Behavioural ‘experts’ quietly shaped robodebt’s most devilish details – and their work in government continues

One of the things still worrying me about robodebt was the attention to detail.

By that, I am not referring to the crude system by which hundreds of thousands of Australians on benefits received letters between 2016 and 2019, wrongly demanding they repay Centrelink money they did not owe.

I am referring to the care with which the robodebt letters were designed – and the so-called science behind those devastating design decisions.

‘Nudging’ people to pay at all costs

What Centrelink wanted was for the recipients to quietly pay up, or go online and provide years of payslips they probably didn’t have, rather than jam up its switchboards asking questions.

The robodebt royal commission heard that details as specific as the colours of the letters were decided on after receiving advice from “experts in behavioural science”. (In the end, Centrelink went with black and white.)

An email about redeveloping debt letters using ‘behavioural insights’. Robodebt royal commission

So it made what Royal Commissioner Catherine Holmes found was a “conscious decision” not to include a phone number recipients could use to find out more.

That’s right, the letter didn’t include a phone number – a decision Holmes found was made “with the intention of forcing recipients to respond online”.

Where did the idea come from?

Holmes found it came from “behavioural insights”.

The human toll of powerlessness

People left with nowhere to turn and without ready access to, or familiarity with, using the internet felt powerless.

Witnesses told Holmes they wanted to end their lives. Holmes devotes an entire chapter to those who did.

Holmes found that while “behavioural insights” were sought, “no outside parties with an interest in welfare were consulted in order to understand how the scheme might actually affect people”.

Holmes wrote:

The effect on a largely disadvantaged, vulnerable population of suddenly making demands on them for payment of debts, often in the thousands of dollars, seems not to have been the subject of any behavioural insight at all.

And that’s the problem with the relatively new technocratic-sounding science of behavioural economics.

‘Choice architects’ shaping policy

That Centrelink used specialists in behavioural science ought not be surprising.

A year before robodebt began, the then prime minister Malcolm Turnbull set up what he called a Behavioural Economics Team Australia (BETA) unit in his department. It was modelled on the so-called “nudge units” set up by former US president Barack Obama and former UK prime minister David Cameron.

A “nudge” is a change destined to get someone to do something, sometimes also known by the Orwellian-sounding name “choice architecture”.

Cass Sunstein helped invent both those terms, coauthored the book Nudge, and headed Obama’s Nudge Unit. In 2015, Sunstein launched Turnbull’s unit.

I was a fan of behavioural economics, back when Turnbull set up his nudge unit.

Now, after robodebt, I’m starting to suspect much of it is no science at all.

Hollow science

A real science examines not only cause and effect, but also develops a theory of the mechanism by which that effect takes place. That’s another way of saying a real science examines more than correlations.

Psychology is one such real science; economics is (usually) another.

But the more I’ve looked at it, the more often behavioural economics seems hollow: not concerning itself enough with what needs to happen for results to be achieved.

The Behavioural Economics Team Australia is still active in the prime minister’s office. Its website is full of dozens of projects that look useful: how to lift organ donation rates, how to make energy bills easier to understand, how to get people to take part in the census.

Yet – and I am aware of the irony – even the best-known choice architects have sometimes lacked insight into their own work.

One of the most famous findings in behavioural economics, in a 2012 paper, was that people who signed an honesty declaration at the beginning of a form rather than the end were less likely to lie.

Two years ago the paper was retracted amid allegations the data was false.

Blind to empathy

So widespread are behavioural economics “findings” that cannot be replicated, the prime minister’s BETA unit has done a podcast on that “replication crisis”.

And now, under the Albanese government, there’s another unit. This one is being set up in Treasury under the eye of Competition Minister Andrew Leigh and will be called the Australian Centre for Evaluation (ACE).

Its brief, a bit like BETA, will be to find out what works.

But if it only does that, without examining how it works, it risks being as blind to the potential costs on real people as the “behavioural insights” that shaped the robodebt letters.

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Australia is on the brink of ending interest rate hikes and an economic first – beating inflation without a recession

What if Reserve Bank Governor Philip Lowe and his successor Michele Bullock were able to achieve something truly remarkable – a steady decline in inflation without further interest rate increases, and without bringing on a recession.

