Wednesday, April 27, 2022

The 4 economic wildcards between now and election day

There are four economic wildcards between now and the election, and we know exactly when each will be played.

The first is this Wednesday at 11.30am eastern time, when we get the official update on inflation. We’re likely to see a figure so large it will take many of us back to the 1990s, to a time before anyone under 30 was born.

With the exception of a short-lived blip following the introduction of the goods and services tax in 2000, inflation has scarcely been above 5% since 1990.

After a series of extremely large interest rate hikes in the early 1990s succeeded in taming inflation, it has been close to the Reserve Bank target of 2-3% ever since – so much so that even those of us who remember the 8% inflation of the 1980s and the 18% in the 1970s have come to regard fairly steady prices as normal.

When ABC Vote Compass asked voters to name the issue of most concern to them in the 2016 election, only 3% picked “cost of living”.

Only 4% picked “cost of living” in 2019. With inflation so low it had dropped below the Reserve Bank target band, and a good deal below slow-growing wages, there was nothing much to be concerned about.

Suddenly, the cost of living matters

That was until the last few months. Suddenly, the latest Vote Compass finds “cost of living” is voters’ second biggest concern, behind only climate change.

This election, 13% of voters – one in eight – regard the cost of living as the most important concern of the lot, ahead of accountability, defence, health, education and COVID.

It has happened because prices are climbing like they haven’t in years. The official inflation rate for December (the most recent we’ve got) had prices climbing at an annual rate of 3.5%.

Led by petrol and food, they climbed an awful lot more in the lead-up to March, with the figures to be released on Wednesday likely to show annual inflation approaching 5%.

While that’s some way short of the 6.7% inflation in Canada, the 6.9% in New Zealand, the 7% in the United Kingdom, and the 8.5% in the United States, each of these countries has begun increasing interest rates as a result, some quite aggressively.

A high inflation rate on Wednesday will confirm what the public suspects: that prices really are climbing at a pace without modern precedent, and that for those who rely on wages, it is sending their living standards backwards.

It will also encourage the Reserve Bank to begin to push up interest rates in line with its contemporaries throughout the English-speaking world, eating into the living standards of Australians on mortgages.

The second wildcard: rising interest rates

That’s when the second election wildcard gets played, next Tuesday May 3, at 2.30pm eastern time, after the Reserve Bank board’s May meeting.

If inflation is especially high, there’s a chance the bank will announce it is pushing up rates, lifting its cash rate from its present all-time low of 0.10% to 0.25% or to 0.50%, and holding an afternoon press conference to explain why.

If fully passed on, an increase to 0.50% would add an extra $100 to the monthly cost of paying off a $500,000 mortgage.

The increase, and the explanation that it was much higher prices that brought it about, would be crushing for a government campaigning on what it is doing to address the cost of living. It would help Labor, which has made the cost of living a key plank of its campaign.

There ought to be no doubt that if the bank decides it needs to raise rates at its meeting next Tuesday, it will do it then, rather than wait a month until the campaign is over. It pushed up rates during the 2007 campaign, three weeks before John Howard was swept from power.

But if inflation isn’t ultra-high but merely high, and not necessarily sustainably high, the bank is likely to wait for another piece of evidence before acting.

After its last meeting it said it wouldn’t lift rates until it saw “actual evidence” that inflation was “sustainably” within the 2-3% target range.

The wages wildcard – 3 days before polling day

To get that evidence, the board would need either very high inflation, or evidence that wage growth was high enough to sustain what might otherwise be short-lived high inflation, caused by a spike in the oil price (which has since retreated 16%).

That official word on wages is the third economic wildcard, arriving at 11.30am eastern time on Wednesday May 18, three days before voting day.

To date wage growth has been frustratingly low: at 2.3% in the year to December, well below what is needed to maintain living standards in the face of inflation, and well below what would normally be needed to make high inflation self-sustaining.

High official wage growth in the year to March could make a post-election interest rate hike all but certain, if rates haven’t already gone up ahead of the election.

Continued demonstrably weak wage growth – which is probably more likely – will officially confirm that prices are racing ahead of wages, just before polling day.

The poll-eve jobs wildcard

Which leads on to the fourth economic wildcard, to be delivered the next day, two days before polling day on Thursday May 19 – about the only piece of economic news ahead that’s likely to play well for the government.

Ultra-low interest rates and massive government stimulus, originally designed to keep people in jobs during COVID but continued beyond that, have delivered an unemployment rate that rounds to 4% but is actually a touch below it at 3.95%, the lowest since November 1974, almost 50 years ago.

