Thursday, December 31, 2020

(Economics) books to read over summer

The Deficit Myth: How to Build a Better Economy

Stephanie Kelton, Hachette Australia

No book prepared ahead of time better targeted the year in economics.

Just as governments including Australia’s were embracing debt (A$800 billion and counting) and creating money out of nowhere ($200 billion scheduled) came a treatise explaining that at times like these (actually, at any time when the resources of the economy aren’t fully employed) that’s entirely responsible.

Stephanie Kelton’s book has rightly been displayed on Alan Kohler’s desk, and Kohler himself has become a convert to modern monetary theory which the book outlines in the clearest of terms.

Kelton explains that in an economy such as Australia’s the purpose of tax isn’t to raise money but to slow spending, and something else: demanding the payment of tax in Australian dollars forces Australians to use Australian dollars.

The example of teenagers not cleaning up around the house that she used in her talk at Adelaide University in January is priceless. You can watch the video here.

Economics in the Age of COVID-19

Joshua Gans, MIT Press

Written as we were coming to grips with what to do, and posted online chapter by chapter to get real-time feedback, the Australian author’s flash of inspiration was that we have experience in shutting down an economy and then restarting it.

We do it every Christmas writes Joshua Gans, and “no-one screams depression”.

That his way of seeing things now dominates talk about the pandemic doesn’t make it less radical. It’s partly because of his insights, published in April, that most governments no longer think that in this crisis they can trade off health against wealth.

He persuades by analogy. Fans of Mission Impossible II, the computer game Plague Inc and the came of chess will appreciate the references.

Radical Uncertainty

Mervyn King, John Kay, Hachette Australia

The idea that every possibility can be reduced to a number, to a probability, is what makes simple mathematical economics work. It’s what makes insurance and credit ratings and assessments of the risk of getting coronavirus work. And it is wrong, as became clear in the devastation caused by the global financial crisis.

By itself, that’s not a particularly useful observation, but what is useful is the author’s discovery of where the idea that probability could be reduced to a simple number came from. The Nobel Prize winning economist Milton Friedman shares much of the blame. He insisted that every uncertainty could be reduced a number that a rational utility-maximising human being could use to make decisions.

Before Friedman and contemporaries, there used to be two numbers, one representing risk, and the other representing uncertainty, which are quite different things and can’t be thrown together.

If you’re too busy for the book, try the London School of Economics podcast.

Fully Grown: Why A Stagnant Economy Is A Sign Of Success

Dietrich Vollrath, University of Chicago Press

Advanced economies may or may not roar out of the recession, but they are unlikely to boom as they did before. For decade after decade throughout the 1900s annual economic growth has been strong, averaging 2% per capita in the US.

In the first two decades of the 2000’s that growth has been weak, averaging 1% – only half of what it did.

Dietrich Vollrath, who blogs on growth and had no preconceptions, approached the puzzle as a mystery and found that the usual suspects (rising inequality, slower innovation, competition from China) didn’t explain enough.

The extra comes from success. The populations of the US and kindred nations have become so rich and (on average) old that having more children and striving for even higher incomes no longer makes sense.

The technical stuff is at the back. The message from the front is that we’ve arrived at our destination, which needn’t be a bad thing.

Economics in Two Lessons

John Quiggin, Princeton University Press

I’ve slipped this one in from 2019 for a reason. John Quiggin is about to publish a sequel, The Economic Consequences of the Pandemic.

Economics in One Lesson, published in 1946 financial journalist Henry Hazlitt, was a homage to the power of prices in a free market.

In lesson one (the first half of the book) Quiggin teases out Hazlitt’s thinking, and in lesson two shows how it follows from it that in many circumstances the market has to be contained.

Central to both lessons is opportunity cost, “what you give up in order to get something”, the most important concept in economics.

Polluters will make the wrong decisions if the cost of their pollution (largely borne by others) isn’t charged for. It’s a persuasive and increasingly-pressing argument.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The Conversation

Wednesday, December 30, 2020

Sure, interest rates are negative, but so are some prices, and when you look around, they’re everywhere

On December 10, it finally happened. Instead of demanding an interest payment from the government in return for lending it money, a group of investors offered to pay the government in order to lend it money.

Naturally enough, the offer was accepted.

The government needed A$1.5 billion which it promised to repay on March 26.

