Witty, smart, zealous for intellectual combat, Friedman enjoyed the University of Chicago classroom but reached well beyond it. Born in 1912, he was already a prominent economist by his early thirties. He won the Nobel Prize for economics in 1976, and continued to advocate his views until his death thirty years later. Through his Newsweek columns, television appearances, relentless cultivation of powerful friends, and frequent travel, he magnified the considerable influence he earned as an economic thinker. It was actually Stigler who came up with the line that “if you have never missed a flight you have wasted a lot of time at airports” but it was Friedman who most strikingly embodied the idea. Gifted with immense energy and verve, he hustled.

Readily conceding some of his big ideas didn’t work, Burns argues Friedman was nonetheless responsible for much of the shape of the world today. He created, she argues, modern central banking, floating exchange rates, and the “Washington consensus” on a universally applicable model of market economies. If she is right it was a considerable achievement for an economist who never ran a government department or held political office, and whose central theory, like that of Karl Marx, turned out to be just plain wrong.

And wrong it was. His big theory was that the rate of inflation — or more broadly nominal income — is always related to the rate of growth of the money supply. It was a claim with important implications. For Friedman, it meant a market economy was inherently stable except for variations in the money supply. If the money supply contracted it could cause a depression. If it expanded too quickly, it could cause inflation. Since the money supply could be controlled by government, it was government that was responsible for inflationary booms and deflationary busts. A capitalist economy would be stable if the money supply grew at a steady rate consistent with low inflation and reasonable output growth.

Friedman’s conviction was sustained by his 1963 finding, with Anna Schwartz, that the US money stock had plummeted during the great depression of the 1930s. Their observation stimulated debate, though it didn’t prove that a fall in the money stock caused the depression. After all, 9000 US banks had failed during the Depression, and the biggest component of money measures is bank deposits. It’s hardly surprising the quantity of money declined.

Put to the test by Federal Reserve chairman Paul Volcker in 1979, Friedman’s theory turned out to be wrong. To quell inflation, the Federal Reserve announced money growth targets aligned with Friedman’s rule. The targets proved very difficult to achieve. The US central bank did succeed in forcing up interest rates, however, creating back-to-back recessions and dramatically reducing inflation. Meanwhile the money supply continued to increase at much the same rate as before. Contradicting Friedman, interest rates mattered in controlling inflation; the money supply did not.

Though some have concluded that the swift rise in the money supply and the subsequent increase in inflation during the Covid epidemic bore out Friedman’s prediction, it didn’t. The episode was an even more telling repudiation. From 2020 to 2023 the US money supply (measured as M1, which is mainly bank transaction deposits) rose by 400 per cent, the result of the Federal Reserve creating cash to buy bonds and lend freely to banks and business. Over the same period US prices rose by 18 per cent, or less than one twentieth of the increase in the money stock.

(It is true, as Friedman maintained, that inflation is always and everywhere a monetary phenomenon. In a certain sense this must be true, since inflation is by definition about changes in the value of money. But changes in the quantity of money need not and evidently do not result in equivalent changes in inflation or nominal income.)

Once followed with eager interest by economists and market analysts, the money supply numbers these days are rarely mentioned. Friedman’s conception of the relationship with inflation survives in elderly conservative haunts (including the pages of Australia’s Quadrant magazine) and among some financial markets people.

It was still a widely discussed variable when I was working on a doctorate in economics in the US in the early eighties. Yet in later years on the Reserve Bank board I can’t recall the money supply being seriously mentioned, ever. Nor in an earlier four years as an economist in the office of the treasurer and then the prime minister. Nor yet was it taken seriously when I was working subsequently as an economist in financial markets. Though dutifully published by central banks, the money supply numbers contain no information useful for predicting inflation or nominal income growth.

But then some of Marx’s central ideas were also wrong. Demand hasn’t proved always to be less than supply, workers haven’t become increasingly poor, and the labour theory of value, which he adopted, has long been superseded by better ways of explaining prices. Yet Marx undoubtedly exerted great influence on the world. While conceding he was wrong on the central point of the “monetarism” he espoused, Burns argues that Friedman was similarly influential.

By 1979, when the central monetarist idea began to fail, Friedman had already given his famous 1967 presidential address to the American Economic Association in which he challenged many of his colleagues’ focus on a short-run trade-off between inflation and unemployment. He succeeded in reorienting economic thinking back to a long run in which there was no trade-off and therefore not much room for stabilising the economy with government spending.

More than monetarism, that address changed scholarly economic thinking. The short-run trade-off survives today in economics teaching, but coupled now with a long-run story in which there is a certain minimum unemployment rate — often disputed — consistent with stable inflation.

Intelligent, well-researched, scrupulous, balanced and clearly written, Burns’s is an excellent biography. Her archival work on Friedman’s relationships with Chicago colleagues, Federal Reserve governors, presidential candidates and presidents is thorough, fresh and deeply interesting. Even so it credits Friedman with more than seems to me reasonable.

Much of Friedman’s reputation was based on a wonderful stroke of professional luck in the late 1960s. As Burns tells it, he observed an increase in the rate of growth of the US money supply and predicted an increase in inflation. In his 1967 address he argued there was no stable relationship between inflation and employment. When people observed that inflation was rising they would increase their wage demands and businesses would increase prices, taking inflation higher. When inflation took off in the late 1960s Friedman claimed to be vindicated. When unemployment also rose in response to a slowing economy, Friedman was doubly vindicated. He had predicted both rising inflation, and unemployment, and by the early seventies both were apparent.

It was also true, however, that the Johnston Administration was financing both the war in Vietnam and its ambitious Great Society program of social spending and infrastructure. Federal spending rose from 16 per cent of GDP in 1965 to 19 per cent in 1968, with almost all of the increase funded by an increased deficit. Inflation rose from 1.6 per cent in 1965 to 5.5 per cent in 1969. During the next decade, helped along by a tenfold increase in oil prices, inflation and unemployment would increase very much more. Even so, the increase at the end of the sixties was a disorienting shock, one that burnished Friedman’s repute as an economic seer. Through the seventies, a decade of high inflation and an intermittently rising unemployment rate, Friedman’s reputation grew.

They were his best years. By the early eighties, with Volcker’s disinflation efforts demonstrating that a money supply target was a lot harder to achieve than Friedman supposed — and unnecessary to combat inflation — his professional reputation lost some of it shine. Even at Chicago, a new school of “rational expectations” pioneered by younger economists was displacing Friedman at the centre of classical economic thinking. At the same time, though, his public reputation became more lustrous with popular books and a television series lauding capitalism, markets and the freedom Friedman argued capitalism encouraged.

Friedman could claim some singular successes, as Burns points out. He was an advocate of floating exchange rates at a time when orthodoxy predicted global chaos if exchange rates were not fixed against each other and the price of gold. When the big market economies were forced to move to floating rates from the end of the 1960s, Friedman was proved right. Markets adjusted, and more importantly monetary policy could refocus on targeting inflation rather than the exchange rate.

Friedman could claim considerable credit not only for arguing in favour of floating exchange rates, which have become nearly universal in major economies, but also for several proposals that for one reason or another were not widely adopted. One is school vouchers, a government payment which would allow parents to choose their children’s school. Another is the negative income tax, which in Friedman’s version would replace other welfare payments with a single payment.

It is harder to praise Friedman alone for widely shared ideas that also proved useful. For example, Burns credits Friedman for insisting on the role of prices as the central mechanism in a market economy. But in this respect he was by no means unique. He deployed a style of economic analysis that Adam Smith called the invisible hand and was most coherently developed by the British economist Alfred Marshall in the 1890s. The technique was used by Marshall’s pupil Keynes and taught at Harvard in much the same form as at Chicago. It is still taught today and remains one of the most powerful tools in economics. Friedman was good at it, but not as good as his contemporaries and colleagues, Stigler and Gary Becker, or many other microeconomists of his era.

Friedman did successfully contest the supremacy of fiscal policy over monetary policy, a lingering legacy of Keynes’s advice for dealing with deep slumps such as the Great Depression. The fiscal emphasis was rooted in Keynes’s notion that the circumstances of the Depression and the fear it engendered meant lower interest rates would not make much difference to spending. It was the “liquidity trap” in which people conserved cash rather than buy things or invest. Direct government spending was a better option to sustain demand and jobs. This aspect of Keynes’s thinking dominated economic thought in the United States, particularly among supporters of Roosevelt’s New Deal. Friedman insisted on the important role of central banks, a reorientation that remains.

Friedman’s enduring contribution, Burns argues, was to remind the economics profession that money matters. She is certainly right, even if the particular mechanism he had in mind proved to be wrong. Even so I am not at all sure of her argument that Freidman resurrected interest in money among economists, or that it had ever ceased to be of interest. After all, Keynes wrote his Treatise on Money before the General Theory of Employment, Interest and Money, and the General Theory has much to say about money and interest rates. John Hicks’s famous simplification of the General Theory, still taught as the ISLM equations, is all about interest rates, the public penchant to hold money, and the quantity of money. Friedman himself acknowledged the contributions of an earlier American monetary theorist, Irving Fisher.

Burns also credits Friedman with an important role in creating the “Washington consensus,” the nineteen nineties notion that began as a description of a widespread change of economic policies in South America away from import replacement. Friedman made some contribution, though not as important as that of his trade theory colleagues. Japan, then Korea, then Taiwan, then most of Southeast Asia had in any case focused on export strategies decades before Chicago economists, including Friedman, advised Pinochet regime in Chile to adopt one.

Generalised with Thomas L. Friedman’s The World is Flat into a view that democracy, capitalism and economic globalisation had become the more or less universally agreed elements of human societies, it moved well beyond Friedman’s scope. Friedman certainly welcomed it, but did he create it? A world of liberal market economies had, after all, been an American foreign policy ideal since the end of the second world war. The creation of the modern global economy rested on successive GATT trade rounds, the European common market, the reconstruction of Japan and Germany and other changes Friedman may have applauded but had nothing to do with him. He welcomed China’s accession to World Trade Organization in 2001 but was not an important player in removing the US veto. China’s economic success with considerable state ownership and direction ran opposite to Friedman’s prescriptions. On the Washington consensus, there is anyway today no consensus.

As he became more involved in Republican politics, Friedman’s moral compass became unreliable. Supporting Barry Goldwater’s campaign for the presidency, Friedman opposed the 1964 Civil Rights Act. His argument, according to Burns, was that people have a right to racially discriminate if they wish. With economics, you need to know when to stop.

His fans claim Friedman’s ideas also had a big impact on Australia. According to economist Peter Swan, speaking at a Friedman tribute in Sydney in 2007, Friedman’s ideas arguably spurred not only “the demolition of the Berlin Wall, the demise of the Soviet Union and of communism [and] the rise of Maggie Thatcher in the UK” but also the “magnificent success of the early Hawke–Keating government,” which “freed up the financial system, floated the dollar, and deregulated and privatised much of the economy. And Friedman’s ideas surely laid the foundations for the great prosperity enjoyed by Australians under the Howard government.”

Putting aside his suggestions about the Berlin Wall and the demise the Soviet Union, Swan’s attribution of the success of the Hawke and Keating governments to Friedman is hard to see. Writing about those governments, researching the archive of Keating’s files, I cannot recall coming across Friedman’s name once.

The Hawke and Keating governments were indeed adherents of what was then broadly known as economic rationalism, but it is fanciful to credit Friedman. It was just regular economics. The Hawke government put in place an Accord with the trade unions which, with the cooperation of the wage arbitration tribunal, restrained the growth of wages. That idea was anathema to Friedman. The Hawke and Keating governments legislated tariff cuts, long advocated by Australian economists and drawn from mainstream economic thinking that long preceded Friedman. (Influenced by Bert Kelly, Whitlam had also been a tariff reformer.) Friedman was an advocate of the sort of privatisations effected by the Hawke and Keating governments, but so were many other prominent economists.

There is perhaps more of a Friedmanite influence in financial deregulation. Australia’s efforts were in some respects more thoroughgoing than in the United States, but somewhat later — as was the float of the currency. In Australia, as in Britain and the United States, deregulation was prompted by the increasing success of unregulated financial businesses, cross-border competition and the opportunities offered by computing and communications technologies. Friedman advocated financial deregulation but, again, so did others.

And while Australia’s Reserve Bank continued with monetary targets until 1985 the operating instrument and the real focus of policy was always the short-term interest rate. The bank anyway had no more success than other central banks in meeting its money targets. The targets were seen as aspirational projections rather than outcomes that had to be attained. Not long after the float of the Australian dollar, the bank (and the government) dropped what had by then become fictional monetary targets. As the bank’s then deputy governor, Stephen Grenville, pointed out in a canonical 1997 paper, by the late eighties it was widely recognised that the relationship between money and nominal income had broken down. He approvingly quoted a remark of the Bank of Canada governor: “We didn’t abandon monetary targets, they abandoned us.”

For all that, Burns rightly points out that Friedman could claim a good deal of the credit for many of the characteristics of contemporary central banking. One is explicit targets, though now expressed as an inflation range rather than a rate of growth of money. Another is openness, expressed as public information about the monetary policy decisions of the central bank, and its economic forecasts. A third might be the greater independence of central banks from the rest of the government. In the United States all three were in varying degrees absent from the Fed when Friedman began drawing attention to the role of money and monetary policy from the later 1950s onward. He could claim to have had a big influence on central banking, and for the better.

Freidman’s most thorough intellectual biography is the magnificent two volume study by Edward Nelson, an Australian economist working at the Federal Reserve in Washington. At over 1300 pages Nelson’s Milton Friedman and Economic Debate in the United States 1932-1972 (University of Chicago Press, 2020) demonstrates in detail the range of Friedman’s professional impact in the long-running disputes between economists broadly aligned with Keynesian views, and those adhering to the Chicago classical tradition.

As Nelson noted in 2011, some of Friedman’s views have been put to unexpected uses. The then Fed chair Ben Bernanke cited Friedman’s criticism of inactivity of the central bank during the Great Depression to justify the large-scale intervention of the Fed in the 2008 financial crisis. But it is also true that the 2008 crisis was caused by a grotesque failure of financial businesses to control risks. Alan Greenspan’s misplaced confidence that financial markets would correctly price the risks of mortgage securitisation, the most expensive error in the history of central banking thus far, had a distinctly Friedmanite or at least Chicago ring.

Perhaps Friedman’s most enduring legacy is his support for the notion that market economies usually work reasonably well. They occasionally crash but by and large the price mechanism, the invisible hand, guides efficient decisions much better than state control of prices, labour and capital. Friedman argued for this view but it was, after all, the fundamental tenet of economic theory as developed in Western Europe and Britain from the eighteenth century onward, and not a view that Friedman either invented or much improved. A brilliant advocate, an important scholar — that should be enough for one very distinguished career in economics, without also being held responsible for the shape of the world in the second half of the twentieth century. •

Milton Friedman: The Last Conservative
By Jennifer Burns | Farrar Straus Giroux | $59.99 | 592 pages

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Ambitious? Yes. Cyrus Vance, president Jimmy Carter’s secretary of state, called it “a daring stroke.” Foolhardy? Many thought so, including members of Carter’s staff.

Failure was a real possibility and would reflect badly on Carter, already struggling with a perception that he lacked authority. Egypt and Israel were sworn enemies who had been fighting wars since the creation of the state of Israel in 1948.

Carter took Menachem Begin and Anwar Sadat to Camp David, the presidential retreat in the Maryland mountains outside Washington, and kept them there for the next thirteen days. A media blackout prevailed until an agreement was reached. Kai Bird, author of The Outlier, a 2021 biography of Carter, described his approach as “sheer relentlessness.”

Sadat and Carter wore down an intransigent Begin until he succumbed, agreeing to a peace treaty with Egypt, including relinquishing control of the Sinai Peninsula, taken from Egypt in the 1967 war, and the dismantling of Israeli settlements there.

The agreement also included the election of a self-governing Palestinian authority in the West Bank within five years, together with (according to Carter’s detailed record) a five-year freeze on Israeli settlements there. Within three months, Israel started on a major expansion of West Bank settlements, with Begin denying the freeze had been part of the official agreement and Carter telling his staff that Begin had lied to him.

The peace treaty with Egypt, the strongest Arab state, stuck, although it cost Sadat his life. He was assassinated in 1981 by members of the Egyptian Islamic Jihad, who condemned him as a traitor for the Camp David accords.

Carter’s hopes for a broader Middle East peace have proved elusive ever since, although he could clearly see the consequences. Near the end of his presidency he wrote in his diary, “I don’t see how they” — the Israeli government — “can continue as an occupying power depriving the Palestinians of basic human rights and I don’t see how they can absorb three million more Arabs in Israel without letting the Jews become a minority in their own country.”

Nevertheless the accords were a notable achievement and unimaginable in the context of the Middle East politics of recent decades. Carter reaped a political dividend but also paid a cost: relations with the enormously powerful pro-Israel lobby in the United States were never the same again. They had not expected an American president to act as an honest broker.

Carter’s single term in the White House is generally rated among the less impressive in the presidential rankings. Yet his presidency has undergone a re-evaluation given his significant achievements in foreign and domestic policy, which look all the more substantial from today’s perspective.

In the tradition of the best political biographies, Bird gained access to volumes of material, including the copious personal diaries Carter kept as president as well as those of important figures in his administration. To learn that senior members were eating sandwiches at an important meeting in the cabinet room may not be vital to our understanding but it does point to a notable attention to detail.

Reading the narrative from the inside confirmed much of what I observed from the outside as a foreign correspondent in Washington during most of the Carter presidency. But it did so in much starker relief.

For example, the tensions between secretary of state Vance, the diplomat, and national security adviser Zbigniew Brzeziński, a cold war warrior, were evident at the time, but not their depth. Bird provides instances of what he called Brzeziński’s “highly manipulative” approach; Vance called him “evil, a liar, dangerous.”

Carter, a peanut farmer from small-town Georgia with a distinctive southern drawl, was an improbable candidate for the White House. He was a practising Baptist for whom, unlike many politicians, his religion was more than a veneer.

In a south where the echoes of the civil war still resonated and segregation continued in practice if not in name, he took a stand against racism. Yet he also was a skilled politician, elected as governor of Georgia despite his reputation as not being a typical white southerner and pragmatic when he thought he needed to be, including by downplaying his anti-racist credentials.

Still, running for president was a huge leap. He wasn’t taken seriously until he won the New Hampshire primary, and even then he was viewed with scepticism by leading members of the east-coast Democratic establishment. “He can’t be president,” said former New York governor Averell Harriman. “I don’t even know him!”

Sceptics dismissed him as self-righteous. His promise to voters that “I’ll never lie to you” prompted his friend and adviser Charles Kirbo to comment, perhaps not completely in jest, “You’re going to lose the liar vote.” But he came across to voters as sincere and authentic. And then, as now, coming from outside Washington was an advantage.

Circumstances played a large part: his Republican opponent was Gerald Ford, the sometimes hapless vice-president who had served the balance of president Richard Nixon’s term following Nixon’s resignation over Watergate. Even then, Carter won only narrowly.

In elite Washington, Carter’s team of knockabout southerners were often dismissed as hicks. But, like Carter, they were not easily deterred.

Carter brought a luminous intelligence, idealism and diligence to the White House that stands in stark contrast to the era of Trump. He argued that the world was not so easily categorised in traditional American black-and-white terms — that there was more to foreign policy than a contest between the United States and the Soviet Union. He preached against the “inordinate fear of communism” that had led to Washington’s embracing of some of the world’s nastiest right-wing dictators. The Vietnam war, he said of this approach, was “the best example of its intellectual and moral poverty.”

Bird writes that Carter rejected “any reflexive notions of American exceptionalism. He preached that there were limits to American power and limits to what we could inflict on the environment.” America didn’t go to war during Carter’s presidency — an exception up to that time and since.

He elevated human rights in foreign policy. It earned him derision from hardheads but it enhanced America’s reputation abroad, its so-called soft power.

Like any politician, though not as often, he compromised and backtracked when he judged that politics required it. Against his better instincts, he approved development of the MX missile, an expensive boondoggle championed by defence hawks, writing in his diary that he was sickened by “the gross waste of money going into nuclear weapons.”

In the wake of the OPEC oil embargo, when he was trying to persuade Congress to pass legislation to restrict energy consumption and provide funding for alternatives such as wind and solar, he diarised that “the influence of the oil and gas industry is unbelievable.” To set an example, he put solar panels on the White House roof and predicted that within two decades 20 per cent of the nation’s energy would be generated by solar power. He hadn’t count on his successor, Ronald Reagan, who removed the solar panels as one of his first acts as president, nor the ideological climate wars that followed.

While those actions were triggered by the energy crisis, he was receptive to the emerging issue of climate change. Just before leaving office, he released a report from his environmental think tank predicting “widespread and pervasive changes in global climatic, economic, social and agricultural patterns” if the world continued to rely on fossil fuels. It was a prescient warning almost half a century ago.

Carter’s domestic reforms included deregulation of sectors of the American economy, including banks and airlines, thereby increasing competition and reducing prices, though also bringing negative consequences. Consumer regulations led to mandatory seatbelts and airbags and fuel efficiency standards — something Australia is finally getting around to introducing almost half a century later. Environmental laws were passed to reduce air and water pollution; highly contested legislation locked up a large part of Alaska as wilderness and national parks, preventing oil and gas exploration.

In foreign policy, the Panama Canal treaties relinquished American control of the canal, returning sovereignty to Panama. Carter completed the normalisation of relations with China started under Nixon and negotiated an arms control agreement with the Soviet Union.

Other reforms proved to be harder sledding. Legislation on health reform that Carter thought could pass Congress was judged inadequate by Democratic liberals such as senator Edward Kennedy, who championed comprehensive national health insurance and used it as a platform to unsuccessfully challenge Carter for the Democratic nomination in 1980. It would take another thirty years for Barack Obama’s administration to enact significant, if still not comprehensive, healthcare reform.

Carter was never completely accepted by the traditional Democrats that people like Kennedy represented. It came down to suspicion about his Southern roots. Too conservative for northern Democrats, he was too much of a liberal for many southern Democrats and Republicans.

By 1979, with Americans waiting in long queues to buy petrol and paying what were then exorbitant prices for the privilege (US$1 a gallon), Carter’s presidency was at risk of sliding into oblivion. Against the almost unanimous advice of his staff, he decided on another Camp David retreat, this time a domestic summit, inviting some of the nation’s leading citizens to come up with ideas for the nation’s future. What was unusual then seems extraordinary now.

Over ten days a parade of “wise men” travelled to Camp David to diagnose the nation’s ailments and remedies. As with the Begin–Sadat summit, the rest of the nation was kept in the dark by a media blackout.

Carter emerged to give an address to the nation like none other. Sounding more preacher than president, he said America faced a fundamental crisis of confidence that no amount of legislation could fix. Americans were losing their faith in the future, worshiping “self-indulgence and consumption.”

Taking the side of the people while lecturing them at the same time, he said he no more liked the behaviour of a paralysed Congress pulled in every direction by special interests. The immediate test was beating the energy crisis, on which he announced a series of initiatives taking in a windfall profits tax on the oil industry to finance the development of domestic sources of energy, including coal and a national solar energy “bank.” (His focus was on cutting dependence on imported oil, rather than climate change.) He announced plans for rebuilding mass transit systems and a national program for Americans to conserve energy.

Contrary to the fears of his hard-headed advisors, the speech was a great success, reflected in surges in Carter’s approval ratings of 11 per cent in one poll and 17 per cent in another. He was able to convey that most precious of political commodities — sincerity.

But these and other achievements were overwhelmed late in his term by the Iranian hostage crisis. Its origins lay in the Islamic revolution and the toppling of the Shah, who the CIA effectively had re-instated as ruler of Iran in 1953 following the previous Iranian government’s nationalisation of the oil industry. Concerned by the risk to Americans in Iran, Carter resisted efforts to allow the Shah to seek refuge in the United States; but he eventually succumbed to pressure from David Rockefeller, Henry Kissinger and other establishment figures to allow him in on the pretext of urgent medical treatment.

Two weeks later, Carter’s worst fears were realised when Iranian students stormed the US embassy in Tehran and took sixty-six hostages. When diplomacy failed, Carter authorised a complex and risky rescue mission involving ninety-five commandos, a C-130 transport plane and six helicopters. A series of mechanical failures and accidents, including a collision between one of the helicopters and the C-130, resulted in the mission being abandoned.

The hostage crisis plagued the remainder of Carter’s term, reinforcing perceptions of him as a weak president. It subsequently became clear that the campaign team for Republican nominee Ronald Reagan worked behind the scenes with Iranian representatives to delay the release of the hostages, promising a better deal if he won the election. Yasser Arafat, leader of the Palestinian Liberation Organisation, had negotiated freedom for thirteen of the hostages the previous year and told Carter years later that he had rejected approaches from Reagan officials offering an arms deal if he could delay the release of those remaining.

The hostages were released on the day after Reagan’s inauguration following his landslide win in the 1980 election. Soon after taking office, the new administration, despite publicly maintaining Carter’s embargo on arms sales to Iran, secretly authorised Israel to sell military equipment to Iran.

The hostage crisis was not the only reason for the relatively rare election loss by a first-term president. Carter’s support was sapped by the 1970s ailment of stagflation — high inflation and stagnant economic growth — together with the energy crisis. Reagan, the former Hollywood actor, had an appealing personality and a now-familiar slogan: “Make America great again.”

James Fallows, speechwriter for the first two years of the administration, says that Carter invented the role of former president. He certainly had an active four decades of public life following the presidency, with the 110-strong staff of the Carter Centre in Atlanta working on human rights, preventive health care, election monitoring and international conflict resolution.

Carter raised millions of dollars for a program that virtually eradicated guinea worm, a parasitic disease that had disabled and disfigured 3.5 million people a year in Africa and India. His centre helped distribute twenty-nine million tablets in Africa and Latin America for the treatment of river blindness, another disease caused by a parasitic worm. “Americans got used to seeing this ex-president, dressed in blue jeans with a carpenter’s belt, hammering nails into two-by-fours for a house under construction by a team of volunteers for Habitat for Humanity,” Bird writes.

In the 1980s, he spoke out about the concerns he had developed about the Middle East when he was president but he had judged were too dangerous to express publicly. “Israel is the problem towards peace,” he said, citing particularly the expansion of settlements on the West Bank. Accused of bias, he responded that “a lot of the accusations about bias are deliberately designed to prevent further criticism of Israel’s policies. And I don’t choose to be intimidated.” In 2006, he published his twenty-first book with the provocative title, particularly then, of Palestine: Peace Not Apartheid, earning him epithets such as “liar,” “bigot” and “anti-Semite.”

By then Carter had been awarded the 2002 Nobel Peace Prize for “decades of untiring effort to find peaceful solutions to international conflicts, to advance democracy and human rights and to promote economic and social development.”

After he was diagnosed with cancer in 2015 he said, “I’d like for the last guinea worm to die before I do.” Nine years later, aged ninety-nine and in palliative care, he is still going, if not strongly — a metaphor for a lifetime of indefatigability. •

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The modern era has seen many kinds of traditional authority come under challenge, but until now the “right of managers to manage” has remained largely immune. If anything, the managers’ power has increased as the countervailing power of unions has declined. But the rise of working from home and, more recently, Labor’s right to disconnect legislation pose unprecedented threats to the power of managers over information workers — those employees formerly known as “office workers.”

To see how this might play out, it’s worth considering the decline of another once-powerful authority, the Catholic Church. In the early 1960s, following the development of reliable oral contraception, the leaders of the church had to decide whether to accept the Pill as a permissible way for married couples to plan their families. Pope John XXIII established a pontifical commission on birth control to reconsider Catholic doctrine on this topic.

It was a crucial decision precisely because marriage and sex were the most important areas in which the authority of the Church remained supreme and precise rules could be laid down — and generally enforced — among the faithful.

Most people, after all, have no trouble observing the commandments against murder, and other sins like anger, pride and sloth are very much in the eye of the beholder. But the rules regulating who can marry whom and what kind of sexual behaviour is permissible are precise and demanding, to the point that the term “morals” is commonly taken to imply sexual morals. The official celibacy of priests, who thereby showed even more restraint than was demanded of ordinary Catholics, added to the mystique of clerical power.

By the time the commission reported in 1966 John XXIII had been replaced by Pope Paul VI. The commission concluded that artificial birth control was not intrinsically evil and that Catholic couples should be allowed to decide for themselves about the methods they employed. But five of the commission’s sixty-nine members took the opposite view in a minority report.

In the encyclical Humanae Vitae, Pope Paul VI made his fateful rejection of all forms of artificial contraception. As an attempt to exercise and shore up authority it failed completely. The realities of raising large families and dealing with unplanned pregnancies were far removed from the experience of priests and theologians. And the church’s evident demographic motive (the desire for big Catholic families to fill the pews) further undermined the legitimacy of the prohibition.

Previously loyal Catholics ignored Pope Paul’s ruling, in many cases marking their first step away from the Church. Doctrines restricting marriage between Catholics and non-Catholics, including the requirement that children be raised as Catholics, also became little more than formalities commanding at most notional obedience.

The breakdown of clerical authority set the scene for the exposure of clerical child abuse from the 1990s on. Although accusations of this kind had been around for many years, the authority of the church had ensured that critics were silenced or disbelieved.

It is hard to know for sure what would have happened if Pope Paul had chosen differently. The membership and social standing of Protestant denominations, nearly all which accepted contraception, have also declined, though not as much as a Catholic Church that pinned its authority on personal morality. Humanae Vitae’s attempt to exercise papal authority succeeded only in exposing its illusory nature.

In the struggle over working from home and the “freedom to disconnect” we’re seeing something similar happen to the authority of managers.

Following the arrival of Covid-19 in early 2020, working from home went from being a rare indulgence to a general necessity, at least for those whose work could be done with a telephone and a computer. Hardly any time was available for preparation: in mid March, Scott Morrison and Anthony Albanese were still planning to attend football matches; a week later, Australia was in lockdown.

Offices and schools closed. Workers had to convert their kitchen tables or (if they were lucky) spare bedrooms into workstations using whatever equipment they had available. And, to make things even tougher, parents had to take responsibility for the remote education of their children.

Despite the already extensive evidence of the benefits of remote work, many managers expected chaos and a massive reduction in productivity. But information-based work of all kinds carried on without any obvious interruption. Insurance policies were renewed, bills were issued and paid, newspapers and magazines continued to be published. Meetings, that scourge of modern working life, continued to take place, though now over Zoom.

Once the lockdown phase of the pandemic was over, workers were in no hurry to return to the office. The benefits of shorter commuting times and the flexibility to handle family responsibilities were obvious, while adverse impacts on productivity, if any, were hard to discern.

Sceptics argued that working from home, though fine for current employees, would pose major difficulties for the “onboarding” of new staff. Four years into the new era, though, around half of all workers are in jobs they started after the pandemic began. Far from lamenting the lack of office camaraderie and mentorship, these new hires are among the most resistant to the removal of a working condition they have taken for granted since the start.

Nevertheless, chief executives have issued an almost daily drumbeat of demands for a return to five-day office attendance and threatened dire consequences for those who don’t comply. Although these threats sometimes appear to have an effect, workers generally stop complying. As long as they are still doing their jobs, their immediate managers have little incentive to discipline them, especially as the most capable workers are often the most resistant to close supervision. Three days of office attendance a week has become the new normal for large parts of the workforce, and attempts to change this reality are proving largely fruitless.

The upshot is that attendance rates have barely changed after more than two years of back-to-the-office announcements. The Kastle Systems Back to Work Barometer, a weekly measure of US office attendance as a percentage of February 2020 levels, largely kept within the narrow range of 46 to 50 per cent over the course of 2023.

This fact is finally sinking in. Sandwiched between two pieces about back-to-the-office pushes by diehard employers, the Australian Financial Review recently ran up the white flag with a piece headlined “Return to Office Stalls as Companies Give Up on Five Days a Week.”

This trend, significant in itself, also marks a change in power relations between managers and workers. Behind all the talk about “water cooler conversations” and “synergies,” the real reason for demanding the physical presence of workers is that it makes it easier for managers to exercise authority. The failure of “back to the office” prefigures a major realignment of power relationships at work.

Conversely, the success of working from home in the face of dire predictions undermines one of the key foundations of the “right to manage,” namely the assumption that managers have a better understanding of the organisations they head than do the people who work in them. Despite a vast literature on leadership, the capacity of managers to lead their workers in their preferred direction has proved very limited.

The other side of the remote work debate is the right to disconnect. The same managers who insisted that workers should be physically present at the office in standard working hours (and sometimes longer) also came to expect responses to phone calls and emails at any time of the day or night. The supposed need for an urgent response typically reflected sloppiness on the part of managers incapable of organising their own work schedules to take account of the need for work–life balance.

Once again, managers have attempted to draw a line in the sand. Opposition leader Peter Dutton has backed them, promising to repeal the right to disconnect if the Coalition wins the next election. It’s a striking illustration of the importance of power to the managerial class that Dutton has chosen to fight on this issue while capitulating to the government’s broken promise on the Stage 3 tax cuts, which would have delivered big financial benefits to his strongest supporters.

Can this trend be reversed? The not-so-secret hope is that high unemployment will turn the tables. As Tim Gurner (of “avocado toast” fame) put it, “We need pain in the economy… and employees need to reminded of who is boss.” US tech firms have put that view to the test with large-scale sackings, many focused on remote workers. But the other side of remote work is mobility. Many of those fired in the recent tech layoffs have found new jobs, often also remote.

In the absence of a really deep recession, firms that demand and enforce full-time attendance will find themselves with a limited pool of disgruntled workers dominated by those with limited outside options.

Popular stories — from King Canute’s attempt to turn back the tide (apparently to make fools of obsequious courtiers who suggested he could do it) to Hans Christian Anderson’s naked emperor — have made the point that the best way to dissipate authority is to fail in its exercise. Pope Paul ignored that lesson and the Catholic Church paid the price. Now, it seems, managers are doing the same. •

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As it happens, I don’t think we did ever find a story the Rudd government could tell the Australian people. Nor do I recall hearing anything further about this grand mission afterwards. A year or so later, of course, Rudd was gone and, at the 2010 election, so — almost — was the government itself. Julia Gillard, who led Labor to minority government, called Rudd’s “a good government… losing its way.”

It has recently been hard not to wonder: is Albanese’s going the same way?

In many respects, the comparison is unfair. This Labor government has plainly learnt a great deal from the last and has gone out of its way not to repeat its errors. Many of its ministers were there, in more junior roles, last time. Albanese himself, as a rising figure during that era and leader of the House for almost the entire period before ending up as deputy prime minister, sometimes seemed traumatised by the infighting that more than anything wrecked Labor in government.

The differences matter. Rudd wanted to win the media every day. Albanese often seems more like Malcolm Fraser in his aspiration to keep politics off the front page. Rudd talked a big game in opposition about keeping government accountable but then failed to follow through by calling inquiries into the grand failures and scandals of the Howard era such as the Iraq war and the Australian Wheat Board affair. Albanese’s government, by contrast, has called one inquiry after another, most of them exposing the sheer badness of the Coalition on issues ranging from immigration policy through to robodebt.

Barely six months into the life of his government, Kevin Rudd was being called Captain Chaos by the Australian’s John Lyons. Albanese has gone out of his way to emphasise the careful, orderly and process-driven nature of his government. Albanese probably intends such remarks as a rebuke of Scott Morrison, but they often sound equally applicable to Rudd.

The Albanese government has a right to consider itself a good government, even allowing for the fairly low standards we have so often seen this century in Canberra. It has fulfilled many election promises. It has grappled effectively with key areas of Coalition failure and neglect, including stagnant wages and a shambolic immigration policy. It has responded to the general challenge of rising inflation and the particular one of spiralling energy costs. It has conducted that bewildering range of inquiries — not, seemingly, just to kick a can down the road but with the apparent aim of consulting widely and doing good policy — which gives substance to its commitment to evidence and process.

If good government receives its due reward, you might imagine that this is a government coasting to a comfortable election victory next time round. It is remarkable to consider that Labor won a resounding victory in the Aston by-election as recently as 1 April 2023; at the time, it seemed unassailable.

But politics is rarely so simple, and it tends not to be terribly fair either. Recent opinion polling has been discouraging for the government: Newspoll had the two-party-preferred vote at 50–50 in November, and then Labor at 52 to the Coalition’s 48 just before Christmas. That’s not disastrous — the middle of a term often looks grim for incumbents — but it would have given Labor Party strategists plenty to worry over.

Three issues have figured in the commentary. Almost everyone gives significant weight to the cost of living, which is hitting lower- and middle-income families hard. Pollsters and pundits argue that Labor’s support in the outer suburbs is fragile and it needs to do more to show it is on the side of struggling families. Peter Dutton and the Liberals, meanwhile, see these same voters as their only serious pathway back to government. November’s Victorian state election gave signs that Labor’s vote on Melbourne’s suburban frontiers might be a little more fragile than many assumed at the 2022 federal election. The forthcoming Dunkley by-election will test some of the claims made in recent months.

The second issue was the defeat of the Indigenous Voice to Parliament. Labor championed this cause: it became part of the government’s brand from the moment of Albanese’s victory speech on the evening of 21 May 2022. When, therefore, it went down, it was inevitable that the government’s reputation should go down with it. Governments have not historically been thrown out of office on the back of such a defeat, but failure at a referendum can wrong-foot a government struggling under other pressures — as the defeat of its attempt to ban the Communist Party in 1951 did to a Menzies government grappling with 20 per cent inflation.

Third, there is the Gaza war. The horrors that have occurred in Israeli border communities, in the West Bank and East Jerusalem, and in Gaza will move anyone with a sense of humanity, but the political reality is that they have tended to move different groups of people in rather different ways. Labor’s problem here is that for large parts of the left, the Palestine issue is the defining cause of the age; for them, it divides pretend progressives from real ones.

There are parallels here with the Spanish civil war of 1936–39, which was also a divisive issue for a Labor Party that contained secular leftists and others who supported the Republican government, and Catholic right-wingers who leaned towards Franco and the Nationalist rebels. It was a part of John Curtin’s achievement as federal Labor leader that he was able to steer a course through these turbulent waters, largely by committing his party — then in opposition — to isolationism.

That kind of approach isn’t available to Anthony Albanese and Penny Wong. But they still must steer a course that takes into account Australia’s alliance commitments, its support for the so-called rules-based order and international law, the pressures of the domestic political scene and challenges of electoral politics, and its attachments to basic decency, humanitarianism and justice. The government’s hostility to Hamas is taken for granted everywhere except among the unhinged populist right, whose extremism nonetheless now often finds a platform in parts of the commercial media.

