by the media – suggests they’re increasingly confident they can get away with big price rises. But how much success individual employees and unionised workers have in realising their expectations remains to be seen.

Perhaps in this more inflation-conscious environment, employers will be a lot more generous – more caring and sharing – than they have been in the past decade. Perhaps.

The Reserve is under immense pressure from the financial markets, the bank and business economists, the media, the actions of other central banks and even the International Monetary Fund to start raising interest rates.

It will, with little delay. It must be seen to act. But whether it’s at panic stations with the media and the business economists is doubtful. And you don’t have to believe the inflation genie is out of the bottle to see that the need for interest rates to be at near-zero emergency levels has passed.

As BetaShares’ David Bassanese has predicted, the Reserve will be “not actively trying to slow the economy, but rather [will] begin the process of interest-rate normalisation now that the COVID emergency has passed”. Moving to “quantitative tightening” will be part of that process.

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FISCAL POLICY & MONETARY POLICY: PROSPECTS FOR THE POST-COVID RECOVERY

 The pandemic isn’t over, but with most of our population vaccinated, we can hope that the worse of it is over and it won’t greatly disrupt the economy in future. Australia has had great success in containing the virus, and the “coronacession” has proved to be much shorter and shallower than expected. The economy has bounced back from each of the two periods of lockdown, the unemployment rate has fallen to its lowest in almost 50 years and strong growth of a bit over 4 pc is expected in calendar 2022. However, global supply-side shocks have lifted the inflation rate to 5.1 pc over the year to March, and it’s expected to go a bit higher before it starts falling back. To ensure the strong economy doesn’t cause the once-only supply-side price rises to get built into the wage-price spiral, the Reserve Bank has begun increasing the official cash rate to withdraw the “extraordinary monetary support” put in place to help the economy through the pandemic. The government is likely to come under pressure from macro-economists to tighten fiscal policy somewhat for the same reason.

Why the “coronacession” was shorter and shallower than expected

What I call the “coronacession”, which ended Australia’s record run of almost 30 years without a recession in the March quarter of 2020, proved to be much shorter and shallower that originally feared. The initial, nation-wide lockdown in the economy caused real GDP to contract by more than 7 pc in the March and June quarters of 2020. The unemployment rate peaked at 7.5 pc in July 2020, and the under-employment rate peaked at 11.4 pc in September 2020. But, to everyone’s surprise, GDP rebounded strongly in the following two quarters, to end 2020 just 1 pc below where it was in December 2019. Then followed a second lockdown in NSW, Victoria and ACT, which caused real GDP to contract by 1.9 pc in the September quarter of 2021, before bouncing back with growth of 3.4 pc in the December quarter after the lockdown ended. By coincidence, the net growth in real GDP over the two years to December 2021 was also 3.4 pc.

The latest figures for the labour market, for March 2022, show net growth in employment of more than 390,000 jobs in two years, almost all of which were full-time. The rate of unemployment had fallen to 4 pc and the rate of underemployment to 6.3 pc. The participation rate was at a record 66.4 pc, and the proportion of the working-age population with jobs at a record 53.8 pc. Remember, however, that this amazing performance was assisted by the temporary closing of our borders to “imported labour” during the worst of the pandemic. Immigration has now resumed.

Four main factors explain why the coronacession proved shorter and shallower than originally expected. First, the virus wasn’t as virulent as first feared by epidemiologists and our hospital system was stretched but not overwhelmed. We took advantage of our island status to close our borders, all states co-operated in limiting the spread of the virus, a vaccine became available and was distributed far sooner than originally expected, and we didn’t have a big problem with anti-vaxxers or people refusing to wear masks.

Second, the coronacession can’t be compared with an ordinary recession. Whereas ordinary recessions are caused by weak demand by households and firms, the corona recession was caused by a government-ordered temporary cut in supply, as federal and state governments sought to suppress the virus by closing our borders, ordering many industries to cease trading, and requiring people to leave their homes as little as possible. This meant that, when the lockdowns were lifted, people and businesses were able to resume (almost) normal activity. The JobKeeper wage subsidy program was designed to keep workers attached to their employers until the lockdown ended. The temporary JobSeeker supplement was intended to help anyone who did lose their job to keep spending. The two programs were highly effective.

Third, the rebound strategy was hugely effective in restoring employment to roughly where it was before the lockdown. However, the rate of unemployment has fallen by more than would normally happen in response to such a rise in employment. This is because the closing of our border to immigrants caused the size of the labour force to grow by about half the rate it normally does, thus making it easier for increased employment to lead to reduced unemployment.

Fourth, when you remember the massive amount of fiscal stimulus the federal government has applied – more than $300 billion, or about 15 pc of GDP - it shouldn’t be so surprising that the economy has grown so strongly. What this proves is that fiscal stimulus works.

