EconRat

The current Parliament of Australia has 17 members on the cross-bench of the House of Representatives. That’s a record number in living memory and potentially influential if the Labor Government were somehow to lose its majority, currently at 3 votes.

If the Parliament were hung (and I fervently wish that this were the case) then one or more of the cross-bench would need to provide Supply and Confidence for the Labor Party to continue to govern. Or, if all the cross-bench got together, (highly unlikely) they could then support an alternative Coalition Government.

What difference could they make to Australia’s economic policies? And could there be an improvement in the (currently abysmal) making of economic policy?

Well, they could make a difference. One only has to look at the effect that independents had on the last hung parliament: the Gillard Government of 2010. Admittedly, things didn’t end too well, but during its term this Government had an outstanding record of positive policy implementation including: introducing the National Disability Insurance Scheme (NDIS), the Gonski funding, the initial rollout of the National Broadband Network (NBN), a mining tax and the carbon pricing scheme. Right now, if we still had a mining tax and a carbon pricing scheme it would go a long way towards getting us out of economic difficulty.

The kinds of improvements that I would be looking for are as follows:

1. Much more urgent and focused action on decarbonisation of our economy and investment in renewable energy (our number 1 economic and environmental problem).
2. Moving to a balanced-budget situation over the economic cycle. Given that we are currently running a perpetual deficit, this requires either increased overall taxation or a reduction in spending or both.
3. Greatly reducing the currently high level of inequality in wealth and incomes. This would require a whole suite of policies aimed at taxing the rich and giving to the poor as well as finding ways to get disadvantaged people into secure, well-paid jobs. It would also require better (more equal, better funded) childcare, aged-care, education and health systems.
4. Improving decision making in infrastructure funding. Ending the pork-barrel of doling out government money aiming to buy votes.
5. Dismantling monopolies and oligopolies, or at least, better regulating them. Ideally, a number of industries should be renationalised, or at least have competitive Government involvement, starting with the electricity grid.

Who on the cross-bench would be most likely to support such economic reforms?

Well, on point number 1 there are fourteen members of the cross-bench who are pretty vocal about getting real action on climate change. That’s a pretty large number. Only three members could be considered lukewarm or cool towards climate change issues. They are:

1. Dai Le, the independent member for the electorate of Fowler in Western Sydney. Her main priorities are stated to be reducing the cost of living and getting down unemployment.
2. Andrew Gee, the independent (formerly National) member for the electorate of Calare in Central West NSW. He is all about “getting runs on the board” ie. government largesse for his electorate.
3. Bob Katter, the independent member for Kennedy in North Queensland. Bob does have some positive ideas. For example, he is in favour of a national energy grid and removing any taxes on bio fuels. However, he doesn’t appear to be seriously concerned about climate change and is dead against carbon taxes and mining taxes.

None of the above three decarbonisation recalcitrants are likely to rush to support a Labor Government in need of supply or confidence, seeing that they tend respectively towards Liberal, National and Katter views of the world.

On point number 2, budget balance, there are about eight members of the cross-bench who have some proposals aligned to achieve this objective. These are:

1. The four Greens: Adam Bandt, Stephen Bates, Max Chandler-Mather and Elizabeth Watson-Brown, representing inner-city electorates in Melbourne and Brisbane. The Greens are not shy of making everyone pay their fair share of taxes.
2. Allegra Spender, the member for Wentworth in Sydney’s posh Eastern Suburbs. Allegra is forthright in talking about about GST, income taxes, stamp duty, and capital gains tax, and the urgent need for tax reform.
3. Kate Chaney, the member for Curtin in Perth’s comfy south-west. Kate recognises that our tax system is complex and requires reform so it is fit for purpose.
4. Zoe Daniel, the member for Goldstein in Melbourne’s upmarket Bayside. Zoe notes that there have only been tweaks and no major reform since the introduction of the GST in 2000, that Politics killed any consideration of the Henry Tax Review written in 2009 and that, a decade and half on we need another clearheaded broad-based review. 
5. Kylea Tink, the member for North Sydney, long a stronghold of independent-minded electors. Kyle advocates more holistic tax reform, taking pressure off personal income and broadening the tax base including adequate review of PRRT. (I am not completely in agreement with this stance, but I give credit for recognising the problem and agree that it is one way to go.)