But we can be equally certain that it gives Australia’s Labor government no great pleasure to be seen as too close to the present government of Israel, a regime that is for very sound reasons deeply unpopular in Israel itself as well as among many Australian Jews. There is little doubt that in negotiating these pressures, which it has actually done with fair success, the government has nonetheless at times sounded windy and looked wobbly.

By Christmas, I would not have been alone in wondering if this government was going the way of Rudd’s and Gillard’s amid these pressures. A great part of the difficulty has seemed to me the particular combination of policy wonkery and electoral opportunism that has come to hold too much sway in the Labor Party this century. We all like good, evidence-based policy, and we all like electoral professionalism. Successful political parties need both to get anywhere.

But politics is also an aspect of culture. Otherwise highly intelligent Labor politicians can sometimes appear very naive about such matters. The Rudd and Gillard governments are a case in point: who in the Gillard government, for instance, came up with the idea of appointing a former Liberal Party leader, Brendan Nelson, as director of one of the country’s leading public institutions, the Australian War Memorial — in the lead-up to the centenary of the first world war, of all times? And under this government, which seems to support a new direction for the memorial on the issue of representing frontier warfare, it reappointed to the council a former Liberal prime minister, Tony Abbott. Such statesmanship!

These matters might seem trivial beside the problem of ensuring that millions of Australians can pay for their next power bill. But the political right has fewer illusions — Coalition governments stack boards as if their very existence depended on it. Labor shouldn’t follow that lead, but it should pay much closer attention than it does to the points of intersection between civil society, cultural authority and state power.

The Italian Marxist Antonio Gramsci developed the concept of hegemony to explain how power and culture work in capitalist societies. The “common sense” of the ruling class — coinciding with its interests — comes to be seen as that of society as a whole — the “national interest,” to use some contemporary parlance. Conservatives apply Gramsci’s ideas faithfully in their relentless efforts to dominate culture. Their success in the recent Voice referendum was testament to such efforts. Labor governments imagine that so long as they can get that cost-of-living relief through the parliament next week, winners are grinners. That notion rests on a remarkably shallow understanding of how power operates in a society of any serious complexity.

This is why January has been a good month for the Albanese government. Two things happened almost at the very same time, one in “the economy,” the other in “the culture.” In the economy, it recast the stage three tax cuts to ensure that there was a redistribution of benefits towards low- and middle-income earners. Alan Kohler, so often a devastatingly astute commentator on such matters, was right to point out that this was somewhat of an argument over loose change: the tax system as a whole continues to favour those who are best-off. Yet it was something. Albanese, in a National Press Club speech and elsewhere, has framed the shift as a response to changed circumstances, and especially the cost-of-living crisis. A bolder leader would also have said that social democratic governments support progressive income tax and oppose massive hand-outs to those who already have enough.

At the same time as the upholders of national political integrity were launching philosophical disquisitions about Albanese’s “backflips,” “lies” and “betrayals” — often the same journalists and politicians who met far worse from Scott Morrison with vigorous shrugging or lavish praise — Labor was also attending to the culture. The appointment of Kim Williams as new chair of the ABC suggested a government that has an interest in ensuring that one of the country’s most influential public institutions is led by someone who has not only impeccable professional credentials but also sufficient commitment to public culture, the arts and the goals of excellence, independence and balance to align with values supposedly supported by the government itself.

The government can’t expect an easy run over the second half of its term. Media hostility has been increasingly uncompromising and will be relentless on the issue of tax cuts. The cost-of-living crisis, moreover, doesn’t lend itself to easy solutions.

On broader issues of policy, Labor’s Achilles heel seems to me to be housing. It has acted, but it has not done enough, and the Greens have made this one their own. It is ideally calculated to appeal to anyone under forty, and others too. The Coalition will also continue to pretend it has the solution, which involves allowing people with virtually no superannuation savings to use the little they have for a home deposit. The real estate industry will be delighted.

Labor would be well advised to craft a radical solution to housing in the spirit of the 1945 Commonwealth–State Housing Agreement — one that involves not only bold solutions to private provision but also a renewed emphasis on social housing. Even more than the “backflip” on taxes, a bold, evidence-based, well-costed housing policy could set Labor up for an extended period in office and a genuine opportunity to reinvigorate social democracy in this country. •

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Many politicians and public servants have described to me his rare magic in combining academic rigour with clear communication and a talent for finding a cut‑through line. His retirement this year is a good excuse, if one were needed, to talk about tax reform, the subject of his major academic and policy contributions. Indeed, his research and writing read like a tax reform to‑do list.

Pick up the Financial Review on any given day and you’ll find opinion pieces grounded in John’s decades-long efforts to unpick the efficiency and equity impacts of different tax reform options. He has also made the case for these reforms directly to government as a consultant to the Henry tax review, on the review panel of the NSW Federal Financial Relations Review and in other forums.

And while he has done the hard work of tilling the ground, and has no doubt been pleased with some of the progress made on tax reform, much of the broad agenda he has articulated remains on the shelf.

The question is: why? Why, after so many decades of discussion and so many points of broad economic consensus, does tax reform remain so challenging? Is progress possible or is tax reform simply an impossible dream?

To answer this question, we need to first understand why someone with John’s rare talents decided to use them to make the case for tax reform. The bottom line is that tax matters. It matters to all of us: how much we collect and how it’s collected have implications for economic activity, governments’ capacity to deliver services, and levels of inequality.

One challenge we face when we talk about tax reform is that different people start with very different objectives. So let’s unpack some of those.

The first is economic efficiency. Economists rightly focus on the fact that how we collect tax — that is, what we tax and how much — affects the “economic drag” created by the tax system. Almost all taxes come with some loss of welfare, but some drag on growth more than others.

In a static sense, this can be measured by the “marginal excess burden” — how much economic activity is lost for every dollar collected. As Treasury and others have reminded us, this varies significantly between taxes.

But while there can be big differences in the estimates different modellers come up with, they broadly agree that a tax-mix switch from higher-burden to lower-burden taxes would deliver an economic dividend.

The most clear-cut example is a move from stamp duties to taxes on land. Stamp duties are among the most inefficient of taxes. Treasury estimates suggest that every dollar collected can reduce economic activity by up to 72 cents. Stamp duties discourage people from moving to housing that better suits their needs, and sometimes discourage people from moving to better jobs. Overall, they distort choices and gum up the economy.

Another reason we might advocate for tax reform is to make government budgets sustainable and future‑proof our tax system. At a time when the treasurer has just delivered the first budget surplus in fifteen years and we are seeing apparently endless revenue “upgrades,” it may seem strange to be having this conversation right now.

But government spending overall is projected to average 26.4 per cent of GDP over this period — compared with less than 25 per cent over the three decades before Covid — and revenues have not kept up. The federal government’s latest Intergenerational Report reminds us that the ageing population and the fallout from climate change will only see this fiscal challenge grow over the next forty years. The same is true of state budgets.

The implications of not taking policy action are clear: we are asking future generations to bear the costs of today’s inaction.

Governments have three levers they can pull to tackle long-term budget challenges: they can make economic reforms to “grow the pie,” they can increase taxes and they can reduce spending.

Pursuing policies to boost growth is critical. Much of Grattan Institute’s work has focused on this first lever. And I look forward to pursuing this in a big way when I join the Productivity Commission in a couple of weeks’ time. But, as Grattan highlighted in our Back in Black? report earlier this year, we can’t rely on higher growth alone to close the budget gap.

Given the scale of the challenge, governments will also need to find ways to reduce spending and/or boost revenue. After a decade of looking at this challenge I have come to the view that we will need to do both. The scale of the challenge, and the greater buy‑in that can come when the costs are spread across the population are arguments for looking to both sides of the budget for answers.

If we do accept that some additional revenue is needed to respond to the structural challenge outlined, then we want to make sure that additional revenues are collected with the lowest possible economic costs. In fact, this can also help us grow the pie: more efficient, less distorting taxes are one of the Productivity Commission’s “enduring policy priorit[ies]” for productivity growth.

On the other hand, if we do nothing, we may end up on the path of least resistance: collecting ever-more revenue through ever‑creeping taxes on wage and salary earners. Bracket creep may be the most politically painless way to raise revenues, but it is far from the best.

Tax reform for budget sustainability should aim to broaden the base of income taxes — looking at loopholes and overly generous concessions as well as orientating our collections towards more efficient bases such as consumption, wealth, externalities or resource rents. In other words, we need to revisit the John Freebairn back catalogue.

The atrophying of tax reform in recent decades might make us pine for a golden era. In truth, though, tax reform has never been easy. So let’s take a short history lesson — five decades of tax reform in five minutes — and see what we can learn.

Let’s start in 1975. Many elements of our tax system today can be traced back to the 1975 Asprey tax review. This comprehensive, independent review was commissioned by the McMahon government in response to concerns about bracket creep and tax evasion. (Sound familiar?)

The review outlined the basic principles of efficiency, fairness and simplicity that remain our lodestars and made the case for many aspects of the system we have today, including fringe benefits tax, capital gains tax and a broad-based consumption tax.

But the report initially had little impact. Landing in the final, tumultuous year of the Whitlam government, it was written off in the media as a “tax flop,” and its main recommendations not adopted.

It took another decade for momentum to build. In 1985, fresh off the Prices and Incomes Accord and the floating of the dollar, prime minister Bob Hawke and treasurer Paul Keating turned their attention to tax reform. They released a draft white paper on reform options and hosted a tax summit with unions, business and community groups.

These processes resulted in the adoption of some of Asprey’s recommendations, including a capital gains tax, negative gearing reform, fringe benefits tax, dividend imputation and taxation of foreign source income.

But it was a case of “two steps forward, one step back.” A broad-based consumption tax was central to Keating’s original vision but failed to win support and was dropped. And the pioneering negative gearing reforms were repealed two years later.

So the Asprey blueprint was partly implemented. Another long reform slumber followed. The next big push was John Hewson’s Fightback! platform for the 1993 election, which proposed, among other things, a broad-based consumption tax. Fightback! proved to be a false start — Hewson lost the “unlosable” election — but consumption taxes were back on the agenda.

Another six years had to pass for the reform dream to become reality. Prime minister John Howard took a proposal called A New Tax System, which included the GST, income tax cuts and the abolition of a host of inefficient state taxes, to the 1998 election. He narrowly won and the legislation ultimately passed in 1999, twenty-four years after the release of the Asprey report.

We’ve seen precious little in the way of significant, lasting tax reform since then. The landmark Henry review is close to celebrating its fourteenth birthday with most of its meaty recommendations untouched. State and territory tax reform has also, mostly, been a non-starter, despite a succession of reviews converging on similar recommendations.

So what should we take from this history? What can we learn from those rare moments when we managed to overcome the many barriers I outlined before? I see four key steps for would-be reformers.

Step 1: Put reform on the agenda

History shows that an external push is often needed to put tax reform on the agenda. In 1985, fears about Australia’s economic decline and resentment about tax avoidance pushed the discussion forward. In 1997, the High Court’s decision to strike down a key state tax left a significant hole in the states’ budgets and opened the reform window for the GST.

The optimist in me can’t help but draw parallels with last month’s High Court decision to strike down Victoria’s electric vehicle levy. Perhaps we might have another golden opportunity for a grand intergovernmental tax reform bargain on our hands?

Tax reform was hardly on the radar for the Howard government until civil society groups — representing both social services and business — started championing the cause. The Australian Council of Social Service and the Australian Chamber of Commerce and Industry, in particular, pushed in a coordinated way, culminating in the National Tax Reform Summit in 1996. The strong and united messaging put the GST and tax reform firmly back on the political agenda.

Today many groups feel similarly. Federal independent MP Allegra Spender has been spearheading a push to unite academic, business and civil society leaders to build some consensus on the need for tax reform and the way forward.

Step 2: Build a coherent package

While rewriting thousands of pages of the tax code at once would be a recipe for chaos, relying on incremental changes is probably not going to get the job done either.

History shows that reform packages can work well. In 1985, reforms that broadened the income tax base were bundled with income tax rate cuts and tax avoidance measures — a coherent story to sell to the public. In 1999, removing narrow and inefficient, but lucrative, state taxes and widely variable wholesale sales taxes made sense in the context of the broader GST deal shoring up state budgets.

Packages provide the opportunity to dull the sting of reform by sharing the costs more broadly and perhaps offering some compensation to the losers.

The major tax reforms of the past two decades have come at an upfront cost. The GST package overcompensated households by about $12 billion a year, through personal income tax changes and increases to pensions and family payments. This was a key part of its sales pitch. Former Treasury secretary Ken Henry recalled that:

the distributional tables outlining the impact of the GST were the most “thumbed” part of the documentation, certainly by those Treasury officers answering phone queries. Of course, it helped that every individual and family represented across all income levels appeared better off.

Compensation packages are particularly important where there are equity implications for lower-income households. Australians tend to reject reforms that seem unfair. But, crucially, potentially regressive reforms, such as broadening the base of the GST, can form part of larger, fairer reform packages. For example, the carbon tax package involved substantial assistance for households, particularly lower-income households, to address concerns that poorer households would be particularly affected by higher energy and food prices.

Given the long‑term budget challenges, high‑cost packages of the type needed to ensure there are “no losers” from tax changes are difficult to justify. But it is certainly possible to design packages with much lower upfront costs that still compensate vulnerable households. For example, Grattan’s previous work on the GST proposed a revenue-positive package, with a 15 per cent GST, cuts to income taxes, and an increase in welfare payments, that would leave the lowest 40 per cent of income earners better off on average.

Packages might also help address some of the other political economy challenges of reform. Ironically, opening up more fronts in the tax debate may quiet some of the more over-the-top reactions. As Ken Henry has argued, “if you give a lot of well-armed people only one target to shoot, it will take a pounding. Incrementalism sets up a single target on a battlefield occupied by well-resourced attack forces.”

And while my goal here is not to opine on the “what” of tax reform, let me give a sense of some of the types of packages that a government could put forward.

• On income tax reform, we could return to the logic of 1985: broadening the income tax base by winding back loopholes and overly generous concessions, to support a cut in rates. This could include targeting discretionary trusts and super tax concessions, or reforming capital gains tax — either by reducing the capital gains tax discount or returning to the indexation of gains.

• Another package could tackle the inconsistent tax treatment of different savings options, to reduce the distortion in savers’ choices and simplify the system. This would mean lower taxes on interest from bank accounts and bonds, and somewhat higher taxes on other savings vehicles such as superannuation (which is very lightly taxed even after accounting for the long holding periods). An even “bigger bang ” version would be a dual income tax where income from savings is taxed at a consistent low rate, regardless of source.

• On the corporate tax front, we could better tax resource rents to fund a company tax cut. We could also consider more wholesale reforms such as an allowance for corporate equity or a cash flow tax.

• For states, inefficient stamp duties could be swapped for land taxes over time, along the lines of the ACT government’s gradual phase-in or Victoria’s switch for commercial and industrial property.

• In transport, distance-based congestion charges that vary by location and time of day would be a more efficient replacement for the declining fuel tax base.

• Finally, to aid the climate transition, the government could substantially expand and strengthen the safeguard mechanism, while eliminating many higher-cost interventions to reduce emissions, such as the fringe benefits tax exemption for electric vehicles. The package would deliver both faster and lower-cost emissions reduction.

But while packages make a lot of sense, would‑be tax reformers can’t be too purist. Incremental changes in the right direction are still an improvement on the status quo, and in some cases these more incremental steps can ultimately take us towards more comprehensive packages.

Step 3: Embrace the “vomit principle”

The next step is making a compelling case for change. Complicated reforms that can’t be explained are unlikely to win support, and are more vulnerable to scare campaigns. We saw this in 2019 with the confusion about franking credits — irredeemably branded a “retirement tax” — and in 1993, when John Hewson’s tortured explanation of the effect of a GST on the price of a birthday cake helped turn the tide of popular opinion against the new tax.

Convincing the public of both the necessity of change and the proposed solution takes time and political capital. Howard and Costello spent two years and a lot of political energy highlighting the structural problems with Australia’s tax base prior to releasing their reform package in 1998.

While no one likes to pay extra tax for the fun of it, many are more inclined to agree when higher taxes are linked to better services. The proportion of Australians favouring “less tax ” has declined since the late 1980s, according to the Australian Election Study, and the proportion preferring “more spending on social services” has risen. At the time of the 2022 election, 39 per cent indicated they would prefer less tax, 31 per cent more social spending and the remainder said “it depends” — presumably on the nature of both the tax and the spending increases.

My reading is that when our political leaders do the work of tilling the ground and explaining changes and why they are needed, then hearts and minds can shift.

A more recent example, albeit one contrary to received wisdom, was the then‑Labor opposition’s 2016 policy to wind back negative gearing and reduce the capital gains tax discount. We have already discussed some of the public challenges that reform faced, but it is also worth remembering that negative gearing had formerly been viewed as a “political untouchable.”

Indeed, since the Hawke government lost its nerve and reversed its decision to wind back negative gearing in 1987, it has been considered the “sacred cow” of Australian politics. When Labor announced it would introduce these changes to improve housing affordability and contribute to the budget bottom line in 2016, just over a third of Australians supported removing or limiting negative gearing.

But, over time, as shadow treasurer Chris Bowen and others made the case, support gradually increased. Support for limits on negative gearing climbed almost 10 percentage points, from 34 per cent in March 2016 to 43 per cent in December 2018. By the time of the 2019 election, the Australian Election Study estimated that 57 per cent of Australians supported limiting negative gearing.

To me this is a textbook example of what some political strategists call the “vomit principle ” — repeat something until you feel like you are going to vomit. Only then are you cutting through.

Labor has since dropped the policy, of course, and many reading the media commentary would have gained the impression that the tax reform agenda was deeply unpopular and “to blame” for Labor’s surprise election loss in 2019. The reality was far more complex.

In any case, it’s not just down to politicians to argue for reform. Successful tax reforms need a diverse cheer squad. Historically, academics, premiers, public policy institutions, and community groups have all been important advocates for tax reform. Providing incentives for academics and non-profit organisations to participate in public debate would be a useful step to building these coalitions today.

Step 4: Make it stick

Somewhat dispiritingly, even after these hurdles have been overcome and tax reform has been passed, the job isn’t done. Tax issues tend to linger on the agenda, often for entire parliamentary terms, and reforms sometimes don’t stick. As we’ve just seen, negative gearing reforms were undone after just two years in 1987. The carbon tax and mining tax were repealed. The Perrottet government’s hesitant steps towards stamp duty reform were wound back by the new NSW Labor government.

But in other cases the controversy does die down after reform is enacted. Sometimes social norms change quickly — for example, in Stockholm, congestion charging was much more popular after it had been implemented than before, and many people did not even remember that they once opposed the idea.

In Australia, plenty of tax changes that were controversial at the time — the GST, fringe benefits tax, capital gains tax — are now so entrenched that there is no constituency or any visible public appetite for their removal.

Reforms are more likely to stick if they create positive feedback loops — for example, if they result in institutional shifts, if reform winners can be used as advocates, or if businesses make big investments under the new regime. Taking the GST as an example, the Australian Taxation Office and businesses made significant investments in the infrastructure for administering the new scheme; and the changes to federal financial relations created a key constituency — state governments — who had a strong interest in its continuation.

What are the prospects for tax reform? I, for one, remain optimistic.

First and foremost, I don’t think we have much choice. The slow‑burning platform is still on fire, and over the coming decade the gap between our spending needs and our tax system’s capacity to meet them without ever higher taxes on employment income will be stretched to breaking point.

More and more questions are being raised about the sustainability and intergenerational fairness of our current tax mix. Without action, expect them to get louder and louder over the coming decade. Tax must also come into the conversation if we are going to deliver our policy objectives in other areas, including the green transition.

Second, I am confident that our leaders can make a positive case. While I have focused on the challenges, I am also heartened by the leadership we are seeing on difficult reforms in other areas.

Over the past three months the Commonwealth and state governments have made strong commitments to boost the supply of housing through politically challenging reforms to planning laws. If they can pull it off, this would be a huge economic and social reform, and one that has been in the too-hard basket for many decades.

As a reform proposition, making the case for greater housing density is probably of the same order of difficulty as making the case for major tax changes, and yet we are seeing both levels of government go after it in a big way.

Third, I think there is appetite across a broad swathe of interested parties to shift the dial. Allegra Spender’s tax reform round tables suggest at least a consensus among business, academia and civil society that something needs to change, even if there is not yet broad agreement on the reform priorities. A process to harness this agreement, ideally led and shaped by government, could help move the conversation forward.

Finally, I have confidence in the Australian people to see through the noise. Scare campaigns and a shouty media are one thing, but if state and federal governments can hold their nerve in the rule in/rule out game long enough to make a positive case for change, and keep making it, history shows that people can be brought along.

Tax reform is hard, but it’s not impossible. It’s time we woke up from our slumber and became a little less afraid and a little more Freebairn. •

This is an edited version of this year’s Freebairn Lecture, delivered at the University of Melbourne last week. The full lecture, with charts and footnotes, is here.

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But it also confirms one of the most important lessons of the economics Nobel’s past quarter-century: that economics can shed light on all sorts of real-world issues — from whether you should worry about the quality of a used car to the price a woman pays for taking over childcare while her husband builds his career.

These are not the sort of things for which most people think the Nobel Prize in economics is awarded. Indeed, the economics Nobel is the outsider of the Nobel group, and arguably the most misunderstood. Goldin’s win should help shift views about this latecomer among Nobels.

Back in 1898 Alfred Nobel’s will established prizes for the people “who have during the previous year rendered the greatest service to mankind” in each of six fields. The dynamite magnate’s chosen fields were physics, chemistry, physiology/medicine, literature and the pursuit of peace. Economics was not on the list.

The science Nobel quickly gained an unsurpassed reputation. The literature prize, if sometimes quirky, nevertheless acts as national canonisation for whomever receives it; it made Patrick White famous to millions of Australians who never came close to reading him. And the peace prize frequently generates political controversy: comic songwriter Tom Lehrer said of Henry Kissinger’s 1973 peace prize that it made satire obsolete.

The economics prize came seven decades after its sibings, pressed on the Nobel committee in 1968 by the Swedish central bank. It occupies the Nobels’ uncomfortable middle ground, aspiring to the hard-edged epistemological standards of physics but enduring accusations that it is as political as the peace prize.

Economics in 2023 is in a particularly tough corner. According to surveys such as a 2019 YouGov poll of British voters, it is markedly less popular than the physical sciences. And anti-economics views, once confined to the fringe, seem to be spreading into the mainstream.

On the left, economists are widely resented for their tendency to suggest governments should spend money more cautiously on everything from welfare payments to underground rail lines. On the right, once less sceptical of economics, the very idea that pointy-headed economic experts might have something to contribute is now often derided: that 2019 YouGov poll of UK voters found Brexiteers less than half as willing to trust economists than Remain voters were.

It shouldn’t really come as a surprise that economics is less popular than, say, chemistry. As the economist Thomas Karier wrote in his 2010 book Intellectual Capital: Forty Years of the Nobel Prize in Economics, “human behaviour is notoriously fickle and difficult to summarise with a few fundamental equations.” Another economist, Russ Roberts, hit a similar note in an online essay: “there are too many factors we don’t have data on, too many connections between the variables we don’t understand and can’t model or identify.”

The result: interpretation and the investigator’s biases play roles in the social sciences that they don’t play in the physical sciences.

On top of this, as economists from Roberts to John Quiggin have noted, economics is a discipline in which peculiarly few questions receive definitive answers. When Edwin Hubble and Fred Hoyle proffered different ideas about how the universe is evolving, they had to wait just a few years to figure out who was clearly right. (As it happened, though, astronomers didn’t become eligible for the physics prize until after Hubble’s death.) Economists almost never resolve disputes that way.

When a controversial figure receives the economics Nobel, their political allies often leap clumsily to claim vindication. When Milton Friedman won in 1976, the political right rushed to laud his free-market worldview, though his Nobel-cited monetary-theory work suggested the United States left interest rates too high during the Great Depression. When the equally widely admired David Card won in 2021 for work on minimum wages, left-wing commentators crowed that he had shown governments should raise minimum wages to reduce poverty, a view Card specifically disowned.

A frequent Nobel committee response to this problem usefully highlights the difficulty of reaching categorical conclusions on economic issues. The 1974 economics prize, for instance, went jointly to two men who had previously shared little more than a common continent: Friedrich Hayek, an Austrian economist who championed the importance of market signals, and Gunnar Myrdal, a development economist who had served in one of Sweden’s Social Democrat governments.

That pattern repeated in 2011: Thomas Sargent, a leader of the “rational expectations revolution,” won with Christopher Sims, famous as a critic of rational expectations. Then in 2013 Eugene Fama won for creating the efficient markets hypothesis — and behavioural finance expert Robert Shiller won in part for showing where Fama’s hypothesis went wrong.

Sometimes people detect a more sinister pattern in Nobel wins. This tendency reached a high point in the 2016 book The Nobel Factor, by Swedish economic historians Avner Offer and Gabriel Söderberg. The book’s cover blurb uses the familiar newspaper practice of posing a sensational question without answering it: “Was it a coincidence that the market turn and the prize began at the same time?”

Offer and Söderberg press the case that it was no coincidence at all, that the prize was a Swedish central bank plot to undermine the dominant Keynesianism of the time, to give itself greater power and to push popular perceptions of economics in a more market-oriented direction. Indeed, Offer and Söderberg suggest that the plot worked, with the Nobel successfully promoting what is known as the “market turn” in economics, which lasted from the 1970s to the 1990s.

Look at the overall pattern of prizes though, and you might start to think the plotters have displayed rank incompetence. Yes, the late twentieth century produced a crop of future Nobel Prize winners, mostly American, who wanted to promote the power of markets and limit the power of government in various ways. Hayek in 1974 was followed by Friedman in 1976, who at the time was almost unavoidable: even The Nobel Factor concedes that he was for a time the most cited economist ever, above both Keynes and Marx.

A decade later came more market promoters: James Buchanan in 1986, followed by Robert Lucas (1995), Robert Mundell (1999), Finn Kydland and Ed Prescott (2004), Thomas Sargent (2011) and Eugene Fama (2013). But this gang comprises just nine winners out of seventy-five between 1969 and 2016.

The timing seems worse still for Offer and Söderberg’s thesis. Check those dates again: the Nobel committee only got around to gonging the third of these hard-edged free-marketeers (Buchanan) in 1986. By then Reagan and Thatcher — and, in Australia, Hawke — had already implemented the most dramatic of their pro-market policy changes. Why plot to change world history and then wait until it became unnecessary before putting your conspiracy fully into action?

Another story fits the timeline much better: after Keynesianism failed to deal well with the 1973 and 1979 oil shocks, the economics profession began to reconsider Keynesianism and to take more interest in other models. The Nobel committee simply followed that intellectual trend, cautiously, waiting for the passage of time to confirm a particular idea’s lasting effect.

The Nobel Factor barely mentions the effect the oil shock had on economic thinking after almost three decades of postwar growth. Offer and Söderberg also downplay that the intensely pro-market ideas were mostly incorporated in the default view or discarded before the turn of the century.

In fact, when you look closely at the past twenty-five years of economics Nobel winners, “right-wing plot” is not the phrase that springs to mind. A more likely lesson is that, for whatever reason, the winners of the economics Nobel have often taken economics away from the clichéd idea of calculating, rational Economic Man.

Assigning laureates to categories is a fraught business. But the biggest theme of the past quarter century has probably been behavioural economics, which looks at how psychological and social factors lead people to make decisions classical economic theory might not suggest. Such prizes went to George Akerlof and Daniel Kahneman before the 2008–09 financial crisis, and to Elinor Ostrom, Robert Shiller and Richard Thaler after it. In second position would be issues of poverty (Amartya Sen, Angus Deaton, Abhijit Banerjee, Esther Duflo and Michael Kremer). It’s hard to paint such concerns as disclosing a right-wing agenda.

Various technical methodological breakthroughs have also been rewarded. At the very least this category should probably include James Heckman, Daniel McFadden, Vernon Smith, Leonid Hurwicz, Eric Maskin, Roger Myerson, Joshua Angrist and Guido Imbens — though thinkers such as Paul Romer could probably fit here comfortably too).

Other winners have tackled very real-world problems. George Akerlof explained why you might be right to worry that the used car you just bought is a lemon. Paul Milgrom and Robert Wilson found the best way for governments to auction radio frequency rights. Ben Bernanke showed why bank failures can turn a slowdown into a depression, before getting to test his ideas as US central bank chief in 2008–09, with some success. And David Card’s work suggested that raising the minimum wage might not throw people out of work the way most economists feared.

Card’s prize-winning work in particular suggested that the Nobel committee was growing more interested in economics that actually overturned previous beliefs on a practical question.

Card and his co-author, the late Alan Krueger, identified a nice natural experiment, a rise in New Jersey’s minimum wage law, and used it to explore the effects of the minimum wage. They found that a higher New Jersey minimum wage didn’t push New Jersey’s unemployment rate up. As a result, economists are now less certain about the damage caused by increases in low statutory minimum wages.

Yet here we confront again that uncomfortable reality: economics is a social science. And in real-life situations you often just have more going on than you know how to deal with. Practical experiments like Card’s are not controlled experiments capable of replication. Rather, they happen in the middle of very complex societies. As just one example, the New Jersey employers had early notice that the minimum wage would be hiked, and some may have cut their workforce before the raise took effect.

So debate continues about what, if anything, Card’s New Jersey natural experiment proved. Reputable polls of reputable economists suggest a slight majority still think a big increase in the minimum wage across the United States would probably cost jobs.

And yet examining questions like this can yield clear insights about how society might improve itself — and that seems to be the case with this year’s laureate, Claudia Goldin. Perhaps even more than Card, she has convinced many of her colleagues that what they might have thought was going on wasn’t fact the real story.

When Goldin was growing up, she says, she read most of the Sherlock Holmes stories, and the famous fictional detective’s fascination with mysteries rubbed off on her. “I think of myself as Sherlock Holmes,” she told me last year.

In her work on women’s labour, Goldin could not simply pick up existing statistics. She had to act as a real-world Sherlock Holmes, piecing together the picture of women’s labour market experience from a messy pile of incomplete historical data. As friend and fellow economics professor Deirdre McCloskey notes, “She’s just wonderful about finding new sources of information about the past… that’s what makes her unusual.” Economics has sometimes favoured maths nerds, but nowadays it likes data nerds at least as much.

Goldin has put her hard-won data to many purposes. But among her most important is her investigation of the gender pay gap in most professional and managerial occupations across most Western nations.

People talk about “how we need to devise methods to eliminate bias,” she says. “I couldn’t agree more. But that isn’t going to solve the big issue.” Rather than rely on bias as an explanation, Goldin describes how the gender pay gap arises predominantly from the “couple inequality” between men and women with professional or managerial training. In this dynamic, she argues, women often end up effectively sacrificing their own careers when children arrive so that their husbands can work longer hours and get ahead. What Goldin has identified is the skewing effect of social expectations built up over decades — in a sense, the raw weight of history on today’s labour market.

As McCloskey puts it, Goldin “brings a fresh perspective to what is usually thought of as sheer exploitation.”

Goldin’s explanation for the gender pay gap is particularly remarkable because she has gone to such lengths to assess all the more popular explanations — hiring bias, pushy men, negotiation dynamics, occupational segregation. And perhaps most remarkably of all, given the sensitivity of this territory, her gender work has so far proved immune to attack. It simply fits the facts far better than any of the alternatives.

In an ever more complex social world, Goldin has shown it is still possible to put together a convincing story about what is going on.

Goldin’s pay gap research is in some ways harder to describe than, say, David Card’s minimum wage work. (One of her own attempts is here.) But more so than Card, Goldin’s work points to solutions. Notably, she argues many businesses need to change the way they structure jobs and pay to give professionals and managers more flexibility to take care of children for a few years without destroying their careers.

None of us should overstate economists’ ability to answer complex economic and social questions. But neither should we understate the importance of trying — and of acknowledging those who make truly great attempts. •

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The episode rather neatly demonstrated the balancing act Lula is trying to perform on the world stage. He has been assiduously positioning Brazil as an independent global power, seeking to act as a mediator in Ukraine rather than condemning Russia as demanded by the United States and Europe, promoting the non-Western BRICS club of major economies (Brazil, Russia, India, China and South Africa) and flying to Cuba to reiterate Brazil’s role as a leader of the G77 grouping of developing countries.

But he has also just signed a joint declaration with the United States proclaiming the G20 group of large economies the principal forum for multilateral diplomacy and declares himself a global champion of democracy, warning of the perils of authoritarian populism promoting racism and civil violence. (Brazil had its own “invasion of Congress” events in January this year when supporters of former far-right president Jair Bolsonaro stormed parliament and the Supreme Court in an attempt to overthrow Lula’s election victory, a deliberate echo of the events of 6 January 2021 in Washington, DC.)

The jury may be out on whether this balancing act can work, but no one could accuse Lula of passivity in foreign policy. In the past few weeks he has attended the Global Financing Pact summit in Paris, the BRICS summit in Johannesburg, the G20 summit in Delhi, the G77 summit in Havana and the UN General Assembly and Climate Ambition and Sustainable Development summits in New York, and convened his own Amazon summit in Brazil’s northeastern city of Belem. This year Brazil chairs the Latin American trade partnership Mercosur. Next year it will hold the presidency of the G20. In 2025 it will lead the BRICS and will also host the critical UN climate summit COP30.

To appreciate what Lula is seeking to achieve from this feverish activity it helps to understand the man. Now seventy-seven, Luiz Inácio Lula da Silva (“Lula” was an early nickname he later formally incorporated into his official name) has not had the usual politician’s life. Born to poor parents who migrated from Brazil’s northeast to São Paulo in search of work, Lula didn’t learn to read until he was ten. Starting out as a metalworker in the automobile industry, he became a trade unionist, was elected leader of the Metalworkers’ Union at the age of thirty, and then led major strikes and democratic protests against Brazil’s military dictatorship in the 1970s.

In 1980, increasingly identifying as a socialist — neither a communist nor a moderate social democrat — Lula helped form a new political party, the Workers’ Party. Though he was widely mocked for his poor Portuguese, his electrifying rhetoric and brilliant organising skills marked him out. He was elected to Congress in 1986 and subsequently stood as the party’s presidential candidate three times before finally winning in 2002.

In office, Lula immediately set about fulfilling his election promise to attack poverty, establishing the Bolsa Familia system under which mothers received welfare payments conditional on their children staying in school and being vaccinated. Aided by an economic boom, he raised the minimum wage, and expanded primary education and healthcare. Poverty in Brazil fell by more than a quarter in his first term alone. Re-elected in 2006, he turned his attention to the Amazon, succeeding in slowing deforestation for the first time. Brazil’s economy grew and its public debt fell.

When he left office after two terms in 2010 Lula had popular approval ratings of over 80 per cent and the undying enmity of Brazil’s conservative political elite. When the Trumpian populist Jair Bolsonaro became president in 2016, no one was surprised when he used a compromised judicial system to put Lula in jail.

Defeating Bolsonaro in last year’s election was redemption for Lula. But in a deeply divided country — the parallels with the United States are remarkably close — the margin was tiny: 50.9 per cent versus 49.1 per cent in the run-off vote. In the Brazilian Congress, which he does not control, Lula has had to cobble together an unstable multiparty coalition, making his legislative task much harder this time round.

Nevertheless, he has high ambitions. His Ecological Transformation Plan is meant to be a comprehensive economic strategy aimed at greening the country’s industrial structure. He wants to raise agricultural productivity to expand food production while conserving the country’s abundant natural resources. He has committed to ending hunger by extending Brazil’s welfare system, and to ending the illegal incursions into the Amazon forest by miners and loggers that routinely lead to violence against indigenous people. Deforestation is already down by over 40 per cent in less than a year.

Lula’s remarkable ability to build pragmatic political alliances makes it likely that he will achieve much more of his program than his congressional numbers would suggest. But it is on the world beyond Brazil that Lula’s political gaze is now increasingly fixed.

It is not too much to say that Lula wants to redesign the global order. In his speech to the UN General Assembly this week, Lula railed against the increasing inequality of a global economy in which, as he pointed out, the ten richest billionaires have greater combined wealth than 40 per cent of the world’s population, and 735 million people go hungry. He noted that the richest tenth of the world’s population are responsible for almost half of all carbon emissions, but also insisted that developing countries did not want to follow the same economic model. And he decried the erosion of multilateralism — “the principle of sovereign equality between nations” — in global affairs.

Lula’s rhetoric has always been grandiose, even utopian. But he has a remarkable record of making things happen. At the end of this year’s G20 summit in New Delhi, Lula set out his plans for next year’s presidency. Under Brazil, he said, the G20 would focus on reducing global inequality, poverty and hunger; on making the global growth model more environmentally sustainable, in terms of both climate change and nature conservation; and on reform of the way international institutions are governed.

Because he believes it is what will unlock the others, it is the last of these goals that is really in Lula’s sights. Like almost all leaders from the global South, Lula looks at how multilateral institutions work and sees both historical obsolescence and profound injustice.

Almost all the major institutions of global governance have remained unchanged since they were established at the end of the second world war. Eighty years later, despite new economic and regional powers emerging — notably the European Union, Germany, Japan, India and Brazil — the UN Security Council still has only five permanent members (the United States, Britain, France, Russia and China), the great powers that had prevailed in the war. And the World Bank and International Monetary Fund are still governed by their largest shareholders, an even narrower group of Western countries dominated by the United States and the other economies of the G7 (Germany, France, Britain, Italy, Japan and Canada).

All members of the World Trade Organization have equal decision-making power, but partly for that reason it has increasingly been bypassed in recent years by regional and bilateral trade agreements promoted by the United States, China and the European Union. The world’s premier economic advisory body, the Organisation of Economic Co-operation and Development, or OECD, remains in thrall to the free-market orthodoxies of the Western countries that run it.

And the single most powerful institution in the world economy is arguably the dollar, in which a huge amount of global trade and investment is denominated. But this means much of the world is deeply vulnerable to changes in its value, as the last two years of simultaneously rising dollar and US interest rates have shown. The dollar is not even governed by postwar international arrangements: its master is the US Federal Reserve, whose mandate is entirely focused on the US economy.