Households have yet to spend much of the stimulus money and ordinary income they received over the past two years. Household saving as a proportion of household disposable income is an unusually high 13.6 pc, and households have an extra $240 billion in bank accounts. Because of this, and because so many people have jobs, the outlook for the economy at present is unusually strong. Real GDP is expected grow by a huge 4 pc or more in calendar 2022, but slow to a below-trend 2 pc in 2023 (because population growth won’t be back to normal). The unemployment rate is expected to fall further to 3.5 pc.

The return of inflation

Like all the advanced economies, Australia had enjoyed low inflation in the RBA’s target range of 2 to 3 pc on average since the mid-1990s. But over the past few quarters we’ve been hit by an unusual coincidence of global supply-side price shocks arising from disruptions caused by the pandemic, by Russia’s attack on Ukraine causing a big increase in oil and gas prices, and even by climate change, with restocking since the end of the severe drought causing a jump in beef and lamb prices. The “headline” inflation rate rose to 5.1 pc over the year to March, while the “underlying” rate rose to 3.7 pc. Both are expected to rise further, with the headline rate getting to about 6 pc before starting to fall back. As a consequence of this return to inflation well above the target range, and with the economy growing strongly, in early May – during the election campaign - the RBA began increasing the official interest rate.

The policy mix returns to normal

For many years, the “policy mix” was for monetary policy to be the primary policy instrument used to achieve “internal balance” – to smooth the path of aggregate demand as the economy moves through the ups and downs of the business cycle  – with fiscal policy playing a subsidiary supporting role. This worked well when the primary policy problem was seen as high inflation rather than high unemployment.

But when the economic disruption of the pandemic arrived, with its need to lockdown the economy, the policy mix reversed, with fiscal policy becoming the main instrument, and monetary policy playing the supporting role. Governments always resort to fiscal stimulus during recessions, but this was especially necessary in the response to the pandemic because the official interest rate was already down to 0.75 pc when it began, leaving little room to cut it further.

Now, however, with the econocrats’ need to ensure the surge in imported inflation doesn’t get built into the wage-price spiral, inflation has become the big worry and monetary policy has returned to primacy in the policy mix. In any case, this year’s budget papers say the government has transitioned to the second phase of its medium-term fiscal strategy which is to “focus on growing the economy in order to stabilise and reduce debt”.

Now let’s turn to the basic facts you need to know about the two arms of macroeconomic management and how they are now being used to continue the economy’s recover from the coronacession while returning inflation to the target range.

The monetary policy “framework”

Monetary policy - the manipulation of interest rates to influence the strength of demand - is conducted by the RBA independent of the elected government. With the recovery from the coronacession now well under way, it has returned to being the primary instrument by which the managers of the economy pursue internal balance - low inflation and low unemployment. Monetary policy is conducted in accordance with the inflation target: to hold the inflation rate between 2 and 3 pc, on average, over time. The primary instrument of MP is the overnight cash rate, which the RBA controls via market operations.

Recent developments in monetary policy

Because of the seven successive years of below-trend growth since 2011-12, the Reserve Bank cut its cash rate from 4.25 pc at the end of 2011 to 0.75 pc at the end of 2019. It’s not hard to see why it kept the official interest rate low and getting lower for so long: the inflation rate had been below its target range; wage growth has been weak, suggesting no likelihood of rising inflation pressure; the economy had yet to accelerate and had plenty of unused production capacity, and the rate of unemployment showed little sign of falling below its estimated NAIRU of 5 pc, which the RBA revised down to 4.5 pc before the arrival of the pandemic.

Then the advent of the virus led the RBA to cut rates twice in one month, March 2020, lowering the rate to 0.25 pc. Despite its previously expressed reservations, it also joined the US Federal Reserve and other major central banks in engaging in quantitative easing, QE. It announced its intention to buy sufficient second-hand government bonds to ensure the “yield” (interest rate) on three-year bonds was about the same as the cash rate. And, to ensure the banks keep lending to small business during the recession, it announced it was prepared to lend to them at the same rate as the cash rate.

In November 2020, the RBA cut the cash rate even further to 0.1 pc, along with the target for three-year government bonds. It announced the further measure of spending $100 billion every six months buying second-hand government bonds with maturities of 5 to 10 years. Note that all the QE measures were intended to lower the interest rates paid by governments and private firms on longer-term borrowing. The RBA’s total purchases of second-hand bonds worth more than $350 billion are equivalent to it funding more than all the government’s fiscal stimulus by merely “printing money”.

In May 2022, following news that the inflation rate had jumped to 5.1 pc, the RBA announced its decision to raise the cash rate by 0.25 pc points to 0.35 pc to “begin withdrawing some of the extraordinary monetary support that was put in place to help the economy during the pandemic”. This would “start the process of normalising monetary conditions” and returning to “business as usual”. Ensuring that inflation returns to target over time “will require a further lift in interest rates over the period ahead”. If the goal were to return the real cash rate to “neutral” – that is, neither expansionary nor restrictive – at about 2.5 pc (the mid-point of the inflation target) by the end of 2023, the cash rate would have to be increased by 0.25 pc points every month or so. Note that this will involve the RBA taking its foot off the accelerator, so to speak, not jamming on the brakes. The RBA also announced that, having ended further QE bond purchases in February, it would now move to QT – quantitative tightening – by not “rolling over” (renewing) its bond holdings as they reach maturity.