It’s suddenly looking possible. Inflation is now coming down so quickly worldwide there’s probably no need to push it down further.

We couldn’t have said that a week ago. Then, the US inflation rate was 4%, well down on the peak of 9.1% a year earlier, but high enough for eminent economists such as former US Treasury Secretary Larry Summers to say the US would need a mountain of unemployment to bring it down further.

Specifically, Summers said that to control inflation the US would need

five years of unemployment above 5% to contain inflation – in other words, we need two years of 7.5% unemployment, or five years of 6% unemployment, or one year of 10% unemployment

That was in late June, when US inflation had slipped from 5% to 4.9% to 4% over three months. Then, it was at least arguable that it wouldn’t fall much further without another push.

No longer. Last week, we learned that US inflation plunged yet again to 3% in June. Although our result for June isn’t out yet (it’s next week) it is now no longer easy to argue that progress isn’t real and continuing.

This graph of the latest monthly readings of annual inflation rates shows inflation peaked in the US, the UK, Canada and Australia late last year, and has been coming down fairly steadily since.

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Summers and others in the US used to deride those who said ultra-high inflation would go away as “team transitory”. But it is now looking as if that high inflation was indeed transitory, even if the transition took longer than expected.

Driving down inflation has been one of the key forces that drove it up: energy and transport prices, which surged in the wake of Russia’s February 2022 invasion of Ukraine.

US energy prices have fallen 16.7% over the past year, led down by a 26.5% slide in the price of what Australians call petrol. That’s a saving that will push down Australia’s inflation rate and inflation rates worldwide.

Non-energy and non-food inflation fell as well, suggesting that there isn’t (yet) a psychology of expectations holding US inflation up.

Falling inflation expectations

Here, Australians expect falling inflation, if their answers to the Melbourne Insitute’s monthly expectations survey are to be believed. In June, those surveyed expected inflation of 5.2% in the year ahead, down from 6.3% a year earlier.

This makes Australians less likely than they were to bake high inflation into wage negotiations and other decisions, making it less likely inflation will remain high.

And it ought to be noted that the inflation Australians say they expect has traditionally been much more than what’s been delivered. That’s presumably because most of us notice the prices that are going up more than those that aren’t.

A soft landing, without a recession

The much quicker than expected collapse in US inflation has dramatically raised the likelihood of what’s called a “soft landing” in the US. Here in Australia, it’s what our current Reserve Bank Governor has called staying on the “narrow path” of returning inflation to target in a reasonable timeframe, without a recession.

If that happens, finance journalist Alan Kohler says Lowe and his successor Michele Bullock (who takes over in September) will be the first team at the top of the bank to get inflation down from above 7% without delivering a recession.

There was a recession when the bank tried to get inflation down below 7% in the mid-1970s, in the early 1980s, and in the early 1990s.

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That we might be able to pull off yet another first ought no longer to surprise us, after all of the firsts during COVID. Enduring Australia’s (brief) 2020 recession without unemployment climbing above 7% was also a first.

The minutes of the Reserve Bank’s June board meeting released on Tuesday show it is prepared to countenance such a first.

The bank’s board members acknowledged that inflation was “now declining, albeit from a high level”, while falling commodity and shipping prices were cutting cost pressures. All this before the full effect of the bank’s 12 rate rises to date has been felt.

Remember, these are minutes of a meeting that took place before last week’s extraordinarily good news from the US. Those board members’ comments hold open the possibility of Australia keeping the bulk of its gains in employment, while getting inflation back down to controllable levels.

The fact that it has never happened before hasn’t stopped the economics team at the ANZ Bank from predicting it – no further rate rises from here on, a continuing slide in inflation, and only a modest uptrend in unemployment.

A ‘Goldilocks’ economy is in sight

The “Goldilocks” outcome – not too hot or too cold, but just right – would be keeping in work most of the Australians who got into work when unemployment fell and getting on top of inflation. If we can manage that, we will have done future Australians an enormous service.