On point number 3, reducing inequality, the Green Party stands out as having the most positive ideas for dealing with the issues. The Teal independents generally are strongly in favour of equality for women and protection of minorities but are a bit quiet on other inequality issues. Zoe Daniel deserves a special mention for her stance on the Stage 3 tax cuts for high-income earners and for her policies on housing and HELP/HECs. Andrew Wilkie has strongly progressive views on education, employment, house, health and social security.

On point number 4, improved decision making on spending, quite a number of independents are unfortunately vociferously in favour of electorate-based pork barrelling. Andrew Gee is a standout champion in this regard, with Rebekha Sharkie not far behind. The Teals and the Greens however, are not at all greedy.

On point number 5, Bob Katter takes aim at the supermarket oligopoly and wants to renationalise Qantas. The Greens are against the big corporations and want to Government to take direct control of housing, healthcare, electricity, transport and education. Most of the other cross-bench members tend to be rather quiet on these issues.

Some combination of Tealery, Greenery and a splatter of Katter, would be greatly beneficial to Australian economic policy making, enlivening a current d0-nothing dead zone. The worse thing that could happen would be if Labor were to cut a deal with one or more members greedy for pork-barrel projects for their own electorates and ready to forget about their other professed concerns.

As a summary, I suggest that the Greens have the best overall economic policies. Some of the Teals: Allegra Spender, Zoe Daniels, Kylea Tink and Kate Chaney are strong on tax reform. Zali Steggal, Sophie Scamps and Monique Ryan make useful suggestions. Andrew Wilkie is fairly quiet on economic policy but has runs on the board, having supported Julia Gillard, despite being double-crossed by her over gambling reform. And Bob Katter has a unique perspective, he is pretty bad on climate change but he should be respected for some of his views.

So 4 out of 17 are very good at economics, another 4 are pretty good, 2 more are interesting, another 4 at least recognise the urgent need for decarbonisation, and the remaining 2 need to lift their game.

Actually, there are many. This is just one of many that really sticks out.

If you are a top income earner and also have significant wealth, you are also probably one of those people who don’t like to pay income tax, or rather, prefer to pay as little tax as possible.

Here’s one way to do it: put your excess income into a self-managed super fund.

Let’s say you haven’t found another means to avoid the top marginal rate of income tax (45 cents in the dollar) and you are happy to keep your accumulated wealth until you retire. (If you are near to or over 60 that’s probably just around the corner anyway.)

So, putting your excess cash into super doesn’t hurt you at all, and once it is there: Bingo! the tax on any income from that wealth reduces to 15 cents in the dollar. A massive reduction in tax liability.

You won’t be alone, there are a few hundred people in Australia who hold around $50,000,000 plus in this sort of superannuation. The earnings from such wealth would be about $250,000 plus per year, and would otherwise be subject to taxation of $112,500 plus. But once they are over 60, those who have stashed this wealth into superannuation can spend this money as they wish without any further taxation.

If however, you are a low-income earner, earning say $40,000 a year, you must pay 19 cents in the dollar for each additional dollar you earn (and you almost certainly can’t afford to run a self-managed super fund). If you earn $40,001, you must pay 32.5 cents in the dollar, a massive amount more than Mr/Ms Moneypenny above.

It stinks.

I don’t really want to comment on politics because I’m a political simpleton. Heck, I have never voted for any party that has won government. I once even voted for the Australia Party, the ‘keep the bastards honest’ Democrats, often for the Greens, a couple of times for Andrew Wilkie, once for the Sun-ripened Warm Tomato Party, and once for the Party Party Party Party.

But, the current appalling state of economic policy making in Australia makes me wonder what is required of politics in order to get on track for positive economic reform.

The problem, as I see it, is that we have a government that does not intend to undertake any significant action on economic reform. This situation has not essentially changed with the change of government last year.

Indeed, the current government’s economic policies are essentially the same as the previous one.

For instance, the most significant economic problem facing Australia is to do something meaningful to counter climate change. But there is no action, only meaningless targets for the distant future (when we will all be dead.) Australia’s Long Term Emissions Reduction Plan was written by the previous government. And so was Australia’s Technology Investment Roadmap. And so was Australia’s commitment to net zero carbon emissions by 2050.

I can go on. Tax policy for example. No change. Education – zilch. Social welfare – nada. Competition policy – nope. Defence – you have got to be kidding.