There’s every chance the April unemployment rate will be even lower, perhaps the 3.75% the treasury expects later in the year. If it is, the Coalition will deserve and will claim a lot of the credit. Labor will be left to talk about the cost of living.

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, April 20, 2022

This model tipped the last 2 elections. It’s pointing to a Coalition win

This election will be won by the Coalition and Prime Minister Scott Morrison if the economic models perform as expected – and they usually do.

A model refined in 2000 by then Melbourne University economists Lisa Cameron and Mark Crosby found that most federal election results in records going back to 1901 can be predicted pretty well by just two economic indicators.

And they are not the indicators that might be expected.

The growth in real wages in the year leading up to the election appears to have no effect on the governing party’s chance of being returned to power. (Which is just as well for the Coalition, because the buying power of wages has been shrinking.)

Similarly, GDP (which is shorthand for gross domestic product, the measure meant to encompass almost everything known about the state of the economy) turns out to be “not robustly correlated” with support for the incumbent government in Australia, although it is in the United States.

The only two economic variables that do matter, and they seem to matter a lot, are the rate of inflation and the rate of unemployment, each in a different way.

For inflation, the higher it is, the more the incumbent suffers, as you might expect.

For unemployment, what turns out to matter is not the rate itself. High rates and low rates appear not to be sheeted home to the party in power. What is sheeted home, big time, is the change in the rate.

Voters reward lower unemployment

A government seen to have cut the unemployment rate gets rewarded, while a government seen to have pushed up the rate gets punished.

Cameron and Crosby find a one percentage point increase in the unemployment rate cuts a government’s vote share by 0.58 percentage points.

And they find a wrinkle. In swinging seats, Coalition governments are likely to be punished if unemployment rises, whereas Labor governments are likely to be rewarded. They say their findings are “consistent with voters having the perception that the Labor party is more committed to lowering unemployment”.

In 2005 economists Andrew Leigh (the one who later became a Labor politician) and Justin Wolfers applied a slightly different model to the 2004 election. They found it got the result right, but under-predicted the size of the Coalition victory.

The model usually gets it right

In the latest edition of the Australian Economic Review, University of Queensland economist Hamish Greenop-Roberts applied the Cameron and Crosby model to the past four elections, the one Labor won in 2010 and the ones the Coalition won in 2013, 2016 and 2019. He found it picked the result three times out of four, putting it on a par with the polls and betting odds, which also got the result right three times out of four.

The crucial difference is the economic model got the results right in each of the past two elections – something the others conspicuously failed to do.

Asked this week what the economic model would predict for the current election, Greenop-Roberts notes that on one hand, unemployment is much lower than it was at start of this government’s term (and far lower than was expected), which the model says should help it get re-elected.

On the other hand, inflation is unusually high, which the model says would hurt.

What matters for predicting the outcome is the size of each move and how much the size of each move has turned out to matter in the past.

And it’s no contest. The effect of the dramatic cut in the unemployment rate (from 5.2% to 4%) is so big it more than outweighs the effect of the 3.5% rate of inflation, “setting the stage for the Coalition to be returned”.

Unemployment trumps inflation

So big is what has happened to unemployment that Greenop-Roberts says an inflation rate of at least 8% to 9% would be required to flip the prediction.

Whatever Australia’s official inflation rate is in the lead-up to polling day (there will be an update next Wednesday) it will very possibly above its present 3.5% but still be way short of 8-9%.

Or perhaps the model will be wrong when it comes to inflation. Greenop-Roberts points out that since the early 1990s, an entire generation of voters has entered adult life without experiencing serious inflation, and might either be alarmed by it or not understand the concept. This election might provide a test.

And it is possible this will be one of the rare elections in which the state of the economy fails to predict the outcome. Opinion polls did badly in the last election, but they might recover and they are suggesting a Labor victory. Betting markets did badly too, and are only just suggesting a Labor victory.

Polls, experts and even the model can be wrong

Experts often get it wrong. Greenop-Roberts points to a poll of 13 experts published two days before the 2019 election.

Twelve predicted a Labor victory. The only expert who didn’t predicted the Coalition would be forced to govern jointly with independents, a prediction some way short of the result, which was a comprehensive Coalition victory.

The reality is that this election will be fought seat by seat, and Greenop-Roberts has identified a new metric that might help predict those outcomes.

His Australian Economic Review paper compares the electorate by electorate results of the 2017 same-sex marriage poll with the electorate by electorate swing to the Coalition in 2019.

He finds the electorates that swung most to the Coalition in 2019 (shown below) were those most opposed to same-sex marriage.