Lula wants all this changed. This is why he has loudly pursued the development of the BRICS grouping, even going so far as to suggest that it could seek to replace the dollar as a global trading currency. Lula sees the BRICS as a non-Western power bloc to counter the G7, whose cohesion in the decision-making forums of the G20, World Bank and IMF starkly contrasts with differences among the major countries of the global South.

At its recent summit in South Africa, the BRICS group admitted several new members, including the wealthy and increasingly assertive Saudi Arabia and United Arab Emirates, with the aim of extending its reach and influence. But most Western commentators are dismissive. They note that BRICS, unlike the G7, is made up of countries whose economic and political systems are not only fundamentally different from one another but also subject to major tensions and conflicts, especially in the case of superpower rivals China and India. Nevertheless, it is a signal of Lula’s intent that he wants to strengthen an alternative alliance through which to pursue his reform agenda.

Lula’s public statements on Russia and the war in Ukraine should be seen in this light. Like most countries in the global South, Brazil regards the UN Security Council as the proper arbiter of international conflict. If the Security Council assesses and then condemns one country’s aggression, Brazil will also do so. But it has never done so when the Security Council has not come to a judgement — as in the case of Ukraine, because Russia has exercised its permanent member veto.

Talking to Brazilian foreign policy experts in Brasilia and Rio I detected no illusions about Russia’s responsibility for the war in Ukraine. They note simply that the US invasion of Iraq in 2003, supported by almost all other Western states, was also illegal under UN law. And they observe that the West can apparently find fiscally unconstrained sums of money to defend Ukraine while simultaneously claiming it has no money to expand development aid or climate assistance to the poorest and most vulnerable countries elsewhere in the world. “And what did you do during Covid?” one asked me. “When the world cried out for vaccines, you hoarded even your surplus ones.”

Brazilians are enjoying the country’s new prominence on the global stage. Lula gets notably less criticism for his numerous foreign trips than leaders in most other countries. Along the way, he won’t hesitate to criticise the West for its moral failures. But he will also seize the chance to work with it. “Brazil is back!” the president likes to say. Preparing to assume the chairmanship of the largest powers at the G20, he doesn’t intend to waste the opportunity. •

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Yet the decade as we know it started much earlier than 1930. As Tara Zahra argues in her new book Against the World: Anti-Globalism and Mass Politics Between the World Wars, the retreat from liberalism and international cooperation in Europe and the United States began during the first world war and then intensified when postwar hunger and deprivation drove combatant populations away from the ideals of internationalism and cooperation that had once appeared unstoppable.

From the late nineteenth century, global flows of people, money, goods and ideas crossed borders faster than ever before, as new technologies transformed transportation, communication and refrigeration. Tens of millions of Europeans were on the move, a vast majority of them emigrating to North and South America.

But the war suddenly shut down these globalising forces. As Zahra writes, “European countries devoted all of their destructive energies to damming international flows of people, supplies and intelligence.” The results were catastrophic and far-reaching. Hundreds of thousands of Central Europeans starved to death. In Germany, which relied on imports for about a third of its food supply, imports declined by 60 per cent. Poor seasons and the loss of men to the front killed domestic harvests. In Berlin, food prices rose to 800 times their prewar level.

The crisis was similar in the disintegrating Austro-Hungarian Empire. Although less dependent than Germany on food imports, Austria’s agricultural output fell by almost half. Hungary lost a third of its harvest, and officials stopped sending food to nearby Viennese workers who depended on it. Food rationing exacerbated people’s hunger, and queuing at food depots became a full-time occupation.

Manès Sperber, a ten-year-old in Vienna, recalled long wartime nights of queueing in the cold and wet only to find that “the ‘Sold-out’ sign would be put up just as you finally managed to reach the threshold of the shop.” By the end of the war, Viennese were surviving on just 830 calories a day. “To obey the food laws is equivalent to suicide,” one middle-class Viennese woman wrote in her diary in 1918. Indeed, it was women who led the protests against the food shortages — protests that often turned violent — across Europe. Police sent to quell the protesters often joined in instead.

Zahra uses her exceptional skills as a historian to show how globalisation (not a term in use at the time, though certainly a phenomenon traceable to the nineteenth century) and its demise divided and politicised millions. She shows how the dissolution of Austria-Hungary, long a focus of her scholarship, left Austria adrift. The Paris Peace Treaty cemented the collapse of the imperial order and its fragmentation into warring economic units. Once the largest free-trade zone in Europe, Austria lost much of its food supply and raw materials to the economic nationalist policies implemented by its new neighbours, Hungary, Yugoslavia and Czechoslovakia.

“Of the fragments into which the old empire was divided, Austria was by far the most miserable,” League of Nations official Arthur Salter wrote in 1924. In his memoir The World of Yesterday Stefan Zweig lamented the disappearance of Austria as a centre of cultural and intellectual cosmopolitanism, represented by its multinational, multilingual and geographic diversity. The empire had stood in for the whole world not only because of its diversity of population and languages, but also because of its economic self-sufficiency. Now, it had become a head without a body.

Across Europe, back-to-the-land movements emerged as one of the more popular solutions to the food crisis. Supporters from both sides of politics were keen to develop economic self-sufficiency among local populations as a bulwark against future threats and to boost national economies. Autarky became a unifying goal for populations who had experienced hunger and humiliation.

As Zahra writes, “The importance of food security was seared into the bodies of hungry citizens.” In Italy, land was occupied by returning veterans and women, angry they had not received acreages promised in return for their wartime sacrifice. In Austria, calls for the “inner colonisation” of rural land by unemployed men and women appeared to offer the promise of food, jobs, houses and dignity; in reality, unwanted minorities (Slavs and Jews) were expelled from borderlands to free up space. Later, the same ideas were incorporated by the Nazis into the imperial concept of Großraumwirtschaft (greater area economy), which they used to justify their annexation of lands to Germany’s east and the expulsion of millions.

The settlement movement gained even more followers after the Great Depression, as disillusionment with capitalism spread. Faced with bad soil, bad weather, insufficient skills and an almost complete lack of infrastructure, these efforts weren’t always successful.

Women fared the worst. One of Zahra’s most significant contributions is her focus on the experience of women, who often faced the greatest of anti-globalism’s excesses. The back-to-the-land movement was about not only a return to the land but also a return to traditional gender values. Women were expected to work for up to fourteen hours a day doing backbreaking farm labour and unpaid domestic tasks alongside their children to free men up for paid work.

Mass politics on both sides blamed globalism for the drastic decline in living standards, and governments colluded in deflecting blame for the crisis in civilian mortality onto outside forces. Many European countries seemed on the brink of a socialist revolution, a threat that became a reality for a short time in Hungary and Germany, generating counter-revolutionary violence on the right, as fascists and socialists clashed openly in city streets.

As Zahra shows throughout Against the World, the search for scapegoats often led to Jews, who were perceived as “emblems of globalisation par excellence.” Forced by discrimination and persecution into jobs that demanded mobility — as pedlars and traders, for example — they were seen as perennial outsiders, facilitators of global networks of commerce, finance and trade, rootless and without loyalty to the state.

“Jews were targeted as symbols of international finance, unchecked migration, cosmopolitanism, and national disloyalty,” Zahra writes, with alarming echoes of today. German leaders disseminated a “stab in the back” legend that attributed the German and Austrian defeat to internal traitors, namely Jews and communists (the two were often conflated) working for foreign interests.

After Russia’s Bolshevik revolution, the twin “global” threats of Judaism and Bolshevism led to vicious attacks on the Jewish Hungarian population. These pogroms were even more violent in Poland and the Ukraine. Between 1918 and 1921, between 40,000 and 100,000 Jews were killed, around 600,000 displaced and millions of properties looted or destroyed.

Jews were the group most affected by the “epidemic of statelessness” that followed the postwar collapse of empires and the creation of nation-states. These emerging states engaged in a violent new form of political engineering designed to create nationally homogeneous populations. Minorities were persecuted, murdered, expelled or, at the very least, actively encouraged to emigrate; “reliable” citizens were called home or prevented from leaving.

These efforts to purify national populations helped to invent a new kind of migrant: the refugee. In response, a new League of Nations Refugee Commission was created, one of the myriad international commissions and organisations that descended on Europe after 1918 to help those worst affected by the war and its aftermath. The International Save the Children Fund, the Near East Relief Committee and the American Jewish Joint Distribution Committee were just some of the agencies on hand to assist the vast number of stateless people and refugees created by new and closed borders.

Adding to the chaos from 1919 was the Spanish influenza pandemic, which killed as many as thirty-nine million people worldwide, reinforcing political elites’ desire to tighten borders against “diseased” foreigners. In the United States those foreigners were often imagined as Eastern European and Jewish. The 1924 Johnson–Reed Act introduced “national origins” quotas, effectively reducing immigration from Southern and Eastern Europe to America to a trickle.

While it had once been relatively easy for European (though not Asian) individuals fleeing poverty, war or persecution to find refuge in the United States, the closed borders of this new era of anti-globalism left millions in limbo. Ellis Island, repurposed as a detention centre, was emblematic of this shift. The Austrian writer Joseph Roth imagined a Jewish migrant’s fate in 1927: “A high fence protects America from him. Through the bars of his prison, he sees the Statue of Liberty and he doesn’t know whether it’s himself or Liberty that has been incarcerated.”

One of the strengths of Against the World is Zahra’s interest in how the people of the period — the activists, visionaries, nationalists and industrialists invested in globalism, and its discontents — saw the world and themselves in it.

Rosika Schwimmer, a Hungarian Jewish feminist, is one of the more fascinating characters to accompany us throughout this history. We meet her at the beginning of the book as she oversees the annual meeting of the International Women’s Suffrage Alliance in Budapest. For the delegates, internationalism was crucial to the project of enlightening and emboldening (white) women across the globe.

An early pacifist, Schwimmer spent her life attempting to find ways towards world peace. She appears initially as somewhat naive and opinionated, yet also hopeful. By 1919, a victim of anti-Semitism and sexism, refused a passport to leave Hungary, she is forced to smuggle herself first to safety in Austria and then to the United States, where her application for citizenship is denied. Her transformation from “citizen of the world” to “stateless refugee,” writes Zahra, “was emblematic of the fate of internationalism in interwar Europe.”

In one of the more bizarre encounters Zahra describes, Schwimmer convinced the industrialist and anti-Semite Henry Ford to charter a peace ship to end the war, an expedition that failed amid the derision of American journalists. Ford’s politics were self-serving and contradictory: an anti-globalist who relied on migrant labour, he made his workers perform their assimilation in an eccentric ceremony that involved climbing into a giant papier-mâché “melting pot” in national dress and, moments later, “graduating” in American clothing singing “The Star-Spangled Banner.”

Ford also enforced his own back-to-the-land lifestyle for his company employees, demanding his workers move out of the cities and plant gardens to grow food. Yet he was global in his business aspirations, exporting millions of his cars overseas, including to the Soviet Union, and building plants across the globe. His virulent anti-Semitism also found an international supporter: Hitler praised him in Mein Kampf.

Others who make an appearance include Gandhi, whose own program of self-reliance, or swadeshi, Zahra includes within her anti-globalism frame. Gandhi’s determination to free India from Britain’s imperial chains and its subordination in the global economy resonated around the British empire, including in Ireland, where boycotts of British food caused an economic tariff war between the two countries.

“In a world of falling prices, no stock has dropped more catastrophically than International Cooperation,” the journalist Dorothy Thompson lamented in 1931. When Zahra sat down to write this book in 2016, Donald Trump had just been elected president and Britain had voted for Brexit: “There was a refugee crisis, and populist, right-wing parties were winning elections across Europe with anti-migrant platforms.” Covid and the war in Ukraine followed. (Zahra doesn’t mention here the tensions with China or the wars in the Middle East, equally destabilising.) Globalisation’s future, she writes, appeared uncertain.

Zahra’s neat binary of globalism and anti-globalism might bother some, but I found Against the World a refreshing and intelligent account of a period studied perhaps more than any other. This is a book about the fragility of democracy in the face of economic breakdown. Millions across the political spectrum faced hunger, homelessness, financial ruin and family separation in the wake of the first world war. Both the left and the right offered alternatives to the havoc wreaked by reliance on the global economy.

There are clear differences between the anti-globalisation movements of the interwar years that empowered fascism and those of our own times. But there are clear echoes in today’s widespread disenchantment with democracy’s ability to combat the inequalities associated with lost jobs, farms and homes; with the capacity of our international institutions to mediate conflicts; and with foreign competition and free trade. The other frightening echo is in the easy politics of fear, which sees the world’s most vulnerable cast out by demagogues seeking easy targets.

It’s hard to imagine how a world turned inwards will be able to tackle the biggest global challenges of our time. “The earth heaves,” warned a pessimistic John Maynard Keynes in 1919, “and no one is aware of the rumblings.” •

Against the World: Anti-Globalism and Mass Politics Between the World Wars
By Tara Zahra | W.W. Norton & Company | $57.99 | 400 pages

The post Anti-globalism’s cauldron appeared first on Inside Story.

In recent months, China’s exports, along with its currency, its consumer confidence and the price of pork, have begun to tumble. The real estate sector, broadly responsible for 30 per cent of the country’s GDP, is looking more and more like an empty tower block teetering on a foundation of debt. Banks have shaved another 2 per cent off an already modest economic growth forecast in 2023 of 5 per cent. One economic indicator that is rising is youth unemployment, though after it surpassed 21 per cent last month the government stopped publishing statistics.

Until recently, the Communist Party under Xi Jinping has been able to muddle through crises, including those of its own making. Yet fears are mounting that the People’s Republic could be entering the kind of deflationary spiral that took a rising Japan back to ground in the 1990s.

While trying to stamp out spot fires, the Communist Party has predictably grabbed the oldest fire extinguisher in its cupboard, labelled Blame the West. It has sprayed abuse at outside observers who have been so rude as to raise the alarm. “At the end of the day, they are fated to be slapped by reality,” asserted a foreign ministry spokesperson in August, doing his best to block the view of the front door burning.

What props up that door is the subject of economist Keyu Jin’s new book, The New China Playbook: Beyond Socialism and Capitalism. It lands in bookshops just as it has become urgently necessary to understand how China’s economy really functions, and the less obvious ways it fits into global economic and financial systems.

Beijing-born and Harvard-educated, Jin splits her time between Beijing and London, where she teaches at the London School of Economics and Political Science. She is well connected in Beijing — her father, Jin Liqun, is a former vice-minister of finance and current president of the Asia Infrastructure Investment Bank. Her intimate understanding of the system, ability to explicate complicated economic issues in plain English, and emotional investment in a thriving China all inform this most timely book.

China’s economic success, she writes, has defied all the usual assumptions about the necessary ingredients for long-term growth: a strong rule of law, for example, along with robust corporate governance and solid intellectual property protection. What’s more, neither its consumers, nor its entrepreneurs, nor the state itself have behaved like “conventional economic agents.” Rather, she contends, their actions are shaped by culture and history as well as ideology. These particular conditions cast doubt on whether China’s growth model could be replicated elsewhere in the developing world. But if it’s unique, she argues, it’s far from a “miracle,” as some have called it: China has simply caught up to its own potential.

How it has done this is the interesting part. The old playbook, Jin writes, referring to the first decades of reform, was all about “short and fast” development, a “febrile rush to boost GDP.” She chronicles how Deng Xiaoping and his successors progressively introduced market mechanisms into what had been a central planned economy, putting it on the road to becoming the manufacturing powerhouse and global economic power it is today.

One of the central and widely misunderstood aspects of the “new China playbook,” which she says aims for “a slower but saner pursuit of growth,” is how closely interconnected are the country’s state and private economies. There are numerous partnerships between state-owned enterprises and private businesses. These partnerships, in turn, are typically situated in what is nicknamed the “mayor economy”: a synergy between local government, state enterprise and private business. Other central aspects of the new playbook include the country’s idiosyncratic stock markets and the widespread “shadow banking” practices that introduce both risks and benefits into China’s finance sector.

Jin counters some common misapprehensions. In her chapter on China’s role in global trade, she shows that burgeoning US–China trade and investment did not in fact cause a net loss of American jobs. Less-skilled workers certainly suffered badly from trade-related job losses. Yet, she notes, that’s partly because the American economy privileges employers over employees: the impact of trade on workers was less in the European Union because of the strength of unions there and its fairer labour practices and laws more generally.

As for innovation, it’s often said that industry in China is better at copying than creating. But she points out that economists distinguish between “from zero to one” innovation — the production of a first-of-its-kind device, method or process — and “from one to N” innovation, which seeks to improve on existing technologies. She describes “from one to N” as China’s innovation “sweet spot.”

In March this year, incidentally, an Australian Strategic Policy Institute report concluded that China already leads the United States in thirty-seven out of forty-four critical technologies, including drone technology and critical minerals processing.

In discussing the agility of Chinese companies, Jin relates how the ridesharing company Didi has used its flexibility in adapting to local conditions to make inroads into places where Uber has failed to establish a presence. In Brazil, for example, where many drivers live hand-to-mouth, Didi pays them on a daily basis, and for those without a bank account, it helps them apply for one through its app.

Jin’s accomplishment is to illuminate the workings of this ever-evolving system, using a mix of statistics, narrative and anecdotes. Less impressive are some of her breezy references to Chinese culture and history, those “underlying fundamentals” (as only an economist could call them). She makes numerous minor mistakes. For instance, she places the invention of paper, the compass and printing in the Song dynasty (960–1269) when they arrived more than seven centuries earlier, in the Han.

Her insistence that China has had meritocratic government since the third century BCE stretches the definition of meritocratic: it wasn’t until the late seventh century that Empress Wu Zetian, incidentally the only woman to rule in her own name in all Chinese history, reformed the procedures for entry into the civil service so that exams would be held on a regular schedule and be open to men of humble background for the first time. (Women, no matter how meritorious, were never eligible). There would still be debates, which heated up in the late nineteenth and early twentieth centuries, about whether the exams produced an actual “meritocracy” or simply elevated to power men who were able to memorise and regurgitate classical texts.

Jin similarly credits Confucius with providing the Chinese with an ingrained work ethic married to respect for authority, nodding to the popular view that Confucianism has been a foundation for economic success not just in China but in South Korea, Japan and other societies influenced by Confucian thought. She speaks of “996” (Chinese slang for working 9am to 9pm six days a week) as a “work ethic,” when in most Chinese discourse it’s more of a complaint. If it is a work ethic, it’s one many young people have rejected, choosing instead to “lie flat,” to engage in extremely non-Confucian “quiet quitting” or even actual quitting. It’s also a reason that the public service, with its regular hours and less hectic demands, has re-emerged as a desirable employer for many of China’s youth.

Simplistic and uninflected views of history chime with contemporary Communist Party narratives aimed at promoting cultural pride, but they can’t carry the full freight assigned to them here of providing a meaningful explanation of Chinese economic and other behaviours.

Jin confronts problems such as ballooning debt and an ageing population head-on. Yet she doesn’t adequately address the underlying ideological and political issues that have in many cases an outsize impact on China’s economic policies, performance and behaviour. The party, by its own proclamation, wants to control everything; there is no sphere of life exempt from political “leadership.” The recent draft patriotic education law made that clear by mandating that its demands extend to how parents speak to their children.

If the party controls everything, Xi Jinping controls the party. It seems odd for an economist not to question whether this will lead to better or worse economic decision-making. Jin notes that Xi Jinping has “himself taken over the job of overseeing China’s technology advancement, previously under the supervision of a government minister.” She likens this to wartime mobilisation, explaining that “China sees being at the forefront of developing key technologies as a matter of survival.”

But she doesn’t ask whether having Xi — a non-technologist — in charge is the best bet for guaranteeing that survival. After all, Xi, dubbed by Geremie Barmé the “chairman of everything,” is not just leader of party and state but chair of the Central Military Commission and numerous other central bodies, including those with responsibilities for Taiwan affairs, Hong Kong and Macau affairs, foreign affairs, national security, financial and economic affairs, defence and military reform, and cyberspace. What’s wrong with having a dedicated minister in charge of each of these important portfolios? Xi’s assumption of leadership in the technological sphere hardly seems the acme of rational decision-making, economic or otherwise.

It would certainly not be comfortable for someone who lives part of the time in China and has family there to focus on such things, but the avoidance of politically sensitive topics and analysis compromises the value of The New China Playbook. It also draws attention to the odd narrative lacunae.

For example, Jin speaks in positive terms of the rising demands of the people for civil society, and backs this up with statistical evidence. The problem is that the data refer to the period right before Xi took power in 2012–13. She doesn’t add that, almost from that moment, Xi has ruthlessly set about crushing that civil society, silencing legal academics, detaining feminists planning to protest sexual harassment on public transport, clamping down on LGBTQI activism, and imprisoning lawyers who argue for rights given to the Chinese people by the Chinese constitution itself.

She also writes admiringly of China’s data protection laws — and yet doesn’t tackle the problem of the clauses regarding “national security” (which is defined very loosely in China) that allow the state itself to access pretty much whatever data it wants. Her claim that Chinese people “feel very differently” from those in the West about issues like privacy and surveillance, thanks to a cultural preference for stability and safety, might be broadly true. There are plenty of people, including in Xinjiang, on the other hand, who feel rather similarly to people in the rest of the world.

On the subject of Xinjiang, the vulnerability of the Chinese economy to political boycotts of its products would seem a useful subject for examination in a book like this, but no.

The problem is that China’s political and economic goals are frequently in conflict: the need for foreign investment, for example, is frustrated by increasingly strident anti-foreign rhetoric and rising party interference in the business sector that make China a more difficult, or at least less enjoyable, place for non-Chinese to do business in. She does acknowledge that China’s relative lack of soft power acts as a barrier to global economic leadership (including greater use of its currency in international trade). She also observes the paradox that the pursuit of economic stability through control can actually trigger instability.

We’re seeing plenty of evidence of that now, and it’s unclear whether Xi Jinping and the party he leads can control their way out of the mess. There’s no pleasure in contemplating the possibility that Xi might steer the Chinese economy off a cliff and drag the rest of the world down with it. Jin professes to feeling optimistic “that pragmatism and rationality will eventually prevail.” I’m not persuaded. But I hope she’s right. •

The New China Playbook: Beyond Socialism and Capitalism
By Keyu Jin | Swift Press | $36.99 | 368 pages

The post Slapped by reality appeared first on Inside Story.

In the early 2000s, the mining boom gave us full employment without any need for it to be an objective. But concerns that policy was not doing enough to deal with joblessness returned in the 2010s: with slower economic growth, the unemployment rate remained fixed in a range between 5 and 6 per cent without bringing forth any deliberate action by policymakers to shift it lower.

All the signs, however, are that the 2020s will be a new era of emphasis on full employment. The federal government’s 2022 Jobs and Skills Summit gave priority to the goal of achieving full employment. And in April this year the government immediately accepted the recommendation of the Reserve Bank review that the bank “should have dual monetary policy objectives of price stability and full employment, with equal consideration given to each.”

Achieving full employment — ensuring that the maximum possible number of the nation’s available workers are employed in jobs for as near as possible to the number of hours they want — has two main benefits. It maximises national output, and hence overall living standards. And it significantly improves equity, by lifting the incomes of people who would otherwise be unemployed and on income support, or are underemployed.

Pushing employment as high as possible also has the greatest benefits for the people who find it hardest to get work, including lower-skilled workers, the young, and people living in disadvantaged regions.

With Australia’s low unemployment rate of 3.5 per cent these equity benefits are on full display. Just one example highlights the point: in the 25 per cent of regions that had the lowest proportion of employed people before the pandemic, the employment rate grew by 2.2 percentage points in 2022 — about three times more than in the 25 per cent of regions with the highest employment rates.

The benefits of employment are, of course, broader than income. As Treasury secretary Steven Kennedy has emphasised, “working is associated with better mental health and lower rates of psychological distress [and] strong intergenerational benefits [because] children with parents who work are more likely to work themselves.”

All this might suggest that our objective should be to have everyone who wants to be employed in a job working exactly the number of hours they want — effectively abolishing unemployment and underemployment. But it’s universally accepted that’s not going to be feasible.

The labour market is in continual flux. For most new workers, looking for and finding a job takes time. Similarly for workers who lose their jobs, and often also for those who leave a job. Inevitably, at any point in time, some of the available workforce won’t be in work.

The costs of pushing employment growth too far also impose a limit. More of the available workforce in employment means less spare labour available to fill new jobs that are created, forcing employers to compete for workers by offering higher wages. Historical experience tells us that eventually wage inflation will become excessive, imposing major costs.

High wage inflation cuts off jobs growth. It also feeds into higher price inflation, making society worse off in other ways: the cost of living rises, the wealth of savers is reduced and economic activity is destabilised (including by the likely policy response of higher interest rates).

Setting a full employment objective is a balancing act. We want to use as much of the available workforce as possible to benefit national output and equity. But we want to avoid excessive wage inflation. The critical decision is what rate of unemployment achieves that balance. Many commentators see the trade-off resulting in a jobless rate of more than 4 per cent. But if I were setting a full employment objective at present, I’d be aiming for close to the current rate of 3.5 per cent.

Maintaining this rate would generate substantial benefits for national output and equity, compared with going back to our average rate of 5.5 per cent through the 2010s. Wage inflation has not been excessive at this rate of unemployment, either at present or on the other recent occasion when the rate of unemployment fell to about the same level, during the mining boom of the late 2000s. While wage inflation has picked up in recent months, much of this can be attributed to efforts to compensate for high price inflation rather than the effects of a tight labour market.

Fears that our low rate of unemployment could take us back to the spiralling inflation of the 1970s therefore don’t seem well founded. The Australian labour market is a different place today. Reforms to the wage-setting system in the early 1990s — primarily the shift to enterprise-level bargaining — and the fall in price inflation since that time have enabled unemployment to fall further before provoking concerns about wage inflation.

So far I’ve been talking about a full employment objective expressed as a target rate of unemployment, which is how it is usually thought of. But the shift back to a full employment objective also gives us an opportunity to consider whether that’s the best approach.

An alternative would focus on labour underutilisation, which takes in both unemployment and underemployment. We want people to have a job, but we will only make the fullest use of their labour if they are also working the number of hours they want. This matters because underemployment is an increasing share of labour underutilisation. By 2022, of the extra hours that could have been worked in Australia, about 45 per cent were a result of underemployment.

Having a broader measure also matters for how low we think it’s possible to push the rate of unemployment. More underemployment means the economy has greater spare capacity than the raw unemployment figures show. Wage pressures are therefore not as great as they have been at any given rate of unemployment. In this environment, holding down the unemployment rate poses less of a risk for wage inflation. It’s another reason why a target rate of 3.5 per cent is realistic.

In the short-term, existing Australian Bureau of Statistics data could be used to calculate underutilisation among members of the labour force. Longer term, a measure could be developed that also encompasses spare capacity among people not currently in the labour force.

Working to achieve a specific target for full employment means policy is directed towards improving wellbeing; and having a target that is easy to communicate also creates accountability.

Yet, it’s important to recognise that, even if the overall target is achieved, some groups will still be missing out to an unacceptable degree: First Nations people, people with disabilities, people living in disadvantaged regions, and other groups. So, beyond an overall target, goals to improve employment outcomes for those groups are an essential element of a full employment objective. •

The post The unemployment opportunity appeared first on Inside Story.

A few days later president Joe Biden and Indian prime minister Narendra Modi tried a different approach. Modi was given the full state visit treatment: marching troops on the south lawn of the White House, a glitzy (vegetarian) dinner, lengthy talks and a special address to both houses of Congress. The two leaders signed a series of strategic business deals in key fields such as semi-conductors and space technology, and held a joint press conference. (Though if anyone was in any doubt who Modi’s primary audience was, the fact that he spoke in Hindi may have been a clue.)

The Biden–Modi summit communiqué, covering myriad arenas of cooperation and every major global issue, ran to fifty-eight numbered paragraphs: this was clearly not the product of the meeting itself, but of months of prior negotiation by the two countries’ diplomats.

Hard on the heels of these two summits came a third, on Thursday and Friday this week, this time involving not just two leaders but more than forty. Hosted by French president Emmanuel Macron, the “Summit for a New Global Financing Pact” brought together ministers from around eighty countries at the imposing Napoleonic Palais Brongniart in central Paris. And unlike the others, this encounter wasn’t largely for the photographs: over two days the meeting saw substantive and unexpected progress made on a range of issues to do with the financing of sustainable economic development in the global South.

The summit was an ad hoc event, not part of the United Nations, G20 or other regular governance mechanisms. It was proposed by Macron last November following discussions with the prime minister of Barbados, Mia Mottley, on her “Bridgetown Initiative” for global financial reform. Mottley’s plans, first articulated at the COP26 climate conference in 2021, aim to mobilise hundreds of billions of dollars in new public and private financing for climate-related investment.

Unusually, Mottley’s ideas got traction both with developed country heads like Macron and EU president Ursula von der Leyen, and with governments in Africa and among the “V20” group of climate-vulnerable nations. A remarkable consensus has arisen: on the eve of this week’s summit thirteen leaders from across the world issued a jointly written article calling for an urgent scaling-up of financial flows.

The summit filled out some of the detail. In a set of round tables on different topics on the Thursday, followed by an evening dinner for heads of government and two hours of talks on Friday morning, a number of specific proposals were presented and agreed. Well, sort of agreed: with the summit having no formal ability to make binding decisions, the French hosts asked countries to indicate which of the proposals they could support, and then set out in the final communiqué what had been discussed and how it would be taken forward. It was a clever way of preventing the biggest countries exercising veto powers and thereby generating a weak, lowest-common-denominator agreement.

The most significant announcement was that the richest countries had met their promise to reallocate US$100 billion of Special Drawing Rights, or SDRs, to pay for poverty reduction and climate adaptation measures in developing countries. SDRs are the reserve currency used by the International Monetary Fund in times of financial trouble. In 2021, a huge US$650 billion of SDRs were issued to help countries through the Covid pandemic. But the problem was that the IMF constitution requires that SDRs go to countries in proportion to their shareholdings in the IMF, so the vast majority went to the richest countries who needed them least. In October 2021 they promised to give US$100 billion back, to be spent in the poorest countries — but up to now they had not done so.

After months of determined persuasion of his fellow leaders, Macron was able to announce in Paris that the figure had been reached. Only the most churlish of observers pointed out that the American contribution had still to be ratified by Congress, which might never happen.

You wait a long time for US$100 billion, and then two come along at once. Macron was also able to say that the US$100 billion in finance for climate change first promised by the developed world in 2009, and again in the Paris agreement of 2015, was also going to be achieved this year. A long time overdue, it was nevertheless a welcome statement that the developed world would (eventually) keep its promises. As several emerging economy leaders noted, those countries’ previous failure to do so has been a trust-depleting blight upon international relations for a long time.

Four issues dominated this week’s summit discussions. The first was reform of the World Bank and its regional counterparts, including the Asian, African and Inter-American Development Banks. Using capital provided by the richest countries, these banks provide low-interest (“concessional”) and commercial loans to emerging and developing economies, aimed especially at poverty reduction. But in recent years the banks have been heavily criticised as too slow and cumbersome, applying too many conditions and making overly cautious decisions, especially in comparison with the huge scale of lending now being undertaken by China.

Perhaps surprisingly, the United States has led the calls for reform. In Paris, treasury secretary Janet Yellen repeated her demand that the World Bank “evolve,” particularly by providing more money for climate investment. She found a willing partner in the bank’s new president, former Mastercard CEO Ajay Banga, whose commitment to reform has been widely welcomed. Banga’s new definition of the World Bank’s purpose — “eliminating poverty on a liveable planet” — provided a neat acknowledgement that climate change and wider environmental sustainability must now be incorporated into everything it and the other multilateral development banks do.

But this was not enough for the African leaders present. Noting that the World Bank’s lending to the poorest countries will fall this year because much of it was “front-loaded” to deal with the crises of the last two, they called for an immediate increase in contributions from the developed nations. In pointed asides, several noted that when it came to Ukraine, the West has been able to find apparently unlimited sums of money for arms and aid without any budgetary constraints. Why not similarly for Africa?

In response, Yellen did promise new funds from the United States, and Banga said the World Bank would seek to squeeze more out of its balance sheet. But the kind of quantum leap in funding demanded by Africa will only come through a recapitalisation of the bank: that is, an injection of new equity by its major shareholders. The United States won’t commit to that now. But the word on the grapevine is that Biden is open to the idea if Banga can prove he can deliver reform.

And that in turn would open up another front: reform of the bank’s governance structure. Today, Western developed countries own just above 50 per cent of its shares, thereby maintaining control of an institution they have long regarded as theirs. But a new capital injection would also bring in more money from China and India, and thereby tip the balance of shareholding away from Western control. This is of course precisely what the global South would like to see, and equally precisely what makes the US most nervous. So we can expect some serious negotiation about this over the next year.

The second major agenda item was debt. The IMF estimates that around two-thirds of the lowest-income countries are now in “debt distress” or at risk of it, meaning that they are close to defaulting on the international loans they have received from richer countries, international institutions and private lenders. The rise in US interest rates over the last year has seen many of them spending over half of their government revenues on debt service payments, with devastating impacts on health and education budgets. It is clear that their debts need relieving, but talks with the most affected have failed to yield much progress over the last two years.

So it was welcome news that two of the most heavily indebted countries, Ghana and Zambia, had now reached agreement on debt restructuring packages. Separately, the Ivory Coast and France announced a “debt reduction and development contract” to convert a portion of the former’s debts into grants for poverty reduction and education.

At the same time, a number of countries and multilateral development banks announced that they would start using “natural disaster clauses” in their debt contracts. Pioneered by Grenada and Barbados, such clauses allow debt service payments to be suspended for two years when a borrowing country is hit by an extreme weather event such as a hurricane or major flooding, thereby releasing much-needed cash for clean-up and reconstruction efforts. With such events occurring ever more frequently, the widespread use of these clauses could prevent billions of dollars leaving vulnerable countries just when they most need the money.

Another initiative emerged during the summit when presidents Gustavo Petro of Colombia and William Ruto of Kenya proposed the establishment of an expert review of the relationship between debt, nature and climate. The two leaders expressed concern that debt repayments were forcing countries to destroy rainforests and other biodiverse habitats. The review will examine proposals such as “debt for nature” swaps, in which creditors cancel debt in return for verifiable conservation efforts, and debt linked specifically to the achievement of climate action plans.

The third main issue was climate finance. In preparing the summit, France had called for a number of taxes to be considered as new sources of funding. But in the pre-summit negotiations, taxes on aviation, fossil fuels and financial transactions were ruled out. This left just one new tax on the table, a proposed levy on carbon emissions from shipping. Countries agreed to ask the International Maritime Organization to examine how such a levy could work. To the disappointment of some, though, the text failed to mention the possibility that some of the revenues could be used to compensate countries for the climate-related loss and damage they are experiencing. With the last round of climate talks having agreed a fund for this purpose but no money, this idea is likely to gather increasing support over the next year.

Fourth, the summit discussed how more funds can be provided by the private sector. For many years the holy grail in this field has been the mobilisation of private capital for clean energy and environmental conservation. With government budgets highly constrained, this was felt to be the only way in which the dollars flowing to developing countries could rise “from billions to trillions.” But these sums have so far proved elusive: asset managers have perceived the risks as too high and the rewards too few.

So in Paris countries welcomed an idea developed by Barbados’s economic adviser, Avinash Persaud. Persaud proposed a special facility to insure foreign investors against the risk that the returns they make could fall if the local currency declines in value. He pointed out that such risk can often be the difference between a renewable energy or agricultural project in an emerging economy looking profitable or not; he estimates that his proposed scheme could release tens of billions of new investment.

These discussions proved the value of summits in which leaders don’t turn up mainly for show but actually engage with the substance. Negotiations on the final communiqué had, of course, been taking place behind the scenes for several weeks. But they continued long after the meeting was due to close, as developing country leaders insisted that the wording on the urgency and scale of the funds required should be strengthened, and developed ones sought to limit the commitments they were being pushed into making.

It was not till late on Friday that the French government issued the final documents. They included, in addition to a statement of principles and decisions, a detailed roadmap setting out how each of the policy proposals discussed could be taken forward over the next eighteen months, at future meetings such as September’s G20 Summit in India, the World Bank Annual Meetings in October and the climate COP28 in Dubai in November–December.

No one came away from Paris thinking the job was finished. By 2030 the world will need to invest around US$2.4 trillion every year in sustainable development, of which around US$1 trillion will have to come from international flows. The world is still well short of such figures. But there was also little doubt that the summit had given new momentum to these efforts. This was perhaps best symbolised by an announcement on the sidelines of the event that a new Just Energy Transition Partnership, or JET-P, had been agreed between a range of Western countries and the government of Senegal, led by president Macky Sall.

JET-Ps are the new hope for development and climate financing: national plans for clean energy and industrial development backed by new public and private investment, both domestic and international. Three JET-Ps were announced last year, in South Africa, Indonesia and Vietnam, all committing to phasing out the use of coal-fired power. In Senegal the plan involves — controversially — exploiting new gas reserves, but for the first time that will happen under an explicit commitment that these will subsequently need to be phased out again as the country aims for net-zero emissions.

In the long term this will be the real test of whether the summit was worth it. Can enough money be invested to give developing countries a new path to prosperity, one that doesn’t involve trashing their natural environments as the now-rich countries largely did at the same stage of development? Will financing partnerships like JET-Ps see emerging economies find a role supplying minerals and goods for the green industrial transitions that are now a central aim of economic policy in the United States, the European Union and China?

We shall discover the answers over the next decade. In the meantime attention will shift across the Atlantic. Under its new, outspoken president, Luiz Inácio Lula da Silva, Brazil will host next year’s G20 Summit, where the decisions made in Paris will be brought back for a progress report and new commitments. Fittingly, this will coincide with the eightieth anniversary of the Bretton Woods summit in 1944, when the present global financial system was designed.

That meeting set a high bar. The usual summit handshakes and photo opportunities make it easy to be cynical. But sometimes meetings like these do actually change the world. •

The post Summit of ambitions appeared first on Inside Story.

In her new book, The Power of Hope, Carol Graham, a noted economist and senior fellow at the Brookings Institution, argues that hope is a dimension of wellbeing that is too often neglected. The economics of wellbeing — a growing specialisation that aims to expand the scope of the discipline and make its science less dismal — usually examines feelings of life satisfaction or levels of positive and negative emotion. But whereas both those metrics evaluate past happiness from the standpoint of the present, hope looks forward. For Graham, believing we can realise a better future is crucial to thriving.