So, a bigger Labor government majority would not be a solution. That would simply be regarded as a vindication of their approach of being nothing different, just nicer.

Nor would a return to a Liberal-National coalition. (Unless you like nuclear power?)

Our cross-bench, on the other hand, is pretty impressive. But it has no real influence as long as one of the two major parties hold power. (Even Bob Katter is against privatisation.)

The answer, I have decided, is that Australia must swing right in the right way.

That is to say, that Australian Labor should lose three seats to right wing loonies. Sooner, rather than later.

The next election (2025) is too far away. Our best hope is for three marginal Labor members to resign from politics (to spend more time with their families), triggering by-elections that are won by the opposition. (More independents would be ok too.)

Then, the numbers in the Australian parliament would then be 75 Labor, 59 Coalition and 17 Cross-bench.

Labor has always declared that it won’t do deals to stay in government. But, you know what? They lie.

And, you know what also? Any cross-bench member that Labor does a deal with is likely to demand much more action on climate change.

It’s a long shot, but it seems to be our only hope.

There is something deeply rotten about the current Australian Government’s listless attitude to infrastructure investment that is epitomised by its (lack of) involvement in the Melbourne Airport Railway. And it is a prime example of how not everything is better under Albanese than it was under the now reviled Morrison.

This is a project that has been contemplated since 1958 but never acted upon, never even had the land space reserved, at a time when the new Melbourne Airport at Tullamarine was surrounded by open paddocks and land was as cheap as chips.

This is a project for which the strategic need is strong and which will provide long term benefits. It is a critical link in a heavily congested transport corridor which in turn is key to improving the quality of life in one of Australia’s fastest growing cities.

This is a project that finally started construction in October 2022 only to be halted indefinitely following the election of the Albanese Government in May 2023.

Why?

As is customary after every change of government that switches from one party to the other, the Albanese government reviewed all the major ongoing projects initiated by the previous Abbott-Turnbull-Morrison governments. And this is one of the projects that it chopped.

Why?

Infrastructure Australia has argued that the project is not investment-ready and should not be put on the priority list because of its concerns about the cost estimates, the risks and the expected outcomes.

Certainly the project will cost a lot of money at 13 billion dollars. Certainly the project’s proponents could have done a better job at evaluating the business case and investigating alternatives. Possibly Dan Andrews gold-plated this project when pushed to undertake it by Malcolm Turnbull. Perhaps a direct tunnel option all the way from the city centre to the airport would have been better.

Infrastructure Australia argues that the benefits of the project are currently about half the costs. However, it does concede that the project will look good in 13 years time when the Tullamarine Freeway is expected to reach capacity.

My view is that the project is stymied by the Albanese government not wanting to undertake any project that reflects favourably on its predecessors. And it is stymied again because the Albanese government is short of money. It is short of money because it won’t raise any taxes. It won’t raise any taxes because it is mortally afraid of the politics of doing so, ever since Tony Abbott and his “Ax the Tax” slogans. But there are very good reasons why taxes should be raised, particularly taxes on mining, greenhouse gas emissions and high incomes and wealth.

It should be noted that Sydney, Brisbane and Perth now all have train services to their airports. Patronage of Sydney and Brisbane airport rail initially fell short of expectations due to the high prices charged. In Sydney, the Green Square and Mascot stations have become heavily congested since surcharges were dropped, but surcharges remain for access to the airport stations, and demand is therefore considerably reduced compared to what it would be like without these surcharges.

Infrastructure Australia’s arguments about the benefit to cost ratios are weak on the following points:

1. Infrastructure Australia uses a discount rate of 7%. However, the Australian Government is able to borrow long term funds at 4%. At 4%, the project is profitable.
2. It argues that the benefits of the project will improve when the Tullamarine Freeway reaches capacity (forecast to be 2036). But I don’t know what this means, maybe when Tullamarine Freeway becomes Tullamarine Gridlock. I have driven along this route several times in recent years and I can report that it is already heavily congested.
3. The project is being viewed from within the narrow prism of choosing between driving along the Tullamarine Freeway versus catching the train from the city centre. A wider view of what this choice means is more favourable to the project including the benefits to the people of the city as a whole, and to users of the public transport network in particular, in making it possible to live without a car. Some of these benefits are likely to be capitalised into the value of real estate that is well-connected to public transport and are not considered at all by Infrastructure Australia.
4. The wider economic benefits of cutting vehicle exhaust emissions and reducing road congestion are not considered (improvements in health, reductions in greenhouse gases, benefits to car drivers).
5. The project is discounted on the grounds that autonomous vehicle uptake would greatly improve the efficiency of roads and public transport would no longer be so important. But I would argue that we might as well do away with roads and airports altogether and simply use autonomous drones ! (sarcasm alert)

Bottom line: this project should proceed immediately.