It sought tenders. What was the lowest return an investor would accept to lend it the money?

It wasn’t short of offers. It fended off $8.2 billion of bids, and some of them were prepared to accept very low returns indeed.

The lowest was -0.01%. The minus sign indicates that, instead of the government paying the lender a return for lending to it, the lender would pay the government a return for the privilege of lending to it – a perfectly-legal backhander if you like.


The government got a fair chunk of the $1.5 billion for less than nothing.

Some of the bidders demanded more, but nothing too far into positive territory.

It happened because the sale of bonds benefits both parties: the government gets to borrow money it needs and the investor gets a safe place to park their money.

Read more: The government has just sold $15 billion of 31-year bonds. But what actually is a bond?

In those circumstances, where benefits flow in both directions, there’s no reason to suppose that the final payment will flow in only one direction.

And sometimes the direction chosen is arbitrary. Economist Joshua Gans made the point on Twitter talking about the coronavirus vaccine.

He said “half of the economists out there think people should be paid to be vaccinated, the other half think they should pay to be vaccinated earlier.

He asked: "can we at least work out whether the price is positive or negative?”

Which bank pays which bank?

Two banks are involved when you whip out a debit card to pay for a purchase – your bank (that issues the card), and the seller’s bank (that accepts the card).

Which should pay which? Usually the seller’s bank pays a fee to buyer’s bank, but not always. Depending on the type of card and bank, sometimes the fee flows the in the other direction, from the buyer’s bank to the seller’s bank.

The truth is both parties benefit from the transaction, and who the banks ultimately manage to pass the fee on to (the buyer or the seller) is another question altogether.

Home taping is killing music?

The advent of cassette recorders frightened record companies, and throughout the 1970s, 1980s and 1990s they persuaded governments in Australia, Canada, the United States and much of Europe to impose levies (taxes) on the sale of blank recording media such as cassette tapes and compact discs in order to compensate the companies that would suffer.

There was only one problem. The companies didn’t suffer. The advent of the cassette made it possible to listen to recorded music in places other than the loungeroom record player (most notably in cars and later, with the Walkman while walking or jogging).

The amount of time people spent listening to recorded music shot up, recorded music sales in the US more than doubled, and the record companies took in more money than ever before.

Radio stations should pay to play, or…

If anything, record companies should have been paying the purveyors of cassette tapes rather than the other way around.

The same sort of two-way exchange happens when radio stations play music.

Radio stations pay the artists, composers and record companies for the music they play (although not very much) and sometimes the recording companies pay the radio stations (payola) in order to ensure their records are played.

Read more: Spotify may soon dominate music the way Google does search — this is why

In 1970 Australia’s six largest record companies demanded more money from the radio stations, which they refused to pay. The resulting “record ban” saw commercial radio drop the British and Australian artists represented by the majors and instead play the American and independent local artists whose companies weren’t demanding more money.

Without airplay, sales faded. The Long and Winding Road cracked the top five most places it was released, but not in Australia.

Six months on, each side realised it needed the other.

Google should pay newspapers, or….

Now the government is insisting that platforms such as Google and Facebook pay news organisations for the content they link to, in something of a world first.

Or at least it seems to be. The original draft legislation released in April required the arbitrating panel to take account of the direct and indirect benefits of the news content to the digital platform.

After representations from Google and Facebook the revised final legislation released in December also requires the panel to take account of the benefit “to the registered news business” of having the digital platform pointing to its content.

That benefit is huge. Without Google and Facebook, news websites would be bereft of traffic (which is why they allow Google and Facebook to point to their content).

Means of accessing Australian news sites

2017-18. ACCC Digital Platforms Inquiry, final report

The Treasurer calls it a “two-way value exchange”. At least to me, it’s no longer clear in which direction the money should flow.

Prices can be negative as well as positive.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Friday, December 25, 2020

What’s the best way to boost the economy? Invest in high-voltage transmission lines

When, in the midst of the pandemic, the Economic Society of Australia invited 150 of Australia’s keenest young thinkers to come up with “brief, specific and actionable” proposals to improve the economy, amid scores of ideas about improving job matching, changing the tax system, providing non-repayable loans to businesses and accelerating telehealth, two proposals stood out.

They were actually the same proposal, arrived at independently by two groups of “hackers” in the society’s annual (this time virtual) “hackathon”.