Hope is a staple of American political rhetoric and has been a reliable feature of its presidential campaigns. It runs from Jesse Jackson’s “Keep Hope Alive” to Bill Clinton’s The Man from Hope biopic, from George W. Bush’s “A Safer World and a More Hopeful America,” through Obama’s The Audacity of Hope and iconic campaign poster, Bernie Sanders’s “A Future to Believe In” and Joe Biden’s “Our Best Days Still Lie Ahead.” As optimistic slogans go, these examples certainly outshine “Make Your Wet Dreams Come True” (a reference to ending Prohibition) from Al Smith’s 1928 run.

Campaigners everywhere are selling a future, of course, but the prominence of the American hope trope can be striking to foreigners. In recent times it is almost as if hope is proclaimed so loudly precisely because the need to restore it seems so desperate.

Graham wouldn’t disagree with that. “Deaths of despair” in the United States — suicides, overdoses, alcohol poisonings — have risen to astonishing levels and life expectancy is tracking backwards, unlike in any other rich country: American exceptionalism in reverse. To Graham, these grim trends reflect a growing wellbeing inequality that is every bit as troubling and socially toxic as more familiar inequalities of income and wealth.

Loss of hope is regionalised and racialised, disproportionately affecting the white working class in the heartland, fuelling disengagement from work and education, and promoting political radicalisation and resentment of coastal elites. Restoring hope is urgent not only to stem general misery and the opioid epidemic, but also to overcome threats to civil society, national security and liberal democracy itself.

The Power of Hope reviews some of the accumulating evidence on the economics of happiness and despair, and presents two new research studies in separate chapters. These studies exemplify Graham’s focus on the racial and cross-national dimensions of hope, and her interest in the fate of young people who, like larval sea squirts, must navigate the currents of life in search of a solid footing.

The first follows late adolescents from a poor district in Lima over a three-year period, assessing their aspirations for education, occupation and migration. These aspirations are strikingly high and stable over time, and they predict what Graham calls “human capital outcomes.” Higher educational aspirations at eighteen, for example, were associated with greater educational involvement and less risk-taking at twenty-one.

The second study was intended to replicate the first with adolescents in St Louis, Missouri, but was disrupted by Covid. Graham finds a stark racial difference: white participants had lower and less parentally supported educational aspirations and less social trust than their African-American peers, despite being materially better off. These findings chime with other research Graham reviews on the greater resilience of African Americans, who are buffered by “communities of empathy” more than low-income Whites, who retain a culture of “stubborn individualism” but have lost the belief that hard work pays off. Unfortunately, the study’s tiny sample of thirty-two provides a flimsy platform for generalisations and makes it a questionable inclusion in the book, although vignette descriptions of individual participants help to personalise the findings.

Before and after these empirical studies, Graham makes a compelling theoretical case for why economists and psychologists should view hope as a unique explanatory factor rather than submerge it within other concepts of wellbeing. Its definition, and how it differs from optimism, aspirations and goals, is left somewhat open, but Graham presents it as a combination of positive expectations for the future and a sense of personal agency in bringing them about.

It is entirely credible that a specific lack of hope in this sense, more than present-focused unhappiness, should undermine motivation to act and emotional investment in the future. It has been well established in clinical psychology that hopelessness is more strongly associated with suicide than is depression, for example.

Despite hope’s plausibility as a driver of positive life outcomes and resilience, though, the evidence mustered by Graham’s studies falls short of demonstrating that it plays a causal role. Having high aspirations may be associated with doing better in life, but other factors, such as realistic assessment of one’s prospects, may give rise to both hope and positive life outcomes without the former influencing the latter. It is important to remember cautionary tales of oversold psychological concepts like self-esteem, which was once seen by advocates as a panacea for all manner of social and psychological pathologies and later shown to be primarily an effect rather than a cause of doing well in life.

A similar point can be made about proposed interventions to restore hope. Graham reviews a range of options, including community-based wellbeing initiatives, scaled-up mental health programs and private–public partnerships. But none of these directly target hope — many focus on building social connection and belonging rather than cultivating optimism — and there are few grounds to infer that a revival of hope is the main active ingredient in any benefits they may have.

Graham makes a strong theoretical case that hope matters and a strong methodological case that it should be measured, but current evidence is yet to justify any claim that hope is the key to unlocking social misery. Hope remains a promissory concept. This is not to criticise Graham’s championing of hope but simply to recognise the need for more definitive research. I suspect researchers who take up that challenge are backing a winner.

Although the book is generally accessible and engagingly written, it has a few imperfections. Statistical jargon (“endogeneity,” “fixed effects”) creeps in occasionally and tables of regression coefficients will glaze many readers’ eyes. Some points become repetitive, and it was an editorial oversight to allow four paragraphs to be repeated with minimal alteration in consecutive chapters.

Even so, The Power of Hope delivers its hopeful message with the passion and gravity the topic deserves. The book will interest academic readers from across the behavioural and social sciences, and anyone curious about the wider social and political relevance of the science of wellbeing. •

The Power of Hope: How the Science of Well-Being Can Save Us from Despair
By Carol Graham | Princeton University Press | US$35 | 200 pages

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Taking place in the airy World Conference Centre in the former West German capital, the official title of the conference is the fifty-eighth meeting of the Subsidiary Body for Scientific and Technological Advice, and the fifty-eighth meeting of the Subsidiary Body for Implementation, both of them subsets of the better-known UN Framework Convention on Climate Change, or UNFCCC. The delegates’ task is to take forward the agreements made at the twenty-seventh meeting of the Conference of the Parties, COP27, which took place in Sharm el-Sheikh, Egypt in November last year, and prepare the 28th meeting, scheduled for Dubai in the United Arab Emirates this coming December.

If all this sound complicated, that’s not the half of it. The conference agenda sets out the many different negotiating tracks that previous COPs have set in train. It is a bewildering array of numbers, concepts, processes and former host cities.

Along with the second Glasgow Dialogue on Loss and Damage, there’s a meeting on matters relating to the Santiago Network under the Warsaw International Mechanism, also covering loss and damage; the seventh meeting of the Paris Committee on Capacity Building; the eighth meeting of the Katowice Committee on Impacts; a workshop under the Glasgow–Sharm el-Sheikh Work Programme on the Global Goal on Adaptation; not to mention a meeting on the as-yet-unlocated “rules, modalities and procedures for the mechanism established by Article 6, paragraph 4, of the Paris Agreement and referred to in decision 3/CMA.3.”

It is easy to be cynical, of course. But the negotiating agenda is not simply a make-work scheme for government officials. It reflects the reality that tackling climate change is a complex and multifaceted task involving not just every country in the world but also many different kinds of policy.

Debate in developed countries focuses mainly on climate “mitigation” — how to reduce greenhouse gas emissions by decarbonising energy, transport, industry and agriculture. But the primary issues are different for poorer countries experiencing devastating floods, droughts and hurricanes, and changes to food production and water availability from rising temperatures. They are more interested in how to adapt to the changing climate and whether they will be compensated for the loss and damage they suffer — with both issues requiring the rich world to make good on its promise of financial and technical assistance. A complicated negotiating agenda is a small price to pay if it leads to any of that support being delivered.

Yet the question remains whether it will be. Although the Bonn conference continues the official UN process, it is in many ways not even the most important climate negotiation at the moment. Just two weeks ago the richest countries, meeting at the G7 summit in Japan, declared that this year they would finally reach the US$100 billion in annual climate financing they first promised at COP15 in Copenhagen fourteen years ago. And in two weeks’ time French president Emmanuel Macron will host an even more significant summit in Paris.

Macron’s aim is to establish a new financial pact between the global North and South to guarantee finance for environmentally sustainable and climate-compatible development. In Bonn, government officials are discussing processes and modalities intended to govern finance and other forms of assistance to countries in the global South. But in Paris, heads of government will be agreeing on actual money for renewable energy, adaptation and disaster prevention, potentially in the hundreds of billions of dollars, via bilateral aid, World Bank lending and private sector finance. You could be forgiven for thinking that the official UN talks are a bit of a sideshow.

Not that controversy will be absent in Bonn. The fact that this year’s COP will be held in a Gulf oil state is the main focus for climate activists. With the UAE having helped water down COP27’s position on the phasing out of fossil fuels, the appointment of the chief executive of the Abu Dhabi National Oil Company as president of COP28 looked to many like a deliberate provocation. Sultan Al Jaber is in fact an experienced climate negotiator who, as former head of UAE’s investment fund Masdar, developed the country’s extensive global portfolio in renewable energy. But it was inevitable that his appointment to chair the UN climate talks would attract criticism.

Pointing out that Al Jaber’s company is hugely expanding its oil and gas production, the campaigning group Oil Change International has described his appointment as “a truly breathtaking conflict of interest… tantamount to putting the head of a tobacco company in charge of negotiating an anti-smoking treaty.” More than 130 members of the US Congress and European Parliament have signed an open letter calling on him to be removed as COP28 president. His presence, they said, reflected the “undue influence” of fossil fuel companies over UN climate talks and “risks undermining the negotiations.” The fact that a UAE official was recently found to have edited Al Jaber’s Wikipedia page to remove such criticisms has only added fuel to the fire.

Al Jaber himself will brush off the controversy: as a close ally of the ruling family his position isn’t in jeopardy. But other countries will hope the furore embarrasses the UAE sufficiently to provoke some compensating action. The country has been making huge windfall profits from higher global energy prices in the past two years. What better way to demonstrate its commitment to the climate than by providing a few tens of billions of dollars in financing for the most vulnerable countries?

Elsewhere there is talk about reforming COPs themselves — not least in the United Nations, where the gulf between the linguistic complexity of the negotiating agenda and the practical requirements of dealing with climate change has not gone unnoticed. In quiet meetings behind the scenes this year the organisation has been canvassing views on how to bridge the gap.

It is not as if the rest of the world is absent from UN climate meetings. On the contrary: nearly 50,000 people are estimated to have attended COP27 last year, most of them representatives of businesses, investors, international organisations, NGOs and research institutes. These people come to the annual COPs to participate in a global climate conference and expo, with literally thousands of events and meetings alongside the formal negotiations.

Most of these attendees are focused on how to make progress in the real world: the new technologies being developed to cut emissions, the policies required to incentivise them, the financing available for investment, the research and data needed to monitor both the climate and climate actions, and the political campaigning to pressure corporations and politicians.

It’s in these spheres and among these kinds of players that climate action is really occurring, not in UN negotiations. The Paris Climate Agreement has been signed, and its detailed rulebook completed. Important issues are still to be resolved, not least on finance. But observers generally acknowledge that the focus of attention at COPs should really be on the real-world action, not the talks.

Up to a point, the UN already recognises this. Alongside the negotiations it convenes a wide range of partnerships between companies, countries, cities and researchers to develop and disseminate climate solutions. These cover technologies, business models and policies in a range of nine fields from energy to oceans, transport to land restoration. The question being posed for COP28 is whether this so-called Marrakech Partnership for Global Climate Action could move closer to centrestage.

Could a parallel conference be organised, alongside the negotiations, to present and discuss climate progress in the real world? Might this provide a forum where some of the major industries, companies and financial institutions that have made ambitious-sounding climate commitments over recent years — commitments critics often describe as little more than “greenwashing” — are called to account? As several observers have noted, this would be particularly appropriate for COP28, which will feature a “global stocktake” of action and inaction over the past eight years.

Typically, the question of whether COPs could be made more relevant to the real world won’t be on the negotiating agenda in Bonn over the next two weeks. But as ever in these thirty-year-old talks, it is as much what goes on in the corridors and during the time-outs that matters. There are six months still to go before the world reassembles in Dubai. It’s still possible that when it does so, it will find itself at a somewhat more useful gathering. •

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If, like me, you spent countless childhood hours hunched over the pages of an atlas (and an entire school year in the late 1990s getting hyped for the Sydney Olympics), this map is your mental default. It is the first thing you see in your mind’s eye when someone says “Central Asia” or “St Vincent and the Grenadines.” It had the same formative effect that maps of the British Empire had for generations past, a timeless, divinely ordained organisation of the world’s landmass, flattened and abstracted.

Despite all the inroads globalisation has made into our consciousness over the last forty years, when we imagine the world, we still tend to think of these large, territorially bound, centrally administered nation-states. And we also tend to assume that while laws can differ between these states, within them we are subject to more or less the same rules as everyone else. One people, one nation, one territory, one set of laws.

Maps can always mislead, but on the evidence of historian Quinn Slobodian’s new book, Crack-Up Capitalism, this picture of the political world is looking distinctly sepia-tinted. Over the past four decades, he writes, large parts of the map have been quietly (and not so quietly) unmade. The jigsaw puzzle now has more pieces than we could possibly comprehend. But it isn’t the borders of the existing states that need updating: it is the thousands of legally distinct “perforations” that exist within them.

The thing that is doing most of the perforating, writes Slobodian, is the “zone.” A zone is best understood as a kind of quasi-extraterritorial enclave carved out of an existing nation-state, within which a different set of laws is allowed to apply. Zones are “both of the home state and distinct from it”: freeports and export-processing areas, tax havens, private islands, special economic zones, gated communities, alpine principalities, “seasteads.” In 1986, he calculates, there were 186 worldwide. By 2023, there were around 5400.

To say zones are business-friendly would be to understate the case. Within them, ordinary forms of regulation are rarely enforced. Taxation is usually low or non-existent. Many are simply a place for the global super-elite to park their wealth. Some residential skyscrapers in London’s Canary Wharf, for example, are almost permanently empty, functioning exclusively as anonymous, tax-effective offshore bank accounts for billionaires and oligarchs.

Zones have many boosters in the West, but they seem to proliferate most happily in the Global South. This pattern is clear right from the book’s opening pages, which recount the American economist Milton Friedman’s visit to Hong Kong in 1978. At a moment when many parts of the West were grappling with high inflation, record-breaking strikes and the prospect of long-term economic stagnation, Friedman saw that Southeast Asian city-state as a vigorous outlier, a place where commerce might escape the uncomfortable constraints that hamstrung it in other parts of the world.

Hong Kong, Slobodian argues, was the ur-zone. Jurisdictionally ambiguous, it was the former colonial outpost that never fully decolonised. It became a “tycoon city,” a place that capital built in its own image. It was administered almost exclusively by a handful of hyper-wealthy families; its residents were always subjects before they were citizens. It ranked highly on dubious global rankings of economic freedom, and not so highly on measurements of political freedom. It was a “laboratory experiment,” Friedman once said, in “what happens when government is limited to its proper function.”

For most of the market radicals who appear in Crack-Up Capitalism­, that proper function appears to be remarkably consistent with the interests of capital itself. As a rule, each character in the book identifies as some brand of don’t-tread-on-me, taxation-is-theft libertarian, but at heart their desire is never really to eliminate the state: it is to capture it. Most of their crackpot schemes work best when governments play along.

These visionaries dream not of a world without rules but rather of a world with a very specific set of rules: ones that protect the heroic, enterprising owners of capital against the greedy, redistributive impulses of the masses.

In eleven colourful, globetrotting chapters, Slobodian takes us into the dreamworlds of this weird collection of free-market economists, philosophers and — let’s be honest — cranks. In some chapters, we see their ideas reflected in the exponential growth of the familiar hubs of global finance: places like Hong Kong, Singapore, London and New York. In obvious but rarely recognised ways, the rise of hyper-localised, business-friendly policies in parts of these cities have even changed their physical shape. In the 2000s, he writes, the world built skyward.

Other chapters, though, unfold like a nightmare you might have after reading Atlas Shrugged. In 1990s Somalia, a Dutch interloper attempts to reframe the collapse of the state as the creation of an anarcho-capitalist paradise. In America, a group of cosseted weirdos imagine a return to the legal pluralism of the middle ages. In apartheid South Africa, the leaders of a racially segregated “homeland” try to stimulate investment by completely eliminating taxes and regulations. And in Honduras, a bunch of Silicon Valley “countrypreneurs” attempt (and fail) to set up their own privately run “charter city.”

The people who vouch for these schemes are at best politically naive and at worst authoritarians with little interest in anything other than their own bank balances. You can be sure that almost all of them keep a bunch of cryptocurrency locked away on a USB stick or bars of gold buried in their backyard. Like all goldbugs, they are obsessed with fantasies of exit and secession, of “sovereign citizenship.” They have spent so much time thinking about societal collapse that they seem to yearn for it.

Most of their theories, though, involve radical simplifications of complex social and political realities. When the state fails, thinks the tech guru Balaji Srinivasan, the citizens of the “cloud nation” will gather in a “new hub” to build their own libertarian society. Exactly where they would find this empty land is beyond the bounds of this thought experiment. The only real-world example he can offer is, tellingly, Israel’s settlement of Palestine. As Slobodian writes, this is “a PowerPoint slide in place of understanding.”

Enjoyably, then, every chapter of the book closes with a kind of tyre puncturing, a thorough accounting of all the flaws in the libertarian logic. In Somalia, the anarcho-capitalist rhetoric is revealed to have disguised the de facto survival of many state functions in urban areas. In Honduras, the “start-up nation” proved almost cartoonishly neo-colonial and was eventually rejected by voters. Those seeking their exit via the metaverse, meanwhile, papered over the fact that the internet is as physical as it is virtual, built on immense farms of privately owned servers, themselves powered by energy sources that are increasingly destructive.

Which is not to say that zones haven’t been remarkably effective at attracting vast flows of foreign capital. It is just that the claims about freedom and liberty are almost always bogus. The book’s subjects like to imagine that if you can outsource politics to the market, it might all just go away. They dream of a world of a thousand sovereign city-states, each competing in a tax-cutting race to the bottom.

Conveniently, though, in this Darwinian fantasy, it is they who always seem to come out on top. They are rarely able to imagine a freedom for anyone other than themselves and the people they know.

The uncomfortable fact about zones is that most of the places where they have had any serious success are single-party states, among them Saudi Arabia, the United Arab Emirates, Singapore, and the great zone entrepreneur, China. If your goal is to draw a line around an area and declare it free from labour laws, it helps to be able to deal with any dissent that might result. The spectacularly successful zone-induced foreign investment boom in Dubai, for example, has been built on a vast supply of migrant labour, housed behind barbed wire, possessing little to no rights and kept in check by the ever-present threat of deportation.

These days it’s fair to assume that most people who claim to believe in democracy can stomach the existence and even the usefulness of capital, markets and private property — or have at least resigned themselves to some degree of accommodation with them. But, as Slobodian shows, the reverse is not true among the free-market fanatics. In their view, democracy is not just a handbrake on the excesses of capital: it is its enemy. Democracy means regulation, taxation, labour unions. Removing these impediments is not only desirable but necessary.

This sounds authoritarian, but it is perhaps more accurately described as an extreme case of business brain. The market radicals seem to want the whole world to be organised and run like a business. The most important attributes of their ideal society are growth and efficiency. Everything is a transaction. The ideal leader is not a prime minister elected to carry out the wishes of the people, but a CEO appointed to impose order and purpose from the top down. The population are there to be managed, not governed, either as loyal employees or as customers who might choose to opt out and shop elsewhere.

This is the logical end point of finance capitalism, the ultimate product of the assumption that what is good for business is good for the economy and what is good for the economy is ultimately good for everyone. There is no greater sin in the business world than inefficiency, and for business types — the kind of people who see the entire world through company balance sheets and P&L statements — democracy is simply an inefficient organisational structure. The solution to society’s ills lies in submitting to the business world’s nihilistic logic: cut costs, maximise revenues.

Mercifully, of course, not all states are run this way. If anything, there is a growing distaste for such ideas among policymakers in the world’s major liberal democracies. American workers are engaged in several high-profile fights for their right to unionise. Authorities are taking a tougher stance on monopoly power and corporate tax dodging. Liz Truss’s attempts to turn Britain into Singapore-on-the-Thames lasted less than fifty days.

In the long run, it is not even clear that these schemes are particularly good for business. As Martin Wolf — the most senior economics columnist at the most prestigious business newspaper in the world — argued at great length recently, “democratic capitalism” has historically delivered much better outcomes than despotism. When democracy and capitalism are in some kind of equitable and sustainable balance, people are both more prosperous and more free.

There will always be those among us who cannot comprehend this, and who are unable to resist the siren song of the Hong Kong model. But with Crack-Up Capitalism, Slobodian has given us plenty of reasons why we should. •

Crack-Up Capitalism: Market Radicals and the Dream of a World Without Democracy
By Quinn Slobodian | Allen Lane | £25 | 352 pages

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Unlike any government for many decades, the Labor government explicitly committed itself to full employment. In opposition, Anthony Albanese promised to hold a jobs summit and commission a white paper on full employment. No doubt deliberately, the fact that it would be a “White Paper” called to mind the founding document of postwar Australian prosperity, the 1945 White Paper on Full Employment in Australia.

Commissioned by John Curtin’s wartime Labor government and written by a team led by economist H.C. “Nugget” Coombs, the 1945 paper used John Maynard Keynes’s economic model as the basis for a commitment to use taxes and spending to maintain full employment.

At the same time, the Chifley government turned the Commonwealth Bank into a modern central bank. Having refused to help save the economy during the Great Depression, the bank would now be explicitly focused on maintaining full employment. Coombs was appointed governor, and retained the position after Robert Menzies’s Liberals took government.

Later, still under Menzies, the Reserve Bank Act of 1959 split off the commercial functions of the Commonwealth Bank and created a new Reserve Bank of Australia with three statutory objectives: price stability, full employment and general prosperity.

Changes in monetary policy were also in prospect when Albanese and his colleagues took government last year. The shift to inflation targeting in the early 1990s, implemented using adjustments to central bank lending rates, had put the Reserve Bank in full control of macroeconomic policy. Like other central banks, it reinterpreted full employment to mean the “non-accelerating inflation rate of unemployment,” or NAIRU, a model-based construct derived from the work of Milton Friedman. (Friedman preferred to call this the “natural rate” of unemployment.) Estimates of the NAIRU aren’t stable (they are usually above the actual rate of unemployment), but have recently been near 4 per cent.

Events since the global financial crisis have challenged the belief that inflation targeting can ensure financial and economic stability. For much of the decade after 2008, central bank interest rates were stuck at or near zero in most countries. Australia was heading in the same direction, with the cash rate down to 0.75 per cent, when the pandemic hit. Responding to this and other unexpected developments, the new government commissioned a review of the Reserve Bank.

The stage seemed set for a return to the policies that gave us the postwar Golden Age. But it didn’t take long for the lights to dim. The jobs summit turned into a “jobs and skills summit” dominated by employers complaining about “skills shortages.” It wasn’t so much a shortage of specific skills; rather, employers had come up against the fact that full employment makes it as hard for an employer to fill a vacancy as it is for a worker to find a job.

Then the word “Full” disappeared from the title of the Albanese government’s Employment White Paper, which is still a work in progress. True, maintaining full employment still appears at the head of the list of objectives, but discussion so far suggests it will get short shrift when the white paper actually appears.

When it was released last month, the Reserve Bank review reflected a similar tendency. Most attention was focused on internal restructuring, while the desirability of a higher inflation target and other issues were kicked down the road. Discussion of the full employment objective in the bank’s charter was limited. Most damagingly, the review recommended removing the treasurer’s power to override decisions of the bank via an announcement to parliament. Although it has never been used, the existence of this option was central to the integrated operation of fiscal and monetary policy in the decades before the shift to inflation targeting.

And, finally, we come to the budget. The scene had been set by the report from the government’s new Economic Inclusion Advisory Committee, which recommended a large increase in the poverty-level JobSeeker benefit and a commitment to full employment. Labor treasurer Jim Chalmers immediately signalled that the first of these recommendations would be rejected as both unaffordable and politically unpopular.

Eventually the government was shamed into a modest increase in JobSeeker, but full employment disappeared from the agenda. The budget projected an unemployment rate of 4.5 per cent — exceeding estimates of the NAIRU, let alone any measure of full employment based on actual labour market outcomes (such as requirement that there should be as many vacancies as unemployed workers). During his budget speech Chalmers described the rate as “low by historical standards,” effectively confirming that his benchmark is the last fifty years of failure rather than any notion of full employment. He then returned quickly to the central theme of the government’s policy, the need to reduce inflation.

Even this short period of full employment has had hugely beneficial consequences. Workers who previously have been dismissed as unemployable have suddenly found employers willing to take them on. Remote work has persisted since the lockdowns because employers who demand five-day attendance lose workers and can’t find replacements. Even more radical ideas like the four-day week are gaining traction.

With luck, and full employment will persist a little longer. But if it does, no thanks will be due to this Labor government. •

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As well as rising mortgage costs, families on the fringes face steep increases in energy prices. Across most of Australia, the wholesale price of electricity has more than tripled in the past two years; retail prices have followed, and are generally double or triple what they were two years ago.

A big contributor to those cost hikes is the price of gas, which has risen sharply as a result of Russia’s invasion of Ukraine. As one of the world’s largest gas exporters, Australia had been immune to such risks because of its plentiful local supplies. But we lost that immunity after 2015 when large-scale exports from the east coast led to domestic scarcity and the imposition of global pricing. The looming rundown of Victoria’s big Bass Strait gas fields poses a further risk to supply and prices.

High commuting costs, like energy market failings, result from poor planning. But they have another thing in common: transport and energy infrastructure are often financed by pension funds rather than governments. The people who administer these funds are the subject of political economist Brett Christophers’s new book, Our Lives in Their Portfolios: Why Asset Managers Own the World. These asset managers, he writes, “increasingly own and control our most essential physical systems and frameworks,” and their financial priorities are not aligned with social priorities unless governments impose that requirement.

While his style is somewhat dry and a little didactic, Christophers highlights three tendencies that raise big questions about how we finance infrastructure: the investment priorities of pension funds often determine which infrastructure projects go ahead; governments often take on risks that should belong to investors; and the conditions imposed by one infrastructure project can corrupt the process of providing public services or assets.

Christophers probes these interactions of public and private interests in detail. But I’m not sure he has stepped back to see the bigger picture. For starters, these investments aren’t big enough to justify the suggestion that asset managers rule society. Assets under management might total as much as US$1 trillion, he says, but that’s less than a third of the infrastructure investment undertaken last year by the fifty or so largest economies in the world.

The pension funds need reliable, predictable income to meet their obligation to pay regular returns, and the fees charged by proven asset managers are correspondingly generous. It’s no coincidence that the pioneering firm, Macquarie Bank, is called the “millionaires factory.” Macquarie, adept and innovative, has found new ways to skim earnings from unlikely places.

Asset management took off after the global financial crisis, partly because some assets — housing in the United States being the prime example — became relatively cheap and yet still offered good rental income. In the aftermath of the crisis the world was seemingly awash in savings; as interest rates fell, infrastructure assets became much more attractive to big investor organisations.

Christophers is inclined to focus on the incidental pitfalls of the asset managers’ investment in essential infrastructure rather than look at the design of the system that encourages this kind of asset. In many cases, these managers are standing in for governments. They raise money, just as governments do. Once an investment in a road or a tunnel or a power generator has been made, they generally manage the asset just as a statutory authority or government department would — or they outsource that function.

This form of asset management is created by government. Because the assets are often singular — a freeway or tunnel required to meet social needs — governments own the project from the start and set the terms. Asset managers often, perhaps always, get near-monopoly rights, and the primary tension between them and government is usually price.

What is this monopoly worth? If governments get that wrong, they miss out on some, or even a lot of, cash. If investors get it wrong, they don’t make much money — or sometimes go broke.

Interestingly, Christophers doesn’t examine two other fundamental questions: why roads are financed using tolls, and how better government might deliver more equitable and efficient results. And though politics can be  heavily influenced by real estate interests, he leaves property-sector influence in Western economies largely unexamined.

Our Treasury officials carry on quite a bit about rent-seeking by industry, but rarely do you see much pushback when developers demand taxpayer support as they convert broad acres into housing, often kilometres from schools or hospitals or even shopping centres. Looking back on the recent history of urban expansion, it’s fair to ask whether urban planning is extinct.

Poor planning exaggerates demand for some assets, like outer-urban freeways, that neatly fit the economic interests of asset managers. But you can’t blame asset managers for that. They might, however, have contributed to the illusions that have led governments down hazardous paths.

How did we get here? Australia’s economic debate has evolved over many years. In the decades after Federation an accord between capital and labour manifested in the Harvester judgement — our first national minimum wage — and relatively high levels of industry protection. During the 1970s and especially the 1980s a more laissez-faire consensus emerged, opening Australia up to trade, among other things, and sharply increasing the role of finance.

Once-passive pension funds, closely aligned with employers, became active investors largely driven by arithmetic. Asset trading became a big driver of Australian economic activity. And politicians became unused to thinking about public investment in any sector where business might have a role, even when the involvement of business depends on government.

One example Christophers highlights is renewable energy. He notes that asset managers haven’t much interest in large-scale traditional power stations, which are too complex and risky. He suggests that the set-and-forget nature of solar cells and wind turbines has attracted very big players to the energy transition. Government-backed purchase agreements are undoubtedly a factor, too, providing taxpayer assurance of investment returns.

One challenge of the energy transition derives from the fact that the energy itself is only part of the price consumers pay for electricity or gas. A cursory look at a typical electricity bill reveals that the supply charge is large relative to the price of the energy consumed. This charge is largely made up of the cost of wires, poles and maintenance, a monopoly activity delivered by privately owned companies largely in the hands of asset managers.

Less transparently, energy is only partly priced by markets. Australia’s National Electricity Market is good at pricing the least-cost source of power at any time of day, effectively delivering a competitive outcome. But consumers expect power when they flick a switch, and that level of reliability depends on investment in generation that isn’t needed all the time. This raises a challenge for the energy transition, and it cannot be resolved by the NEM.

The electricity supply Australians have today was built almost exclusively by state governments. Over time, New South Wales and Victoria sold power stations and other elements of their state energy authorities to private owners. In general, much of the money raised has been redirected to other infrastructure. Only Queensland and Western Australia still have a public power utility — though Victoria intends to resurrect the State Electricity Commission and the new NSW government has indicated it might have similar plans.

So far, though, state governments have been unwilling to deal in any concrete way with the reliability part of electricity supply. Yet the crucial question, occasionally hinted at by the national regulator, AEMO, but only raised in blunt terms by people like former Snowy Hydro chief executive Paul Broad, is this: will we have seriously unreliable power during the transition?

Without going into the specifics, the key point is that our power supply is a basic service that we experience in a certain way because of choices made decades ago, mostly by state governments. Today’s governments don’t appear to accept that part of their role is to ensure the next system is at least as effective as the old one.

While asset managers are certainly investing in the energy transition in a big way, they are not utilities. In fact, most of them behave more like property speculators, acquiring a right and setting up renewable generation before flipping the asset to a fund.

What seems to have happened since the 1970s is that Australia’s public management has retreated from any activity that has commercial potential, assuming instead that “the market” will deliver the right outcome as long as the “settings” are right.

In the case of power, a debate actually took place about the need for a publicly funded “capacity” payment to ensure that backup power was available for times when the system was not adequately supplied. But the states couldn’t agree. Instead, it was assumed that the very high prices that arise when normal supply is interrupted will encourage private investors to build storage capacity or “peak” gas plants that can be brought on quickly. For a variety of reasons, that latter outcome now seems less likely.

Meanwhile, we are getting good at bringing forward the dates on which the big, concentrated coal-fired plants will close, but less adept at rapidly rolling out the transmission and other investments needed to make sure those closures don’t bring serious problems.

Christophers’s exploration of the remarkable global reach of private asset managers into social assets is interesting and informative. But the other side of the asset management trend is a passivity among governments at a time when demands for active management of public assets are intense and have the potential to rise to unprecedented heights. •

Our Lives in Their Portfolios: Why Asset Managers Own the World
By Brett Christophers | Verso | $39.99 | 320 pages

The post Global reach appeared first on Inside Story.

Chalmers’s former boss, Wayne Swan, forecast a $21.7 billion surplus in the 2008–09 budget. The global financial crisis took care of that. Four years later, heedless, Swan forecast an implausible $1.5 billion surplus. He was only $20 billion out. And we remember the hubris of Josh Frydenberg and Scott Morrison at the time of the 2019–20 budget, with their coffee cups printed “Back in Black.” Their budget was already heading for red when Covid arrived and gave them a good excuse.

This time, it’s the current financial year that Chalmers says will end in surplus. We’re in May now, and the year ends on 30 June. It would be a bad shot if he missed from this close. Let’s assume the long wait is over: Australia’s federal budget is finally back in surplus, even if only by $4 billion or so.

But will it last? The Murdoch hunting pack has focused on the budget’s forecast that this will be a one-off, and next year the budget will be back in a deficit that will then grow bigger still. And yes, that is what the budget forecasts say. But when you read the assumptions underlying those numbers you realise they’re not really forecasts, but rather a worst-case scenario. They assume a collapse of global commodity prices.

Why does Treasury give us a worst-case scenario? Because we don’t like unpleasant surprises. If a tradie promises to do the job for $1000 but then lifts his bill to $2000, we get cross. But if he promises to do it for $2000, but then after doing it, says “No, that was easier than I expected, $1000 will do,” we think he’s a great bloke.

Treasury now works on the same principle. It begins by forecasting a worst-case scenario: in this case, adopting the lowest market forecasts for prices of iron ore, gas and coal. The bears always predict a price collapse; that would flatten the profits of Australian miners, and hence Australia’s company tax revenue.

On that basis, Treasury forecast in October that company tax receipts would crash from $127 billion this financial year to $100 billion in 2023–24. But now it’s May, and prices are still high. Treasury has had to upgrade this year’s forecast to $138 billion, and the worst it can come up with for next year is now $129 billion.

Don’t assume it will end in deficit: no one knows yet. The future will reveal itself, as it always does. We could be entering a new era of surpluses or slumping back to the old run of deficits. Treasury is no longer trying to guess those numbers. It just starts with a gloomy forecast, so the eventual reality will be better than we expected, and we’ll hail their boss, the treasurer, as a good economic manager.

That’s how governments want us to see them. An unexpected budget surplus, especially the first for fifteen years, is a gold star on the treasurer’s report card. Well done, Jimmy Chalmers!

And by and large, he has done well, on the macro front. This budget is far from perfect. But as Chalmers keeps pointing out, it had to balance the need for restraint to bring down inflation with the reality that a lot of Australians are experiencing big falls in real income, the economic outlook has darkened, and the worst is yet to come. And those who have won or lost will be voting on the government in two years.

Economists in the ivory towers of academia or Murdoch’s propaganda machine feel free to ignore the pain felt by less fortunate Australians, or the government’s reasons for doing something for them. In the real world, though, Chalmers is right: government, of whichever party, has to find a balance between these goals.

Here’s a concise comparison from the budget’s key table on macro matters: table 3.3 in budget paper 1. (“Parameter variations” are the changes in Treasury’s baseline estimates with no policy changes. And remember: by the 2021 budget, the economy was already roaring ahead, and by the 2022 budget, inflation was emerging as an issue):

Neither side would appreciate the comparison, but the balance Labor struck this time is remarkably similar to that of Josh Frydenberg’s budget a year ago. He banked 75 per cent of his windfall gains from Treasury’s upgraded bottom line; Chalmers has banked 81 per cent of his. Frydenberg was facing an election two months later; Chalmers is facing a more difficult economic situation.

An important note. The net effect of policy changes is not “new spending” as our ABC mates keep mislabelling it, but new spending minus new revenue. For the four years, the budget estimates a net $41.4 billion of new spending, only partially offset by $21.9 billion of net new revenue.

Chalmers points out that $7.5 billion of that new spending was required to correct unfunded or underfunded commitments left by the Coalition government, including underfunding our biosecurity program, digital health infrastructure, the Brisbane Olympics and Canberra’s national institutions. (While the War Memorial was given a $500 million expansion, all the other cultural institutions were starved by the Coalition, perhaps to pay for it.)

After perusing the departmental expenses table in budget statement 4, I doubt that Labor has dealt with all the underfunding. Excluding the National Disability Insurance Agency, the budget assumes that the cost of running departments and agencies will grow on average by just 2.8 per cent annually over the four years, down from an annual average of 5.3 per cent over the last four years. I’ll believe that when I see it.

There are lots of spending cuts in this budget, though relatively few are specified. The government says its two budgets so far have achieved almost $40 billion of “savings and spending reprioritisations.” We’ll come to them later, but the allusions to them in the budget papers are full of management speak: there are no “spending cuts,” just spending “efficiencies” or “streamlining and modernising.” Using that language must make cuts easier on the cutters.

Still, Treasury estimates that this budget restraint will have a significant impact. In the past three years, it estimates, public demand in real terms grew by 18.9 per cent. In the next three years, it is forecast to grow by just 5.3 per cent — about the same as expected population growth. Three years of zero growth per head in public spending will be a big brake on the economy.

While we’re on the macro issues, three important things to note. First, the mix of higher commodity prices, high job growth and strong GDP growth has caused a dramatic improvement in the budget outlook, even through Treasury’s gloomy binoculars. And that has dramatically changed Australia’s debt outlook.

Instead of gross federal government debt peaking in 2030–31 at 46.9 per cent of GDP, Treasury now forecasts it will peak in 2025–26 at 36.4 per cent. That’s a big turnaround, and if it happens a great relief that increases our ability to cope with future shocks.

Second, be aware that, like the International Monetary Fund, Treasury thinks worse times are on the way. Retail sales — which had been way above trend in 2022 — are now falling as higher interest rates bite. Employment growth is forecast to shrink to 1 per cent a year for the next two years: that implies only a third as many new jobs will be created as in the past two years. Unemployment would rise, and real GDP growth would fall to just 1.5 per cent in 2023–24 and 2.25 per cent the following year. Those forecasts sound plausible.

Finally, Treasury predicts a ray of sunshine on wages. By the first half of next year, it believes, wages will be rising faster than prices, giving Australian workers their first growth in real wages for four years. But even if that is right — and Treasury has often overestimated wage growth in the past — real wages will have fallen 7.5 per cent in that time. It’ll be years before Australian workers get back to where they were before Covid.

Treasury predicts that inflation as measured by the consumer price index will decline to 3.25 per cent by the middle of next year — helped by several budget measures designed specifically to lower the CPI. That could mean less reason for the Reserve Bank to increase interest rates. But while the Reserve might ignore these budget tricks as it focuses on underlying inflation, the case for further interest rate rises now looks weak indeed.

The gloomy macro outlook makes it even more important to get the microeconomic policies right. On that score, this budget has big problems.

Labor is selling its budget as a package of measures designed to provide “cost-of-living relief” targeted to “looking after the most vulnerable.” It does some of that, but only sporadically, where it has spotted an opportunity that appeals to it.