The recent controversy over the Federal Government’s decision to deny Qatar Airway’s request for 21 extra flights into Australia pushes my lethargic fingers into action on the keyboard. After all, the question of what is in the national interest in determining who gets to fly to Oz is something that at one time earned me a living.

If one takes the laissez-faire economics view, the question is a simple one. Maximise the competition and net economic welfare will maximise itself. That is to say, the interests of consumers in getting cheaper airfares and better services are the only relevant considerations. The airlines that deliver these services will be chosen by the law of comparative advantage, and Australia does not necessarily have an advantage in producing airline services. If Qantas goes bust, so be it, the resources previously employed will find a new home in an imagined world of general equilibrium and everyone will be satisfied.

The laissez-faire view has never prevailed in the real world however. Rather, most governments all over the world have invariably chosen to negotiate airline routes with an eye to the interests of their flag-carrier airlines.

In Australia’s case, the flag carrier has been Qantas, and permission to fly to and from Australia has been negotiated with a very strong interest in preserving Qantas’ ability to compete. In order to negotiate these routes, the interests of the countries at the other end of the flight also has to be taken into account, typically ending up in a duopoly of airlines flying between countries.

Perhaps, at one time this made some sense, in that Australians could take pride, and some profit, in flying about half the time with Qantas.

But no more:

• Qantas is now only about half Australian owned, so the interests of Australian shareholders are now heavily diluted.
• Qantas no longer provides secure well-paid jobs to Australians. Many jobs have been taken offshore completely. The remainder of Qantas employment has increasingly been contracted out to providers that laughingly provide ‘a service’ – but neither a quality service nor a particularly remunerative one.
• Qantas no longer provides quality services to its customers – the planes are getting old and shabby, baggage is lost, flights are regularly cancelled, delays are commonplace, safety measures are being weakened, and the food services are abysmal.
• Qantas does not provide all that much in terms of government revenues. Rather, in recent times, Qantas has been the recipient of billions of dollars of government subsidy.

If there is one beneficiary of all this, it has to be Alan Joyce, the CEO who has garnered millions in income rewards for running a once proud airline into the ground.

In comparison, flying with Qatar looks like a good deal for the Australian traveller. Qatar is now rated the second-best airline in the world after Singapore Airlines whereas Qantas has plummeted to 17th.

Qatar has an incredibly good hub and spoke network enabling the Australian traveller to get to a wide number of destinations, especially in Europe and the Middle East, in just two hops. Qantas, on the other hand, competes with Qatar only in flying to London and Rome – anywhere else, you have to go code-sharing or switch to another airline. In that sense, there is hardly any competition at all between these two airlines.

To assert that denying these flights to Qatar is in the national interest does not appear to survive scrutiny.

Disclosures:

1. I have flown with Qatar. The service was excellent, but I have a distaste for Arab treatment of women which extends to a distaste to flying through the Middle East on any airline.
2. I have flown with Qantas. In recent times: they have lost my baggage and failed to find it again without my help; they have cancelled my flights, forcing me to take unwanted circuitous routes; they have served me shitty food; they have charged me high prices; there have been several flight delays and one flight was delayed for over one hour for repairs with all the passengers waiting onboard.
3. My preferred airlines are Singapore and Cathay Pacific.

David Rowe’s view

The mantra that the powerful and their parasites have trumpeted for far too long, namely: “You can’t have a pay rise until your productivity improves”, may be not just wrong, it may be completely arse about.

It is wrong because there is a transfer going on in the share of the cake between ordinary workers and CEO’s, and between workers and profits. Workers are getting less and CEO’s and shareholders and getting more. We should be chanting “No CEO pay rise until productivity improves, nor any increase in dividends”. But the powerful don’t care to say that.

It is arse about because it may be that what we need to increase productivity is an increase in wages.

A few perceptive observers have already given a tap on the head of this nail.