Things get easier when unemployment is low. We get more likely to become more productive, because we’re less resistant to change when unemployment is less of a threat. We get in a better position to help the budget, by taking less in benefits and paying more in tax. And we become more like each other – lessening inequality.

It is looking as if the Reserve Bank has the opportunity to cement low unemployment while controlling inflation. Holding off (and perhaps abandoning) future rate raises will keep it in reach.

Our next official inflation update, due out next Wednesday, will matter a lot.

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The RBA has kept interest rates on hold. It’ll be cautious from here on

The Reserve Bank decided to keep interest rates on hold at 4.1% because it thinks there’s a chance – just a chance – it has lifted them all it needs to.

In his statement released after Tuesday’s board meeting, Governor Philip Lowe said while inflation was still too high and set to remain so for some time yet, it had “passed its peak”.

Growth in the Australian economy had slowed and labour market conditions had eased, although they remained tight.

After 12 near-consecutive rate hikes, and in light of the “uncertainty surrounding the economic outlook”, it had decided to wait at least a month before hiking again until it knew more about the impact of what it has done on inflation and the health of the economy.

And when you compare Australians’ experience of rising rates with other countries, the Reserve Bank has already done more than many people realise.

Rising rates have hit Australian borrowers harder

Criticism of Australia’s Reserve Bank for not pushing up its cash rate as far as other countries overlooks an important difference between Australian borrowers and borrowers in those countries.

Canada has lifted its central bank rate from close to zero to 4.75%, Britain to 5%, the US to just above 5% and New Zealand to 5.5%.

Yet Australia’s increase – from close to zero to 4.1% – has caused Australian borrowers much, much more pain than borrowers in those other countries.

That’s because an exceptionally large proportion of Australian mortgage holders are on variable rates: roughly 70%. That’s compared to 35% in Canada, 15% in the UK, 12% in New Zealand and less than 5% in the United States.

In the words of Australia’s Reserve Bank: “interest rates on loans with very long fixed-rate terms tend to be less sensitive to changes in the short-term rates”.

Back in February, the Reserve Bank’s estimate was that the interest rates actually paid on Australian mortgages had climbed two percentage points since it began pushing up rates.

In contrast – as this Reserve Bank chart shows – the rates actually paid in New Zealand had climbed by one and half percentage points, the rates in the UK by just half a percentage point, and the rates in the United States by very little at all.

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Increases in mortgage rates actually paid

Months since the official rate began climbing. 100 = one percentage point

RBA, APRA

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And because mortgages themselves are so much bigger than they used to be, the dramatic increase in rates actually paid costs a lot more than it would have.

Modelling by Ben Phillips at the ANU’s Centre for Social Research and Methods suggests that in the past two years, the average share of mortgaged households’ post-tax income devoted to payments has jumped from 17% to 25% – the biggest share in an awfully long time.

And it’s set to get worse, whatever the bank does to its cash rate.

The looming mortgage cliff

Usually, Australians take out very few fixed-rate mortgages. But in 2020 and 2021, we took out lots with fixed two- and three-year rates, when fixed rates were low.

As many as 880,000 of those fixed-rate terms are about to expire, pushing those borrowers from rates of around 2% (which might cost $2,100 per month to service) to rates nearer 5.5% (which might cost $3,000 to service).

The Reserve Bank itself expects 15% of borrowers to find themselves with negative cash flows in the coming months – meaning their incomings won’t match their outgoings and they’ll have to run down savings, work more hours, or tighten belts.

We’re already winding back spending. Although total retail spending has climbed 4.2% over the past year, prices have probably climbed 7% while the population has climbed 2%. This means the amount bought per person has shrunk sharply.

Recession is increasingly likely

Anything that makes us cut back even more runs the risk of bringing on a recession, something that’s already happened in New Zealand and may be about to happen in the United Kingdom.

At the start of this week, The Conversation’s expert forecasting panel assigned a 38% probability to a recession in Australia, much more than at the start of the year, but still less than 50% – meaning we might escape it.