Fiscal policy “framework”

Until the arrival of the pandemic, fiscal policy - the manipulation of government spending and taxation in the budget – had been conducted according to the Morrison government’s then medium-term fiscal strategy: “to achieve budget surpluses, on average, over the course of the economic cycle”.

Since the coronacession, however, the government has adopted a two-phase strategy. Phase one, the economic recovery plan, involved huge fiscal stimulus to promote employment, growth and business and consumer confidence. It was to remain in place until the unemployment rate was “comfortably below 6 per cent”. Phase two now involves a “focus on growing the economy in order to stabilise and reduce debt”. “This underlines the commitment to budget . . . discipline and provides flexibility to respond to changing economic conditions,” the budget papers say.

Recent developments in fiscal policy

At the time of its election in 2013, the Coalition government expressed great concern about the high budget deficit and mounting public debt it inherited, resolving to quickly get on top of both. But it turned out to lack enthusiasm for either cutting government spending or increasing taxes. And the years of below-trend growth caused by secular stagnation meant the debt kept growing and the budget didn’t return to balance until 2018-19. Mr Frydenberg was expecting the budget to return to surplus in 2019-20, but this was overturned by the pandemic, which caused the budget’s automatic stabilisers to go into reverse and return the budget to a large deficit. The government’s massive fiscal stimulus has added further to the deficit and public debt.

The budget deficit reached a peak of $134 billion (6.5 pc of GDP) in 2020-21, and is expected to fall to $80 billion (3.5 pc) in 2021-22, $78 billion (3.4 pc) in the coming financial year, 2022-23, then have fallen to $43 billion (1.6 pc) in 2025-26. The budget is projected still to be in a deficit of 0.7 pc of GDP in 2032-33. The gross federal public debt is projected to reach a peak of 44.9 pc of GDP ($1.1 trillion) in June 2025, before beginning a slow decline as a proportion of national income.

With the election over, the government is likely to come under pressure from macro-economists to tighten fiscal policy somewhat and reduce the budget deficit, so as to hasten the decline in the public debt as a proportion of GDP, as well as to help monetary policy return inflation to the target range.

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MACROECONOMIC MANAGEMENT AND THE CHANGING ‘POLICY MIX’

UBS HSC Online Economics Day

I want to talk to you today about the two “arms” or “instruments” of macroeconomic management – monetary policy and fiscal policy – used by the economic managers to stabilise aggregate demand, to smooth it out as much as possible as the economy moves through the ups and downs of the business cycle. Their goal is to achieve “internal balance” – low inflation and low unemployment – but, like most balancing acts, this combination isn’t easy to achieve and maintain. That’s because the thing that makes it easy to achieve low inflation is a low rate of growth in aggregate demand – GDP – but low growth usually means high or rising unemployment. On the other hand, the thing that makes it easy to achieve low unemployment is a high rate of economic growth, but high growth usually means rising inflation pressure, as the demand for goods and services runs ahead of the economy’s ability to supply those goods and services.

In other words, there is much potential for conflict between the two objectives of macro management, low inflation and low unemployment. They don’t easily fit together, but we do want both of them. So achieving both at the same time is the great challenge the macro managers – the RBA and the elected government, as advised by Treasury – must continually struggle to achieve.

Both policy arms should push in the same direction

In principle, both arms of policy are capable of being used either to speed up demand or slow it down. For instance, if you use monetary policy to lower interest rates, that should encourage borrowing and spending and so strengthen demand. If you use monetary policy to raise interest rates, that should discourage borrowing and spending and so weaken demand. But similarly, if you use fiscal policy to increase government spending and/or cut taxes, that should stimulate demand, whereas if you use fiscal policy to cut government spending and/or increase taxes, that should restrict demand.

Again in principle, at times when the macro managers feel they have a bigger problem with high unemployment than with high inflation, they should have both arms of policy pushing in the same direction: to strengthen demand. At times when the managers feel they have a bigger problem with high inflation than with high unemployment, they should have both arms of policy pushing in the direction of restraining demand. To put it another way, the economic managers will have more trouble achieving internal balance when, for some reason – perhaps political – they have the two arms pushing in opposite directions.

But the two arms have differing strengths and weaknesses

In practice, however, it’s often not that simple. That’s because the two arms have differing sets of strengths and weaknesses. In practice, the managers have found that monetary policy is better at slowing demand than at speeding it up. This is particularly true at times when household debt is very high – as it is at present – meaning that cutting interest rates isn’t very effective in encouraging people to take on even more debt, whereas increasing interest rates is highly effective in limiting people’s ability to keep borrowing and spending. A second reason why monetary policy is less effective in encouraging spending and more effective in discouraging spending is that interest rates in recent years have been so close to zero. There’s been little scope for them to be cut, but much room for them to be increased.