Ian Verrender in ABC News 23 May¹ calls this the Catch 22 of Australia’s industrial relations system: “You can’t have a pay rise until productivity improves. And productivity can’t improve until you get a pay rise.”

And Mark Humphrey-Jenner in the Conversation of June 19² argues that we must: “make it clear that workers who care more will get cared for more”. His reasoning is sound and clear: “shrinking real wages are demotivating. Workers whose real wages are falling might care less about their jobs. They might work more slowly, or they produce worse-quality goods or services. And their attitude might permeate to other workers and to clients, undermining productivity more broadly.” And I agree. Let the pay rise begin!

But I would go further.

We need to worship the worker and encourage her to take responsibility. And we need to ditch the idea that CEO’s have much influence at all on a company’s performance.

Sure, in the short term, CEO’s have increased company profits by cutting costs, firing staff, and outsourcing jobs to the gig economy. But the cost has been that nobody cares anymore, they have no pride in their work and take no personal responsibility.

The pay issue is important and the relativities also. When we see a CEO getting a 15% pay rise when we are getting 2%, our natural response is that we’re not important, let the CEO do the job. But she can’t and won’t. Here’s the thing: a CEO is not at all omniscient, doesn’t actually know what everyone does or how well they do it, and has no direct power to influence these things in any case. All she’s got is more frugality and reduced customer service.

The pay rise doesn’t have to be direct cash – it could be in the form of company shares, shares of the company’s profits, or bonuses for improvements in customer services.

An immediate direct effect of a general pay rise is of course, increased unemployment. Companies will aim to shed their least productive workers, substitute more robots, and hesto presto! there will of course be increased labour productivity paying for the pay rise. There needs to be a corresponding government fiscal policy to bring the economy back towards full employment, paid for naturally by reversing the stage 3 tax cuts and increasing taxes on the super profits of mining companies.

There’s more:

The basic economic model has forever regarded labour as a mere “factor of production” substitutable for more or less other inputs such as land and capital.

And Neoliberalism has encouraged people to believe that everything is a mere cash transaction.

What’s wrong with these ideas are that workers are people. And people are influenced, sometimes to ridiculous levels, by their sense of their own importance in the universe. What this means for productivity is that they can be induced to work harder (some more than others) by recognising their status.

We, the people are stupid, but not complete idiots all the time. We have been buttered up by glorified job descriptions and medallions for service. Everyone is a manager now, or a director, not a mere sales assistant. Nobody is motivated by nothing. The rewards have to be real and if you can’t identify who’s working and who’s shirking then you have to reward everyone.

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1. “https://www.abc.net.au/news/2023-05-23/why-your-pay-is-not-keeping-up-with-inflation/102379114”
2. https://theconversation.com/tired-of-shrinking-pay-the-real-drain-on-australians-productivity-is-falling-wages-207807

AUKUS submarines

• The proposed purchases of second-hand US nuclear submarines doesn’t make me feel any more secure. Acquiring them seems likely to make Australia even more aggressive. And the thought of using them for warfare makes me even more anxious, so what is the point?
• The AUKUS program will not create any new jobs – it will divert highly skilled workers and valuable resources from much more worthwhile projects.
• I am absolutely horrified at the idea of spending $3 billion on creating jobs in sub-building USA.
• Nobody wants a nuclear sub in their harbour – even the extreme right wants to put them somewhere else.

Monetary Policy

• The Reserve Bank and Philip Lowe are getting beaten up in the media for raising interest rates in its attempts to control inflation.
• But the real problem is that the Reserve Bank has been given an impossible task.
• It is trying to solve multiple issues: inflation, employment, economic prosperity and welfare, when it only has one instrument: interest rates.
• The body that should be given a beating is the Australian government for its abject failure to properly conduct fiscal and other policies that are available to solve these problems. That’s both the current government and all the previous ones.

Productivity

• The Productivity Commission has issued its five-yearly report on Productivity and unsurprisingly found that we have improved our productivity hardly at all.
• It has made a huge number of suggestions for improvement which will probably be ignored.
• But perhaps we no longer need a “Productivity Commission”. Maybe we are at a dead end with regard to producing more stuff with less effort.
• Perhaps we need a “Well-being Commission” that inquires into how to make us better off. Some first cabs off the rank would be how to cut carbon emissions, how to reduce economic inequality, how to make the planet more peaceful, how to enjoy more leisure, and how to preserve our wonderful natural resources. The current Productivity Commission hasn’t really thought about any of these important goals. (Hardly anyone else has either.)