‘No’ vote in the 2016 same sex marraige poll versus 2019 swing to Coalition

Forecasting Federal Elections: New Data From 2010–2019 and a Discussion of Alternative Methods, Hamish Greenop-Roberts

The statistically significant link better predicted voting intention than income, education or unemployment.

It might again, or we might not yet have perfected the science of predicting what will happen, which might be just as well. What’ll happen in this election is up to all of us.

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, April 13, 2022

Forget the election gaffes: Australia’s unemployment rate is good news – and set to get even better by polling day

When Labor leader Anthony Albanese couldn’t say whether the unemployment rate was 5% or 4% on Monday, he might have had a point.

It’s 4%. But for a decade – the entire decade leading up to COVID – it never strayed too far from five-point-something per cent.

Melbourne University labour market specialist Jeff Borland points out that in March 2010, Australia’s unemployment rate was 5.4%. Ten years later, before COVID changed things in March 2020, it was 5.3%.

In the years between, it briefly dipped to 4.9% (three times), climbed slowly as the mining boom wound down, edged above 6% in 2014 as the newly-elected Coalition government cut spending, and then fell back slowly towards what the Treasury then regarded as the long-term sustainable rate of 5%.

For much of Albanese’s time in parliament, from 1996 to now, it has been 5-6%.

And a case can be made that it is 5% right now.

Independent economist Saul Eslake says what he calls the “effective” rate of unemployment is indeed 5%. To the 607,900 officially unemployed Australians in February 2022 (the lowest slice of the population in decades), Eslake adds the historically high:

  • 72,000 people who were counted as employed despite working zero hours, for what the Bureau of Statistics called “economic reasons” including being stood down or because there was insufficient work

  • 59,000 people who were counted as employed despite working zero hours for reasons “other than economic”, including being on leave

The result is an unemployment rate of 5%, which doesn’t count as unemployed the 221,000 employed Australians who worked zero hours due to illness or injury – twice as many as before COVID.

The figures point to something real

But even Eslake’s effective rate of 5% is lower than before COVID.

The massive 26,000-household survey of employment conducted each month by the Bureau of Statistics is pointing to something real.

To get an idea of the scale of the bureau’s survey, compare it to the Essential and Newspoll surveys used to indicate how people are going to vote in the election. Essential surveys 1,000 people each time, Newspoll about 1,500.

The bureau surveys 26,000 households every month to obtain information on the employment status of about 50,000 people aged 15 and over. The scale of the operation is exceeded only by national elections every three years and the census every five years.

Australia’s biggest survey

The survey asks first whether those surveyed worked in the previous week, then whether they were employed but away from work because of holidays, sickness or another reason. Then it asks about hours. Less than one hour (unless it was due to time off) counts as not working.

It is this definition (one hour a week = work) that generates so much of the mistrust of unemployment figures.

The bureau uses one hour per week as the cutoff because it has to use something and because every other comparable country has used it, since 1982.

Some of the questions asked in the ABS labour force survey

Fewer than 50 of the 50,000 people surveyed each month report working only one hour, meaning the cutoff makes little difference.

If the bureau used a different cutoff, such as three hours per week, its employment numbers would be moving in the same direction.

It defines being unemployed as not being employed and looking for work. If you are not looking, you are “not in the labour force” and not counted as unemployed.

This is a problem when times are tough and people don’t bother to look (or can’t easily look, such as during lockdowns) and can mean that genuine unemployment is higher than the figures suggest.

More jobs on offer than ever before

But that isn’t a problem at the moment. So many jobs are on offer (423,500 – far more than ever before) that people who want work know it is worth looking.

More of the population aged 15 and over is in work than ever before. And almost all of the new jobs are full-time.

As would be expected given the shift to full–time work, casual employment (defined by the bureau as employment without paid leave) has fallen in recent years, rather than climbed as the opposition leader’s material suggests.

Women have benefited more from the improved jobs market than men, getting 240,000 of the 395,000 new places created over the past year. Every age group up to 65 has more work than it did before.

We will get an inkling as to whether things will keep getting better on Thursday when the bureau releases the employment figures for March, and again just two days before the May 21 election, when it releases the figures for April.

The Treasury and the Reserve Bank are cautious, expecting unemployment to settle at 3.75% before (in Treasury’s case) gradually climbing back to 4.25%.

But private forecasters are bolder. Westpac is forecasting an unemployment rate of 3.25% by year’s end. Citibank is forecasting 3.3% by the end of this year and an extraordinary 3% by the end of 2024 – which would be a 60-year low not seen since 1974.

How to keep creating jobs with reopened borders

It is tempting to say what has happened with unemployment is the result of closed borders and slower population growth during COVID (more jobs per worker than there would have been). But the banks making those bold forecasts know the borders have been reopened.