By contrast, fiscal policy is probably better at boosting demand than at slowing demand. This is mainly because the budget is controlled by politicians, who find it a lot easier to increase spending or cut taxes than to cut spending or increase taxes. To put it another way, the things you do to encourage demand are politically popular, whereas the things you do to discourage demand are politically  unpopular, so it makes sense for the encouragement to be done mainly by politicians through the budget, and most of the discouragement to be done by unelected independent bureaucrats through monetary policy.

The ever-changing ‘policy mix’

This brings us to the key decisions the economic managers must make about the relative roles to be played by the two arms at any point in time. Which of the two arms should take the lead, while the other arm plays a subsidiary, supporting role? If monetary policy is better at slowing demand, while fiscal policy is better stimulating demand, which arm plays the leading role will depend on whether, at the time, high inflation or high unemployment is the main problem. As the problem changes, so will the mixture of the two policy arms.

For many years, the “policy mix” was for monetary policy to be the primary policy instrument used to achieve internal balance, with fiscal policy playing a subsidiary supporting role. This worked well when the primary policy problem was seen as high inflation rather than high unemployment.

But when the economic disruption of the pandemic arrived, with its need to lockdown the economy, the policy mix reversed, with fiscal policy becoming the main instrument, and monetary policy playing the supporting role.

Now, however, with the all the fiscal and monetary stimulus having caused the economy to bounce back strongly from the two lockdowns, the economic managers’ greatest need is to ensure the surge in imported inflation doesn’t get built into the price-wage spiral. So inflation has become the big worry and monetary policy has returned to primacy in the policy mix. As well, this year’s budget papers say the government has transitioned to the second phase of its medium-term fiscal strategy which is to “focus on growing the economy in order to stabilise and reduce debt”. So the policy mix has returned to where it was before the arrival of the pandemic.

Now let’s look in more detail at recent developments, first in monetary policy, and then fiscal policy.

Recent developments in monetary policy

Because of the seven successive years of below-trend growth after 2011-12, the Reserve Bank had cut its cash rate from 4.25 pc at the end of 2011, to 0.75 pc at the end of 2019. It’s not hard to see why it kept the official interest rate low and getting lower for so long: the inflation rate had been below its target range; wage growth had been weak, the economy had yet to accelerate and had plenty of unused production capacity.

Then the arrival of the virus led the RBA to cut rates twice in one month, March 2020, lowering the rate to 0.25 pc. Despite its previously expressed reservations, the RBA also joined the US Federal Reserve and other major central banks in engaging in quantitative easing, QE. It announced its intention to buy sufficient second-hand government bonds to ensure the “yield” (interest rate) on three-year bonds was about the same as the cash rate.

In November 2020, the RBA cut the cash rate even further to 0.1 pc, along with the target for three-year government bonds. It announced the further measure of spending $100 billion every six months buying second-hand government bonds with maturities of 5 to 10 years. Note that all the QE measures were intended to lower the interest rates paid by governments and private firms on longer-term borrowing.

In May 2022, following news that the inflation rate had jumped to 5.1 pc, the RBA announced its decision to raise the cash rate by 0.25 pc points to 0.35 pc to “begin withdrawing some of the extraordinary monetary support that was put in place to help the economy during the pandemic”. This would “start the process of normalising monetary conditions” and returning to “business as usual”. Ensuring that inflation returns to target over time “will require a further lift in interest rates over the period ahead”. Note that this will involve the RBA taking its foot off the accelerator, so to speak, not jamming on the brakes. The RBA also announced that, having ended further QE bond purchases in February, it would now move to QT – quantitative tightening – by not “rolling over” (renewing) its bond holdings as they reach maturity.

Recent developments in fiscal policy

At the time of its election in 2013, the Coalition government expressed great concern about the high budget deficit and mounting public debt it inherited, resolving to quickly get on top of both. But the budget didn’t return to balance until 2018-19. Then the pandemic caused the budget’s automatic stabilisers to go into reverse and return the budget to a large deficit. The government’s massive fiscal stimulus has added further to the deficit and public debt.

The budget deficit reached a peak of $134 billion (6.5 pc of GDP) in 2020-21, and is expected to fall to $80 billion (3.5 pc) in 2021-22, then have fallen to $43 billion (1.6 pc) in 2025-26. The budget is projected still to be in a deficit of 0.7 pc of GDP in 2032-33. The gross federal public debt is projected to reach a peak of 44.9 pc of GDP ($1.1 trillion) in June 2025, before beginning a slow decline as a proportion of national income.

With the election over, the government is likely to come under pressure from macro-economists to tighten fiscal policy somewhat and reduce the budget deficit, so as to hasten the decline in the public debt as a proportion of GDP, as well as to help monetary policy return inflation to the target range.

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The cost of living is soaring, but raising interest rates won't help

This week removed any doubt that the cost of living is the dominant issue in this election campaign. We got official confirmation that the many people complaining about rising prices are, to coin a phrase, right on the money.