The panel’s central forecast is for two more rate hikes this year, which it expects to be quickly unwound. If that happens, and if we escape a recession, the panel expects unemployment to climb only modestly over the year ahead while inflation glides down to 3.9% – within spitting distance of the Reserve Bank’s 2-3% target.

Lowe says getting things right means staying on a narrow path.

The case for living with higher inflation

That path might mean accepting a slower glide down in inflation than some would like, or even a higher end point – something closer to 3% than 2-3%.

Nobel prize-winning economist Paul Krugman this week suggested quietly abandoning the US inflation target (of 2%) once inflation dropped to a point where people no longer noticed it all the time, which he thought would be about 3-4%.

There would be a case for doing that here, so long as inflation was stable, predictable and no longer causing alarm. It’d help keep unemployment low.

In any event, we’re nowhere near there yet. The March quarter inflation figure (the most recent quarterly figure) put the annual rate at 7%. The update due in three weeks will show how quickly we are moving toward 4%.

When we get there, Lowe or his successor (Lowe’s term expires in September) will have time to think about how important ultra-low inflation of 2-3% really is, and whether it is worth the cost to Australians of getting there.

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Two more RBA rate hikes, tumbling inflation, and a high chance of recession: how our forecasting panel sees =2023-24

Of the 27 leading economists assembled by The Conversation to forecast the financial year that’s just begun, every one expects inflation to continue to fall.

The official quarterly measure of inflation peaked at 7.8% in the year to December and is now 7%, and the newer monthly measure peaked at 8.4% and is now 5.6%.

What’s at issue is how quickly inflation will continue to fall, how many more times the Reserve Bank will push up interest rates to make sure it falls as quickly as it wants, and the damage those rate hikes will do to an already very weak economy.

Twelve of the 27 think a recession is either more likely than not, or an even chance. And almost all expect a “per-capita recession”, in which economic growth fails to keep pace with population growth, sending living standards backwards.

Now in its fifth year, The Conversation survey draws on the expertise of leading forecasters in 25 Australian universities, think tanks and financial institutions – among them economic modellers, former Treasury, International Monetary Fund and Reserve Bank officials, and a former member of the Reserve Bank board.

Two more interest rate hikes this year

After 12 interest rate hikes that lifted the Reserve Bank’s cash rate from 0.1% to 4.1% in a little over a year, the panel expects two more.

The panel predicts a cash rate of 4.5% by the end of this year, followed by a decline to 4.3% by the middle of next year, and to 3.9% by the end of 2024.

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Asked to specify the month in which the cash rate will peak, and how high it will go, the panel settled on a peak of 4.7% in November.

A cash rate of 4.7% would lift the typical rate on a new mortgage from 5.4% to 6%, adding a further $200 per month to the cost of servicing a $600,000 loan.

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But the extra pain would be short-lived. Asked how long the cash rate would stay at its peak before being cut, the panel’s average guess was six months, meaning rates would begin to fall in June next year.

Several of those surveyed warned against expecting rates ever to fall back to anything like the emergency lows of 2020 and 2021. Others noted that the one thing that could force the Reserve Bank to cut rates faster than expected was a recession.

Plummeting inflation, an uptick in real wages

The panel expects inflation to slide from 7% to 5.2% by the end of the year, then to 3.9% by mid-2024, and to 2.9% a year later – putting it back within the Reserve Bank’s 2-3% target band.

Although steep, the fall in inflation isn’t as fast as predicted by the bank itself (3.6% by mid-2024) or the Treasury (3.25% by mid-2024).

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Barrenjoey Chief Economist Jo Masters said while price pressure from imported goods and fuel was easing, inflation was increasingly being driven by the prices of services such as rents that tended to be persistent.

Margaret McKenzie of Federation University identified the reopening of borders as a source of downward pressure on prices, saying it would ease labour shortages.

Moody’s Analytics’ Harry Murphy Cruise said although weaker spending was putting downward pressure on inflation, the Reserve Bank seemed unwilling to let that take its course and wanted to slow inflation more quickly, risking “knocking the wind out” of an already fragile economy.

A welcome upside of much lower inflation forecasts is a forecast of the first increase in real wages in three years, albeit a small one.