I have been too depressed about the state of economic debate to post for some time. But the most recent developments (if they can be given such a grand name, when they afford hardly any progress at all) have aroused me from my torpor.

I am talking about the proposed 30 percent tax on the earnings of superannuation funds that exceed $3 million.

Here we are in the banana republic of Australia where such a trivial increase in taxes on the rich is greeted with howls of agony.

We need to increase government revenue immediately by around $40 billion just to balance the budget.

Instead, we can only manage a paltry $2 billion starting after the next election. And, all over the place the rich and greeeeedy are digging in for trench warfare over what is seen as the start of a campaign to steal ‘their money’ – the money that successive governments have given them in the form of various concessions and exemptions on tax that would otherwise be payable, ranging from, lower (and even zero) rates of capital gains tax, and higher deductions for capital expenses. Treasury has made a list for you (see: https://treasury.gov.au/publication/p2023-370286) which is not actually fully comprehensive, but it is a start. And the concessions are worth mega billions.

We have had nine years of governments ostensibly dedicated to balancing the budget by cutting expenditures (which at the same time cutting taxes and expanding these concessions).

They were are miserable, unlawful (see Robodebt), ungodly, unfair(see Robodebt), inequitable failure.

Now we have a government that is timidly trying to swing back the pendulum, but all it can manage is about one tick of the clock when we need at least twenty.

This situation has long been foretold. Back in 1986, Paul Keating, the last halfway economically-literate treasurer, foresaw that Australia would degenerate into a ‘banana republic’ if it did not deal with its structural deficit problems, its unwieldy, inefficient and inequitable taxation system and its failure to save for a future in which a much larger proportion of the population was retired and no longer contributing to economic output.

Back then, superannuation was intended to provide for the majority of Australians to have a comfortable retirement, and to offset the looming unfunded contingent liability of a larger population qualifying for the age pension.

Now, after decades of fiddling while Australia burns, superannuation has become a tax dodge for the minority to park their wealth at concessional rates of tax.

I would like to see a government actually contribute to the superannuation of people who earn so little that they are not accumulating any significant funds. And a concessional rate of (say) 4 per cent on the contributions and superannuation earnings of people in the 19 percent tax bracket. That way, we might eliminate the otherwise unfunded future liability of paying age pensions. At present, it is future generations of youth (if there are any) who will bear this burden.

A 15 percent concession may be ok for those on a 30 percent tax rate. For those who accumulate from $3 to $500 million in super I would make no concession at all.

A former Prime Minister of Australia, Paul Keating, is world famous in Australia for saying that our last recession (1991) was ‘a recession we had to have’.

And now we are on the cusp of another such event.

Almost everywhere in the world things are looking grim.

The OECD is forecasting that Germany, Italy and Russia are sliding into recession – largely as a result of the Russian invasion of Ukraine and the collateral increase in energy prices and shortage of gas supplies. The UK is pursuing manic flip-flop economic policies like a drunken sailor and is finally realising that Brexit is an economic disaster. The US Federal Reserve is pushing up interest rates until inflation is brought down regardless of the risk of recession. China is continuing to pursue zero Covid, has an increasingly autocratic government under Xi Jinping, and its economic growth is expected to falter, down maybe even to zero.

So, can Australia avoid recession?

Absolutely economically, yes.

But politically, no.

Unless the Australian government radically changes its economic policy stance.

The current Australian treasurer, Jim Chalmers, and the finance minister, Katy Gallagher, are softening us up for another ‘inevitable recession’. Chalmers has recently said that his forthcoming budget ‘will deliver “responsible” cost-of-living relief, investments in the capacity of the economy and look toward budget repair’. But, that’s nowhere near good enough and fearful of breaking promises he made while politically wedged by the previous government, he has also ruled out a number of ways of raising the money to pay for any recession-busting fiscal boosting. The Stage 3 tax cuts are here to stay, apparently. As are the ridiculous give-aways of our resources to multi-national companies. No mining taxes or gas taxes are planned.

Meanwhile, the Reserve Bank has hiked interest rates sharply in response to the sudden increase in inflation.

Remember just 7 months ago? The then Liberal-National government, now thankfully decimated, was forecasting an inflation rate of just 3%. I forecast 6%. (See my post: The Budget Forecasts, April 10). And 6% is what we now have.