Now the Reserve Bank is under immense pressure to begin increasing interest rates at its board meeting on Tuesday. If it does so, this will add to the cost pressures facing many consumers, making the cost of living an even bigger issue politically.

But were it to wait for the latest information on wages that it will get three days before the election – which it really ought to – then increase rates in early June, it will be accused of choosing its timing to help the Coalition. And rightly so.

As Reserve Bank governor Dr Philip Lowe’s predecessor, Glenn Stevens, argued convincingly when he increased the official interest rate just before the 2007 election, which saw John Howard thrown out of office, the only way for the Reserve to be apolitical is for it to do what it believes the economy needs without regard to what’s happening politically.

Speaking of politics, The Conversation’s Peter Martin has used the ABC’s Vote Compass – a questionnaire which, among other things, asks respondents to name the issue of most concern to them – to show that, at the 2016 election, only 3 per cent picked “cost of living”.

At the 2019 election, it was only 4 per cent. At this election, however, 13 per cent of voters have picked it, making it the respondents’ second biggest concern, behind only climate change. (Which should be biggest. But that’s for another day.)

After this week, it’s probably more than 13 per cent.

This week the Australian Bureau of Statistics released figures showing the consumer price index rose by 2.1 per cent during the three months to the end of March, and by 5.1 per cent over the year to March.

Strictly speaking, the CPI is a measure of consumer prices rather than the cost of living, but it’s near enough. So this “headline” figure is the right one for people concerned about living costs. It’s the highest annual rate for two decades.

But it can be affected by extreme prices changes that don’t represent the general price pressures on the economy, so “for policy purposes” (that is, for its decisions about changing the official interest rate) the Reserve focuses on a measure of “underlying” inflation called the “trimmed mean”.

This excludes the 15 per cent of prices that rose the most during the quarter and the 15 per cent of prices that rose the least or fell.

By this measure, prices rose by 1.4 per cent during the quarter and by 3.7 per cent over the year. This is the highest it’s been since 2009, and well above the Reserve’s 2 to 3 per cent target range.

It’s standard behaviour for incumbent politicians to claim the credit for anything good that happens in the economy during their term, regardless of whether they’re entitled to.

So it’s only rough justice for opposition politicians to blame the government for anything bad that happens – which is just what Labor’s been doing this week.

But Scott Morrison and Josh Frydenberg have been arguing furiously that the leap in most prices has had nothing to do with them. And I think there’s a lot of truth to their claim.

Let’s look at the particular prices that do most to explain the March quarter jump in living costs. The biggest was a 5.7 per cent rise in the cost of newly built houses and units.

This has been caused by shortages of certain imported building materials due to pandemic-related disruptions to supply, worsened by a surge in demand for new homes arising from the authorities’ efforts to counter the “coronacession” by cutting interest rates and using HomeBuilder grants to keep the building industry moving.

Next in importance in explaining the surging cost of living is an 11 per cent rise in the cost of petrol and diesel fuel, caused by Russia’s war on Ukraine. These prices are up 35 per cent over the year to March.

The higher world oil price has also raised fresh food prices by increasing the cost of fertiliser, as well as increasing the cost of transporting many goods. The pandemic has temporarily increased the cost of international shipping.

Third in importance this quarter is a 6.3 per cent increase in university fees caused by a federal government decision last year.

Add in the 12 per cent annual rise in beef and lamb prices caused by graziers’ restocking following the end of the drought and you see that most of the rise in living costs so far comes from factors far beyond the government’s control.

So, are Morrison and Frydenberg off the hook on rising living costs? No. People feel the pain of rising prices more acutely when their wage rises haven’t been keeping up, let alone getting ahead.

In a well-managed economy, workers’ wages rise a little faster than prices. This hasn’t been happening, particularly in the past two years or so, and the government has made no attempt to rectify the problem.

Raising interest rates can do nothing to fix all the problems we’ve noted on the supply-side of the economy. The only thing it can do is dampen the demand for goods and services by increasing the cost of borrowing and by leaving those people with mortgages with less disposable income to spend.

Which is an economist’s way of saying what everybody knows: that higher interest rates add to the living costs of the third of households paying off a home loan. Those who’ve taken on loans in recent years will feel it most.

Of course, all those people living off their savings will be cheering the return to rising interest rates. But from an economy-wide perspective, the winners are far outweighed by the losers.

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Banking royal commission: much misconduct, not much follow-up

Can you remember as far back as three years ago? Scott Morrison and Josh Frydenberg are hoping you can’t. And fortunately for them, the media’s memory is notoriously short.

The media mostly live in the now. What’s being promised in this election campaign? Not much as yet on what promises were made last time and what became of them.

A big issue in the years before the election in May 2019 was the many complaints about people’s mistreatment by the banks, much of it brought to light by this masthead’s Adele Ferguson. There was growing pressure for a royal commission.

But the banks denied there was a problem, and then-treasurer Morrison repeatedly dismissed the need for an inquiry. Finally, when some government backbenchers signalled their support for a motion to establish a commission, the banks begged the government to take over and ensure the inquiry had appropriate terms of reference.