The panel expects wages growth of 4% in the financial year ahead, just beating price growth of 3.9%. The resulting 0.1% increase in the so-called real wage would be followed by a more substantial increase of 0.7% in 2024-25 as wages growth of 3.6% topped price growth of 2.9%.

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A per-capita (if not an actual) recession

New Zealand is already in a recession, and the panel assigns probabilities of 59% and 42% to the prospect of recessions in the United Kingdom and United States respectively, with the most likely start for both being the final three months of this year.

Throughout 2023, the panel expects economic growth of just 1.2% in the US and historically weak growth of 4.9% in China, suggesting Australia’s biggest customer for minerals will be unable to provide much help as Australia’s own economic growth dwindles.

The panel is forecasting Australian economic growth of just 1.2% in 2023 – the lowest rate outside a recession in more than 30 years, climbing to just 1.5% in the year to June 2024 and 2.3% in the year to June 2025.

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AMP Chief Economist Shane Oliver said if the low growth rate turns into what is usually called a recession (two consecutive quarters of shrinking gross domestic product) it will be because the Reserve Bank pushes up interest rates too far for highly indebted Australians to withstand.

He said consumer spending is almost certain to shrink as debt servicing costs hit a record high and, on the Bank’s own analysis, 15% of households with a variable-rate mortgage – roughly a million people – experience negative cash flow.

Asked to estimate the chance of the Australian economy going into recession in the next two years, the panel’s average answer was 38%, well up from the 26% the panel assigned to a recession in February’s survey.

KPMG Chief Economist Brendan Rynne assigned a 100% probability to what he called a “shallow, extended recession”, in which growth is first weighed down by a downturn in housing investment, followed by a slowdown in business investment.

The average forecast start date of a recession, should there be one, is the final three months of this year.

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The panel’s economic growth forecast of 1.5% for 2023-24 is well below the Treasury’s forecast of population growth of 2%, suggesting output per person will shrink in what is called a per-capita recession.

Unemployment climbing, albeit slowly

The panel expects a gradual increase in the unemployment rate from its present near-50-year low of 3.6% to 4.3% by mid-next year, followed by an increase to 4.6% by mid-2025.

The forecasts are in line with those of the Treasury and Reserve Bank, and suggest Australia is unlikely to surrender the big gains in employment made in the aftermath of the COVID lockdowns and return to the pre-COVID unemployment rate of 5%.

University of Tasmania economist Mala Raghavan said while job markets would become less tight as the economy weakened and as foreign students and migrants returned, the impact would be felt first in the underemployment rate, which reflects the extent to which workers are working fewer hours than they want.

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Less household buying, higher house prices

The panel expects growth in real household spending of just 1.5% in 2023-24, meaning the amount bought per household is likely to shrink.

Yet at the same time, it is forecasting continued modest growth in home prices, which climbed for the fourth month in a row in June after falling since mid-2022.

Most of the panel expects further growth in Sydney and Melbourne home prices in the 12 months ahead, with only four panel members predicting declines. The average forecast is for both Sydney and Melbourne prices to climb a further 2%.

Former Productivity Commission economist Jenny Gordon identified renewed migration as a driver of demand, offset by declining real wages and the risk of a recession.

Jo Masters said sellers appeared to be withdrawing supply, with total listings a third lower than normal, while the buyers appeared to have higher incomes than before and lower debt-to-income ratios, meaning they were less troubled by high interest rates.

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Tiny share market growth, tiny budget deficit

The panel expects the budget surplus for the financial year just ended to be followed by only a tiny budget deficit of A$9.4 billion in 2023-24, which would be less than 0.4% of GDP.

Two panellists, Mariano Kulish and Stephen Anthony, expect this year’s surplus to be followed by another one of $18 billion to 20 billion. Anther, Jenny Gordon, expects this year’s surplus to be followed by a budget in balance.

The forecasts reflect an iron ore price expected to stay near US$104 per tonne at the end of the year, instead of falling towards US$60 as forecast in the budget.

The panel expects modest share market growth of 3% in the year to June 2024, with the results sensitive to home prices (through the profits of financial corporations) and minerals prices (through the profits of mining companies).

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