I was one of the judges.

The mentors who helped test and guide the proposals were some of the leading names in economics, among them Jeff Borland, John Quiggin, Gigi Foster, Deborah Cobb-Clark, Peter Abelson and John Hewson.

The proposal is to fast track the 15 or more projects already identified by the Australian Energy Market Operator as essential to meet the electricity grid’s transmission needs over the next 20 years.

Starting them immediately, when business investment is weak and there’s a need for jobs and governments can borrow at rates close to zero, will bring forward all of the benefits of being able to bring ultra-cheap power from the places it will be made to the places it will be needed as expensive fossil-fuel generators bow out or are out competed.

Read more: Explainer: what is the electricity transmission system, and why does it need fixing?

Judges Alison Booth, Jeremy Thorpe and I noted that policy hacks were the most useful where neither the market nor the government was getting the job done.

The proposal would help ensure renewables can connect to the grid, something “neither the market nor the government is managing to do quickly”.

A few weeks later Labor leader Anthony Albanese used his budget reply speech to propose the same thing – a Rewiring the Nation Corporation to turn the projects identified in the Energy Market Operator’s integrated system plan into reality.

Here is what is proposed in the winners’ own words:

Accelerating priority transmission projects

Nick Vernon, Agrata Verma, Bella Hancock

Investment in new renewable generators in Australia sank 40% in 2019. A major factor holding them back is grid access. The best locations for wind and sun often have poor access to the cables that transport electricity to consumers.

Our near-term recommendation is to guarantee Project EnergyConnect, a 900-kilometre cable between NSW and South Australia due to begin construction next year. The network operators got approval in January, but there is now uncertainty over whether they will get the funding.

Read more: 'A dose of reality': Morrison government's new $1.9 billion techno-fix for climate change is a small step

We propose that the two state governments agree to cover the shortfall between approved revenues and realised costs (up to a pre-determined limit) to ensure construction starts on time in 2021.

Medium-term, we recommend the Australian Energy Regulator conduct the regulatory investment test and revenue adjustment processes for all priority projects in parallel to condense approval timelines and that the Commonwealth and state governments underwrite priority projects’ early works.

This would allow service providers to commission new transmission lines sooner after regulatory approval.

AEMO Integrated System Plan

The case for fast tracking transmission

Patrick Sweeney, Sam Edge, Elke Taylor, Jacob Keillor, Timothy Fong

Currently valued at A$20 billion, the Australian transmission network was designed for a centralised 20th century power mix and suffers from aging infrastructure.

The $6 billion upgrade we propose would have as its centrepiece 15 projects the Energy Market Operator has already identified as essential.

Fast-tracking these projects has the potential to generate 100,000 jobs, to bring about strong private investment in low-carbon power production, and to place downward pressure on wholesale power prices, producing $11 billion in benefits.

A national taskforce consisting of the department of energy and the market operator would oversee a project of a similar size to the Snowy Mountains scheme, which itself created more than 100,000 jobs during its lifecycle.

Read more: The verdict is in: renewables reduce energy prices (yes, even in South Australia)

The government would procure the funds by issuing bonds, with recent rates indicating the yield payable will be less than the rate of inflation.

Firms that tendered for the work would be evaluated on their capacity to upscale production to meet milestones and on their plans to generate long-term, sustainable employment.

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Monday, December 21, 2020

Book chapter: Australia had sound economic leadership through the crisis, the challenge now is managing the recovery

Of all the baseless claims made as coronavirus struck, the most dangerous was that there was a trade-off between lives and the economy.

The Conversation’s cartoonist Wes Mountain illustrated it perfectly.  

The idea, raised early and not so much later on, was if we did too much to save lives from coronavirus, we would damage others in ways that were harder to see.

It was wrong in part because lives are what the economy is. 

Australia’s treasury, using a framework developed by Nobel Prize winner Amartya Sen, describes the aim of economic policy as maximising a person’s “freedom to lead a life they have reason to value”.

Deaths destroy that freedom. Deaths matter for economics.

The idea was also wrong because it failed to take account of the pernicious way the virus spreads. Assessing a lockdown is not simply a matter of weighing up lives saved versus lives disrupted. It is a matter of adding to those lives saved all of the future disruptions that will be avoided and the future lives that will be saved if the lockdown stops the virus spreading.