Former High Court judge Kenneth Hayne was appointed to inquire into misconduct in the banking, superannuation and financial services industry. For months, the public was shocked by the misbehaviour his hearings revealed.

People – even dead people – being charged for services they didn’t receive, signatures being forged, banks finding many ways to put their profits ahead of the fair treatment of their customers.

The government, too, professed its shock and utter disapproval of the banks’ behaviour. When the commission’s final report was submitted just a few months before the election was due, the government took three days to announce it was acting on all 76 recommendations and going further in “a number of important areas”.

“My message to the financial sector is that misconduct must end and the interest of consumers must now come first. From today the sector must change, and change forever,” Treasurer Frydenberg declared.

But the backdown began just five weeks later, even before the election. Frydenberg announced that “following consultation with the mortgage broking industry and smaller lenders, the Coalition government has decided to not prohibit trail commissions on new loans, but rather review their operation in three years’ time”.

As Professor Richard Holden of the University of NSW observed at the time, Frydenberg offered nothing in its place.

Back in 2009, in the aftermath of global financial crisis, the Rudd government imposed “responsible lending obligations” making it illegal to offer credit that was unsuitable for a consumer based on their needs and capacity to make payments.

These have always irked the banks, and soon after the Coalition came to power in 2013 it attempted to wind them back, but was blocked in the Senate. The Hayne commission said they were fine.

But in September 2020, under cover of the “coronacession”, Frydenberg announced plans to dismantle the obligations because they’d become “overly prescriptive, complex and unnecessarily onerous on consumers”.

Professor Kevin Davis, of the University of Melbourne, a respected expert in this field, has argued that these justifications don’t make much sense.

By January last year, Davis found that the government was yet to implement 44 of the 76 recommendations it had accepted, and had “turned its back on five key reforms – including curbing irresponsible lending practices”.

“Instead, it appears to be banking on market forces and voluntary codes of conduct to protect financially unsophisticated borrowers. This is the triumph of ideology and vested interests over logic and evidence,” Davis said.

The Hayne commission was highly critical of the Australian Securities and Investments Commission, saying it was too accommodating towards the bodies it was regulating, being too ready to negotiate and not keen enough to litigate.

In August last year, Frydenberg significantly changed his “statement of expectations” of ASIC from the one issued in 2018. The new directions start by saying the government expects the body to “identify and pursue opportunities to contribute to the government’s goals, including supporting Australia’s economic recovery from the COVID pandemic”. Hmmm.

Hayne recommended setting up a “compensation scheme of last resort”, funded by the industry, to ensure that victims of financial misconduct actually receive compensation that had been awarded where the firm was unable to pay because it had collapsed.

Hayne also recommended a “financial accountability regime” to hold finance leaders accountable for misconduct that occurs on their watch.

The two measures were finally recommended for passage by the relevant Senate committee in mid-February. But neither was passed before parliament was prorogued for the election.

It’s remarkable what miraculously winning an election can do to your determination to make the bankers behave.

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If you care about our future, care about declining home ownership

The most thought-provoking contribution I’ve heard so far in this utterly dumbed-down election campaign is from barrister Gray Connolly, saying the big issue we should be debating is housing and intergenerational wealth.

Connolly was speaking as a self-proclaimed Red Tory, on ABC Radio National’s Religion and Ethics Report. Red Tories, he says, are people on the political Right who have a more traditional view of what we’re trying to achieve. They are true conservatives, trying to conserve the institutions and practices that have given us the way of life we value.

Red Tories believe in communitarianism – much more about “we” than “me”. They highlight the virtues of home and family. They emphasise the boring virtues, like duty, perseverance and loyalty, not just people’s rights.

That so few Australians under 40 have any form of home ownership or wealth of any kind is a ticking timebomb socially, Connolly says. It’s this that could split the country demographically.

“I cannot believe how little work either side of politics has done on the housing issue. It’s an absolute disgrace that the Coalition, on the Right of politics, for whom home ownership is usually something very important, has done so little to promote home ownership among young people.

“You cannot have a stable country where so many people do not have security in their homes, do not have security in their work, don’t feel they’re getting ahead, and do not feel they have a stake in society that causes them to want to preserve it.

“I cannot believe that so many people on the Right of politics do not get this,” he says.

How do the economic policies of recent decades adversely affect traditional conservative values?

“For the better part of 20 years, nothing has been done other than pour fuel on the housing-price fire,” he says. This has continued even to the point of not looking after renters, not looking after people with insecure work.

It has delayed coupling and family formation for most people. “If you don’t have secure work, chances are you’re not going to form a family because chances are you cannot afford a home.”

If you have housing that is so expensive, then you have young people moving away from where their parents are. You have the family bond dissolve, he says.

“If you are a conservative, you want to conserve [that bond].” You want adult children to be able to look after their ageing parents. You want grown-up children to be able to turn to their parents for childcare. This, he says, is the natural order of society.

But because “the market” and government policy mean we don’t “prioritise residential housing for actual residence, but for investment, you have the absolute social disaster where these bonds are being split apart.”