New Zealand has enjoyed faster (although still slowed) population growth than Australia over a year in which its unemployment rate has slid to 3.2%.

What New Zealand, Australia and the other nations now enjoying unusually low unemployment have in common is out-sized government spending and record low interest rates during COVID to keep the economy afloat.

Spending and ultra low rates create jobs. If we keep them in place right up to the point where we create worrying inflation, we will be able to get even more Australians into jobs and, all being well, keep them there.

It’s the most important thing to grasp from what’s happened. More important than the exact rate of unemployment.

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, April 11, 2022

One issue matters more to top economists than any other this election: climate change

Offered a menu of issues to choose from as the most important in the May 21 election, Australia’s top economists have overwhelmingly zeroed in on one.

Three quarters of the 50 top economists surveyed by The Conversation and the Economic Society of Australia have nominated “climate and the environment” as the most important issue for the incoming government and the most important in the election.

The 74% who nominated climate and the environment is more than twice the proportion that nominated the four substantial runners up: housing availability and affordability, health, tax reform, and education.

None of the 50 surveyed nominated “lower taxes” as important for the election or the incoming government, and only 8% nominated support for business.

The economists chosen for the survey are recognised as leaders in fields including economic modelling and public policy. Among them are former IMF, Treasury and OECD officials, and a former member of the Reserve Bank board.

Many noted that their priorities were at odds with those of both major parties.

Guyonne Kalb of The University of Melbourne observed that Australia was especially vulnerable to climate disasters, and that the population seemed to recognise this more than the government. Being the last nation to use outdated technologies was “never wise if it can be avoided”.

Young Economist of the Year Stefanie Schurer said Australia had fallen so far behind the richer countries on measures to reach net zero it ranked “dead last” according to the Climate Council. It was not only embarrassing, but “incredibly shortsighted” given Australia’s exposure to extreme weather events.

Flavio Menezes of The University of Queensland said the needed transition was massive. To achieve net-zero by 2050 (a target accepted by both sides of politics) Australia would need an 800% increase in large-scale wind, solar and hydro generation, as well as a corresponding increase in the transmission capacity.

The current government’s motto of technology not taxes was “an empty slogan”. Much of the needed spending would have to be funded by taxes.

A carbon tax would help

The University of Queensland’s John Quiggin described the campaign as the most depressing he had seen in more than 50 years of paying attention. Neither major party was offering anything substantive.

Several participants noted that a carbon price (or tax) of the kind Australia had between 2012 and 2014 would provide a permanent incentive for every sector of the economy to find new ways to cut emissions, but was “not on the table”.

Consulting economist Rana Roy said Australia actually had several types of carbon price in place, but their rates varied widely, with emissions in some sectors untaxed, while emissions in other sectors (such as petrol) were overtaxed.

The third of the economists surveyed who nominated tax reform as an important issue said it would be needed to deal with the other issues identified as important: housing affordability, health, and education.

Saul Eslake said in an ideal world both sides of politics should be having an intelligent conversation about the least damaging ways of raising the extra one to two percentage points of GDP in tax revenue that will be needed to fund priorities including aged care and the national disability insurance scheme.

Tax reform would help

The University of Melbourne’s Kevin Davis said next year’s planned stage three tax cuts directed at higher earners (and costed by the Parliamentary Budget Office at $76.2 billion over four years) should be scrapped on equity grounds alone.

Superannuation tax should also be reformed, and capital gains tax concessions reduced or axed. The “massive” tax concessions offered to home buyers and buyers of investment properties were among the chief reasons for high prices.

Curtin University’s Rachel Ong ViforJ said changes that moved tax away rewarding the ownership of non-productive assets toward rewarding work would be needed to address the intergenerational transmission of debt.

Higher roductivity would help

The University of Sydney’s Nigel Stapledon said neither side of politics seemed focused on the emerging risk of 1970s and 1980s-style inflation.

The idea that the government could drive real wages growth without productivity improvements and not feed inflation was dodgy economics and risky policy.

Melbourne University’s John Freebairn said productivity growth had been below world’s best practice for a decade, making it hard to lift incomes and collect tax.

Tax reform itself could raise more tax by boosting productivity and cutting inequality, as could better regulations and less wasteful government spending.

Former OECD official Adrian Blundell-Wignall said Australia didn’t have a plan that offered less dependence on digging holes. Research and development and a highly educated population were the keys to driving sustainable growth.

But there’s little optimism

None of the 50 members of the panel was optimistic about either side of politics offering what was needed, at least during the campaign.

Eslake (a Tasmanian) said he was more likely to “tread in thylacine-poo on my front lawn of a morning” than to see the intelligent conversations that were needed between now and voting day.