The government rightly imposed huge and otherwise unconscionable costs on the economy in order to get on top of the virus.

Each time it backed them with support for the people and businesses those measures would hurt.

Mid-March 2020, as the government banned public gatherings of more than 500 people (killing the Grand Prix and the footy) it doubled JobSeeker and related payments and gave Australians in need early access to their super.

In late March, as it tightened the limit on gatherings to just two people (forcing much of the population to stay at home), it unveiled JobKeeper, guaranteeing to pay the wages of millions whose jobs were at risk until at least September.

It would be wrong to say all the costs were government-imposed. Well before the big lockdown in late-March 2020 large numbers of Australians were staying away from restaurants, cinemas and the like of their own accord. The recession began during the months those venues were free to trade.

In the face of an unavoidable reality the government decided it was responsible to spend as much as was needed to survive with the least possible damage.

Gone was the carping about the “debt and deficit” Labor ran up to get us out of the global financial crisis.

When he was parliamentary secretary to Prime Minister Tony Abbott in 2014, Josh Frydenberg berated Labor for “intergenerational theft”. It had saddled “every man, woman and child” with thousands of dollars in government debt.

As treasurer, in a crisis on his own watch, Frydenberg doubled government debt with scarcely a mention of children.

His finance minister Mathias Cormann said the strategy was to deal with debt by running up more debt.

As he put it, “the way to get on top of this debt is by growing the economy more strongly and by creating more opportunity for Australians to get ahead, get into jobs, get into better paying jobs. Stronger growth leads to more revenue and lower welfare payments. That’s the way we can go back to where we were.”

We’ve known this works for more than half a century. Government debt was more than 100% of gross domestic product at the end of the second world war. It came down each year as a proportion of GDP, not because the Commonwealth ran budget surpluses it could use to pay it down (with one exception it ran deficits all the way through to the 1980s), but because GDP grew, fuelled in part by annual budget deficits that necessitated more borrowing.

The best way to grow GDP is to avoid or escape a recession. If it achieves that, borrowing can pay for itself.

Borrowing to pay interest on debt can be bad advice for a household, but for the Australian government it is different, especially in an crisis.

Reserve Bank Deputy Governor Guy Debelle resorted to an equation to explain the mechanism at a seminar organised by the Economic Society in June.

He said so long as the interest rate charged (r) was less than the future economic growth rate (g), the burden of interest payments would shrink as a proportion of GDP over time.

Australia’s average rate of real economic growth has been more than 2% per year. More importantly, over the past decade actual annual growth (not adjusted for inflation, which is what matters for debt repayments) has averaged 4.5%.

Right now the government can borrow for ten years at 0.9% per year. In late July it issued a rare 31-year bond that won’t have to be repaid until the middle of the century. It locked in 1.94%, for $15 billion. It had $36.8 billion of bids.

It has arranged interest payments that are likely to be much less than the annual growth in its ability to pay them.

Foreign and Australian investors including super funds are bidding against each other for the right to lend for next to nothing in return for a guaranteed government income.

And the government would have no problem financing its coronavirus programs even if they were not.

Erased from the consciousness of mainstream economists from the 1990s onwards has been the knowledge that governments such as Australia’s can fund as much of their spending as they want by issuing currency – “printing money”.

Britain, Japan, the United States and Europe resumed doing it during and after the global financial crisis. Australia held out for longer, clinging to the myth that the only ways governments could fund programs were taxing and borrowing.

It’s been a useful myth for those wanting to restrain government spending. Martin Wolf of the Financial Times talked about the value of propagating the myth this year when he wrote that while the myth was wrong, once politicians believed it was wrong it would “prove impossible to manage the economy sensibly”.

A branch of economics with strong roots in Australia’s Newcastle and Adelaide universities never doubted that it was wrong. It’s called “modern monetary theory”, which is odd because it is neither modern, nor a theory. It’s reality. Governments can fund spending by creating money – the only real downside being the risk of inflation, which isn’t a risk during a recession.

Since March the Reserve Bank has been doing it by buying government bonds. A bond is a piece of paper on which is written a promise to repay and to pay interest.

The bank has been paying for those bonds by creating Australian dollars, literally, through a process known as balance sheet expansion. On one side of its balance sheet it records the bond it has bought as an asset, on the other it records a matching liability, which is the deposit it has placed into the account of the institution it has bought it from.