Until the last fortnight or so saw a clamour of protest against its decision to ignore the report of its Economic Inclusion Advisory Committee urging a big rise in JobSeeker benefits, it’s clear that Labor’s only plan for JobSeeker was to move fifty-fives to sixties into the slightly less poverty-stricken category with those over sixty.

Labor’s moral and political antennae were askew. Anthony Albanese was lucky that he grew up in an era when to be poor in Australia meant the government gave you an austere but liveable income and cheap housing. That is no longer true. Albo needs to get back in touch with the angry teenager he used to be. The smug, rich sixty-year-old he has become might have something to learn from that boy.

At least the budget included a last-minute decision to lift the JobSeeker benefit by $20 a week. That’s $2.86 a day: there’s not much you can buy with that, and the budget offered no prospect of any further increases — not because it can’t afford them, but because it just doesn’t see the unemployed as a priority.

By contrast, under the stage three tax cuts — totally unmentioned in the budget papers, prompting News Corp journalist Samantha Maiden to dub them Voldemort — people with incomes of more than $200,000 a year will get an extra $25 a day. That’s more like the rise Labor’s expert committee said the unemployed should be getting. How can Labor claim it is focused on those “most in need”?

The budget papers estimate that the two changes to JobSeeker combined will cost $1.3 billion a year, in a budget of $700 billion a year. Questioned by Maiden yesterday, Chalmers implied Voldemort will initially cost $23 billion a year when it takes effect on 1 July 2024. It’s just a matter of priorities.

The government gave a better hearing to the inclusion committee’s second priority, an increase in rental assistance payments for the hard-up. They will rise 15 per cent, costing roughly $700 million a year.

And it went much further for single parents whose youngest child is aged between eight and fourteen: their benefits will rise from JobSeeker-level to pension-level — an increase of nearly $90 a week as against the $20 a week rise for those left behind on JobSeeker.

The story the spin doctors left for the budget itself was perhaps the best of all. Labor has finally acted to stem the flow of doctors out of general practice, which has seen more than sixty GP clinics close their doors in recent years, some leaving towns without doctors. But their way of fixing it, while interesting, might just backfire.

The GP crisis stems from the long freeze in Medicare rebates, begun by Labor’s Wayne Swan and continued for years by the Coalition. This effectively cut GPs’ incomes by about 25 per cent. Frydenberg ended the freeze, but it has never been made up, and only 11 per cent of new doctors now nominate general practice as their future career.

Health minister Mark Butler deserves our thanks for having listened, and persuaded his colleagues to act. But Labor won’t increase the rebates, which would have seen benefits flow to all patients. Instead, it will roughly treble the separate incentive it gives to doctors to bulk-bill.

This should more or less restore GPs’ real earnings, and see more patients treated for free. That in turn could reduce medical cost pressures on the CPI. Labor estimates that 11.6 million Australians will be able to get free (bulk-billed) care from their GP. But that also implies about fifteen million Australians will not. Watch this space.

Still, the biggest issue in health funding appears finally resolved. But the biggest issue in housing is getting further and further from a solution.

The budget forecasts that residential investment will decline 7.5 per cent in the three years to 2024–25 — at the same time as national rental vacancies have hit a record low of 1 per cent and advertised rents have risen by 10 per cent in the year to April.

Yet the budget simultaneously reveals that in the year just ending, population growth will exceed 500,000 for the first time. In the year about to begin, it is forecast to be close to another 500,000. In three years, almost 1.5 million more people will join us, yet housing is in record short supply, new construction is slumping, and every week builders are going broke.

Population growth mostly comes from net overseas migration, which is mostly under the control of the federal government. This is as bad a failure of policy coordination as I’ve ever seen.

The solutions are obvious: put the brake on immigration — especially since job growth is forecast to collapse — and put the accelerator on housing. This is now a crisis. The government should stop persisting with a patently inadequate target and funding mechanism, sit down with its crossbench critics and the industry, and work out solutions that fit the scale and urgency of the problem.

The other big problem with this budget is Labor’s fear of increasing taxes, which are far below the levels of comparable countries overseas. Just read the list of its “major budget improvements”:

The government is still frightened to impose significant new taxes on business, or any tax on “ordinary Australians.” Instead, it targets groups with no voice in public debate, like smokers and tourists. Yet many of the “most vulnerable” Labor wants to look after are smokers: the household expenditure survey shows smokers tend to be older and lower-income. Labor has hit them more heavily than the gas companies that make huge profits but pay little tax.

Cutting government-funded beds in aged care facilities from seventy-eight to sixty places per thousand people received little budget coverage. It’s one way of responding to staff shortages and “the increasing preference of older Australians to remain in their homes,” but it looks like a cynical move. It is expected to save eight times more than Labor’s extra spending on home care.

This budget is like a house with an impressive framework, built in difficult conditions, but puzzling in its detail. The further you explore inside this apparently attractive home, the more worried you become. •

The post The devils in Chalmers’s details appeared first on Inside Story.

The report’s “highest” and “immediate” priority” was for a large enough increase in JobSeeker to significantly reduce poverty among the unemployed. The right amount, it suggested, would be 90 per cent of the age pension, or an increase of $256 a fortnight.

The government has responded by increasing the rate by just $40 a fortnight, or $2.86 a day. Yes, it did some other things — a slightly increased rate for unemployed people aged between fifty-five and sixty, an increase in rent assistance by $31 a fortnight, more money for single parents with children between eight and fourteen, incentives for more bulk-billing under Medicare, and help with energy bills. That will make a difference, but not — with the exception of the single parents’ payment and perhaps some people’s energy bills — a substantial one.

The increase in JobSeeker and the youth allowance will cost an estimated $1.3 billion next financial year out of an expected $668 billion in total revenue. Despite the professed concern about the impact on inflation of pushing more money into the economy, the inflation rate is coming down, the economy is slowing and the budget has been taking more money out of the economy than it is putting in.

No doubt the government believes it got the politics right. I mean, what were the members of the advisory committee thinking by suggesting such a huge increase in JobSeeker? Even $40 a fortnight was far too high in the eyes of people like Robert Gottliebsen, who wrote in the Australian that “it is particularly galling to see able-bodied younger people gaining extra money to pursue a non-working lifestyle at a time of labour shortages.”

How can a committee of experts possibly compete with such deep-seated prejudices, and with a government that feels it must indulge them?

It was ACT independent senator David Pocock who secured the government’s commitment to set up the Economic Inclusion Advisory Committee during the negotiations over industrial relations legislation last November. He called it a “game changer” for people living below the poverty line, especially as the government agreed that the committee’s expert advice about how the most vulnerable are faring “and what needs to change to ensure we don’t leave them behind” would be released publicly before each budget.

The government honoured the promise, appointing a stellar cast of committee members. At their head is Jenny Macklin, a former Labor minister with a legacy of major reforms (including the National Disability Insurance Scheme) and a record as a researcher and expert adviser on health and welfare issues extending back to the Hawke era.

She was joined by leading academic experts in relevant fields, including Professor Peter Whiteford on welfare payments, Professor Jeff Borland on the labour market and Associate Professor Ben Phillips on inequality. Then there were representatives of the major interest groups, including the Australian Council of Social Service’s Cassandra Goldie, the ACTU’s Sally McManus and someone even Mr Gottliebsen couldn’t place among the usual suspects — Jennifer Westacott, head of the Business Council.

The government shouldn’t have been surprised by the committee’s findings. Yet it did its best to bury the report, sneaking it out late in the day, distracting attention to other issues and writing Pocock out of the script.

This response wasn’t just part of the annual political ritual of lowering expectations before the budget. Treasurer Jim Chalmers had clearly decided that tackling what the report called the “serious inadequacy” of payments to the unemployed was not sufficiently important.

As its track record shows, Labor has higher priorities than that, such as politics. It didn’t get around to increasing unemployment benefits when it was last in government. Then, in opposition, it remained sufficiently unmoved by evidence that the unemployed couldn’t survive on the prevailing rate of $40 a day as to promise no more than a review in government.

Even that commitment was dropped before the last election. It was left to the Morrison government to provide a permanent $50 fortnightly increase ($10 more than in this budget) following the withdrawal of the Covid emergency payment.

Labor’s attitude stems from deep-rooted myths about unemployment. In the words of the Grattan Institute’s Danielle Wood, the myths’ most pervasive image is “a work-shy twenty-something playing video games in their parents’ basement.” The same attitude convinced the Morrison government it was on a winner with its ill-starred robodebt scheme and accompanying rhetoric about welfare bludgers.

Department of Social Services figures show that just 16.8 per cent of people on JobSeeker and Youth Allowance are under twenty-five. Anti-Poverty Week executive director Toni Wren points out that half of those on JobSeeker are over forty-five and 28 per cent over fifty-five — many of them facing overt or covert age discrimination.

Forty-three per cent of JobSeeker recipients have been assessed as having only a partial capacity to work, mainly because higher eligibility hurdles have barred them from the more generous disability support pension. Many of them are forced to apply for eight jobs each month to continue receiving their payment.

About 10 per cent of the unemployed are single parents with children between eight and fifteen who would have qualified for the higher parenting payment before the Howard and Gillard government reduced the cut-off age for children from sixteen to eight. This move has now been largely reversed, which will improve the lives of some of the one in six Australian children living in poverty — a figure that Toni Wren points out has not changed in twenty years.

In short, the figures reveal a very different profile of the unemployed from the stereotype.

JobSeeker has become the fallback payment for many of those who have been locked out of higher income support options by increasingly restrictive eligibility requirements. This has very little to do with the populist rhetoric that anyone should be able to get a job when the unemployment rate is down to 3.5 per cent.

Danielle Wood points out that the Macklin committee’s proposed increase of $128 a week would still take the payment to only just over half the minimum wage, leaving a very significant financial incentive to work. Better employment services for those who face large barriers to employment would help; ACOSS says Australia’s spending on those services is less than half the OECD average.

The government is reviewing employment programs, and it’s to be hoped they’ll improve, but this is no substitute for a decent level of JobSeeker. As the Macklin committee stressed, the payment’s current inadequacy is also itself a barrier to finding work.

Was David Pocock too optimistic about the Macklin committee being a game changer? Perhaps not, if we look to the future. Its first report shifted the public debate to an extent that must have unsettled the government, though not enough to take proper action. Otherwise, perhaps there wouldn’t have been even the $40 increase, which was decided only near the very end of the budget process when the government learned it had more money coming in.

The Macklin report’s message cut through the pre-budget communications clutter, despite the government’s best efforts and its equivocal response. It generated an outpouring of support from an unusually broad political spectrum. Among the 350-plus signatories to ACOSS’s follow-up letter to Anthony Albanese were four federal Labor backbenchers — and others came out in public separately — Liberal MP Bridget Archer, the teals, other independents and the Greens, former Labor and Liberal ministers and backbenchers, prominent economists, and church and community leaders. The letter made several pointed references to not leaving people behind — a sentiment Anthony Albanese expressed in his election victory speech last year and has repeated since.

The Macklin report’s impact came not only from its official, if reluctant, government sanction. Step by step it builds the argument for the sheer inadequacy of JobSeeker. In the twenty years to 2020, the rate for a single adult rose by less than 3 per cent in real terms. The post-Covid increase in 2021 lifted this to 13.7 per cent, still far short of the 47 per cent increase in disposable income received by median households. In the same period, the gap between JobSeeker and the age pension grew in real terms from $35 a week to $160.

As a proportion of the national minimum wage, JobSeeker fell from 47 per cent in 2002 to 41 per cent in 2021, making it the third-lowest rate, after Britain and New Zealand, among the thirty-four developed countries of the OECD. Including housing costs, for which assistance is more generous in both those countries, puts Australia at the very bottom of the OECD rankings. “When an average earner becomes unemployed their income drops by more than [in] any other high-income country,” says the report.

And then there is the moral argument. JobSeeker recipients told the committee about looking around the house for things to sell, choosing between medicines and paying electricity bills, and doing without meat and fresh fruit and vegetables. This is the face of poverty in Australia — one of the richest countries in the world, but one where inequalities in income and wealth have been growing.

Under the agreement with Pocock, the Macklin committee will report annually before the budget. The pressure to turn into reality the prime minister’s words about leaving no one behind and holding no one back will continue.

Has the government made a rod for its own back by agreeing to the committee, as the Australian Financial Review’s Phillip Coorey has argued, given how many worthy, competing and unavoidable demands are made on the budget?

To the contrary, if it helps dispel ignorance and misunderstanding about Australia’s unemployed and pushes the government to do more to help them, it may be to Labor’s political advantage. Voters may be less inclined to defect to the Greens and independents if the government implements more real Labor policies for which the arguments are so compelling. •

The post Jenny Macklin’s mythbusters appeared first on Inside Story.

At 3.5 per cent, the unemployment rate is close to the lowest it has been in the forty-five years since monthly numbers began. And that isn’t because of low immigration: on the contrary, the workforce is much bigger than before the epidemic. The number of people with jobs and total hours worked are also at record highs. (In the years between the global financial crisis and 2019, by contrast, unemployment didn’t get below 5 per cent.) By the second half of last year real income per head was also at a record level.

Inflation is certainly too high, and occupies most of our attention. Yet in recent quarters it has been decelerating. Underlying inflation was running at an annualised rate of about 4.8 per cent in the March quarter, still way beyond the Reserve Bank’s target range of 2–3 per cent. To get back towards the midpoint of that band we need to see that underlying rate decelerate from 1.2 per cent for the March quarter this year to around 0.7 per cent a quarter. That’s a big move, but smaller than the decline in quarterly underlying inflation over the six months to March.

The key point here is that underlying inflation has markedly decelerated despite firm output growth and despite unemployment remaining near a record low. Wages growth remains modest.

The Australian pattern is remarkably similar to America’s. There, trimmed-mean personal consumption inflation (which removes the most extreme price changes) peaked in January with a 6.1 per cent annualised rate, and by March was down to a 3.4 per cent annualised rate. Unemployment was down to 3.4 per cent in March — the lowest rate since 1953.

On last Friday’s Reserve Bank forecasts, annual underlying inflation won’t fall below 3 per cent for two years (and even then it will only be just under). But its forecast numbers are consistent with the quarterly underlying rate (measured by the trimmed mean) coming back within the target band by this time next year. On the quarterly numbers, underlying inflation will be consistent with the band long before the headline annual rate is back within it. Once the quarterly numbers are within the band, the inflation problem is over.

We have a good chance of getting inflation down without a serious recession and perhaps, as the RBA also forecast on Friday, with continuing gains in employment and the jobless rate still below where it was before Covid.

With inflation contained, the time will have come to recognise our long-term constraints, which are considerable.

First, inflation may well decelerate without a recession, but not without two years of slowing growth and rising unemployment. The low-inflation world to which we are returning was also a world of slow growth and somewhat higher unemployment. It will likely be a world of markedly lower interest rates, a point the IMF made in its recent World Economic Outlook.

As we were reminded in those four or five years before Covid, however, low interest rates don’t necessarily spur rapid output growth. With much higher government debt and with the Reserve Bank running down rather than building up its government bond holdings, we should also expect contractionary fiscal policy for all circumstances short of a serious downturn.

Another constraint is that it is quite a while since Australia (like most other rich countries) has seen much increase in output per hour worked, or productivity growth. That doesn’t give room for real wage increases, or for real income increases more generally. With population growth through immigration likely to exceed GDP growth, Australians will be no better off in real terms in two years than they are today.

Then there is the budget, and the discretionary spending options open to the Albanese government. With revenue flattered by big increases in nominal GDP, and spending pressures eased by high employment and the withdrawal of Covid spending, tomorrow’s budget outcome and forecasts for the coming financial year will be more favourable than predicted in the budget revision of October last year. Even so, the path ahead is difficult. Last October’s budget forecast higher deficits for 2023–24 through to 2025–26, even with modest average spending increases and revenues close to previous records as a share of GDP.

Perplexed by the immediate concerns about high inflation and rising interest rates, we have not focused on these underlying constraints. By the middle of next year, all going well, they will begin to become more evident. Going into a 2025 election, after two years of slower growth and rising unemployment, they will be more evident still.

For the Albanese government, the appealing story will have to be about the next term, not this one. That story will need to include the balance between fiscal and monetary policy over coming years, a topic elided in the recent review of the Reserve Bank. It will also need to include measures to stimulate productivity growth. Getting productivity up will be harder than getting inflation down — a good reason to elevate the search for ways and means to the centre of national attention. •

The post Inflation and beyond appeared first on Inside Story.

Admittedly, he would barely have had to open his mouth to be seen as an improvement on his predecessor, Trump appointee David Malpass. Never popular, Malpass made something of an ass of himself last September when he appeared to deny the existence of global warming. He lasted just five more months before resigning, a year before the end of his term.

The system under which the United States appoints the president of the World Bank while Europe gets to choose the president of the International Monetary Fund is routinely denounced by developing countries. It is a postcolonial carve-up without justification in the modern age, except for the fact that the United States and European countries are the two organisations’ largest shareholders.

Banga’s positive reception can be put down to two factors: he is a genuine financier with a solid strategic and managerial record at Mastercard, and he grew up in India, where he is still regarded as one of their own. He spoke last week at a number of public and private events on the fringe of the spring meetings of the bank and the IMF. His audiences included finance ministers from well over a hundred countries, along with businesspeople, academics and representatives of NGOs, philanthropists and the financial media.

To wander among the packed fringe meetings in Washington, as I did, was to be given an education in global development policy, with topics ranging from renewable energy to emerging market currency risk, humanitarian assistance to climate-resilient agriculture, low-income country indebtedness to girls’ education. In these fields and others, the World Bank spends around US$100 billion annually via a combination of commercial loans to middle-income countries, low-interest loans to poorer countries, and grants.

The bank is the largest in the network of “multinational development banks,” or MDBs, that lends resources from developed to developing nations: the others include the Inter-American Development Bank, the African Development Bank, the Asian Development Bank and the much more recently established Asian Infrastructure Investment Bank, in which China is the major shareholder.

Banga is arriving just as reform of this system is in the air. Last year US Treasury secretary Janet Yellen called on the bank to prepare a “roadmap” for change, with the aim of clarifying its mission and streamlining its procedures. As a draft of the roadmap was published in advance of the spring meetings, other voices sought to widen the agenda further. On a state visit to China, French president Emmanuel Macron called for a “new global financial pact” to revise “the financial terms of international solidarity, whether it concerns debt issue or mobilisation of the World Bank and IMF, to address both inequalities and the consequences of climate change.” He confirmed that Paris would host a summit in June to pursue these issues.

Three principal problems underlie calls for reform of the World Bank and MDB system. The first relates to changing conditions since the institutions were designed in the decades after the end of the second world war to help the developing world out of poverty. This remains their core mission, but in recent years new challenges have become increasingly pressing.

As resource depletion and habitat destruction gathered pace, the banks were forced to redefine themselves as champions not merely of economic growth but of “green growth.” As continuing income and gender inequalities disfigured many countries’ development records, “inclusive growth” became the mantra. Now, accelerating climate change not only threatens to overwhelm past growth but also demands a new form of development altogether, one that is both resilient to rising temperatures, and decarbonised.

It was Malpass’s inability to grasp these challenges that eventually did for him. But the necessary reorientation of the World Bank won’t be straightforward. The poorest countries know how damaging climate change is for them, but they warn that a greater focus on tackling carbon emissions will inevitably reduce funding for education, health and other traditional anti-poverty measures. Backed by India and China, they insist that any broadening of the bank’s remit must be accompanied by an expansion of its lending resources. Developed countries, however, are not minded to provide new funds — at least until they can see reform under way.

Second, the World Bank’s operating procedures have been widely criticised. Determined to protect the triple-A credit rating that allows it to borrow at the same interest rates as Western governments, the bank follows highly risk-averse lending policies. In many countries it competes with private banks to lend to commercially safe projects, leading commentators to question its added value. In an early reform agreed to in Washington, the bank will now be able to lend out more funds relative to its shareholder capital. But this will yield only an extra US$4 billion annually.

Meanwhile the bank’s own operating procedures are notoriously slow and cumbersome. Forced by its developed-country shareholders and NGOs to apply stringent environmental and human rights safeguards, and still using paper-based processes, the bank can often take two years to reach a decision on a lending application. As one African leader observed at a fringe event, “If I want a new road, I can be driving on the one that China builds us before the bank has put it to their committee.”

Third, the MDBs are being urged to mobilise far more private-sector lending. In a world in which developing countries need to invest an estimated US$2.4 trillion annually in green infrastructure, sustainable agriculture, nature conservation and climate resilience, the funds at the banks’ own disposal are not nearly sufficient. But getting the private sector to invest at scale in emerging markets other than China has proved difficult.

Even in stable economies like India, the interest rate charged on borrowings is twice as high as in a rich-world country; in Africa it can often be a multiple of three. New, more innovative approaches are thus being urged on the banks, involving greater use of risk-sharing instruments such as government guarantees and insurance mechanisms to protect against exchange rate fluctuations.

Can the World Bank and its sister institutions respond to these demands? The latest version of the bank’s reform roadmap was widely criticised in Washington as too limited and incremental. But blame-shifting was also rife: country shareholders pin the weak draft on unimaginative management; the latter say privately that it is the shareholders who have watered down their much bolder initial proposals.

Ajay Banga thus faces both great expectations and tough challenges. He has been clear about his own priorities. Integrating climate change into everything the bank does will be one of them; mobilising private sector cash another. And he warns he will be forthright whenever the real problem is not the bank’s bureaucracy but the unwillingness of its country shareholders to agree to something new.

The elephant in the room is the make-up of the shareholders themselves. As in any bank, voting rights reflect equity. Since the last set of reforms in 2010, China has been the third-largest shareholder in the bank’s main arm, after the United States and Japan. With other emerging and developing economies it now has 47 per cent of total shares. If, as seems likely, the bank receives another injection of capital next year consequent on reform and an expansion in its remit, that figure could rise to more than 50 per cent. But the United States and its Western allies will be loath to allow China the possibility of amassing a majority voting coalition.

In this context June’s Paris Summit promises to be pivotal. Working closely with Barbados prime minister Mia Mottley, originator of the ambitious “Bridgetown Initiative” for global financial reform, and Indian prime minister Narendra Modi, chair of this year’s G20, Macron has set out an ambitious agenda for world leaders.

Focused on expanding global financial flows for development, climate and environmental protection, the summit will make World Bank and MDB reform one of several priorities. Others will be a review of the system under which developing countries fall into, and might escape, unsustainable debt; new funding streams for climate “loss and damage,” such as an international levy on carbon emissions from shipping; and the reallocation of Special Drawing Rights, the reserve currency issued by the International Monetary Fund, to poverty-reduction programs. If the “3M” leaders — Macron, Modi and Mottley — succeed, each of these issues will be taken forward to detailed decisions next year.

For his part, Ajay Banga has made clear that he is up for the idea of a “new global financial pact” along these lines. He may be their nominee, but the question is whether the United States and its Western allies are up for it too. •

The post Banking on Banga  appeared first on Inside Story.

To a man, the officers nod or voice their agreement. It is not until the meeting is about to close that the lone woman in the room musters the courage to speak. Her statement comes in the form of a question, the standard gendered inflection of women in her day. “Isn’t the economy supposed to serve society,” she asks, “rather than the other way around?”

It has been nearly half a century since I drafted a minute, a ministerial or a cabinet submission, but that single interrogative sentence has been forever imprinted on my brain. Since resigning from the service, I have stood outside the arena, taking another direction in my own life as governance in Australia followed the trajectory outlined in that brief senior officers’ meeting.

It may surprise some to be told that the meeting took place while Labor’s Gough Whitlam was still prime minister, and that his government was adopting a tighter approach to fiscal expenditure. This is not the general view of things, but the truth is that the government, under the extreme pressure it was subjected to during that year, accepted it was time to pull up its socks and conform to more stringent fiscal expectations. If the Dismissal had not intervened and the government had been permitted to continue, the received wisdom about its economic capability would be substantially different.

That said, the Whitlam government — and that of its Coalition successor under Malcolm Fraser, whose election later that year was so ignobly prosecuted — was still imbued with a fundamentally Keynesian outlook, the legacy of our postwar reconstruction. The Coalition certainly introduced stringent cost-cutting, but the Country Party’s influence combined with Fraser’s reversion to stimulus measures in the 1982 budget indicated that it hadn’t subscribed to demands for wholesale economic reform.

Indeed, the Fraser government took back responsibility in 1977 for women’s refuges, which had previously devolved to the states, and doubled the allocation for them. It also continued funding childcare and resisted subsidising commercial centres. It was the Hawke Labor government, elected in 1983, that was wholly committed to what was variously called Reaganomics, Rogernomics or economical rationalism, albeit a tempered version. We know it now as neoliberalism, the basic idea of which is that governments should get out of the way and let the market take over.

This change, though focused on economics and couched in its language, has ultimately been a cultural one, and it has been profound. It is perfectly acceptable even today for professionals of all stripes to speak of “the market” in quasi-deistic terms. A spate of articles appearing in the 1980s — in ostensibly progressive media like the National Times as well as in business journals — valorised the pursuit of riches and those who pursued them in gushing terms. I used to keep score of the number of times the word “success” was used, meaning getting ahead in some sort of business.

By the time Howard came along, we were all businesses. Even freelance writers like me were sending out invoices to our editors, and the more fortunate among us were filing quarterly business statements and charging GST. The practice continues to this day, and no one bats an eyelash over the paperwork involved in what was supposed to be a development to rid us of red tape.

And I’m not the first to note that in our dealings with government suddenly we were “clients” and “customers” but never citizens. Gradually, many began to see themselves as lone actors instead of members of communities or collectives. Union membership declined, as did that of political parties. Politics too became a profession rather than a calling.

How have women fared under these developments? Before addressing the question, let me say a few words about myself. I was born in the United States during the Great Depression, and Franklin Delano Roosevelt was president until I was six. It’s hard to explain how a child that young could absorb the zeitgeist of his New Deal, the relief of knowing that a government was there to help, that people who had been at risk of starvation were given work, even artists and writers and actors like my mother, but I did. And it would be years before I would find myself with a government resembling it.

I left the United States when the scourge of McCarthyism had only just begun to subside. We were now in the grip of a cold war and the repudiation of anything smacking of socialism. Though the Australia I came to in 1958 was also enmeshed in cold war politics, and I was shocked by the blatant racism and what we would come to know as sexism, the attitude towards government I found here was markedly different. To paraphrase the historian Keith Hancock, Australians expected their governments, state and federal, to be at the service of their citizens.

Even for an American scarified by those McCarthy years, the easy Australian attitude towards government took some getting used to. It wasn’t until 1972 that I felt I could let my guard down — that I was once again experiencing a government whose progressive flavour and sweeping reforms for improving society resembled those of the war years of my youth.

Yet less than three years later the seeds of neoliberalism had been planted, the hope and excitement of the Whitlam experiment came crashing down, and though it would take another eight years for the seeds to ripen, the tenor of the previous contract between government and its citizens was transformed.

Is the purpose of an economy to serve a society, or is it indeed the other way around? Most particularly, how have women accommodated this profound change in economic understanding, and its consequent changes in governance?

For an answer I have to go back to those Whitlam years again, during which some groundbreaking reforms were initiated. Women’s reproductive freedoms were enhanced, financial support for single mothers was introduced, and advances in employment were set in train, with the government backing equal pay for equal work and the extension of the minimum wage to women. Discrimination committees were established, part-time work encouraged and, most importantly, a wide-ranging, substantially funded childcare program was introduced.

Free tertiary education, arguably the most significant reform, was not specifically designed for women but did most to expand our horizons. All this required an expansion of the federal public service and the public sector in general. But under the changed zeitgeist, and as time has passed, both have been systematically whittled back, to the point where today we are subjected in every conceivable sphere to the signs of a seriously fractured social order.

Climate change and the Covid-19 pandemic have accentuated these fault lines. The accelerated appearance of extreme weather events predicted by climate scientists decades ago has been met with increasingly woeful federal government policy, the Gillard government’s short-lived emissions trading scheme being the sole exception.

After more than twenty drought years since the turn of the century, whole towns have been left without water and rivers turned dry. The bushfire season has extended, and resources for fighting the growing number of fires and their increased spread and ferocity have been seriously overstretched. What’s more, the very means for fighting them – the planes, the water, the fire retardants – add to the carbon discharged into the atmosphere, itself the cause of the heat enveloping the planet.

As the planet struggles to adapt, the weather volatility grows. Floods ruin homes and vital infrastructure, damage crops and spread disease, and again the tools at our disposal for saving lives and rebuilding the damage escalate their cause. The sad truth is that almost every facet of human existence, as contemporary Australians have known it, contributes to this spiral effect.

One of neoliberalism’s central tenets is that by reducing the size of the public sector the more efficient markets will stimulate trade and a concomitant growth in wealth. Beginning with the Whitlam government’s 25 per cent across-the-board tariff reduction in 1974, the edifice of tariff protection that characterised our postwar years was dismantled, with serious inroads on our manufacturing sector, which had grown substantially out of the import substitution policies adopted after the war.

I’m not arguing that freeing up trade has been wholly bad for this country, but we have seen how the neoliberal approach, being more an ideology than sound economics, has seriously distorted our economy, made all the more evident in a crisis like the Covid pandemic when supply of vital imports is disrupted. Moreover, the globalisation of assets and the ceaseless movement of goods and people around the planet have all contributed, along with the effects of climate change, to the emergence of pandemic viruses like SARS, of which Covid-19 is but the latest manifestation.

And where has this led for women? Childcare has become prohibitively expensive, and the effective marginal tax rate on married women with children has acted as another disincentive to their participating in the workforce. The safety nets that formed part of the social contract when the Hawke–Keating government signed up to Reagan and Thatcher’s economics have either shrunk or are punitively applied; with deregulation, the weakening of unions and galloping casualisation, working life is transformed.

It’s arguable whether these changes were deliberately designed to frustrate women’s advancement; some were, most weren’t. Despite the general increase in female workplace participation over the past forty years, its predominance of part-time and casual work has resulted in an associated reduction in women’s earning power and superannuation, so much so that women in their fifties today have become the fastest-growing group among the homeless.

At the same time, the one lasting legacy of the seventies women’s movement and its involvement in the Whitlam government has been women’s view of ourselves, and the aspirations we have held for our futures. As Whitlam’s first women’s adviser, Elizabeth Reid, once put it, what had been a women’s movement had become a movement of women, as women became a visible presence in all walks of life.

I marvel that for years after my arrival in Australia in 1958 I never saw or heard a woman reading the news or anchoring a current affairs program, let alone driving a bus or piloting a commercial aircraft. Women held a tiny minority of management positions, in the order of 3 per cent, and these were mostly in the public sector or gender-segregated occupations. It is salutary to be reminded, too, that when Whitlam came to office not a single woman held a seat in the House of Representatives. All that has changed, and dramatically so.

Yet somewhere along the way the egalitarian ethos of the earlier movement was abandoned, with class divisions evident in the seventies substantially deepened today. It’s true that we feminists of the second wave were predominantly middle class, with many having benefited from the expanded education and tertiary scholarships initiated under Menzies.

Yet not all the women who participated were products of middle-class privilege, and the socialist bent of women’s liberationists in particular made us acutely aware of the entrenched inequalities in what was all too often touted as Australia’s classless society. So while it can be said that the movement’s composition was largely middle-class, it would be wrong to characterise it as such. That feminists didn’t always succeed in erasing unexamined, often racist assumptions about Aboriginal women, for example, doesn’t mean we didn’t try.

But it is also true that women did advance even as neoliberalism permeated all aspects of society. There’s no denying that many of us did well. Women began to be taken seriously in the media. A fair few became professors, a scarcely imaginable trajectory when the movement began, even if the prospects for young female scholars today are considerably less rosy. Casualisation was well under way with the corporatisation of universities, but the future for current untenured academics, particularly in the humanities, has dimmed altogether with the pandemic.

Women have succeeded in getting themselves elected in increasing numbers, and despite the setbacks, especially on the Coalition side, many more have been ministers. A woman heading a public service department is nothing to marvel at; that there are female chief executive officers in both public and private sectors is barely worthy of comment, yet a whole generation of women in their twenties and thirties are precariously employed, paying high rents and excluded from the ever-escalating housing market. Their day-to-day struggles to keep afloat financially have made it harder for them to organise politically than it was for us back in the 1970s. And although there are signs — with #MeToo and the 2021 March4Justice — that this may be changing, social inequality is deepening and democracy itself is threatened.

It’s been forty-four years since I left the public service determined to become a writer, and thirty-eight years since my first novel, based on my experience in the Department of the Prime Minister and Cabinet, appeared. West Block begins two years after the Dismissal, and opens with the teenage daughter of the central character discovering her mother’s diary and reading the last entry, dated 9 December 1977.

“Two years have passed since it happened,” writes Cassie Armstrong, “when with a shock the trunk imploded. Leaves withered and dropped. We were dazed, stunned with it, and I found myself a conservative.” In writing these lines through my alter ego, the wording was not only to convey the sudden, brutally executed change of government, when those in the department found themselves serving conservative masters, but also to express my dismay that basic Australian traditions — traditions that had become precious to me, and that my heroine, likewise, hoped to conserve — were being dismantled.

Although it would take a few more years for the neoliberal revolution to take hold, we were standing on the brink of it in 1975, and looking back, we can see it for the revolution it was. There is no little irony, then, that the truly radical revolutionaries of the Anglosphere have not been those on the left of the spectrum, but those on the right.

As Cassie Armstrong, head of the department’s Women’s Equality Branch, or WEB, went on to say in the novel, not all change is good. It is up to us now to do what we can to restore the democratic traditions of fair play and social equality that have been so comprehensively repudiated. But how?

The radical changes ushered in by the moneyed ascendancy have been so pervasive and become so entrenched that it would be dishonest to suggest they could be undone easily. But it would be equally mistaken not to take heart from some changes for the better since those palmier days. Australians generally are more attuned to feminist aims than they once were, more aware of Indigenous achievement and the appalling racism Indigenous people have endured, and more accepting of differing sexual orientations and gender fluidity.

For all that, it’s next to impossible for any leader today to argue the simple proposition that taxes are not only needed but beneficial if the revenue raised is directed towards restoring good government and a fairer, more productive society. Tax and what its purpose is in a democracy remain so far a no-go area in the dominant political discourse.

Having participated in the 2019 campaign to elect an independent in the federal Sydney seat of Warringah, I was acutely aware that there was no chance of Zali Steggall’s winning it if she didn’t openly reject Labor’s 2019 policies to remove negative gearing and franking credits. And though I’ve been heartened by Steggall’s re-election in 2022 and the striking success of other independent candidates, the vast majority of whom are women, I’ve yet to hear them make taxation an issue, though most would seem in favour of reversing the Morrison government’s highly regressive stage three tax cuts that the Labor government has insisted — at least so far — on keeping. Some have also supported needed changes in superannuation taxes.

At this point it’s worth recalling not only that the 1970s women’s movement involved numbers of tertiary-educated women, but also that many of us, owing to the effects of sexism, were out of work at the time. In this we could be said to have been repeating the part intelligentsias with grievances have historically played in revolutionary movements.

Given the casualisation and precarity of university teaching today, we might also consider organising groups by enlisting redundant or precariously employed academics to study the new economics developed by women like Mariana Mazzucato. This could be influential in gaining greater community understanding of the crucial role governments can and have played, in both directing economic development and providing basic services, and the vital role played by progressive taxation.

Women’s policy developed in the Whitlam government was predicated in large part on the need for women to be more strongly represented in all aspects of political life. The government’s 1975 Women and Politics Conference was excoriated in the media, but its long-term effect is undeniable. No matter the barriers they continue to face, female politicians are no longer the isolated oddities they were when that conference was held. We’ve had a female prime minister, female premiers, and female senators and members of parliament, many of whom have reached the rank of minister. But not all of them, particularly on the Coalition side, have delivered what the community has needed, or indeed what has been expected of them.

The 2019–20 bushfires and the Covid pandemic necessitated growth in government spending, but it was reluctantly and inefficiently delivered, with too many sectors rendered ineligible for the Coalition’s largesse, while the waves of new variants disrupted the economy further just as it was tightening its purse strings. That female politicians were enlisted in its retrograde parsimony is regrettable.

While advocacy groups such as the Women’s Electoral Lobby and the National Foundation of Women continue to foster excellent research in the growth of inequality and other matters important to women, the Morrison government paid next to no attention, and members of their National Women’s Alliance faced being defunded if they proved too critical of government policy and practice. The Women’s Office in its various permutations had been sidelined.

In a sense, then, our success in making women’s concerns mainstream political issues has sown the seeds of our failure. In the old days we called that co-option, and my mission once I’d joined the bureaucracy was trying to explain to hardline radical and social feminists fired by anti-establishment sentiment how necessary working within government was.

Today, the positions seem dramatically reversed, even though the nomenclature has changed. We have no shortage of groups tackling specific issues of concern to women or their echoes within the bureaucracies, academia and parliaments. What’s missing, for the moment anyway, is a widespread, radical, community-based movement engaged in fundamental questions such as what constitutes social value, how it can be measured, and how a more equal society that best serves its citizens should be funded.

Climate change and the pandemic have thrown these questions into high relief, and there are glimmers appearing here and there that such a movement’s time may be near.

What I’ve been suggesting is a conscious effort in developing what was once called a double strategy. Yes, we will always need progressive thinkers in government bureaucracies, on government benches and in local and state governments, but the lesson I took from my experience in government is that without the strong, coordinated pressure from within civil society, such penetration can be redirected to regressive aims (for example, greenwashing) or rendered useless altogether.

The neoliberal revolution of the past half-century measures every public service in terms of cost, thus forcing advocates to couch almost every proposal in terms of its economic benefit or detriment rather than its social value. While enriching some and impoverishing many, this cultural revolution has penetrated our thinking and transformed Australia, with a particular impact on women.

To reverse these developments, along with meaningful action on climate change, is the challenge of our century. To steer us through it, the basic question to ask remains: isn’t the economy meant to support society? And seeing the result of the opposite viewpoint all around us, how were we ever persuaded to switch the two around? •

This is Sara Dowse’s contribution to the new book Women and Whitlam: Revisiting the Revolution, edited by Michelle Arrow and published by NewSouth.

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The report included sensible discussion of a wide range of options for promoting productivity, none of which were likely to provoke violent controversy. But, like Sherlock Holmes’s dog that didn’t bark, the absence of controversy is notable and revealing.