Individual responses:

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, April 06, 2022

The super giveaway that gives more to the already-wealthy, tax-free

One of the strangest, certainly one of the hardest to justify, measures in last week’s budget was called “supporting retirees”.

A better title would have been “supercharging the wealth of those retirees who already have more than enough to live on”.

It flies in the face of the findings of the government’s own retirement income review and legislation it introduced partly in response earlier this year.

It happens not to support the living standards of retirees at all. It will enable some to spend less on themselves than they would have, while enabling those with serious wealth to accelerate the accumulation of even more, tax-free.

What the measure does is extend a temporary COVID relaxation of the rules requiring retirees to actually withdraw a minimum amount from their super each year, introduced in March 2020 when financial markets were in free-fall.

All retirees are required to withdraw a minimum amount from super each year in order to ensure it isn’t simply used as a vehicle to accumulate tax-free savings that aren’t used.

Retirees have to withdraw a minimum per year

For retirees aged 65-74 the regulated minimum is 5% per year, for those aged 75-79 it is 6% per year and so on, up to retirees aged 95 and over, who are required to withdraw at least 14% per year.

Nothing stops retirees withdrawing more than the regulated minimum, but the review found that in practice the typical withdrawal rate is just above the minimum, because people use it as an “anchor” or guide to what to do.

It identifies the most common misconception about super being that

“the minimum drawdown rate is what the government recommends”

It says another is: “I should only draw down the income earned on my assets, not the capital”. Both set up retirees for a much lower standard of living than they could get.

The review finds that if a middle earner drew down an optimum amount rather than the minimum required, his or her super income would be 20% higher.

Instead, most retirees “die with the bulk of their wealth intact”. One fund told the review its members who died left 90% of the balance they had at retirement.

Most die with most intact

It’s at odds with the purpose of super, defined by the government as to provide “income in retirement”. In February the government legislated to help make sure this is what funds did. From July they will be required to present to their members with an income strategy, for which bequests “should not be an aim”.

Things changed when the Australian share market collapsed 30% between mid-February and mid-March 2020 as coronavirus took hold.

As a “temporary” measure, Treasurer Josh Frydenberg halved the drawdown requirements, in order to enable retirees to better build up their balances after the storm passed. A similar measure was introduced during the global financial crisis.

The storm passed quickly. Markets began climbing back the day the treasurer made the announcement, and then kept climbing. SuperRatings says in the past year the median balanced super fund has grown 13.4%.

Yet oddly, the government extended the measure in May last year when the market was soaring to new heights, in order to “make life easier for our retirees” and then extended it again on budget night in order to “recognise the valuable contribution self-funded retirees make to the Australian economy”.

It is as if the government has junked the idea that super should actually be used to provide income to the people who accumulate it.

As it happens there is nothing in the drawdown requirements that forces retirees to spend on themselves (and nor could there be). All they do is force retirees to withdraw a minimum amount from the generally tax-free environment that is retiree super, and have it treated like other people’s investments and savings.

Earnings in retiree super untaxed

If retirees aren’t forced to withdraw a minimum, in the words of the retirement income report to the treasurer, large amounts will be held in super “mainly as a tax minimisation strategy, separate to any retirement income goals”.

The only justification offered in budget papers (a weak one) refers to “ongoing volatility” and the need to “allow retirees to avoid selling assets”.

But markets are generally volatile, and it is usually super funds that sell assets, not retirees. It’s as if the measure is directed at self-managed super funds, some of which are rich beyond most of our wildest dreams, certainly far too rich to need to pay out anything but a tiny percentage of their holdings to their members.

A freedom of information request by the Australian Financial Review has revealed that 27 such funds hold more than A$100 million each. Its best guess is they are owned by Australia’s wealthiest families.

Of course, most retirees have much lower balances, and are reluctant to withdraw funds for another reason. Perhaps surprisingly, studies examined by the review find that main reason isn’t a desire to pass on an inheritance to their children.

Overwhelmingly, retirees are concerned about “outliving their savings”.

Frightened of outliving savings

The prospect of inferior aged care or a late health emergency compels most retirees to save far more than they are likely to need, just in case.

Many are unaware of how little end-of-life aged and health care can cost (“especially given the complexity of aged care means-testing arrangements”) and many more want to buy their way out of standard care because of the awful things they have heard, some of it in the aged care royal commission.

It makes Labor’s budget reply promise of more money for aged care and a nurse on each site 24/7 doubly attractive. It might stop us hanging on to absurd amounts of our super out of fear.

It might allow us to relax and enjoy what could be the best decades of our lives.

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.