To put some (largely cosmetic) distance between creating money and funding government spending, the bank has promised to buy only as many bonds as are needed to keep bond rates low, and to buy them from intermediaries rather than from the government itself. But the effect is the same as if it had handed the newly-created dollars directly to the government, except that it hasn’t needed to do it much.

So keen have been private investors to buy government bonds that, apart from creating and spending $50 billion early on to show that it could, the bank has been able to sit back and watch other investors fund the government, and outbid each other in order to do it.

Despite the government’s (probably premature) announcement of plans to wind back JobKeeper and JobSeeker at the end of the year, there’s no sign of big spending stopping.

After the coronavirus crisis has passed the government will need to spend still more to fund the recovery.

Borrowing at way less than the predicted rate of economic growth means it can fund projects whose prospects were once considered poor, such as high speed rail and widespread tax cuts. But it remains important to pick projects wisely.

The best ones will set Australia up to thrive in the decades to come, decades marked by climate change and (quite possibly) repeated pandemics.

Rarely has a government had such an opportunity to shape Australia.

It has handled the crisis well. The next test will be sculpting the recovery

Chapter in 2020: The Year That Changed UsThe Conversation, Edited by Molly Glassey


Thursday, December 17, 2020

So far so good: MYEFO shows recovery gathering pace

Outside of Victoria the number of hours worked has almost returned to where it was – nowhere near where it would have been, but almost where it was.

Employment figures released as Treasurer Josh Frydenberg was unveiling the mid-year budget update show 1,298 billion hours were worked outside of Victoria in November, just a whisker short of the 1,303 billion worked in March, before things went south.

On a graph it looks like a “V”, the much-talked about V-shaped recovery.

Monthly hours worked in all jobs, excluding Victoria

Seasonally adjusted. ABS Labour Force, Australia

Eagle-eyed readers will note that hours worked were turning down before the coronavirus hit. They peaked in September last year.

Victoria itself has bounced back sharply from the lowpoint of its lockdown in August.

Then it put in 417 billion hours of paid work. In November, with its lockdown over, it put in 453 billion, not too far sort of its peak of 476 billion before things turned bad.

Frydenberg says 85% of the 1.3 million Australians who either lost their jobs or saw their working hours reduced to zero are back at work.

Read more: It isn't right to say we are out of recession, as these six graphs demonstrate

The numbers reflected in the so-called MYEFO budget update.

With more people back in jobs more quickly, and people leaving JobKeeper more quickly than expected in the October budget, the projected deficits will be somewhat smaller, peaking at just under A$200 billion this financial year instead of just over A$200 billion as expected in October.

The budget will still remain in deficit for as long as anyone can forecast, at least ten years, and even after that the government’s net debt will still exceed one third of gross domestic product, although falling interest rates will mean net interest payments start to fall before net debt does.

Some government loans cost it 5% to 5.75% per year in interest. As they expire in the next the years they will be replaced by loans costing 1% or less, and in some cases less than zero, where bidders for bonds offer negative interest rates.

Soaring iron ore prices have pushed up estimates of this year’s company tax take from the $84.5 billion expected in October to $87.9 billion.

At the time of the budget on October 6, the “cost and freight” spot iron ore price (which includes the cost of getting to it to the buyer) was near US$120 a tonne. In the ten weeks since it has climbed to more than US$150 a tonne.

Spot iron ore price, US$ per tonne, cost and freight

The budget papers express the price differently, as a “free-on-board” price, which excludes shipping and is about US$10 less than the cost and freight price.

In what it says is a “prudent judgement”, the update expects the free-on-board price to glide down to US$55 a tonne by September 2021, meaning it expects it to more than halve.

Much depends on how quickly Brazil ramps up production after a series of catastrophic dam collapses and coronavirus interuptions.

The sooner it does, the sooner the price will halve and the volumes of Australian iron ore sold will wind back, cutting company tax revenue. China would rather buy from Brazil than Australia.

Read more: Robodebt was a policy fiasco with a human cost we have yet to fully appreciate

Boosting the budget is an improved forecast for employment. The unemployment rate is now expected to get down to 5.25% by June 2024, somewhat below the 5.5% expected at budget time.

Working the other way is a self-inflicted injury. Tucked away in Appendix A of the update is confirmation of the cost of settling the case brought against the government on behalf of victims of Robodebt who were sent often-incorrect automatically-generated notices alleging that they had to pay back benefits.