The trajectory of the Productivity Commission is a microcosm of the history of neoliberalism (often described in Australia as “economic rationalism” and “microeconomic reform”). During the fifty years since the early 1970s, neoliberalism has gone from being an economic policy revolution (or counter-revolution) to being a dominant ideology, before finally fading to near irrelevance.

The Productivity Commission dates back to the beginning of that period, in 1973, when it replaced the old Tariff Board. In those early days it was called the Industries Assistance Commission, or IAC, and it was part of the first bout of microeconomic reform in Australia.

Prime minister Gough Whitlam had recently taken power, and his government — despite its big spending program — was the first to promote economic rationalism. It cut tariffs across the board by 25 per cent and abolished the superphosphate fertiliser bounty paid to farmers, repudiating the policy of “protection all round” promoted most strongly by Country Party leader John “Black Jack” McEwen.

“Protection all round” combined import tariffs, which raised costs for farmers, with subsidies (like the superphosphate bounty), which lowered them. Struck by the difficulty of working out the net effect of these policies, one of Australia’s great economists, Max Corden, developed the concept of “effective protection.”

Decisions to cut industry assistance were unpopular, to put it mildly, in the sectors directly affected. The IAC’s job was to analyse the impact of such policies on the economy as a whole. It took on a task that had previously been split between the Tariff Board, which advised on protection for manufacturing, and the Department of Primary Industry, which dealt with assistance to agriculture.

While the Tariff Board had moved towards a more critical perspective on protection under its final chairman, Alf Rattigan, the new IAC (also chaired by Rattigan) was unabashedly ideological. Its primary objective was to “improve the efficiency with which the community’s productive resources are used.” While ordinary Australians might have understood this to refer to the efficiency of production, or “productivity,” the IAC interpreted it in the technical sense dominant in economics, which implied the need to remove all “distortions,” such as tariffs and subsidies. The paradox of an IAC rigidly opposed to assisting industries eventually led to a shortening of its name to the Industries Commission.

Disputes over tariffs dominated the work of the IAC and the IC over the 1970s and 1980s. The cause of free trade lost ground under the Fraser government before triumphing under the Hawke–Keating government and its successors. Today there is virtually nothing left of “protection all round,” or of the manufacturing sector it protected. What remains of Australian manufacturing is dominated by simple products like meat, bread and wine, along with limited processing of minerals and a handful of niche producers of high-tech equipment.

As the importance of manufacturing declined, the scope of microeconomic reform expanded. National competition policy, privatisation and public–private partnerships were all on the agenda. From a relatively limited program of “getting prices right” in the 1970s, the advocates of neoliberalism had shifted their focus to comprehensively reversing the growth of government during the twentieth century.

The glory days of the Productivity Commission were the 1990s. (The name was adopted in 1996 when the IC swallowed its main institutional rivals, the Economic Planning Advisory Council and the Bureau of Industry Economics.) Using measures newly developed by the Australian Bureau of Statistics, the PC announced that Australia was experiencing a “productivity miracle.” More precisely, this marvellous performance was not so much miraculous as “the ‘predictable’ outcome of policy reforms designed to raise Australia’s productivity performance.”

By the time the PC released an account of its first thirty years in 2003, the glow of the productivity miracle was beginning to fade. But there were still grounds for confidence that the program of reform would continue, delivering improved living standards for all Australians.

As it turned out, the process of microeconomic reform was pretty much over. National competition policy had run its course. The tide was beginning to turn against privatisation. The one major attempt at continued reform, John Howard’s WorkChoices, was a political disaster largely reversed under the Rudd–Gillard government.

Moreover, the productivity miracle fizzled out completely. Dispute remains over whether it was a statistical illusion or an unsustainable blip. But, as the latest five-year report shows, the reforms of the late twentieth century didn’t deliver a boost in productivity. Over the period since 1990 (which includes the “miracle” years), annual labour productivity growth has averaged 1.6 per cent, lower than the 2.4 per cent recorded in the 1960s and 1970s.

There are many reasons for this decline, but the most important is the transformation of the economy from one based on producing, transporting and distributing physical goods to one based on human services and information. To the extent that they were ever relevant, the policy prescriptions of twentieth-century neoliberalism have nothing to offer here. On the other hand, we have yet to see the emergence of a coherent alternative.

To its credit, the PC has responded by focusing on more relevant policy issues. The central themes of last week’s report are improving education and managing energy transition. The recommendations are sensible, with little if any ideological content.

Privatisation, once the signature policy of neoliberalism, gets only a single, negative mention, in a discussion of the impact of the privatisation of building surveyors in the 1990s. It seems likely that privatisation’s last gasp, the sale of state land titles offices, will be similarly disastrous.

The “good fight” against tariffs gets a brief run, with the argument that tariffs are now so low that compliance costs outweigh any revenue benefits. The PC’s view that they should be reduced to zero is hard to disagree with.

As has been true throughout its fifty-year existence, the Productivity Commission has produced another piece of well-written and professional analysis. But whether it is worth extending the life of a body so thoroughly tied to the era of neoliberalism is an open question. •

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Up to mid 2021 this looked about right. Although enthusiasm for Brexit had gently declined since 2016, sentiment had not shifted dramatically. But since then, support has fallen much faster and, fuelled by Britain’s economic malaise, debate has intensified. In August 2021, 46 per cent of people told YouGov Britain was wrong to leave the European Union and 42 per cent said it was right. Those figures are now 54 per cent and 34 per cent. Just 18 per cent think the government has handled Brexit well.

Both the government and the opposition are studiously, and understandably, ignoring this shift in opinion. Within the Tory membership and the parliamentary party, support for Brexit remains strong. Prime minister Rishi Sunak is in a weak position, doing poorly in the polls and under attack from the most aggressively anti-European faction in his party, supported by his predecessor Boris Johnson. The government can do little beyond quietly trying to improve relations with European partners, as we are seeing with its attempt to resolve vexed issues over Northern Ireland.

Labour’s base strongly opposes Brexit but, given Remainers have nowhere else to go, the opposition’s focus is on winning over socially conversative but economically left-wing voters in marginal seats. Attacking Brexit would be actively unhelpful with this group. Labour leader Keir Starmer and his team are also clearly terrified about being attacked as soft on immigration — hence his repeated emphasis that free movement of people would be off the table under a Labour government.

But if opinion continues to shift against Brexit, this can only be a temporary strategy for both parties, and will eventually become unsustainable.

Support for Brexit was always likely to decline over time because of the age profile of the groups that voted Yes and No in the 2016 referendum. A majority of under-fifty-year-olds voted Remain; pensioners were always the biggest backers of Leave. Given very few Remain voters have changed their minds over the past six and a half years, and people who were too young to vote in 2016 overwhelmingly oppose Brexit, natural voter replacement is generating an inevitable shift.

Professor Simon Hix and colleagues estimate around 35 per cent of the drop in support for Brexit since 2016 is due to this replacement effect. It’s likely that if the initial referendum took place next year Remain would now win — even if everyone who could vote in 2016 voted the same way.

Brexit enthusiasts always ran a risk in depending so greatly on older voters, which makes it all the more strange that they doubled down on appealing to their existing supporters rather than attempting to make a case that might appeal to younger, more liberal voters. As a result, alongside the replacement effect, the age gap has got even bigger. An analysis of YouGov data shows people born between 1985 and 1994 have shifted hardest against Brexit, whereas those born before 1944 are even more supportive than they were in 2016. This will exacerbate the impact of replacement over the next five to ten years.

This powerful effect means that Brexit will continue to get less and less popular even if no one else changes their mind. So those who want to stay well clear of the EU need to convince younger voters that it was a good idea. At the moment, that clearly isn’t happening — the proportion of Remain voters who’ve changed their minds is tiny. Nor is there are any reason to believe this will change in the next few years, given that no obvious benefits are about to become apparent.

The only factors that might push opinion in the other direction would be a strong economic recovery for which at least some credit was given to Brexit, deserved or not, or, more possible though still unlikely, a major crisis within the EU that makes Britain look like a safe haven. Tensions certainly exist that could turn into something more existential. For instance, in late 2022 we saw Hungary blocking a bailout to Ukraine as part of an ongoing argument over Viktor Orbán’s undemocratic rule. And many EU states, including France, are still unhappy with Germany’s behaviour over the energy crisis.

But at the moment nothing seems likely to give Remain voters pause. That puts the focus on Leave voters. If they stay supportive of Brexit then it will take longer for a major shift in policy to become a political necessity for the main parties. At the moment 18 per cent of those Leavers are telling YouGov they now think leaving was the wrong decision — higher than a year ago — but 74 per cent are sticking with their initial decision.

Yet when you dig into how people feel about Brexit, that support looks like it could drop a fair bit more, especially among younger Leave supporters. JL Partners’ polling in October showed that just 24 per cent of Leave voters think Brexit has helped the economy compared with 34 per cent who think it’s made it worse. Across every area JL Partners tested — from better public services to the cost of holidays — Leave voters were more likely to say Brexit has made their lives worse than better. A Public First poll in December for the charity More in Common found that, of Leave voters who had changed their minds, 69 per cent cited damage to the economy as a reason.

Why then do 74 per cent still say it was right to leave? Mainly, it seems, because they are still hopeful there will be benefits in the coming years. While JL Partners found little hope among Remainers that any benefits might be forthcoming, a majority of Leavers felt trade deals with the rest of the world and “better UK laws” would bring future improvements. Critically, though, most expected to see those benefits in the next five years. My sense is that if they don’t, and there’s no reason at the moment to think they will, then support among Leavers will continue to drop, on top of the age effects.

If it seems fairly clear that people are unhappy with Brexit so far, even if some are still hopeful, what people want instead is harder to read. This is partly because, as ever, most people don’t spend much time thinking about politics, let alone policy detail, and so don’t have formed views on the benefits of joining the single market versus a bespoke trade deal. It’s also down to the complexity of the issue.

Thanks to the kind people at focaldata I’ve been able to ask some of my own polling questions to test how well people understand one of the key concepts that comes up in discussions of how Britain might deal with the post-Brexit malaise. To do that, I gave four short (and by necessity simplistic) descriptions of the single market to see if people knew what it actually means. Thirty-eight per cent correctly chose “Agreeing to participate in the free movement of goods, people, services and capital with European Union states” and 35 per cent nominated another option I’d phrased to be almost right. But another 27 per cent chose options — “a bespoke deal with the EU” or “rejoining the EU” — that were completely wrong.

There’s also the matter of how you frame the questions. As ever, small changes in wording can make a huge difference. When I asked if people thought Britain should join the single market but stay out of the European Union, I found 55 per cent in favour and 26 per cent opposed. Opinium Research asked if people supported “gaining access to the European single market” and found 63 per cent supporting and 14 per cent opposed. Both JL Partners and Public First asked (different) multi-option questions that gave quite different results for how many people would prefer joining the single market versus some other type of closer relationship.

Given all this, we have to be careful about overreading the data. But I think we can say the following: not many people want to keep the status quo and only a very small minority want to move even further away from the EU. A substantial majority, including most Leavers, want some kind of better relationship, though short of rejoining. They are particularly concerned about the economy but are also bothered by the inconvenience of travelling abroad, and they support closer security relationships and sharing of police information.

What is really hard to judge is which trade-offs people are prepared to accept. Things can be done to develop a closer economic and security relationship with the EU, short of single-market membership or rejoining, but they are limited. Both single-market membership and rejoining would certainly help the economy, but both would have costs, including payments to the EU, accepting free movement (though most people don’t want higher immigration) and, if Britain were not a full member, having to follow rules that it had no say in forming.

In my poll I tried to get at this issue by asking people what would worry them most about rejoining the EU — with a list of options. My hypothesis was that free movement would be way out in front as the biggest concern. But it wasn’t at all. Just 12 per cent said it was their main concern, and only 19 per cent of Leavers. The greater worry, at 21 per cent (24 per cent of Leavers), was paying money to the EU, which I guess shouldn’t have been a surprise given the arguments about that damn bus advert. The other concerns that registered double figures were loss of sovereignty (15 per cent); going back to political arguments about membership (12 per cent); and concern about overturning the referendum (10 per cent).

Of all the public’s views at the moment, how strongly people feel about immigration is one of the hardest to get a grip on. But I can’t help thinking that politicians are overly worried about it compared with other factors, particularly the state of public services and the economy.

When YouGov and Public First explicitly cite free movement as a consequence of joining the single market or striking a “Swiss-style” deal, they seem to get similar responses to when they don’t, and in each case they register clear majority support for these options. LSE researchers explicitly tested a “free movement” deal with the EU and found majority support among Leavers.

But that doesn’t mean the real-world argument for these options, or rejoining, would be easy to win. Only 19 per cent of voters, and only 30 per cent of Remainers, had no concerns at all about rejoining. While the concerns are more diffuse than I expected, they are there, and would, of course, come more to the forefront of the debate if the government pushed for a more dramatic change in the EU relationship.

Given the shift in opinion against Brexit, and given that, barring a dramatic economic recovery or the implosion of the EU, the trend is very likely to continue, what does that mean for the current Tory/Labour positions?

Neither party faces any immediate pressure to change policy. Sunak has no room to shift even if he wanted to. The Tories will go into the election citing “Get Brexit Done” as a success, though they won’t make it a centrepiece given how little benefit voters have seen.

Labour will stick to its current position too — “Make Brexit Work” — and stay out of anything that would require the return of free movement. What making Brexit work means in practice is harder to define, but it will include closer regulatory alignment on a number of areas, trying to reduce trade barriers, and closer security arrangements. This is extremely safe ground, backed by most Leave voters and an overwhelming majority of Remainers.

I suspect Starmer could go a bit further, without talking about any specific mechanism, in his warmth towards future relationships without doing any harm electorally. And he certainly doesn’t need to pretend, as he did the other day, that joining the single market wouldn’t bring economic benefits.

But, of course, I can understand the caution. Proposing to rejoin now would undoubtedly be a mistake. As Luke Tryl notes, his More in Common polling shows that “swing voters — those who have either switched to Labour since 2019 or who voted Tory and now are undecided — say by a margin of 47 to 16 per cent that if Labour pledged to rejoin they would be less, rather than more likely to vote for the party.”

I suspect things will start to move a bit faster after the election. Labour will have to engage with the issue within its first year because Britain’s 2020 trade agreement with Europe is automatically reviewed every five years. The party base will urge the new government to maximise alignment.

My view is that Labour should, on taking office, immediately commission an analysis of the costs and benefits of Brexit to inform the review, and should try to bring in sensible Leave backers to make the conclusions as widely accepted as possible.

If a new deal, following the review, has some limited benefits, and goes down okay with key voter groups, pressure will grow for something more comprehensive. The timeline here will depend on a number of things:

• Will Leave voters start to shift in greater numbers, or will ongoing drift in opinion depend entirely on replacement?

• Will anything happen that might push against that drift (economic recovery/EU crisis)?

• Will a disgruntled Labour faction — perhaps built around ministers fired in an early reshuffle — make getting back into the EU a loudly popular cause among the base?

• Will EU states be keen to bring the UK back into the fold, given that its politics would further complicate existing dynamics and there are some advantages of keeping it outside as an example of why holding the EU together matters?

• What will the Tories do?

This last question is a hard one to anticipate. On the one hand, parties that lose elections tend to retreat into their comfort zone quickly and for some time. It’s easy to imagine someone like business and trade minister Kemi Badenoch — a figure popular with the party base and the current favourite to take over the Tories after an election loss — doubling down on Brexit and choosing to fight Labour on immigration and culture wars. But if the result is really bad it may force an earlier acknowledgement of reality than happened after 1997.

Yes, a complete reversal on Brexit among Conservative MPs seems implausible given how committed so many in the party are to it, but a gentle back-pedalling is possible if they have a leader who sees how precarious their position is among younger voters. If they choose to downplay it, and not make it a big part of their pitch, that makes it easier for Labour to change position too.

One way or another, though, things will feel very different as we approach 2030. Britain is likely to be moving towards a closer relationship with the EU rather than the intransigence that has marked the past six years. Voter opinion will very likely be overwhelmingly in favour of this and substantially in favour of a more formal relationship of some kind. It will, by then, be fourteen years since the referendum. There will be thirty-two-year-olds who weren’t old enough to vote in 2016.

I don’t know if Britain will ever formally rejoin the EU, but I would be very surprised if it doesn’t have a dramatically different relationship within a decade, and that may well include de facto, if not de jure, membership of the single market. •

The post Getting Brexit undone appeared first on Inside Story.

An unnamed emergency doctor, fuelled by the desire to staunch suffering, worked long days in Afghanistan for six months treating patients with horrific injuries. It was not this experience, however, that led her to quit, but rather her time working in an emergency room of a community hospital on her return to America, where her days felt like a meaningless cycle of “rinse and repeat.”

How are we to make sense of the strange alchemy by which modern workplaces convert some workers’ enthusiasm, commitment and confidence into cynicism, withdrawal and depletion? In their new book The Burnout Challenge, organisational psychologists Christina Maslach and Michael P. Leiter offer two contentions about understanding and tackling these quiet workplace tragedies.

The first is a riff on the historical practice of putting canaries into coalmines to detect toxic air that could kill miners. “Let’s say our hope was to keep more birds singing in the mines. What would be our best approach? Should we try fixing the canary to make it stronger and more resilient — a tough old bird that could take whatever conditions it faced? Or should we fix the mine, clearing the toxic fumes and doing whatever else necessary to make it safe for canaries (and miners) to do their work?”

The second is the claim that an “increasing mismatch between workers and workplaces” is the cause of burnout, and that the mismatch takes six forms: work overload, lack of control, insufficient rewards, breakdown of community, absence of fairness, and values conflicts. The self-described “burnout shops” of Silicon Valley are archetypal mismatched workplaces, the authors say: employers brazenly boast of having an “always on” work culture, and workloads are so obviously unsustainable that a job in a startup is only feasible for a few years.

How or why this particular chamber of the “mine” got so toxic for its canaries, though, or its relationship to the other kinds of workplaces that make up the mine, is not something the authors attempt to explain. Befitting experts who have made major professional contributions in the form of taxonomies and systems for data collection (Maslach was the creator of the “Maslach Burnout Inventory,” Leiter the “Areas of Work Life Survey”), The Burnout Challenge takes a highly schematised approach in guiding managers to incrementally improve levels of worker efficiency, health and happiness in their workplace.

It turns out that decades of peer-reviewed research shows “receiving good vibes or compliments” to be “an uplifting experience” and that involving staff in rostering decisions can increase their sense of control. Evidence also backs the idea that “there should be sensible limits on work hours and a focus on how employees will complete tasks within that time rather than be forced to donate personal or sleep hours to finish their work.” It is particularly dispiriting for employees to have an overfilled plate of tasks when those tasks are lower than their capability level. The blunt assumption that “people deliver under pressure” is wrong.

Many employers could genuinely benefit from reading this advice, and not all of them are quiet admirers of the rise-and-grind, move-fast-and-break-things management philosophy of Silicon Valley. Maslach and Leiter provide lots of neatly enumerated lists illustrated by breezy narrative vignettes and even simpler graphics (the section on “insufficient rewards” gets a thumbs-down emoji; the chapter on “values conflicts” shows a broken heart lying in a pool of blood). If you find ticking off a to-do list an appealing mechanism for keeping the complexity of the world at bay, you may find all of this soothing.

Readers drawn to thinking about the deeper causes of burnout may be struck by how eye-wateringly obvious and familiar these statements are. Since F.W. Taylor popularised “hard” scientific management in the early twentieth century, observers have noted the self-defeating and demoralising consequences of attempting to wrest maximum value from employees.

Elton Mayo’s book The Human Problems of an Industrial Civilization, for instance, published in 1933, included chapters on fatigue, monotony and morale, all themes taken up by Maslach and Leiter. Like them, Mayo urged managers to view employment in relational terms. What workers required was recognition, community and respect.

Rather than asking ourselves what is wrong with this kind of advice, we may be better off considering why, ninety years on, books on these themes are still in demand. A simple response might be that, like the wisdom of a kindergarten teacher, basic lessons in how to behave well at work are always relevant and it never hurts to have them repeated: listen carefully, don’t demand impossible things, practise give and take, don’t steal, apologise when you make a mistake, and it is not okay to threaten people to get what you want.

Another, less rosy answer is that books of this kind not only are easy-to-read digests of academic research but also reinforce the longstanding idea that burnout is a consequence of inadequate managerial technique rather than inadequate worker power.

For their work to resonate with their time’s commonsense ideas of wellbeing, every generation of scholars in the human relations school has to tackle their task in a slightly different way. In Mayo’s day, employers were invited to understand themselves as grappling with “problems of human equilibrium,” “social disorganisation” and anomie. Today, Maslach and Leiter suggest, employers play a six-dimensional game of workplace matching with employees, a framing of the problem that resonates well with what theorists Luc Boltanski and Eve Chiapello dubbed the new spirit of capitalism — the emphasis on individual autonomy, initiative, intimacy, pleasure and creative expression that has prevailed for the last four decades.

The mismatch metaphor diverts attention away from the structural determinants of power and towards the agency of individual workers and their managers. Other actors — trade unions and the governments that set the terms of workplace relations — are relegated to the background.

The idea that tackling the burnout “challenge” involves aligning two puzzle pieces also invites us to assume that the parties negotiate with roughly equal bargaining power, and that if a match is not found either party may walk away in search of another, better match. If we view this drama as a mutual desire for a satisfying “click,” we are less likely to notice that the employer’s puzzle piece is usually made of unyielding metal while the employee’s is more often soft and pliable or, worse, brittle and prone to shatter.

Maslach and Leiter don’t wholly ignore unions. They credit the Australian stonemasons for establishing the norm of an eight-hour working day in 1856. But they don’t acknowledge unions as manifestations of the “beneficial social communities” they praise in other contexts. The Burnout Challenge does mention union-like formations on several occasions, but using terms like “cuddle huddle” and “social pod” that implicitly distinguish these “good,” “customised” forms of collectivity from “bad” ones that come “off the shelf.”

Digital technologies also make an appearance in The Burnout Challenge, but primarily as carriers of additional workload. Maslach and Leiter declare that “technology must be managed — and managing it means balancing on and off time.” This perspective ignores the vast potential of digital technology for workplace surveillance. Numerous observers have noted, for instance, that Amazon’s use of technology to monitor employees’ work rates is related to the dangerous intensification of work at the company. In the gig economy, of course, work may be coordinated and managed at scale in the absence of an employment relationship.

Nor do the authors touch on the digital dynamics quietly eroding anti-discrimination law, labour law, anti-trust law and privacy law through what legal scholars Richard Bales and Katherine Stone call “the invisible web at work.”

Maslach and Leiter coyly allude to the relationship between insecure employment and burnout in a discussion of “tentative relationships,” noting that workers may experience “anxious feelings about disposability” and that “it is difficult to exercise control in a relationship without confidence that the relationship will continue.” The logical extension of such observations — that it might be wise for managers to offer secure employment as a burnout-prevention measure — goes unstated.

In airbrushing power from the narrative, The Burnout Challenge also diminishes employer powerlessness, even though recognising the limits of what managers can do is surely crucial to understanding the phenomenon and its solutions.

Many of the “values mismatches” the writers refer to are the product of institutional frameworks over which employers exercise little control. Consider, for instance, the clash between market-based mechanisms and professional–client obligations in care work and other highly “emotionally connective” jobs. As sociologist Allison J. Pugh has brilliantly observed, a panoply of workers — therapists, teachers, doctors, carers and more — need to be present and receptive, and bear witness, to the emotional truths of others.

Such acts of recognition are inherently particular, and often experienced as among the more meaningful aspects of work. They are also, thanks to New Public Management approaches, subject to massive pressures from rationalisation, standardisation and accountability, via manuals, checklists, scripts, templates and digital platforms, and are organised within “regimes of scarcity.”

A generation of research has observed that psychosocial injury is linked with high quantitative demands, insecure work conditions, compromised skill development, low control of work tasks, and market-based systems. These conditions are not unfortunate accidents; they are the inevitable concomitants of treating care work as a commodity to be delivered “just in time.”

Such dynamics are very difficult to grasp when burnout is framed as a workplace-level issue, as Maslach and Leiter do when they recount what happened after the takeover of a rural hospital by a private health organisation. Following a “values clarification process” of town hall meetings, focus groups and unit-level discussions, a new hybrid values system emerged, with neither hospital nor new owner “winning.”

The authors suggest that managers struggling with similar values clashes should consider the parable of the janitor at NASA who, in 1961, encountered president John F. Kennedy. When the president asked why he was working so late mopping floors, he responded, “I’m helping to put a man on the moon!” Maslach and Leiter distil a set of “sense-giving” steps for managers from this tale: “narrow the focus on one goal; shift from an abstract description of the goal to a concrete one; set up clear milestones to the goal; give life to the idea by using persuasive language and rhetorical techniques.”

A radical indifference to context is apparent here. Not only does cold war–style talk of national purpose no longer apply, but a cleaner would now, more likely than not, be an outsourced worker with an entirely different manager from the “core” workforce to whom the “purpose talk” applied.

The assumption that healthcare is, in essence, similar to putting a man on the moon is also highly questionable. It would only be exaggerating slightly to suggest that true burnout-minimising leadership in a care context involves flipping each of the proposed “sense-giving” steps on its head: encourage employees to widen the focus from the goal to the person; embrace the abstract and expansive goal of hearing someone; reassure employees that work of this kind is not linear and that hearing someone’s needs in a meaningful way takes time; recognise the overwhelming significance of employees having the security, time, skills and trust to form relationships.

It is unsurprising, perhaps, that The Burnout Challenge also has little to say about how the stories that live in our heads and in our culture contribute to burnout. Maslach and Leiter offer scant recognition of how the idea of “passionate work” saturates our culture to the extent that it forms an “interpretative schema” for the world, long before any individual crosses the threshold of a particular workplace.

Drawing on the work of Raymond Williams, communications researcher Renyi Hong has argued that passion is now a “standard post-Fordist affect.” The idea of “passionate work” fosters a sense of an ideal capitalist self: well managed, resilient and capable of coping with economic fluctuations and precarity. It is an argument that resonates closely with Lauren Berlant’s concept of cruel optimism: relationships made available at work under capitalism offer themselves as objects of desire while also representing profound obstacles to flourishing. The relevance of both ideas to employee burnout is obvious.

As a concept, “burnout” need not be bereft of political potency. It can invite critical thinking about limits, energy and reproduction, and help reframe the “non-productive” as crucial and valued. It can question the logic that intensity is inherently good. In the climate change era, these questions are excellent ones to be asking, both of ourselves as individuals and of societies as a whole.

A politics built on the refusal to be “burned out” recalls the insistence that labour is not a commodity and invites its extension to other things — such as rivers, skies, forests and all the ecosystems of which they are part — that we should not readily accept as simply raw materials for production. It asks that we consider how we will revalue and protect all of the human spaces founded on non-capitalist values — families, schools, welfare states, unions and Indigenous communities, to name a few. It would be a politics, in other words, built on deliberate and defiant mismatches.

The Burnout Challenge, needless to say, is not concerned with such a politics. While its authors may have rejected the project of turning the canary in the coalmine into a “tough old bird” capable of enduring toxicity, their book doesn’t do much to analyse or adjust the underlying sources of the mine chamber’s fumes. Much less do they consider inviting the bird to participate in the endeavour.

Maslach and Leiter offer modest and practical suggestions that may help some bad workplaces become less bad. But the bird they construct as their object of concern is a lonely and flighty one, primed to glide into the next chamber in search of better air, sustained by the hope that their “match” is just around the corner. •

The Burnout Challenge: Managing People’s Relationships with Their Jobs
By Christina Maslach and Michael P. Leiter | Harvard University Press | $51.95 | 272 pages

The post On not burning out appeared first on Inside Story.

A reporter from the Times had gone undercover in a firm contracted by British Gas to collect overdue energy payments. In a return to the days of putting a penny in the slot to heat the bathwater, his team had the job of installing devices that force customers to pay for gas before they use it. The meters serve two purposes: when consumers add money to their account, British Gas takes a share as part repayment of outstanding bills; and the pay-as-you-go system prevents customers from racking up even bigger debts.

The break-ins are authorised by court orders and intended as a measure of last resort. But of the 367,140 applications for warrants last year — that’s 1000 a day — only fifty-six were refused. The warrants are often “waved through” in bulk, with cash-strapped courts earning a fee per case from the arrangement. One magistrate quit when his job became “nothing more than rubber stamping.”

Energy companies are not supposed to force prepayment meters on families with children aged under five, pensioners, people living with a disability, or other vulnerable households. Yet the Times reported teams breaking into the homes of a single father with three young children, a mother with a four-week-old baby, and a woman whose daughter relies on a hoist and an electric wheelchair for her mobility.

In a British winter marked by soaring energy prices and week-long blasts of sub-zero temperatures, these families are condemned to live without heating or hot water whenever they can’t afford to put money on the meter. And when they do buy gas, they are charged a higher rate than customers paying by direct debit.

Not surprisingly, the Times’s exposé prompted outrage and moral condemnation, not least because Centrica, the company that owns British Gas, recently announced that its earnings in 2022 are likely to be more than seven times what they were in 2021.

This is the logic of Britain’s energy market. Centrica wants to derive maximum profit for its shareholders; customers who can’t pay their gas bills are bad for business so it’s happy to cut them loose; debt collectors are paid with a share of the funds they recover for their clients; prepayment meters are an effective mechanism to claw back as much money as possible. The work teams, which are paid a bonus every time they bust into a home and install a device, tend to overlook cuddly toys, Ventolin puffers, walking frames or other signs of household “vulnerability” that should prompt them to abandon the job.

Yet British Gas management, along with the government and regulators, professed to be surprised by the debt-recovery tactics. Centrica boss Chris O’Shea told the BBC that the contractors’ actions were “completely unacceptable.” The secretary of state responsible for energy, Grant Shapps, was horrified by such “abhorrent practices.” The energy regulator, Ofgem, launched “an urgent investigation” and asked energy companies to suspend the forced installation of prepayment meters until it is reassured that they comply with rules on vulnerability.

We hear equivalent surprise and outrage from corporate leaders, ministers and regulators when business scandals erupt in Australia. How could Rio Tinto have blown up those ancient rock shelters and destroyed so much priceless heritage at Juukan Gorge? Who are these rotten labour hire contractors who systematically underpay migrant workers labouring on farms and in meat-processing plants? What a shock it was to learn, at the financial services royal commission, that clients, some long dead, were being charged fees for no service, that a company duped Aboriginal people into buying overpriced funeral insurance, and that major banks knew their customers were being encouraged into unnecessary debt by mortgage brokers.

Yet such behaviours are entirely predictable and — in the narrow sense of allowing market forces to operate — entirely rational. It’s not that everyone working in finance, mining, labour hire or other scandal-prone sectors lacks a moral compass. It’s just that the attraction of bonuses and other incentives can quickly lead the best of us to lose our sense of direction. Human behaviour is shaped by the logic of the systems we inhabit. And, as NAB chair Ken Henry so memorably put it when he was grilled at the royal commission, “The capitalist model is that businesses have no responsibility other than to maximise profits for shareholders.”

Henry was echoing the views of economist Milton Friedman, who famously railed against the idea that corporations owed any kind of responsibility to the community beyond increasing their profits. Some reporting missed the fact that Henry was arguing, contra Friedman, that the banks needed to move away from treating “customers in purely instrumental terms, as a means to an end, rather than the end in itself.”

Treating people as ends in themselves is surely what Jim Chalmers had in mind when he wrote about creating “a better capitalism,” one that is uniquely Australian and “values-based.” It is a welcome prospect, and the treasurer has offered some glimmers of how it might be achieved.

A wellbeing budget that broadens what gets measured beyond the traditional metrics of GDP growth is long overdue. Welcome, too, is Chalmers’s emphasis on “place-based initiatives” in low-income areas like Logan, in his own electorate, to give communities “the genuine input, local leadership, resources and authority to define a new and better future especially for kids.”

Hearteningly, Chalmers draws on the work of leading thinkers like Mariana Mazzucato, who argues that contemporary economics has lost the moral sentiments that framed the Enlightenment ideas of Adam Smith, and now too readily mistakes price for value. Anyone who turns a profit ends up being a “wealth creator,” even when their earnings are derived from products like gaming machines or cigarettes and the social and financial costs are picked up by the community and government.

Chalmers, like Mazzucato, recognises that markets are not a natural phenomenon that sprang fully formed onto the landscape. They are human systems shaped by policies, laws and incentives. This is obvious from mundane examples — local-content quotas to encourage Australian TV production, for example, or building regulations to ensure fire safety in high-rise towers. If our aim is wellbeing, then we must design markets accordingly, and push to the margins the kind of knuckleduster capitalism revealed at the financial services royal commission and in the Times’s reporting.

Alongside the three crises at the heart of his essay — the global financial crisis, the pandemic and the war in Ukraine — Chalmers refers to Australia’s recent catastrophic fires and floods. And he acknowledges the need to “repair” long-neglected policy fields like “skills and training, energy and climate transition, the standard of aged care, women’s participation and economic equality, equal opportunities more broadly, including in regions and disadvantaged communities, and the unsustainable state of the nation’s books.” The government certainly has its work cut out.

But I can’t help feeling that Chalmers is waging his campaign for kinder capitalism with one hand tied behind his back. He makes only one reference to taxation in the essay — and that is to promise more transparent reporting on “tax expenditures” (concessions like negative gearing and private health insurance rebates that mean the government forgoes revenue). He wants “growth that puts equality and equal opportunity at the centre” and writes that “the type of growth matters — and its distribution matters.” Yet the word “redistribution” doesn’t get a look-in, let alone alongside another unmentioned word, “wealth.” Chalmers wants to tackle disadvantage but is silent on privilege.

Talk of equal opportunity without reference to tax and redistribution fails to take us very far beyond Scott Morrison’s empty notion that those who have a go will get a go. Admittedly, Labor is far more committed than the Coalition to education, training, childcare and healthcare — the kind of public investment that can bring such dreams closer. But if we want equality of opportunity then we must also tackle equality of outcomes. Capitalism is competitive, but we don’t all enter the race at the same point. Some of us get a big head start, and it would be only fair to even things up a bit.

Programs to build opportunity also require significant funding, and apart from extra borrowing — another no-go area for Chalmers given the “trillion dollars of debt” he inherited from the Coalition — the only way to raise sufficient money is through the tax system. Tax is not just good for raising revenue, though, it is also a powerful tool for shaping markets and influencing behaviour, as we saw with the Gillard government’s short-lived carbon price. It is also the most effective way to moderate inequality — and if Labor wants greater equality of opportunity, then this is what it must do.

Jim Chalmers starts and ends his essay with the pre-Socratic philosopher Heraclitus. I’m sure he’s also familiar with the more recent thinker John Rawls. In his Theory of Justice as Fairness, Rawls identified several reasons for regulating economic and social inequalities.

First, “it seems wrong that some or much of society should be amply provided for, while many, or even a few, suffer hardship.”

Second, large social and economic inequalities “tend to support political inequality.” We need to address inequality, he says, “to prevent one part of society from dominating the rest.”

Third, inequality shapes our sense of self, encouraging those towards the bottom to feel inferior and those at the top to feel superior. Rawls thought the attitudes engendered by inequality were great vices: “deference and servility on one side and a will to dominate and arrogance on the other.”

Rawls didn’t want to bring everyone down to the same level. He accepted that differences in status and hierarchy would persist, and probably recognised that they were necessary to drive ambition. But he insisted that “a well-moderated inequality is a condition of economic and political justice.” And such moderation cannot be achieved without progressive tax systems to redistribute income and wealth.

Of course, Jim Chalmers doesn’t want to scare the horses or provide conservative media with a new stick with which to bash Labor by hinting that he might follow the advice of most credible commentators (including the International Monetary Fund) and repeal the stage 3 tax cuts. Yet it is hard to see how Labor can fund the necessary services in care, education and environmental protection, balance the books, shape markets and increase opportunity without fundamental tax reform.

If a Labor treasurer in a government riding high in the polls can’t lead from the front by putting these issues on the agenda, then who can? •

The post Building a better capitalism appeared first on Inside Story.

If she is right, countries will import less than they otherwise would, export less, and make more of the things they consume in their own territory. They will invest more at home and less abroad. Manufacturing in America may expand faster than otherwise, while China’s economic expansion will be blunted. Foroohar thinks all this is a very good thing.

It is not just globalisation to which she objects. She also dislikes big farming in the United States, what she says is the “financialisation” of American business, and the role of the US dollar in international transactions. She warms to the “beauty of localisation” evident in her Brooklyn neighbourhood. Her views, as she says, are akin to those of the old trade union left in the United States. There was much about the Trump administration she admired, particularly its trade policies.

Foroohar is not alone in her view that economic globalisation is reversing. McKinsey and Boston Consulting have in recent times made similar predictions. In January the IMF issued an alarmed paper on what it calls “policy-induced geoeconomic fragmentation,” or GEF, lamenting tendencies that threaten “the future of multilateralism” and introducing a new acronym.

If Foroohar is right, this trend is of the utmost consequence not just for the United States but also for the rest of us. Our accustomed ways to think about the world, our work and play, our financial and career choices will all have to change, and quickly.

Australia is a good case in point. With more exports and more net offshore investment compared to GDP than China, its prosperity is built on global trade and investment. If cross-border trade and cross-border investment flows are dwindling, which is what “deglobalisation” means, Australia will need to remake its economy.

So, too, will most other countries. Exports are now just short of 30 per cent of world GDP, two and a half times the share fifty years ago. That means nearly a third of global GDP will cease to grow or grow only slowly, throwing the burden on the remaining two-thirds of demand to power output. Instead of being distributed around the world according to technologies, labour costs and natural resources, production will be “onshored” to the home market, protected by subsidies and tariffs. The price of manufactured goods will rise, hurting wage earners.

And while Foroohar offers a substitute world in which cross-border trade and investment take place only among like-minded countries — those with what she describes as a “common moral framework” — it would not suit Australia, or its region.

Australia’s total goods exports to its closest security allies, the other members of the Five Eyes intelligence pact, total less than a fifth of Australian exports to China. Australian exports to the entire membership of the NATO alliance are of roughly similar magnitude to those to the Five Eyes. Add in Japan and South Korea and the sum is closer to the total of exports to China, but Japan and South Korea are both nearly as strongly linked to China as Australia is.

If globalisation is reversing, particularly if it means the decoupling of China from the United States and its friends, Australia has a very big problem. It would not be a world in which we would do well.