Does it surprise you to hear anyone on the Right accepting that insecure work is a major social problem? Though the Red Tory label is a recent British invention, Connolly traces its origins back to the mid-19th century and Benjamin Disraeli.

Then, then the Conservatives saw the trade union movement as a necessary counterbalance to the “viciousness and brutality of Manchester liberalism,” Connolly says. (Manchester would have been seen as centre of the dark satanic mills.)

Connolly says Red Tories accept the role of the state as protector of the nation, but also of the family and the family structure. They see the state as being useful for achieving bigger projects for the national good.

Phillip Bond, instigator of Britain’s Red Tory revival, says the market has a tendency to devour its host society. Connolly says this is a very dangerous tendency and that’s where the state comes in.

Corporations are creatures of statute, and what statutes make they can unmake and can regulate, he says. So rather than fearing the state is too powerful, “I am much more scared of the state that’s too reluctant to bring corporations to heel”.

A corporation has no special rights in society any more than any other group does. The state is meant to protect the rights that people need to be protected. We should be conserving society and the community and serving the weakest and the hurt, he concludes.

I think there’s much sense in what Connolly says, and not just about the high social price we’ll pay for making too many jobs insecure and homes too hard for too many young people to afford. We’ll damage the Australian way of life.

The economy is all of us. It belongs to all of us, not just a few big corporations. It must be the servant of our society. Governments’ job is to ensure the economy improves our way of life and doesn’t diminish it.

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Job insecurity: close your eyes and you can't see it

Well, that’s a relief. Labor and the unions are claiming we have a problem with increasing casualisation and job insecurity, but The Australian Financial Review has looked up the official figures and discovered that, if anything, the proportion of casual workers has been falling. So, the problem’s a furphy? Sorry, ain’t that simple.

Strictly speaking, the Australian Bureau of Statistics’ labour force survey doesn’t measure “casual” employment, and certainly makes no attempt to measure whether jobs are secure or insecure, precarious or solid as a rock.

What it does do is ask the workers it surveys whether their job entitles them to annual and sick leave. We’re left free to assume that those who say no must be “casuals”, whereas those who say yes must be “permanents”.

It is true that, by this measure, the proportion of all workers who are casuals grew strongly in the decades before 2000, but then was little changed until the onset of the pandemic in 2020.

But it’s also true that the absolute number of casuals continued to rise until the pandemic.

In the two years since February 2020, the number has fallen – by 61,000, or 2.3 per cent – and so have casuals as proportion of total employment.

I very much doubt the pandemic has cured us of insecure employment.

With some people unable to work because they had the virus or were in isolation, and with our borders closed to the usual supply of temporary workers from overseas, employers became acutely short of labour. But I wouldn’t assume that what employers do during a pandemic is what they’ll keep doing when conditions improve.

So whether the labour movement is wrong to say casualisation is increasing is open to debate. And even if the proportion of casuals continues to decline in the years ahead, does that mean insecure employment isn’t worth worrying about?

In any case, casualisation isn’t really what Laborites are on about. It’s job insecurity that’s the issue. And a casual look at the statistics won’t tell you much about that either.

One man who has taken a very careful look is David Peetz, a professor of employment relations at Griffith University. He summarised his findings in two articles for The Conversation.

He started by taking a closer look at what the figures say about the nature of casual jobs. Why do some jobs need to be casual, and why do some employers need casual jobs?

Surely the answer is that employers want flexibility because they need some people to work at varying times for short periods.

But Peetz found that about a third of casuals worked full-time hours. About half had the same working hours from week to week, and were not on standby. More than half could not choose the days on which they worked.

Almost 60 per cent had been with their employer for more than a year. And about 80 per cent expected to be with the same employer in a year’s time.

What this suggests is that many workers classed as casuals don’t need to be casual in the traditional sense. Peetz found that only 27 per cent of casuals worked varying hours and had no minimum guarantee of hours.

This means a huge proportion of the workers classed as casual because they’re not eligible for paid leave could be classed as permanent, but aren’t.

Why not? One possibility is that the employer simply wants to save on the cost of leave. But defenders of the status quo assure us casual workers receive a special 25 per cent loading in lieu of paid leave. What’s more, many casuals prefer the loading to the entitlement, we’re assured.

The statistics bureau no longer asks workers who say they have no leave entitlement whether they receive a loading – or whether it’s as high as 25 per cent. But back when it did ask, less than half of casuals said they got it.

I wonder how many cases of “wage theft” involve the non-payment or under-payment of leave loading. As for people wanting cash now not paid leave in the future, that’s a sign they’re living hand-to-mouth on a wage too low to give them financial security.

Peetz argues the reason so many people working regular full-time jobs are classed as casuals is because employers have the bargaining power to impose insecurity on some of their less-skilled or less senior workers.

Even if the employer isn’t also saving on how much they have to pay the worker, they get the “flexibility” of being able to get rid of workers without notice or redundancy payout. The worker may not even be formally terminated, just not be given any more hours.