The consequence of all the above that the Australian government is painting itself into a corner with regard to its ability to manage an economic downturn.

Back in April, you will note that I forecast that Australia will slide into recession by the middle of 2023, with a -1% change in GDP for 2023-24.

But, here’s the thing. Nobody, and especially no economist, can predict recessions.

So, don’t believe me (or anyone else predicting a recession).

Recessions are like the collapse of a house of cards when one tiny tremble brings about a bigger tremor, followed by an absolute cascade of failures. Economies are very tippy, especially when everything is going exuberantly well. Suddenly, there can be a crisis in confidence, and suddenly exuberance can turn to gloom, and everything goes disastrously pear-shaped.

Here’s the second thing. Governments don’t have to be impotent in dealing with recessions when they arrive.

But politicians tie themselves up in knots with their promises and political beliefs and dogma and vested interests and blinkered perceptions and…..

Whatever. The solution to recession is tried and tested and proven. It’s fiscal boosting, it’s government spending when everyone else has stopped spending.

But the government has got to have its ammunition ready. It has got to have cash in the bank.

And this government is running out of cash.

If I might raise the topic of lifting minimum wages, many serious-minded (but utterly and irredeemably conventional) economists will reach for their rhetoric popguns and shoot their mouths off as follows:

“How thoughtless of you to suggest such a thing. Aren’t you aware that increasing wages will put people out of work?”

Or: “The economy cannot afford a wage rise! There must be an improvement in productivity to pay for it!”

The conventional wisdom of the rhetoric gunners is something like as follows: the labour market is assumed to be in equilibrium at current wage rates – everyone who wants to work is assumed to have a job and everyone who wants to employ workers has exactly enough of them. If wages are forced upwards, it is assumed that the demand for labour will be reduced, while more people will want to work – the supply of labour increases. So it is assumed that the labour market becomes dis-equilibrated – that there is now a pool of involuntary unemployed.

The conventional wisdom of the requirement that productivity must increase is roughly as follows: the economy is assumed to be in equilibrium with everything that is produced is also consumed. It is assumed that if wages are increased, then more goods will be demanded, but cannot be supplied. Hey presto! Inflation!

What simplistic poppycock.

Such rhetoric in times like the present, when real wages are going backwards, seems misplaced to me. For surely lifting wages by (say) 6 per cent when inflation is running at 6 per cent leaves wage earners about the same as they were before, in terms of their purchasing power. They have the ability to buy about the same quantum of goods, albeit at higher prices. The firms that produce these goods get about 6 per cent more money which they can afford to pay about 6 per cent more in wages. And so the money goes round, just like before, and nothing real is affected.

Conversely, if workers are not given pay rises to match inflation, there would be a constraint on their budgets, they would spend less, firms would sell less goods, firms would then produce less goods, firms would fire staff, who would have less money to spend, and down we go spiralling down.

Now, I am quite aware that the world is a much more complex place than the above arguments would suggest. At some other time I would be happy to consider a more complex model of an economy in disequilibrium, in which the inflation came from external shocks or from a backward step in productivity caused by Covid lockdowns, in which the labour market has been subject to a radical shock caused by foreign guest workers prevented from working and flying home, and coming back very slowly.

The labour market, particularly, is a much more complex beastie than the simple demand-supply model suggested above. Firms don’t generally employ more staff than they need to produce the goods. If wages rise, they might be inclined to pass on the increased cost, if they can, but they can’t immediately shed staff without their production line grinding to a halt. And workers don’t usually say whoopee! my wage is up, therefore I want to work more hours! Quite the opposite – some of them might work less hours because they actually want more time for other stuff and now they can afford it. And so on.

But what causes me to rage is the endless firing of those rhetorical popguns by those serious-minded (but irredeemably conventional) economists.

I would dispute that raising the minimum wage would put many people out of work at all. (While a considerable number of workers would be better off.)

And I would dispute that raising the minimum wage necessarily has a productivity problem. In my world, raising the wage might simply result in a redistribution of rewards. Executives could be paid less, and profits and dividends could be reduced. Shock! Horror!

So there it is.

It ain’t necessarily so that anyone is thrown out of work.

And it ain’t the case that any spanners are thrown into the gears of the economy by awarding a pay increase unmatched by a productivity gain.