Nor would it suit the region. A third of world output is from the Asia-Pacific, a region composed of countries that are closely integrated economically without sharing a common moral framework.

But is deglobalisation really happening, as Foroohar asserts? Homecoming is strong on colourful anecdote but weak on data. Despite the many predictions, deglobalisation is not in the numbers — or at least not so far.

If it were, then we would expect to see cross-border trade and investment falling. Yet cross-border trade has never been higher than it was last year, on numbers published by the Netherlands Central Bank. It is true that exports as a share of world GDP peaked in 2008 and then fell dramatically in the economic slowdown following the financial crisis. But since then trade has recovered as a share of world GDP and on the most recent World Bank numbers was only a little below the 2008 peak.

Global cross-border direct investment did indeed fall during Covid, as one might expect, but not in ways consistent with a deglobalisation story. Direct investment flows into the United States fell sharply, but those into China increased.

And for all the talk of decoupling of the world’s two biggest powers, goods exports from the United States to China in 2021 were higher than ever and were running at an even higher level last year. China’s goods exports to the United States in the past two years have matched those of recent preceding years. A recent study by the Peterson Institute’s Chad Bown found no compelling evidence of US–China decoupling.

It may be that global exports will no longer grow markedly faster than global GDP, as they did in the twenty years to 2007. But rather than deliberate deglobalisation, a large part of the stabilisation of the ratio of world exports to GDP is related to the rebalancing of China’s economy. Its exports peaked at well over a third of GDP in 2006 and now, with policies favouring domestic demand, are down to less than a fifth. The stabilisation of exports-to-GDP after decades of dramatic growth also reflects the faster growth of the less export-intensive services sector compared with manufacturing in world GDP.

The most one can say based on the numbers is that globalisation, measured as the share of exports in global GDP, may have flattened out.

US policy to “reshore” industry may eventually make a difference, but what it has done so far will have a negligible impact on the numbers. By subsidising the construction of local semiconductor chip foundries, the United States will be able to replace some chip imports from Taiwan and South Korea. It will also subsidise the production of solar panels and other new energy technologies, again perhaps substituting for some imports.

Important as they are to the industries involved, these shifts are nonetheless tiny compared with the total flows of goods and services across world borders.

Foroohar is strongly critical of the half century of economic globalisation, mostly from an American point of view. But has the experience of globalisation been so bad?

World GDP has, after all, tripled since 1980, the year after China opened to the world. Since China joined the World Trade Organization in 2001, an event Foroohar deplores, its economic output has more than quintupled, vastly increasing the living standards, health and life prospects of its 1.4 billion people. China’s growth accounts for over a third of the four-fifths increase in real world output since 2001.

Even for the United States, the aggregate outcome has been pretty good. Its output has increased by 50 per cent since China joined the WTO, a strong performance over a couple of decades. Over that period US exports to China have increased at a faster rate than China’s exports to the United States. Foroohar complains of the impact of trade on US manufacturing, but over the twenty years following China’s WTO entry US real manufacturing output actually rose 42 per cent, a not-discreditable performance.

Globalisation as an economic phenomenon is not just the growth of China but also the earlier rapid growth of Japan, Germany, South Korea and Taiwan, and now most of the Southeast Asian economies, all of which have focused on exports. Of this wider globalisation, and of the increases in living standards, health and life expectancy that have come with it, Foroohar has little to say.

Her focus is on China, which she blames for job losses in American manufacturing. It is true that US manufacturing employment plummeted in the years after China joined the WTO, and that imports of manufactures from China rose. But it is also true that US manufacturing output rose quite strongly over the same period, indicating a big role for automation in driving US manufacturing job losses. (In the six years from 2001 to 2007, just before the slump caused by the global financial crisis, US manufacturing output rose by a little short of one-third.)

In fact, US manufacturing employment began to decline after 1978, more than twenty years before China joined the WTO — though the decline accelerated after 2000. By 2010 US manufacturing employment had stabilised and has since increased.

Foroohar rightly points out that real wages have barely increased in the United States over the past couple of decades (by 6 per cent, from 2002 to 2022, using US Bureau of Labor Statistics numbers), a period coinciding with the rapid growth of China’s exports. It is also true, and lamentable, that income inequality in the United States is very wide and much of the gain in income and wealth over the last couple of decades has gone to the already wealthy.

But is this the result of globalisation? Australia, Canada, Japan, France and Germany are among advanced economies similarly open to the global economy, and to which China has become an important trade partner. In all these countries income inequality is markedly less than in the United States, according to OECD numbers. This suggests that domestic policy is the place to look for remedies, not cross-border trade and investment. It is also relevant to Foroohar’s story that on these OECD numbers income inequality in France, Germany, Canada, Japan and Australia hasn’t increased in the past decade, and it has actually narrowed in the United States.

Homecoming is spirited but unconvincing. Complaining of the “financialisation” of US business, for example, Foroohar tells us that the US “financial economy” had become “larger than the real economy,” a statement I find hard to interpret. But I do know that US Bureau of Economic Analysis numbers show the value-add of finance and insurance as a share of US GDP (or total value-add) was 7.5 per cent eighteen years ago and 8 per cent just before Covid.

That is not much of a change. More than nine-tenths of US GDP comes from activities other than finance and insurance. This was true shortly after China joined the WTO, and it is true now. Even though manufacturing had declined as a share of US GDP over the period, in 2020 it was still a markedly bigger share of GDP than finance and insurance, and remains so today. •

Homecoming: The Path to Prosperity in a Post-Global World
By Rana Foroohar | Crown | $60.99 | 400 pages

The post Is this the end of globalisation? appeared first on Inside Story.

Beijing has also raised the tone of its rhetoric on the unification of Taiwan with the mainland. But this move, if it ever came about, would be more likely to exacerbate China’s problems for years, if not decades, rather than solve them. Bali marked Chinese re-entry into the world while revealing the uncertainties that could undermine it.

China did make the most of its G20 presence. Unmasked and confident, Xi Jinping held court, giving or withholding favour from leaders eager to be seen with him. There was little doubt that he would meet Joe Biden, but other leaders seemed to compete for invitations. Emmanuel Macron and Anthony Albanese were invited in, with the latter’s visit seen as a sign of thaw in the icy relationship between Canberra and Beijing.

Others, including Britain’s Rishi Sunak, were not given a meeting, though it’s unclear whether the planned bilateral with Sunak fell victim to the erroneous report that Russia had bombed Poland, or Chinese anger at Sunak suggesting support for Taiwan.

Yet the demonstration of power by Xi belied the seeming hesitancy in Beijing about China’s international strategy. The years of the pandemic saw not only US–China relations entering a period of deep freeze, but also a general lowering of favourability for China in the Global North, in particular in the Anglophone countries. The Global South remained overall friendlier, but it was hard to avoid the impression that it was Chinese Belt and Road funding, not values, that kept them enthusiastic.

And all this was before the dramatic turn in Covid policy that followed mass protests in China in early December. China’s domestic woes, notably a weak economy, are not terminal but they are undoubtedly serious. And solving them is dependent on a clearer sense of where China’s international relations are going.

The Bali meeting did show the US and China speaking in a civilised manner. After the ill-tempered encounter between the two sides in Anchorage, Alaska, in 2021, the polite language on both sides about mutual respect and cooperation was a welcome shift.

Biden was fortunate the G20 took place just after midterm elections in which his Democratic Party did surprisingly well: Chinese analysts follow US politics almost as avidly as Westminster Americaphiles, and it’s likely that the Chinese (rather like the Republicans) were expecting a Democratic rout and a weakened Biden arriving in Bali. In fact, the results left the US president chipper, and the Chinese side less able to lament the supposed continuing slide of the US towards fascism.

However, the meeting also showed that American leadership continues to be tempered by its partners’ varying priorities on China. In Europe, it’s evident that German chancellor Olaf Scholz is uncomfortable with the idea of a Western decoupling from China. His recent trip to Beijing, accompanied by top German business executives, emphasised that point. Even within Germany, there is unease at his position: the Greens in particular have been prominent in demanding a tougher position on China, and at least one senior politician, Reinhard Bütikofer, has been sanctioned by China.

To American complaints, however, Scholz can point out that a range of US corporate majors, from Ford to Coca-Cola, still have a major presence in China. Beijing is quite aware of the power of the China market for at least some Europeans. Xi will understand that there is no prospect of Europe staying neutral between the United States and China, and that the European Union as a whole has moved away from the idea of China as simply an economic partner, regarding it as a competitor in areas ranging from trade to security. Yet he also sees opportunities to remind the continent that simply following the US line is not the only option.

There is one European power that China has yet to figure out: Britain. That the scheduled bilateral between Sunak and Xi did not take place might have come as something of a relief to London (as did the avoidance of a Justin Trudeau–style drive-by tongue-lashing; the Canadian prime minister appeared caught by surprise when Xi harangued him about supposedly leaking a private conversation). Britain’s China policy has been in flux. Under Boris Johnson, it was balanced between the desire to find a post-Brexit market and the desire to respond to growing security (Huawei) and human rights (Hong Kong) concerns.

During Liz Truss’s brief ascendancy, there were moves to declare China as a whole as a “threat.” Sunak’s first major foreign policy speech has declared that the UK will display “robust pragmatism,” a capacious term that seems to indicate a desire to keep trade relations plausible while acknowledging that stronger national security measures are likely in areas such as high-tech scientific collaboration.

Beijing’s hopes, post-Brexit, that Britain would be a vulnerable actor potentially open to a deal with China have faded. But, overall, the perception remains strong in China that Britain is still in flux on its long-term commitment to the Asia-Pacific.

The presence of the G20 in Bali also flagged up another area where US power has become patchier: Southeast Asia. Indonesian president Joko Widodo pointedly appealed to both sides to avoid a new “cold war.”

Overall, the region’s powers have a growing sense of resentment that they are being forced to choose sides, as Beijing and Washington raise the temperature of their language against each other. They are wary of the growing strength of China’s navy, particularly in the disputed South China Sea.

As a result, the news of the AUKUS submarine collaboration between Australia, Britain and the United States in 2021 led to muted reactions in the region, with some concern that the delicate regional balance might be disturbed but also some satisfaction that the United States continued to show commitment to security there.

Yet the Bali meeting also showed up the major absence in the US proposition for the region: an unwillingness to acknowledge the centrality of China’s massive economic presence in Asia. The US security presence still lacks an accompanying economic story (or indeed, an acknowledgement that economics and security are aspects of the same issue regarding China). The US Asia-Pacific Economic Plan is abstract, and does not make up for the link that went missing in 2017, when the newly inaugurated Donald Trump pulled the United States fully out of the Trans-Pacific Partnership.

Nor is there any realistic prospect of the United States joining its successor, the CPTPP (Comprehensive and Progressive Trans-Pacific Partnership): Britain is currently more likely to join. The flaws of these two agreements are many, but that is beside the point. Instead, while the United States is only partially embedded in the network of trade relationships that marks the Asia-Pacific region (primarily through APEC, the Asia-Pacific Economic Cooperation forum established in 1989), China currently sits in all the major groupings except for the CPTPP and is currently applying to join the latter as well.

The United States has been more successful at passing legislation that will hold China back (notably, the CHIPS act that denies China access to advanced technology) than shaping a new model of political economy for the region.

Two issues hung over the US–China relationship as the Bali meeting unfolded: Ukraine and Covid. Ukraine presents the United States with a dilemma: how best to deal with the tacit support China gives Russia while not provoking Beijing into anything like a full alliance with Moscow.

The danger of such an alliance has receded; Putin did not attend the G20, his foreign minister Sergei Lavrov made only a brief visit, and overall Xi has given little indication that he wants any deeper connection with the war. China does benefit from cheap fossil fuels from Russia and enjoys greater leverage that will enable it to pressure Russia in areas where China has special interests, such as Central Asia, or growing new interests, such as the Arctic.

However, China has hedged its bets by making it clear that it remains neutral, rather than officially supportive of Russia, at the United Nations. Nor is China’s hand entirely free. There is more caution in Chinese elite circles about the closeness to Russia than might appear the case at first glance.

One of the most iconic Chinese nationalists of the 1990s, Wang Xiaodong, author of the classic anti-Western text China’s Unhappy, has been writing thoughtful blogs recently reflecting on the rise of what he terms “Nazi” ideology in Russia. Although he scarcely mentions China, it is evident that Wang’s comparing of China’s partner to the Third Reich is not intended as a compliment.

The shadow of the zero-Covid policy hung over Xi at Bali, and his unmasked public presence certainly attracted attention at the summit and at home. The policy seemed to presage a long period of China being closed off to the outside world. But the demonstrations in the streets of China’s cities in early December led to a surprising, and sudden, reversal of policy in mid December. This shift will bring comfort to the many Chinese who have become victims of the country’s Covid-lockdown-influenced recession.

Winter 2022–23 now threatens to be a period of great domestic turmoil. The shift in policy has happened without an effective vaccine rollout, and most analysts inside and outside China think that a sudden spike in infections is inevitable in a country with little herd immunity to the virus.

Chinese New Year 2023 may be particularly testing: the normal phenomenon of millions of people on the move during those weeks has the potential to be a superspreading event, but cancelling the holiday would immediately lead to an outcry that the abandoned policy is coming back. Either way, the difficulty of judgement on these issues argues for a strong concentration on the domestic situation in 2023.

Does the improved tone of US–China relations imply a reduced risk of war between the two? This largely depends on how much it affects China’s readiness to launch a move to incorporate Taiwan in the near future. The official Chinese position remains as it has been for years: bringing Taiwan under Beijing’s control is the last unfinished business of the cold war.

Xi has added to the urgency with his statement that bringing Taiwan into the fold “cannot be left to future generations.” The heightened tension after Nancy Pelosi’s visit in August 2022 has alerted governments and corporations in the region and beyond to the fact that they need to develop a viewpoint on any change in the island’s status in the light of a move from the mainland.

The likelihood of a full-scale invasion of Taiwan is still low. The island has difficult topography and beaches that are unfriendly to an amphibious operation. After seeing the build-up of troops on the Ukraine border in January 2022, the West would be on heightened alert if satellites showed troops and equipment massing on the Chinese coast. China has also seen that bold military moves can go horribly wrong, and that cities under assault can fight back. However, an action that does not involve a physical assault, such as a naval blockade of the island, as a challenge to US and Japanese naval power, might be more conceivable.

Still, such an action would have immense consequences. There would be a high likelihood of coordinated sanctions against China. Beijing might calculate that this is a price worth paying for a number of years in return for conquest of the island, but the medium-term effect on China’s economy would be huge.

Though there would also be a very damaging effect on the global economy as a whole, it would be China that would likely suffer most. In the next few years, the most obvious effect would be a breakdown in the supply of high-grade semiconductor chips from Taiwan, which would be a disaster for both China and the outside world since there seems little prospect of a diversified, reliable supply until sometime into the mid 2020s at the earliest.

Beijing and Washington are still inclined to talk past one another. Beijing insists that it is pushing back against any move towards Taiwanese independence. Washington reiterates that it has no intention of supporting independence (a position of which Taiwan’s politicians are well aware), but that it would defend Taiwan’s democracy, one of the most progressive in Asia, with full free media, multi-party elections, and an active civil society.

China’s latest (2022) white paper on Taiwan says very little about preservation of Taiwan’s freedoms, other than a vague statement that governance would be a “looser” version of the system for Hong Kong, hardly a reassuring response to the fears of Taiwan’s many democratic actors. There is little evidence that Beijing spends much time thinking about the reality that Taiwan is a vibrant society unwilling to give up its freedoms, and a danger that China’s leaders may, like Putin, believe their own propaganda that the island’s democracy is shallow and dysfunctional, and that Beijing’s control would win considerable support.

How likely is a blockade? Unexpectedly, we have more grounds to judge than even a few weeks ago because the sudden shift in policy over Covid gives a variety of clues about what might happen regarding Taiwan. Unfortunately, those clues point in different directions.

The first lesson is that the system does have some flexibility in it and that Xi can listen to advice. Although we have no idea what happens inside the notoriously opaque Chinese leadership bubble, it’s inconceivable that a change of that magnitude could have happened without Xi’s sign-off, and that must imply that he had to accept that his cherished zero-Covid policy had to change.

It’s also notable that the shift in tone turned attention to the economy and the need for growth: ironically, the subject of most concern to the members of the governing elite who seemed to have lost out in the announcement of the new Politburo top team (Wang Yang, Hu Chunhua and Li Keqiang among them). That might imply that an argument of economic rationality would also apply to any attempt to coerce Taiwan into unification, or to change a blockade policy if it showed major adverse economic effects with not much sign of a swift victory.

Just as reversing the zero-Covid policy doesn’t return China to the status quo, stepping back from a physical invasion would be immensely difficult. The government would experience a loss of credibility and the human and economic costs would mean a long period of recovery.

By contrast, in the short term, a naval blockade would be more easily reversible as long as it had not involved any physical attack on the island. If the effect of sanctions were to damage the Chinese economy even more than had been predicted, then the ships could be turned back (as in the Cuban missile crisis).

But that would not return matters to the status quo. International investors, already wary of putting their money in China, would not come flooding back. Foreign firms with production facilities in China would change their risk calculus, even though this would mean the sacrifice of huge sunk costs in China. (And after all, after such a debacle, how likely is it that a sullen Chinese public would buy Western-branded cars and toothpaste as if nothing had changed?)

Beijing’s analysts can make these calculations just as much as Washington can, which is why it is perfectly plausible that China will, in the end, decide that an attempt to subdue Taiwan simply poses too much risk to a Chinese economy under strain. Much of the Chinese public might want Taiwan to be unified in the abstract, but offered the actual price of doing so, might well recoil. (Not that such consequences are likely to be spelled out within China.)

In the last resort, it is another issue that may well persuade Xi that strong rhetoric on Taiwan should continue but it should not be accompanied by action, language that would still be likely to deter any declaration of independence from Taiwan.

That issue is China’s demographic decline. In 2022, new statistics made it obvious that China’s already swift acceleration towards a smaller population, exacerbated by the one-child policy, was heightening a crisis in pensions, eldercare and health provision. China needs to work out now how it can raise pension ages and deal with a fast-approaching reduction in the number of working-age taxpayers. To do this, it needs a stable economy with strong consumption-driven growth, as well as even more exploitation of its real advantages in technological innovation in hubs in Shenzhen, Hangzhou, Beijing and beyond.

Overall, a range of economic problems, from a fragile property sector to rising graduate unemployment, are challenging China in the 2020s. None are insoluble, but an assault on Taiwan would do nothing to fulfil any of them. Avoiding such an assault, and growing the economy, by contrast, stands a chance of creating a “moderately prosperous” middle class that might genuinely stand as a challenge to the Western model.

Apocalyptic stories of Chinese global dominance or collapse should give way to a less glamorous but more probable reality: China will likely be a major power with global influence for decades to come, but its internal crises will continually force it to redirect attention inward. •

This article first appeared in the Substack newsletter Comment is Freed.

The post What next for China? appeared first on Inside Story.

That, at any rate, is the conclusion reached both by Brad DeLong in his new book, Slouching Towards Utopia: An Economic History of the Twentieth Century, and by Sebastian Edwards in his forthcoming book, The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism. Importantly, neither DeLong nor Edwards can be numbered among the neoliberals’ irreconcilable opponents. Both embraced neoliberalism for many years, though in different forms.

The Chile Project, of which Edwards was a generally sympathetic observer, ranks with Thatcher’s Britain as the paradigmatic case of what I’ve called “hard neoliberalism,” which combines authoritarianism and radical free-market policies. The success of the “Chicago Boys” — the economists who have long dominated the Chicago School of Economics — in persuading the Pinochet dictatorship to implement market-driven policies that were largely sustained under subsequent democratic governments. They included a privatised pension system, writes Edwards, along with “openness and globalisation, the fiscal rule, the taming of inflation, and austere health, education, and environmental policies.”

As the examples of Pinochet and Thatcher suggest, hard neoliberalism has nothing in common with the concern for freedom of speech that motivated John Stuart Mill and other liberal thinkers. But it was consistent with the strain of classical liberalism represented by the Austrian-born economist Friedrich Hayek, for example, who was more worried about preserving individuals’ freedom of action, particularly by minimising government interference in property rights.

The “neo” in hard neoliberalism reflects how the successes of social democracy in the twentieth century permanently discredited the kind of classical liberalism that would tolerate mass poverty alongside massive wealth. Neoliberals accepted the need for social services to raise most people above the poverty line. Provided that goal was achieved, they argued, there was no need to be concerned about political and economic inequality.

DeLong is, or at least was, a proponent of what I’ve called “soft” neoliberalism, which derives from the distinctive US use of the term “liberal.” Soft neoliberalism was epitomised by the Clinton administration, in which DeLong served as deputy assistant treasury secretary under Lawrence Summers. Outside the United States, soft neoliberalism was often described as the Third Way. Its central theme was the idea that the goals of social democracy (or liberalism in the US sense) could best be achieved by embracing market-oriented reforms, and particularly financial deregulation, while maintaining a generally redistributive welfare state.

In both hard and soft versions, neoliberalism reached its high point in the 1990s. Chile experienced severe economic crises under Pinochet, but the end of the dictatorship in 1990 was followed by a decade of strong economic performance. The government’s most distinctive reform, a pension system based on individual accounts, was seen as a model by George W. Bush’s administration in the United States.

The triumph of soft neoliberalism in the United States was announced in hyperbolic fashion by Francis Fukuyama’s The End of History and the Last Man and popularised in airport bestsellers like Thomas Friedman’s The Lexus and the Olive Tree. The stockmarket boom of the 1990s, roughly coinciding with Clinton’s term as president, seemed to promise endless prosperity.

Particularly notable were a series of corporate-friendly free-trade agreements that contained investor-state dispute settlement mechanisms allowing corporations to sue governments for policy decisions harmful to their profits. Even more striking was the embrace of the financial sector, symbolised by the appointment of former Goldman Sachs chairman Robert Rubin as treasury secretary.

Neoliberalism’s weaknesses became more evident from the late 1990s on. A series of financial crises (the Asian crisis of 1997, the Long-Term Capital Management bailout in 1998 and the dotcom bust of 2000) prefigured the massive financial disaster triggered in 2008 by the global financial crisis, which continued for most of the next decade.

Having recovered somewhat in the 1990s, productivity growth slowed to a crawl. DeLong marks 2010 as the year when the “long twentieth century” of technologically driven growth came to an end. As he observes, “The years following 2010 were to bring large system-destabilising waves of political and cultural anger from masses of citizens, all upset in different ways and for different reasons at the failure of the system of the twentieth century to work for them as they thought that it should.”

In Chile, meanwhile, the much-touted pension scheme had proved to be a flop, with workers losing much of their savings to management fees. A series of reforms have gradually moved the system back towards a more traditional public pension scheme. Moreover, while absolute poverty fell, broad-based prosperity didn’t result. Those at the top of the income distribution captured most of the gains.

Edwards sees the protest movement that launched in 2019 as the beginning of the end for Chilean neoliberalism. Taking account of global trends, DeLong marks 2010 as the year when the “slouch towards utopia” slowed to a crawl or stopped altogether. Either way, neoliberalism had gone from unchallenged hegemony at the turn of the twenty-first century to full retreat twenty years later.

So far I’ve focused on the period of neoliberal dominance that began with the breakdown of Keynesianism in the early 1970s. This framing exactly fits Edwards’s book, which begins with the Chilean military coup of 1973. For DeLong, though, neoliberalism was the second act in a drama that began in the late nineteenth century. During that hundred-year first act — about which he writes as an economic historian rather than a participant — economic life was utterly transformed for the majority of people on the planet.

The story begins in Western Europe and its offshoots, most importantly the United States, and it is on the latter that DeLong focuses most of his attention. He chooses 1870 as his starting point because that was the year when “invention was invented” with the creation of industrial research laboratories. These enabled inventors to focus on innovation rather than an endless, and often futile, effort to commercialise and license their inventions. Surprisingly, despite being affiliated with the University of California Berkeley, home to twenty-six Nobel prize winners and alma mater of dozens more, DeLong doesn’t mention research universities, which provided the basic science underlying most of these inventions.

As his title suggests, the subsequent century saw remarkable progress that nonetheless failed to create the utopia many believed could emerge from the massive improvements in technology. Instead, the century was consumed by disputes over how to organise societies and economies — ferocious and bloody disputes in the first half of the twentieth century followed by an uneasy peace under the threat of nuclear annihilation.

DeLong personifies the schools of thought within the capitalist world as being those of Hayek (“The market giveth, the market taketh away; blessed be the name of the market”) and Karl Polanyi (The market was made for man, not man for the market). More prosaically, while Hayek opposed all forms of government intervention in the economy as a “road to serfdom,” Polanyi argued that people “had rights to a community that gave them support, to an income that gave them the resources they deserved, to economic stability that gave them consistent work.”

Within this schema, the decades following 1945 (Les Trente Glorieuses, as the French call them) can be seen as the period in which this tension was resolved by the combination of Keynesian macroeconomic management and the social-democratic welfare state. Hayek was victorious in the campaign against comprehensive economic planning but not in his opposition to large-scale public provision of health, education and infrastructure services of all kinds.

Polanyi’s views seemed to gain ground during Les Trente Glorieuses, with the size and scope of the state growing steadily. In the cold war setting of the mid twentieth century, many expected that the rival economic systems of capitalism and communism would converge to a “mixed economy,” with most large businesses owned or tightly regulated by governments, and market forces ruling elsewhere.

But the tables were turned in the space of a few years. Hayek triumphed in the 1970s, both in DeLong’s symbolic terms and as the intellectual star of the decade. Financial markets were deregulated, public enterprises privatised and unions crushed. The era of neoliberalism, which forms the second part of DeLong’s story, had begun.

This account leaves DeLong, and his readers, with two big problems. First, did technological progress really cease to work after 2010 and, if so, why? Second, why was a relatively short burst of high inflation enough to overthrow social democracy yet decades of poor economic performance insufficient to generate an alternative to neoliberalism?

On the first question, I am a bit more optimistic than DeLong. The twenty-first century has seen huge growth in the volume of information distributed through media of all kinds. Unlike traditional goods and services, information is a “non-rival” product: making information available to one person does not reduce the amount available to everyone else. But the infinite capacity for reproduction also makes it hard to force people to pay for information. The most common, though highly unsatisfactory, solution is to attach useful information to advertising people would not otherwise choose to look at.

In these circumstances, traditional measures of output, income and consumption become less and less relevant. At least in countries where most people have access to a basic twentieth-century set of household goods and to a variety of personal services, it may be that future improvements in living standards will come almost entirely from access to information provided outside the market.

On the second question, DeLong argues, correctly I think, that social democracy was a victim of its own success. Everyone expected accelerating growth in their incomes combined with a continuation of full employment and low inflation. When the system failed to deliver at quite the expected level, neoliberalism promised a return to prosperity. By the time it became clear that this promise would not be realised, expectations had been lowered so much that (for example) a 5 per cent rate of unemployment was seen as a success rather than the disaster it would have been perceived as in the 1970s.

Again taking the optimistic view, we are seeing a gradual rehabilitation of the institutions of the mixed economy, including activist governments, public enterprise and trade unions. At least for the moment, we don’t have to worry that our limited successes will recreate the hubris of the 1960s. Perhaps we can finally put the era of neoliberalism behind us. •

Slouching Towards Utopia: An Economic History of the Twentieth Century
By J. Bradford DeLong | John Murray | $34.99 | 624 pages

The Chile Project: The Story of the Chicago Boys and the Downfall of Neoliberalism
By Sebastian Edwards | Princeton University Press | US$32 | 376 pages

The post The slow demise of neoliberalism appeared first on Inside Story.

It takes twenty-five minutes in an overpriced taxi, and longer in a free shuttle bus, to get from either end of the coastal strip to the UN COP27 venue, which has been specially constructed in temporary buildings around the international convention centre. When the conference palls, the bright lights, loud music and traditional Egyptian belly dancers of the Naama Bay strip inevitably have their appeal. “It’s like Las Vegas,” one delegate said, “only not as highbrow.”

Nevertheless, this is where COP27 is taking place, and it’s the scene of plenty of serious negotiation and debate. The Leaders’ Summit in the first two days was notable mainly for the traffic jams caused by presidential convoys and tight security. Although the speeches didn’t generally rise very far to the occasion, they served their allotted purpose: forcing heads of government to declare in front of their domestic TV audiences that climate change is an urgent priority and they are committed to stronger action to combat it.

The two most eagerly awaited speeches were not actually scheduled for the summit itself. Fresh from his unexpected triumph in the US midterm elections, Joe Biden arrived in the largest convoy of all a couple of days after the other leaders had left. In his usual inimitable monotone, he declared that the American Inflation Reduction Act — his administration’s unprecedented package of climate change measures, which finally got through Congress in August — would enable the United States to meet its 2030 emissions targets, driven by investment in new technologies and American enterprise.

The president also declared the United States would provide more help to developing nations to combat a climate crisis that concerned “human security, economic security, environmental security, national security and the very life of the planet.” Climate wonks poring over the text could find little new support that had not already been announced, but the general uplift from Biden’s presence was evident. A grateful audience gave him a standing ovation, not something hard-bitten COP delegates are wont to do.

The other eagerly awaited leader has only just arrived. President Luiz Inácio Lula da Silva of Brazil, fresh from his even more momentous election victory, will make his speech today, and his ovation will be even longer. Under the far-right, Trump-imitating Jair Bolsonaro, Brazil has gone from climate leader to renegade destroyer of the Amazon, and the relief among the climate community to have Lula back in power is palpable.

Without control of Brazil’s Congress, the returning president may struggle to pass the environmental legislation he wants, but he will beef up security protection for forest lands and indigenous peoples, and commit to “net zero deforestation” in the future. He has already made clear that he will be a regional and global champion for climate action, and in a geopolitical world riven by tension between the big Northern hemisphere states — the United States, China, the European Union, Russia and India — there are high hopes for his Southern leadership.

If the big countries inevitably take up the largest space in UN climate conferences — commensurate with their outsized emissions pouring into the atmosphere — there is nevertheless always room at COPs for the small nations to make a mark. It is one of the more remarkable features of the thirty-year-old UN climate regime that decisions have to be reached by consensus, which gives otherwise internationally invisible and powerless countries a crucial role. Coupled with the fact that the poorest countries most vulnerable to climate change — the small islands of the Pacific and Caribbean, low-lying nations such as Bangladesh and glacier-melting ones like Nepal — are the evident victims of a climate crisis they didn’t cause, this creates a rather remarkable dynamic.

At the Paris COP in 2015, it was the tiny Marshall Islands that led the High Ambition Coalition with the European Union and the United States that drove the final treaty negotiations to an unexpectedly radical conclusion. And in Sharm el-Sheikh it is Vanuatu and Tuvalu that have made the early headlines. They have been reiterating their request for an International Court of Justice ruling on the legal liability of rich countries and companies for the historical emissions that threaten their island existence. The two countries have demanded that the world agree a “Fossil Fuel Non-Proliferation Treaty” to manage the global phase-out of coal, oil and gas.

The most powerful speech at the Leaders’ Summit also came from a small island. The prime minister of Barbados, Mia Mottley, was the standout speaker at last year’s COP26, and retained her top spot in the unofficial charts with another remarkable and insightful contribution here.

Mottley’s rhetoric transfixed the hall. “We have the collective capacity to transform,” she told the heads of government sitting in the rows of seats in front of her. “We’re in the country that built pyramids. We know what it is to remove slavery from our civilisation… to find a vaccine within two years when a pandemic hits us… to put a man on the moon. And now we’re putting a rover on Mars. We know what it is. But the simple political will that is necessary, not just to come here and make promises, but to deliver on them and to make a definable difference in the lives of the people whom we have a responsibility to serve — this seems to be still not capable of being produced.”

Mottley’s core argument was that the international financial system isn’t working for poor and middle-income countries, like Barbados, that want to move to net zero emissions and cope with the devastating climate change they are already experiencing. They cannot access the finance or the technology to do so. She laid the blame squarely on the World Bank, the IMF and their developed country shareholders. “This world,” she said, “looks still too much like it did when it was part of an imperialistic empire.”

Mottley is not, however, content with rhetoric. Over the last few months she has been promoting a new plan for financial reform dubbed the Bridgetown Initiative after the Barbados capital in which it was hatched with her adviser, economist and former investment banker Avinash Persaud. And it has been getting increasing traction at COP27.

At the core of the plan are three innovative reforms that between them could galvanise more than US$1 trillion of new finance for climate-compatible development, including emergency help to countries hit by extreme weather events, and low-cost lending for emissions reduction investments.

The first is to get the World Bank, along with the other multilateral development banks, or MDBs, in Africa, Latin America and Asia, to use their capital base more expansively. These banks are all funded by the richer countries to provide concessional lending to developing ones. But the World Bank in particular has become deeply risk-averse. Highly protective of the triple-A rated status of its bonds, it has refused to use its healthy balance sheet to increase its lending capacity.

A recent expert report commissioned by the G20 group of nations found that between them the MDBs could lend an extra US$500 billion or more if they slightly relaxed their risk appetite and capital accounting procedures and better utilised government guarantees.

Second, Barbados has been pioneering “disaster clauses” in its debt contracts. These are stipulations that if a country borrowing money from private or public creditors experiences a predefined extreme weather event, all its debt repayments will be postponed for two or more years. Given how much many developing countries are forking out in debt repayments, such clauses immediately release millions of dollars of liquid funds for disaster relief and reconstruction and public service budgets. The creditors get repaid on a later schedule, but with the interest they have lost made up, removing any financial loss. Barbados is proposing that such clauses should become standard practice in all sovereign debt contracts.

Third, Mottley has called for a new issuance of Special Drawing Rights, or SDRs, the reserve currency the IMF is empowered to release to support the global financial system. She proposes that these SDRs be put into a trust fund that can then back new lending for emissions reduction investments such as renewable energy, methane control and forest and land management. For most developing countries, the cost of capital is simply too high to enable them to borrow for such priorities.

Where developed countries with strong currencies can borrow on international markets at 3 to 5 per cent, most developing countries — including relatively stable, growing ones such as India and South Africa — face interest costs at least three times higher. Barbados proposes that the new fund should auction its lending capacity to the projects, wherever they are located, that can achieve the highest and fastest emissions reductions.

These reform ideas are not the only ones circulating at COP27. The V20 group of climate-vulnerable nations has produced its own suggestions for new financing mechanisms, and innovative ideas are being produced by academics and civil society organisations, including a plan for the cancellation of developing country debt in return for commitments to verifiable climate action plans.

Mottley used her short stay in Sharm el-Sheikh to discuss her ideas with other leaders. French president Emmanuel Macron duly called for an expert group to look at the Bridgetown Initiative and other proposals and make rapid recommendations on their implementation to the international financial institutions and their shareholder nations next year.

And in the negotiating sessions that have followed, ministers from other countries have gone further. Several have called for a review, not just of individual funding mechanisms, but of the entire international financial system. Many countries are today experiencing once again the problem of the dominance of the US dollar. As American interest rates rise, their own currencies are depreciating, making imported energy, food and manufactured goods more expensive and raising the cost of dollar-denominated borrowing. Another global debt crisis looms, with more than forty countries in or at risk of debt distress, according to the IMF. When the United States catches a cold, one delegate noted, the rest of us get flu.

So an even bigger agenda is beginning to make its way into COP speeches and debates. The present international financial system and its institutions were designed in 1944, in a very different economic and political world. Nearly eighty years on, they could do with a refresh.

No one is yet claiming Sharm el-Sheikh will one day be as famous a venue for international financial reform as Bretton Woods. But the seeds are being planted. •

The post Keynes comes to Sharm el-Sheikh appeared first on Inside Story.

In the last three weeks, though, the atmosphere has changed. Victoria’s election has begun to get interesting. The polls, the politics, and the momentum appear to be swinging — not enough to suggest that this election could end Labor’s rule, but enough to make the outcome a bit less certain.

Daniel Andrews specialises in being in control: it’s his thing. Doing press conferences for 120 days straight during the Covid lockdowns was fine with him: the journalists could only ask questions, whereas he could talk as long as he liked without even answering those questions. But he can’t control interviews with thinking radio hosts like Neil Mitchell (3AW) and Virginia Trioli (ABC) who ask critical questions and interrupt him if he goes off on a tangent. So he refuses to face up to them. And in an election campaign, a leader who refuses to appear on the state’s biggest talk shows is a liability to his party.

As the government, Labor normally dominates policy debates. But an election campaign is a more even contest. Both sides have been told by their focus groups that the two key issues for voters are the cost of living and the state of Victoria’s hospitals and healthcare. Both sides are equally able to throw money at any group they think might consider such bribes worth voting for. And both sides are doing so with similar recklessness.

Victoria’s budget is heavily in deficit: even on optimistic assumptions, net debt is heaving towards $165 billion, or 25 per cent of the state’s GDP within four years. The only saving either side has offered so far is Guy’s welcome pledge to cancel the $13 billion Andrews has committed to his “Suburban Rail Loop” (which is not a loop at all). That aside, all the new spending both sides have promised — mostly to shift household costs onto the impoverished state budget and build or rebuild dozens of hospitals — would be funded by further state borrowing, adding to the debt to be repaid by future taxpayers.

It is depressing to watch a once-strong budget being weakened daily by political leaders who lack the courage to make voters pay for what they spend. The long-term costs to Victorians of the Andrews government’s fiscal lassitude in its second term will be substantial. But the spending competition has made the election a more even contest, leaving Andrews for once unable to dismiss the opposition as irrelevant.

Similarly, Labor usually dominates the tactical game, but last weekend it was caught by surprise when opposition leader Matthew Guy announced that the Victorian Liberals would change their preference policy to “put Labor last.” On paper, that’s enough to swing at least two Labor seats to the Greens, even if some Liberals have made it known they don’t like the change.

And the polls are moving, and serving up plenty of variety. Two weeks ago a Resolve poll for the Age found Labor leading 59–41 in the two-party vote. Within days, Newspoll in the Australian declared that lead had shrunk to 54–46. The Financial Review’s new pollster, Freshwater Strategy, put it at 56–44, a Roy Morgan poll reported it as 57–43 (almost unchanged from the last election), while in Monday’s Herald Sun a Redbridge poll put it at 53.5–46.5 — implying a 4 per cent swing against Labor.