Did someone mention job insecurity?

Looking more broadly, Peetz found that the real causes of insecurity aren’t the type of contract workers are on – casual or permanent, full-time or part-time – but rather the way organisations are being structured these days.

“This is designed to minimise costs, transfer risk from corporations to employees, and centralise power away from employees,” he argued.

This motivation helps explain the dramatic increase in franchised businesses. It’s the franchisee that bears responsibility for scandals such as underpaying workers.

Other corporations call in labour-hire companies to take on responsibility for their workers. This cuts costs and transfers risk down the chain – thus making jobs more insecure. Labour-hire workers are usually casual full-time workers, he argues.

Some companies set up spin-offs or subsidiaries. Some just outsource to contracting firms.

“On the other hand, some organisations have found relying on part-time casuals counterproductive, as workers had no commitment and became unreliable. Some large retailers now use ‘permanent’ part-timers rather than casuals,” he wrote.

Between 2009 and 2016, “casual” part-timers grew by just 13 per cent, whereas “permanent” part-timers grew by 36 per cent.

Businesses have used their power to cut their labour costs. Many workers’ jobs have become less secure in the process.

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It's not jobs we're short of, it's jobs that pay decent wages

When it comes to knowing what’s going on in the jobs market, there’s a bit more to it than being able to remember the present rate of unemployment. It helps to know why the unemployment rate is at the level it is, and what that implies for the family’s future finances.

In case you’ve gone deaf – or just stopped listening – Scott Morrison wants you to know the rate of unemployment has been falling rapidly over the past six months, and is now a fraction under 4 per cent.

That’s the lowest it’s been in about 50 years.

But wait, there’s more. Morrison said last week his priorities are “jobs, jobs, jobs, jobs and jobs”. To which effect he’s promising to create a further 1.3 million over the next five years. This will be on top of the 1.9 million jobs already created since the Coalition returned to power in 2013.

The growth in employment and the fall in unemployment since the economy’s massive contraction during the “coronacession” in the June quarter of 2020 is a truly remarkable achievement, for which the Morrison government deserves much credit. Don’t let any carping Labor critic convince you otherwise.

Don’t let anyone tell you the government has changed the definition of unemployment. It isn’t true. What is true is that the problem of underemployment – people who have jobs, but aren’t able to find as many hours as they’d like – is a bigger problem today than it was 50 years ago.

But the rate of underemployment has fallen to 6.3 per cent, down from 8.8 per cent two years ago, and the lowest it’s been since 2008.

In any case, almost all the 395,000 net extra jobs created since the start of the pandemic two years ago are full-time.

Next, get this. The proportion of the working-age population holding a job now stands at 63.8 per cent – the highest it has ever been.

And the biggest winners in this have been young people. Their rate of employment is 4.6 percentage points higher than it was two years ago. The rate for people aged 25 to 64 is up 1.9 percentage points, while the rate for those aged 65 and over is up 0.4 points.

But all the growth in employment hasn’t been sufficient to meet the demand from employers. The number of job vacancies is at a record level of 423,500. That is, getting on for a half a million job openings are going begging.

Now, let me ask you a question: does it sound to you as though our big problem at present is an acute shortage of jobs, jobs, jobs?

If you’ve heard of generals fighting the last war rather than coming to grips with the present one, now you know that prime ministers are prone to the same mistake.

So, why is Morrison claiming to have made getting us a lot more jobs his priority, when there must surely be more pressing problems he should be focused on? Two reasons.

One is that Australia’s had a problem with insufficient jobs – aka high rates of unemployment – since the late 1970s. This was the case for so long – did I mention 50 years? – the notion that a shortage of jobs is an eternal feature of economic life is now lodged deeply in many people’s minds.

And, as is the practice of modern politicians, Morrison finds it easier to pander to our misconceptions than to straighten them out.

“You think we can never have enough jobs? OK, I promise to create another 1.3 million of ’em.”

But how on earth do we finally seem to have got on top of a 50-year problem? Mainly because our first recession in almost 30 years turned out to be more benign than any we’ve had.

In particular, the government spent unprecedented multi-billions on the JobKeeper wage subsidy scheme, which was designed to preserve the link between employers and their workers, even when they had no work for their workers to do. It worked brilliantly.

The billions federal and state governments spent on this and many other programs to protect the incomes of businesses and workers have given an enormous boost to the demand for workers.

But remember, this surge in demand came at a time when our borders were closed to our usual supply of imported labour: overseas students, backpackers and skilled workers on temporary visas.

Now that our borders have reopened, the demand for workers will increase, but so will their supply. If employment does grow by 1.3 million in the next five years, it will be mainly because of population growth, coming mainly from immigration.

The other reason Morrison wants to talk about jobs, jobs, jobs is to direct our attention towards his economic successes and away from his economic failure: since a year or two before the Coalition’s election in 2013, wages have struggled to keep up with the rising cost of living.

If Anthony Albanese was a sharper politician, he’d be telling us his priorities were wages, wages, wages.

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