It’ll cost $112 million, on top of the $705 million that’s been refunded.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Wednesday, December 02, 2020

We're not really out of recession, as these graphs show

It’d be wrong to say that we are out of recession, although that’s how the graph of Wednesday’s GDP numbers makes it look.

Gross domestic product (the measure of everything produced and earned and spent) fell 7% between the March and June quarters after slipping 0.3% between the December and March quarters, and then rebounded 3.3% between the June and September quarters.

It was the biggest bounce since 1976, after the biggest fall on record.

Quarterly percentage change in gross domestic product

ABS National Accounts

But it hasn’t anything like got us back to where we were.

When the levels rather than the changes in GDP are graphed, it is clear that, as Treasurer Josh Frydenberg put it, we have “a lot of ground to make up”.

Quarterly real gross domestic product

ABS National Accounts

At first sight the graph of quarterly gross domestic product looks odd. Surely if GDP fell 7% and then rebounded by half that much it should have got back half its losses.

But 3.3% of a small number is much less than 7% of a bigger number. We’ve regained only two fifths of what we lost.

Read more: 6 things to watch for as Australia crawls out of recession

And we’ve lost more than that. Had the economy grown as the Reserve Bank forecast before the coronavirus crisis, we would have spent and earned A$509 billion in the September quarter instead of $476 billion.

It’s consumer spending that’s bounced

What drove the bounce was a rebound in consumer spending after months in which we were confined to quarters, and here the news is better than it seems.

Quarterly change in household final consumption expenditure

ABS Australian National Accounts

Nationwide, household spending jumped 7.9% after falling 12.5%, but excluding locked-down Victoria (which will have its own delayed bounceback) household spending in the rest of the country rebounded 11% after falling 12%.

And it bounced back in exactly the places it collapsed while we were locked down; in services such as tourism and hospitality.

Household spending by category

National, percentage change between June quarter and September quarter. Australian Treasury

Victoria’s economy literally went backwards.

Spending in Victoria continued to fall while spending everywhere else bounced back.

In only one category, home alcohol consumption, did spending in Victoria advance while spending in other places retreated.

State and territory final demand, September quarter

ABS Australian National Accounts

Consumers financed the extra spending by saving less, but even so, Australia’s household saving ratio remained alarmingly high.

In the June quarter Australian households saved a record (upwardly revised) 22.1% of what they earned. In the September quarter that fell to 18.9%, which is still far too high.

In good times, less-worried Australians save less than half that.

Household saving ratio

ABS Australian National Accounts

Frydenberg put the best spin he could on the extraordinarily high amount of saving by saying it would provide “ongoing support for the economic recovery in the new year as confidence continues to build”.

Australia was as well positioned to recover as “any nation on earth”. Over the past year its economy has contracted less than Britain, France, Germany and Japan.

Exports, business investment continue to fall

Much of that success is due to Australia’s achievement in getting on top of the virus and the success of JobKeeper in keeping Australians in work until conditions improved. The Reserve Bank believes it saved 700,000 jobs.

Working against that has been the forth consecutive quarterly fall in export income (something set to worsen unless relations with China improve) and the sixth consecutive fall in business investment.

In a quarter when consumer spending recovered, non-mining business investment fell a further 3% on top of a fall of 8.6% in the previous quarter.

The US National Bureau of Economic Research defines a recession as

a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production and wholesale-retail sales

On that basis Australia is still in one. Employment, income and production remain well down on where they were a year ago. GDP is down 3.8% on where it was a year ago.

Speaking as the national accounts were being released, Reserve Bank Governor Philip Lowe said he expected Australia’s unemployment rate to remain above 6% for the next two years.

Annual wage growth would remain less than 2%

It was possible the economy could do better.

His forecasts assume no widespread vaccination against coronavirus until late next year. They also assume international travel restrictions until 2022.

But it was also possible things could be worse.

Just three months ago that many were hailing a robust bounce-back in Europe.

Now, Europe’s economy is expected to sink again in the December quarter as member states struggle to contain the virus.

Australia was on a different path, but there was “no guarantee we will remain so”.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.


Sunday, November 29, 2020

Top economists want JobSeeker boosted by $100+ per week

Once about as high as the pension, the JobSeeker (Newstart) unemployment payment has fallen shockingly low compared to living standards.

It’s now only two thirds of the pension, just 40% of the full-time minimum wage and half way below the poverty line.

JobSeeker has fallen relative to other payments because while the pension and wages have climbed faster than prices, JobSeeker (previously called Newstart) has increased only in line with prices since 1991.

In an apparent acknowledgement that JobSeeker had fallen too low, the government roughly doubled it during the coronavirus crisis, introducing a supplement to enable people to “meet the costs of their groceries and other bills”.

But that supplement is being wound down, from A$225 per week to $125 on September 25, and again to $75 on January 1, before expiring on March 31.

After March, the single rate of JobSeeker (including the $4.40 per week energy allowance) will drop back to about $287.25 per week.

JobSeeker vs age pension

Source: Ben Phillips ANU, Services Australia

Ahead of a decision about any permanent increase expected early next year, The Conversation and the Economic Society of Australia asked 45 of Australia’s leading economists where they thought JobSeeker should settle.

Only four think it should revert to $287.25 per week.

All but eight want a substantial increase. More than half (24 out of 45) want an increase of at least $100 per week.

Economic Society of Australia/The Conversation, CC BY-ND

The results suggest the economists would be dissatisfied with a decision to merely increase JobSeeker by $75 per week in line with the supplement that is due to expire at the end of March.

The 45 members of the society’s 57-member panel who responded include Australia’s preeminent experts in the fields of microeconomics, macroeconomics economic modelling, labour markets and public policy.

Among them are former and current government advisers, a former member of the Reserve Bank board and a former member of the Fair Work Commission’s minimum wage panel.

Read more: Top economists back boosts to JobSeeker and social housing over tax cuts in pre-budget poll

Many want an increase of about $150 a week to bring JobSeeker close to the age pension and 50% of median income.

Curtin University’s Harry Bloch asked (rhetorically) whether unemployed people had “lower needs than those on the aged pension”.

Labour market specialist Sue Richardson said keeping payments so low that people lost dignity and hope and suffered material deprivation hurt not only the people who were unemployed, but also the thousands of children who grew up in their households.

A scant incentive to shirk

She knew of no evidence that suggested a low rate of JobSeeker increased the likelihood of an unemployed person getting a job.

Jeff Borland said even if JobSeeker was increased by $125 per week, those on it would still earn less than all but 1% of full-time adult workers and would face plenty of remaining financial incentives to get paid work.

In research to be published in The Conversation on Monday he examines a real-life experiment: the temporary near-doubling on JobSeeker between March and September, and finds it played no role in creating unfilled vacancies.

Read more: New finding: boosting JobSeeker wouldn't keep Australians away from paid work

Emeritus Professor Margaret Nowak said JobSeeker had been driven to the point where it denied unemployed Australians the shelter, food and transport they needed to find work.

Former Liberal party leader John Hewson described the failure to adjust JobSeeker for three decades as “immoral”, and a national disgrace driven by “little more than prejudice”.

Going forward, there was overwhelming agreement among those surveyed that once JobSeeker was restored to an acceptable level, it should be linked to wages (in line with the pension) rather than increase with prices as before.

Economic Society of Australia/The Conversation, CC BY-ND

Two thirds of those surveyed want JobSeeker increase in line with wages, and of those who do not, several want the pension to increase more slowly in order to ensure the two move in sync.

Gigi Foster and Geoffrey Kingston propose a half-way house – increases in both the pension and JobSeeker halfway between increases in the consumer price index and wages.

Wages determine living standards

Others suggest practical measures to make JobSeeker better at getting Australians into jobs. Beth Webster suggests reducing the rate at which JobSeeker cuts out with hours worked to encourage part-time workers to take on more hours.

Tony Makin suggests a relocation allowance to help people take on jobs distant from their current place of residence.

Read more: 'If JobSeeker was cut, the unemployed would be picking fruit'? Why that's not true

None of the economists surveyed expressed concern about the budgetary cost of restoring the relative position of JobSeeker, estimated by the Parliamentary Budget Office to be $4.8 billion per year for an increase of $95 per week.

Several expressed a desire to put the issue behind them, increasing JobSeeker to a reasonable proportion of the pension or median wage and leaving it there so that, in the words of Saul Eslake, “this issue never arises again”.

Individual responses

The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.