What should we make of all that? Take it with a grain of salt. I keep seeing the ghosts of Victorian polls past, such as “Matthew Guy Preferred Premier in Poll as Support for Daniel Andrews Collapses” (2016), or figures during Victoria’s six Covid lockdowns suggesting Labor’s hold had become genuinely precarious. No recent poll suggests that Guy’s Coalition team could win the election.

But there is now a remote possibility that Labor could lose enough seats to lose its majority in the Legislative Assembly — as well as having to deal with a less controllable Legislative Council.

In November 2018, only 22 per cent of Victorians voted for Greens, minor parties and independents. In May 2022, 34 per cent did. That cost Labor no seats at the time, but a repeat of that vote in state electorates on 26 November almost certainly would.

Some numbers might be helpful. Here are three sets of them: in summary form, the votes at the 2018 Victorian election; the Victorian voting at the federal election in May; and a simple average of the five latest polls.

Three things to highlight. First, on the average of the polls, Labor’s primary vote is down 5 per cent since the 2018 election. Yet its two-party-preferred vote is down only 1.5 per cent — and the Coalition’s primary vote is also down, albeit marginally.

What the polls are telling us is that a significant minority of voters are shifting from the major parties — mostly from Labor — to Greens, minor parties of left and right, and independents of all shades.

Even in May, the signs were there. In three-party-preferred votes (that is, Labor v Coalition v the best of the rest), Labor went backwards in two-thirds of its Victorian seats. Even in two-party-preferred contests, competing only with the Liberals and Nationals, Labor lost ground in fourteen of Victoria’s thirty-nine House seats.

Until 2018, the idea of Labor facing challenges in its old working-class seats was implausible. They were rusted on, so it could ignore them with impunity — and did. But then loose coalitions of independents banded together in three of its neglected western suburbs seats to demand similar services to the rest of Melbourne.

Melton, with 70,000 people and growing fast, had no hospital, no TAFE and only an occasional country train service. Werribee was the centre of the booming southwest, where single-lane roads are choked with traffic most of the day. And Pascoe Vale was one of many Labor suburbs repeatedly ignored when the politicians direct their spending promises to marginal seats across town.

None of the independents won in 2018, but they gave the government a scare. In Werribee, treasurer Tim Pallas was fought to final preferences by local GP Joe Garra. In Melton, neuroscientist Ian Birchall came within 5 per cent of winning the seat.

The government briefly acknowledged the western suburbs and made more promises. But four years later, Birchall tells voters, Melton is no closer to getting a hospital, or being part of the suburban rail network, or having its own level crossings removed. You can’t drive around outer northern or western Melbourne without being stunned by the inadequacy of the main road networks their people have to put up with.

Birchall is running again, along with another of the 2018 independents, Bacchus Marsh snake catcher Jarrod Bingham, who in May came third in the new seat of Hawke. Joe Garra has swapped seats to contest Point Cook, but Labor now faces three other independents in Werribee, and more in Broadmeadows, Bundoora, Greenvale, Kalkallo, Kororoit, Laverton, Macedon, Preston, St Albans, Sunbury and Tarneit — as well as in seats in Ballarat, Bendigo and Geelong.

They may all lose. For now, the bookies and punters assume that all of them will lose. But the punters got it very wrong in May, when they bet that Labor’s Kristina Keneally would win Fowler comfortably and only one new crossbencher would be elected: Zoe Daniel in Goldstein. In fact she was one of ten.

As of now, the bookies’ odds imply that only five seats will change hands on Saturday week: Labor losing Richmond and Northcote to the Greens, and Hawthorn and Nepean to the Liberals, while holding on to Bayswater (notionally now a Liberal seat after redistribution changed its boundaries). I suspect they might be once again underestimating the likely changes.

Thirteen seats changed hands in 2018, and the Coalition lost eleven of them. It was left with just twenty-seven of the eighty-eight seats in the Assembly. Most of the Liberals’ seats were won very narrowly, with majorities of less than 3 per cent. The overall two-party-preferred vote (including an estimate for inner-suburban Richmond, where an independent Liberal ran after the party failed to nominate) was 57.5 per cent for Labor, 42.5 per cent for the Coalition.

It’s not a good place for the Coalition to start from, and the redistribution has not made it any easier. In Antony Green’s judgement, nine of the twenty-one Liberal seats are held by 1 per cent or less, whereas the vast majority of Labor seats are held by more than 10 per cent. To imagine the Coalition winning this election requires a creativity beyond my powers.

In Green’s view, the redistribution has left Labor with fifty-six seats, the Coalition twenty-seven, the Greens three and independents two. The Labor-held seats of Bayswater and Bass have become notional Coalition seats on their new boundaries, while Liberal-held Ripon and the Latrobe Valley seat of Morwell, held by National-turned-independent Russell Northe, have become notional Labor seats (the more so because Northe is retiring).

Labor will be re-elected for a third term unless it loses twelve or more seats, and there’s no sign of that happening. But Labor won the federal election in May because of a landslide in Western Australia that I don’t recall anyone predicting. If Victorians are hiding their anger from the pollsters, where might it suddenly erupt on election night?

First, we never have a good handle on country seats. The Liberals won Ripon last time by just fifteen votes; it’s possible that they will squeeze home again, despite the unfavourable new boundaries. The Nationals seem surprisingly confident of regaining Morwell, even though it now includes Labor-voting Moe.

And Mildura is facing a challenging election. Not only are the Nationals out to regain the seat they lost so narrowly last time, but seven-time mayor Glenn Milne is running as a conservative independent against its proto-teal independent MP Ali Cupper.

The bookies see two of the seats Labor won in 2018 as low-hanging fruit for the Liberals. Nepean, at the ritzy end of the Mornington Peninsula, voted Labor for the first time in 2018 but came back strongly to the Liberals in the federal election. Former big-serving Davis Cup player Sam Groth is expected to win the seat back for the Liberals.

The biggest upset on election night 2018 was the Liberals’ loss of Hawthorn. Its MP and shadow attorney-general, John Pesutto, spent the night on ABC TV’s panel, gradually realising that he had lost his seat and his job. At least he lost no friends with the classy way he handled the situation, but as the Age columnist Shaun Carney reminded us last week, Pesutto thereby also lost his chance to take over the Liberal leadership and move the party back from the fringes into the middle ground. His loss was one reason why Labor has faced little competition since.

Labor’s candidate John Kennedy, once one of Tony Abbott’s teachers at Riverview, was living in a retirement home at the time, and won preselection only because it was seen as an unwinnable seat. Despite his win, Labor has reportedly excluded Hawthorn from its priority list, opening the way for Pesutto to fight it out with one of just four teal independents at this election, Melissa Lowe, an administrator at Swinburne University.

But to get close enough this time to make a serious bid for power in 2026, the Liberals will need to win back more seats than that. At the federal election in May, their biggest swings from Labor were in the outer suburbs, especially in the new state seat of Pakenham, and in northern Yan Yean, where they had to disendorse their candidate last time. If, as many argue, the Covid lockdowns did most damage to outer-suburban families, many of whom could not work from home, these two seats could be among the casualties.

Labor generally had easy wins in the outer southeast last time, but that was before Covid. Both sides are putting resources into new housing areas in seats like Bass (now notionally Liberal), Cranbourne, Narre Warren North and Narre Warren South.

The Liberals are also hoping to take back some of Labor’s other unexpected gains last time, including the middle-suburban electorates of Ashwood (formerly Burwood), Box Hill and Ringwood, and the outer-south Geelong seat of South Barwon. Ministerial retirements have opened up rare opportunities for them to win back the Dandenongs electorate of Monbulk, held until now by former deputy premier and education minister James Merlino, and the sea-change electorate of Bellarine, vacated by former police minister Lisa Neville.

But Labor’s success in May reminds us that it’s pretty good at looking after marginal seats. It’s the safe seats it often mucks up. And while most of the 129 independents are running in Labor seats, many of them aren’t well known, and virtually all of them will be poorly resourced relative to the major parties, for whom Labor’s electoral reforms carved out a far more generous set of rules than those applied to new parties.

That leaves the Greens as the third opponent Labor has to worry about. But not too much: even with the Liberals preferencing them ahead of Labor, the Greens’ dream result would be to double their seats in the Assembly from three to six.

They first entered Victorian politics at the 2002 election. Amid a Labor landslide, they overtook the Liberals to run second in four inner-suburban electorates — Melbourne, Brunswick, Northcote and Richmond. Liberal preferences helped an unknown young medico named Richard Di Natale to come within 2 per cent of winning Melbourne.

In 2006 they won three seats in the Legislative Council after the Bracks government made a principled decision to switch it to election by proportional representation. (You could not remotely imagine Andrews proposing such a reform.) And when Adam Bandt broke through to win the federal seat of Melbourne in August 2010 — with 80 per cent of Liberal voters directing preferences to him — the state election seemed set for a similar breakthrough.

But Bandt immediately became one of the crossbenchers supporting Julia Gillard. Federal opposition leader Tony Abbott decided to reverse Coalition policy on preferences: he wanted the Greens to be treated as untouchable, which meant giving Coalition preferences to Labor instead. The Victorian election in 2010 was the first under the new policy, and it saw the Greens lose all four contests.

In 2014 the Greens retaliated by targeting a Liberal seat, Prahran, as well as a Labor one, Melbourne. They won them both, despite Liberal preferences in Melbourne going to Labor.

Let’s note: Daniel Andrews and Labor won that election with a majority of just six seats. Had the Liberals not shifted preferences to Labor, the Greens in 2014 would also have won Brunswick, Northcote and Richmond from Labor, leaving it as a government without a majority. Labor would have had forty-four seats, the Coalition thirty-eight, with five Greens and an independent on the crossbenches. Labor would still have formed government, and could have made it work, but it would have required Andrews to develop skills he has yet to show us.

In 2017, future senator Lidia Thorpe won Northcote for the Greens at a by-election. But she lost it a year later at the full election, although her colleague, medico Tim Read, took Brunswick and the Greens just held on to their other two seats, all very narrowly, while Glenn Druery’s machinations saw them reduced to one seat in the Council. Their progress appeared to have stalled.

The federal election changed that, as they became part of the crossbench wave. Their big successes were in Queensland, but their vote surged to a record 13.75 per cent in Victoria, up from 10.7 per cent at the 2018 state election. The Greens came within 0.32 per cent of winning Macnamara (formerly Melbourne Ports) and within 2.40 per cent of winning the three-way contest for Higgins. Had the Liberals preferenced the Greens at that election, Wills and Cooper (formerly Batman) would also have been very close.

The recent polls suggest the Greens’ surge is holding. Their goal for the Assembly is to consolidate their three existing seats, and pick up three more: Richmond, Northcote and Albert Park.

In Richmond they had been held at bay repeatedly by Labor’s veteran MP Richard Wynne, a well-respected former social worker and Labor idealist, and until recently planning and housing minister. But Wynne is retiring, and the bookies already had the Greens as narrow favourites in both Northcote and Richmond before the Liberals’ preference shift made that outcome more probable.

Albert Park is a tougher ask. Alongside Prahran, it makes up roughly half of Macnamara. But while much of Prahran is natural Greens territory, Albert Park is pretty well-off. On my sums, the Greens would need to top their federal election high by another one to two percentage points to win the seat.

The state redistribution did the Greens favours in some other seats, turning Footscray and Pascoe Vale into possible Greens seats in future. But that’s not where this election will be fought.

The single most important fact in Victorian politics is that, for all the mistakes, the polarisation, the high death toll and the policy overkill of 2020 and 2021, the polls make it clear that a majority of Victorians think the Andrews government did a good job in handling Covid. Clearly, he has earned his plaudits as a communicator with voters.

A survey by the Age suggests the voters just want to forget about Covid: old and young voters alike ranked it near the bottom of the list of a dozen key issues. Andrews clearly just wants to forget about it too. Chief health officer Brett Sutton, for so long at Andrews’s side at all those press conferences, has now been dispatched to the “freezer”: the government didn’t even ask his advice before agreeing to abandon mandatory isolation of people with active Covid.

Of course that is a national policy somersault, not just a Victorian one. It is a fact almost universally unreported and undiscussed that most Australians who have died of Covid have lost their lives in the last six months.

Sources: Covid Live, Australian Bureau of Statistics

Victoria is still by far the nation’s worst Covid hotspot: in the past six months alone, it has seen 63 per cent more deaths per million people than the rest of Australia. But to the premier and the voters alike, it seems it no longer matters. They are sick of Covid restrictions, and if old people die of it, so be it.

Andrews’s second term as premier was a lot worse than his first. Fiscal discipline has collapsed, causing an escalation of debt that will make future generations of Victorians poorer. Its symbol is the so-called Suburban Rail Loop, in reality a very expensive twenty-six-kilometre arc underground through Labor seats in the southeastern suburbs. On conventional cost-benefit tests, the auditor-general estimates the cost to Victorians will be twice the benefits they receive.

If Andrews wins a thumping majority on Saturday week, as still appears the likely outcome, what will his third term be like? Sumeyya Ilanbey’s recent biography depicts a leader who thrives on adulation, resents criticism and doesn’t listen to alternative views. His old colleagues have mostly left the room: only four of the twenty-one ministerial colleagues he started with in 2014 still remain.

If there is any constraint on his power in the next term, it could come from the new Legislative Council: the election result we don’t know already. We will look at that later this week.  •

The post Victoria considers its verdict appeared first on Inside Story.

My problem was that I’d forgotten most of what I was supposed to have learnt from the three years of economics in my commerce degree. It took me many, many hours on the phone to econocrats in the Bureau of Statistics, the Reserve Bank, Treasury, the Industries Assistance Commission and other agencies to relearn what I was supposed to know.

So I’m forever grateful to the econocrats who spent so much of their time helping get me up to speed. I was deeply impressed by their dedication, their selfless desire to educate the public on matters economic by helping educate me. (Now, you may wonder why so many econocrats are willing to speak to me. It’s because they know I’m a columnist, not a reporter. I don’t want to quote them, I want to take those of their opinions I agree with, and make them my own. Opinion writers are in the plagiarism business.)

All this helps explain why I don’t regard myself as an economist, and don’t claim to be one. I used to say I was an accountant pretending to be an economist, but these days I say I’m a journalist who writes about economics. That’s exactly how I see myself, and where my loyalties lie.

Because I’m not an economist, I’m not a member of the economists’ union, which means I’m under no fraternal obligation to defend economists and economics against all those terribly ignorant people who keep criticising us and pointing to our failings. I don’t have to believe what everyone in every occupation or industry believes: that if you’re not in our business, no criticism you make of us could possibly have merit.

Being a journalist who writes about economics, my obligation is to my readers. I see my role as similar to a movie critic. I’m an economics critic. I explain what the economists are telling the government to do and why, and then I tell my readers whether I agree with what the economists are saying. To put it more positively, I’ve spent my career trying to figure out how the economy works, then telling my readers what I’ve learnt. This means my views have evolved considerably over the decades. Hopefully, what I say today is closer to the truth than what I used to say.

When top econocrats give a very thoughtful speech about how the economy’s got to its present state, or what we need to do to improve its performance, the press gallery usually riffles through it looking for some particularly newsworthy remark — say, a hint that the cash rate’s about to rise — and then toss it aside. I see it as a big part of my job to rescue the speech from the gallery’s wastepaper basket and use my column to make sure my readers get the benefit of the top econocrats’ thoughtful explanations and observations. Even when I don’t agree with their policy proposals, I try to give them a fair run before I register my doubts.

Partly because I’m a longstanding exponent of explanatory journalism, I write a lot about economic theory, more than most other economic journalists do. It was many years after I graduated that some economist took the trouble to explain to me the role of theory in our efforts to understand how the world works, to extract some mastery from the seeming chaos around us: about how “models” help us understand the real world by focusing on a few really powerful explanatory variables, and ignoring everything else.

The neoclassical model is hugely useful, and hugely powerful in influencing the way economists think about how the economy works — and should work. This is why I keep writing about its assumptions and limitations. I think “behavioural economics” helps ensure our search for a better understanding of how the economy works isn’t held back by those assumptions and limitations.

But my interest in improving on the neoclassical model seems to bring out the defensiveness in academic economists — particularly on Twitter, where what I say is often dismissed as “simply wrong.” But what’s often not understood is that the neoclassical model I care most about is not the one written down in a set of equations but the one lodged in the heads of econocrats. When I criticise “economists” I’m usually referring to econocrats and other economic practitioners. I care most about what practitioners think and propose because they’re the ones with most influence over policy — the ones with most influence over the economy my readers live in. But academics almost always take “economists” to be referring to them, not to their former students. Their self-absorption is revealing.

I became an economic journalist in 1974, which means I’ve been a professional watcher of the economy — and the econocrats providing economic advice — for almost fifty years. I want to reflect on some of the conclusions I’ve reached in that time, the things I’ve learnt, and the way my views have changed. I guess I’ll be accused of being wise after the event, so let me get in first and plead guilty to exactly that. Being wiser after the event isn’t a crime, it’s a virtue. If you don’t learn from your mistakes, you’re not very bright.

When the era of “microeconomic reform” began in the mid 1980s under the influence of “economic rationalism,” I was a strong supporter. Over the forty years since then, however, I’ve had growing doubts about many of the supposed reforms we’ve made. By now, it’s clear that governments’ enthusiasm for what came to be known as “neoliberalism” has largely dissipated. Any number of policy changes by Liberal and Labor governments are clearly at odds with the principles of economic rationalism. But it’s not just the politicians who’ve lost their compass. I suspect that many econocrats have lost their John Stone certainty of what’s right and what’s wrong in economic policy.

I think we’re going through a period where econocrats and their fellow travellers are wandering in the wilderness searching for a new program of improvement to be working towards. Economic rationalism 2.0, if you like. Econocrats seem as reluctant as any other profession would be to publicly admit the mixed record of neoliberalism. But I’m here to say I don’t think econocrats will get their mojo back until they’re willing to admit that many of the things done in the name of microeconomic reform turned out to make matters worse rather than better. We have to learn from our mistakes. I want to propose a couple of principles that should be at the centre of econocrats’ renewed sense of mission.

First, however, we need to think about what went wrong with that great reform push and why. Let’s be clear: the biggest of the reforms were necessary and have worked well: floating the dollar, deregulating the banks, ending import protection, ending centralised wage-fixing and, as Andrew Leigh has reminded us, introducing national competition policy.

The problem has mainly been with privatisation, outsourcing and “contestability” — “reforms” largely motivated by the belief that the provision of services will always be done better by the private sector than the public sector. This is an article of faith for the Liberal Party, but also for too many econocrats. It has succeeded in making the public sector a lot smaller — and very much smaller than it would otherwise have been — but too often this has come at the cost of higher prices (electricity), fewer services and, particularly, lower quality services, delivered by inadequately trained workers.

This is true in aged care, childcare and employment services. Contracting out to providers in “thin markets” — a Productivity Commission euphemism for pretending there’s a market where none exists — is a big part of the reason for the blowout in the cost of the NDIS. The states’ TAFE systems needed shaking up, but opening up to cherry-picking private providers, plus general cost-cutting, has left us with an utterly inadequate technical education system. Far too many privatisations — particularly in electricity and ports — have involved selling government-owned businesses with pricing power intact, maximising the sale price at the expense of establishing a competitive market.

None of these adverse outcomes were envisaged in the econocrats’ advocacy of these “reforms.” What went wrong when theory was put into practice? One reason is the use of privatisation, and of bureaucrats putting downward pressure contract prices, to reduce “debt and deficit” — which, when you examine it, is about politicians responding to the public’s growing demand for government services without asking people to pay for them with higher taxes. This was never going to add up.

But I place some blame on the naivety of our econocrats. They assumed that what works in the textbook would work just as easily in real life. Many econocrats have never worked in the private sector, but are painfully aware of the deficiencies of the public sector. This, plus the neoclassical model’s implicit assumption that markets are rational but governments aren’t, blinded them to the truth that private firms are hugely fallible. Econocrats believed in the profit motive, but didn’t understand its raw, even ruthless power.

As we’ve seen from wage theft and the banking royal commission, among other examples, even our biggest, most respectable firms are perfectly capable of breaking the law in their pursuit of profit. Everyone wants to take a bite out of the government. When business people are invited to sell to the government, dollar signs appear in their eyes. They put both hands into the public purse and pull out as much as they can possibly carry away. They think the government’s always an easy touch — and too often they’re right. The bureaucratic regulators of private providers have proved no match for business people on the make.

The biggest reason so many reforms haven’t lived up to their billing, however, is the way the econocrats’ political masters have compromised the economic objectives by adding their own political objectives. Sometimes they’re trying to make the government’s finances look better than they really are. By moving debt off-balance sheet, for instance. But sometimes I suspect that the Liberals, being the party of the private sector, see moving businesses and workers from the public column to the private column as a clear win for their side of politics and loss for their Labor opponents.

There’s much more I could say about the crosses on the economic rationalist report card, but I need to get on with suggesting two key principles I think must be part of any revival of reformist zeal.

First, it’s become an empty cliché to say that policy proposals should be “evidence-based,” but it’s actually our beliefs about how the economy works that need to be more evidence-based. The great advance in academic economics in our time has been the way the information revolution has allowed it to become less theoretical and more empirical. The eternal temptation is to forget that models are just models. They’re not the economy, they’re a cardboard cut-out of the economy. They enlighten us in some circumstances, but mislead us in others. The great project in academia must be to test orthodox theory against the empirical evidence, to see what bits of the theory accurately describe the real world and what bits don’t.

The classic example of this is the way empirical evidence has caused economists to change their tune on the role of minimum wages. If there’s one area of the economy where the simple neoclassical model — the one that economists carry in their heads — is an unreliable guide to how the economy works, it’s the labour market. Most econocrats have much to learn from labour economists about how the labour market ticks. Monopsony, for example.

My broader point is that economists who think the neoclassical model they memorised at uni is all they need to give wise advice on policy — whose views on how the economy works haven’t been changed by advances in industrial organisation, asymmetric information, incomplete contracts, behavioural economics and the rest — are setting themselves up for failure. The policies advocated by econocrats have been faith-based rather than empirical-evidence-based.

Second, economic rationalism 2.0 must accept the failure of the smaller-government push. The move to private providers of publicly funded care has not led to any noticeable improvement in the efficiency with which those services are delivered. Where governments have managed to hold down the growing cost of services, this has been achieved by reducing the quantity and particularly the quality of services. Where services have been delivered by for-profit providers, savings from genuine improvements in efficiency have been insufficient to make room for their necessary profit margin. The plain truth is that any savings made by outsourcing services have come simply from side-stepping the good pay rates and conditions of the original workers.

Turning the focus to general government and the budget, the quest for smaller government and its objective, lower taxes, has clearly failed — despite decades of trying. It’s failed because the growth in the public’s demand for more and better government services is inexorable. No government of either colour is prepared to make the big cuts to major spending programs that would make smaller government a reality. Some conservative politicians genuinely believed smaller government was desirable and possible. More of them saw the political attraction of claiming to be pursuing lower taxes while their opponents indulged in “tax and spend.”

Far too many econocrats believed in smaller government and lower taxes as a sure-fire way of increasing economic growth. They focused on the simple theory that taxing any activity always discourages it, while ignoring the absence of empirical evidence that lower company tax leads to increased investment, and lower marginal tax rates encourage work effort. They studiously ignored the evidence that only in the case of secondary earners (mainly mothers) are effective marginal rates likely to affect work effort.

But I think econocrats are guilty of a greater error: their commitment to smaller government — which sort of fits with their day job of using false economies to pare back this year’s embarrassingly high budget deficit — involves pursuing a will-o-the-wisp while ignoring the real challenge. Since big spending on government services is the public’s clearly revealed preference, their job is to use every opportunity to remind the public — not to mention their political masters — that demanding more government spending is fine, provided you’re prepared to pay for it with higher taxes.

By omission, econocrats have played along with the delusion that higher taxes are unthinkable — both economically as well as politically — and settled for eternally struggling ineffectively to reduce budget deficits. They should have been doing all they could to stand against the demonisation of taxation for short-term and usually hypocritical political advantage.

Econocrats have spent too long struggling ineffectively to achieve smaller government, while doing little about what should be their real concern: not smaller government, but better government. Government in which the winners from globalisation and other structural change are required through the tax-and-transfer system to compensate the losers. The neglect of fairness toward the losers from microeconomic reform does much to explain why resistance to reform has grown and too many people have become susceptible to populist solutions.

Econocrats need to care more about how, for instance, assistance with housing costs can be more effective and better targeted to those needing it most. Econocrats — and particularly the accountants in Finance — have relied too heavily on crude annual percentage cuts in agencies’ budgets, and too little on building capacity to identify particular areas of waste. It takes no effort or understanding to barrack for small government or big government. What’s hard is knowing how government spending can be efficient and effective. Too often, econocrats have failed to promote and protect spending measures that should be seen as an investment in future cost reduction in return for immediate spending. Too often, the accountants have yielded to the short-term expedient of giving them the chop.

When it comes to regulation, the econocrat profession should be the repository of the nation’s knowledge of what works and what doesn’t, but it’s made little effort to become that. The new government’s commitment to an “evaluator-general” is good news. We need more rigorous evaluation of spending programs, with the results made public. This will always be resisted by ministers and department heads, but that’s all the more reason the econocrats should be unceasing in pushing for it.

Academic health economists worked for many years to build the information base that allowed governments to control their spending on public hospitals more effectively than just giving them 5 per cent more than they got last year. Eventually this “activity-based” funding model was adopted as part of the federal-state hospital agreement. To my knowledge, the econocrats did nothing to support this research effort, and were slow to realise its value.

It’s clear from all the discussion of the fiscal position inherited by the new government that we face a choice between bigger government with higher taxes, and a never-ending struggle with “debt and deficit.” Our econocrats should make sure they’re on the right side. •

This is an edited version of a talk to the ACT Economic Society’s annual dinner earlier this month.

The post Confessions of an econocrat-watcher appeared first on Inside Story.

Yes, it’s COP time again: that annual attempt by journalists to persuade their editors that this year’s UN climate conference is genuinely important and they really should give it some coverage.

Is COP27 genuinely important? At first sight it’s hard to make the case. Up to and including the twenty-first of these conferences, in Paris in 2015, COPs really were important. The international community was desperately trying to reach a new international agreement to succeed the 1997 Kyoto Protocol, and every year the torturous negotiations produced another faltering step forward. Paris itself produced a historic treaty: the first genuinely comprehensive global climate agreement, with a built-in mechanism for strengthening itself every five years.

But once we had the Paris agreement, what was there to negotiate about? There was a geeky answer: Paris was a high-level accord and many detailed implementation rules still needed to be worked out. COPs 22 (Marrakech), 23 (Bonn), 24 (Katowice) and 25 (intended for Santiago but actually in Madrid because of some local political difficulties) duly worked on these specifics, with few people outside the climate world taking much notice.

COP26, scheduled for Glasgow in 2020 but postponed for a year because of Covid, was the five-year moment when the emissions targets set in Paris had to be strengthened. The Intergovernmental Panel on Climate Change had reported in 2018 that global emissions must be more or less halved by 2030 if the goal of limiting warming to 1.5°C above pre-industrial levels was to be met. Greta Thunberg was leading an increasingly vocal movement of younger climate activists; publics were beginning to mobilise again. Countries would be under the spotlight to respond.

But the conference ran into a huge problem. Yes, many governments brought new emissions reduction commitments (“nationally determined contributions,” or NDCs) to the table, some of them quite ambitious. And many pledged themselves to net zero emissions by 2050 or a decade or two later. But when all these promises were added up, they still fell well short of the cuts scientists said were necessary to meet the 1.5°C goal.

COP26 came up with pretty much the only option it could to “keep 1.5°C alive” and rescue the conference from failure: countries admitted they were not doing enough and promised to come back in a year’s time with stronger, 1.5°C-compatible commitments.

And so COP27 was dragged from post-Paris obscurity and turned into the next critical climate moment. Will those world leaders use their six minutes to announce new targets sufficient to close the “emissions gap”?

Unfortunately we know the answer, and it’s No. Only one major economy has said that it will table a new and stronger NDC — Australia, which for a short time finds itself in the unusual position of being a global climate leader. But the other 195 signatories to the Paris agreement have offered little or no change.

As a result, the emissions gap is barely narrower than it was a year ago. In its latest annual report the UN Environment Programme calculates that current policies offer a two-thirds chance of limiting the global temperature increase to 2.8°C above pre-industrial times. Cuts pledged by governments would reduce this only to 2.6°C.

To limit global warming to 1.5°C, emissions must fall by 45 per cent more than is envisaged under current policies by 2030; for 2°C, a 30 per cent cut is needed. Launching the report, UNEP executive director Inger Andersen warned that “we had our chance to make incremental changes, but that time is over. Only a root-and-branch transformation of our economies and societies can save us from accelerating climate disaster.”

It is hardly surprising, of course, that so little progress has been made over the past year. It’s not been a propitious time to think about emissions reduction plans. In a world still recovering from the Covid pandemic, the Russian invasion of Ukraine has triggered huge global energy price increases, food shortages, generalised inflation and a cost-of-living crisis, not to mention the threat of nuclear war. China and the United States are adopting increasingly belligerent stances towards one another. With the US dollar rising as the Federal Reserve hikes interest rates, many developing countries are seeing trade and growth slow and are falling back into unsustainable indebtedness.

In the meantime, severe climate impacts have become more frequent. After record-breaking heat waves baked India and Pakistan in the summer, monsoon flooding left a third of Pakistan under water, affecting an estimated thirty-three million people and killing more than 1500. As glaciers melted in the Himalayas, extreme heat in Europe led to wildfires. In France, low river levels meant insufficient water to cool nuclear power stations, which had to be shut down, while German barges had difficulty finding enough water to navigate the Rhine.

In the United States, Colorado River reservoirs hit record lows and major flooding occurred elsewhere, from Death Valley to eastern Kentucky. In China, an eight-week heat wave and drought dried up parts of the Yangtze River to the lowest level since the mid nineteenth century — until parts of the same area were inundated with flooding rains in August.

The need for action could hardly be clearer. But if COP27 won’t see any new commitments to cutting emissions, is it even worth holding? Could not the greenhouse gases from all those leaders’ and delegates’ flights at least have been saved?

There are two grounds for saying that, despite all this, COP27 will be a worthwhile event. The first is that climate change is not all about cutting emissions, or “mitigation” as climate negotiators call it. This aspect of the subject dominates the debate in most developed countries because they are responsible for most of the world’s historical and present emissions, and are now more or less all embarked on a difficult process of decarbonisation.

Elsewhere, though, reducing emissions is not the big national issue. Most developing countries produce very few greenhouse gases: their economies are just not large or rich enough. What they are desperately trying to do is cope with the climate change they are already experiencing, and what they want is for the developed world finally to provide them with the financial assistance they have been promised for thirty years to support climate-resilient development.

It is these issues, not mitigation, that will dominate debate at COP27. The agenda has three parts.

The first is adaptation, climate-speak for the things countries have to do to adjust to a warming world: building flood defences, planting drought-resistant seed varieties, and so on. The Paris Agreement decided that there should be a “global goal on adaptation” in the same way that there is a global goal (1.5°C) for cutting emissions.

It seemed clear to scientists and to many developing countries that the adaptation goal should logically be the obverse of the mitigation one, since the more emissions are reduced, the lower the global temperature rise will be, and therefore the less adaptation countries will have to undertake. But the developed world has so far resisted any attempt to define the adaptation goal in this way: it would cast an unforgiving light on their failures to mitigate enough. Negotiators will have another go at COP27.

Second, the subject of “loss and damage” will take centre stage. This is the term used to describe the economic costs developing countries experience from climate impacts. Such costs are in many cases large and growing, not least because of more frequent and more severe extreme weather events.

But the concept of loss and damage unnerves developed country negotiators. It looks far too close to the idea — increasingly being tested in the international courts — that the rich world is legally liable for such costs, and could therefore be forced to pay practically unlimited compensation. The Paris Agreement did recognise that loss and damage occurs but included an explicit clause ruling out any legal liability.

This has not stopped developing countries — particularly the small islands and low-lying states most vulnerable to climate impacts — from pushing for more financial aid. At COP26 they demanded a new financial facility be created for this purpose. The knockback by developed countries nearly brought the conference to a halt; a last-minute compromise in which a “Glasgow Dialogue” was established did little to assuage the vulnerable countries’ anger. They pointed out grimly that the Glasgow Dialogue on Loss and Damage could now be added to the list of futile non-negotiations that already included the Warsaw Mechanism for Loss and Damage and the Santiago Network for Loss and Damage created by previous COPs.

A new financial facility for loss and damage will therefore be back on the agenda in Sharm el-Sheikh; it will be the developing world’s single biggest demand. Recognising the Paris clause, many are now insisting that what they want is specific and automatic help when they are hit by an extreme weather event. They are not seeking reparations for historical emissions. Some developed countries may in turn be relenting: Denmark recently announced the first-ever pledge of specific loss and damage funding. If the financial facility is not agreed — or explicit talks are not at least promised towards it — the vulnerable countries may well walk out.

In the end, adaptation and loss and damage both come down to the third key agenda item, which is finance. Once again, the developed world will be in the dock: it has still not organised the $100 billion per year in financial flows to developing countries it promised at COP15 (Copenhagen, 2009) and again in Paris. Although the funds were meant to be secured by 2020, only $83 billion was provided that year, and the latest review suggests the $100 billion won’t be met till 2023.

The consequence is not just that insufficient money is flowing. It’s the disastrous loss of trust that the shortfall has caused. If developed countries can’t keep to their most straightforward promises, developing nations are little inclined to make commitments of their own.

At the same time, though, the $100 billion is not really the issue. That sum doesn’t get anywhere close to the trillions of dollars now needed for global investment in climate mitigation and resilience. Governments don’t have that kind of money; it’s going to have to be raised from the private sector. Intense discussions are under way looking at how this can be done.

In Sharm el-Sheikh these discussions will take place away from the formal negotiations. Veteran climate economist Nicholas Stern of the LSE will publish a new report with the executive director of the UN Economic Commission for Africa, Vera Songwe, on how much money is needed for different purposes, and how it can be mobilised. Banks, insurers and investment funds will be out in force, proclaiming their commitment to net zero and green growth, while trying to defend their continued financing of fossil fuels.

The World Bank, meanwhile, will come under renewed attack for inadequate climate commitment. The International Monetary Fund will look good by comparison. Even the world’s central banks will be in on the debate, now committed to assessing their financial systems’ stability in terms of “climate risk” as well as the usual capital adequacy.

And this is where COP27 will prove itself worthwhile after all. It’s not really about the formal negotiations. COPs are the annual gatherings of the world’s climate industry. That’s not a term of abuse: acting on climate change is now a major driver of economic growth, of investment and trade, of urban regeneration and rural land restoration, and of civil society mobilisation.

People come from all those sectors: from city authorities and sub-national states, from multinational corporations and green technology innovators, from impact investment funds and academic research institutes, from non-government organisations from both the North and South of the world. They come to announce their new projects and commitments, to network and plan, and to discover what’s happening elsewhere.

And those government leaders will have to make a speech about climate change when they come to the COP. For many of them it may be the only one they make on the subject this year. Oddly enough, none of them will say “actually, you know, this climate change thing is not really happening, so we’re doing bugger all about it.” Each of the six minutes will force leaders’ attention onto the global crisis and what they should at least say they are doing in response. And most importantly, each of those speeches will be covered by those leaders’ national media outlets. They will appear to be talking to the international community, but that’s just the backdrop (and an important one). Each will be talking primarily to their national media and public.

This, in the end, is the justification for the annual UN circus. Progress on climate change will ultimately come because publics the world over will demand it from their governments. They will do this when they are better informe, and the challenge gets a higher profile in each country’s political debate.

Political leaders need to be forced to say they will act, and to be held to it. In a world where so much else is happening, that’s hard to engineer, either for civil society or for the media. Climate change is not news: it’s been the same story now for many years, and if it can be reported on any day it can always wait for another one.

So the point of COPs is to provide a focal point, a moment: one fortnight a year when climate change is unequivocally on the political agenda, and on the news. This year NGOs will find it harder than usual to make their voices heard: the Egyptian government has notoriously been cracking down on dissent and demonstration, and hotels in Sharm el-Sheikh are too expensive to allow most activists to attend.

Nevertheless, for a couple of weeks, climate will come into focus. Political leaders will make speeches, and they will be covered on the main TV news. Broadcasters will run climate change features. Editors will commission articles. •

The post What exactly is the point of COP27? appeared first on Inside Story.

Bringing down a budget in this environment is tough work. Six months ago, during the campaign, Labor was blaming the Coalition for falling real wages: now it is in power and real wages are falling faster than ever, for reasons beyond any government’s control.

Six months ago Labor was ridiculing the Coalition’s economic management for deficits and debt: now it is in power, and has come clean and told us what the Coalition wouldn’t: that the budget, on realistic assumptions, is in even worse long-term shape than we thought.

Does this budget tackle those looming deficits? Yes, but only at the margins. It’s designed not to make them too much worse. In net terms, it adds another $10 billion to the expected deficits for the next four years, but most of that is in 2025–26, when inflation is forecast to be back in its box.

Does it do anything fresh to raise real wages or cushion the rising cost of living? No. Like the Reserve Bank, it accepts the consensus that governments’ most urgent task is to crush the unexpected resurgence of global inflation, and that takes priority over everything.

Well, almost everything. Net new spending in four years totals almost $23 billion, and item after item in the budget papers is introduced with the footnote: “This measure delivers on the government’s election commitment as published in the Plan for a Better Future.” Even the bad bits of the plan have been delivered, presumably to underline the message that Labor’s word can be trusted.

Treasurer Jim Chalmers had an unenviable task in framing this budget, and he got the big call right: fight inflation first. Part of the reason that our standards of living have kept rising over the past thirty years — the International Monetary Fund estimates that Australia’s real GDP per head has grown by 69 per cent in that time — is that the Reserve Bank has not needed to slow the economy to tackle inflation. It would not be in our long-term interests to allow this outbreak to become entrenched.

And Chalmers and Anthony Albanese are playing the long game. They don’t want a term in power to make changes, they want a decade in power to make changes. The first step is to gain credibility with voters so that they will support those changes. Rome wasn’t built in one budget.

But Labor came to power bearing diverse hopes and expectations from the 52 per cent of Australians who preferred it to the Coalition. This budget could disappoint many of them. Let’s look first at what Labor hasn’t done.

It hasn’t directly tackled the biggest problem facing Australian families: their falling spending power as a result of inflation far outpacing wage growth 

The strategy the Reserve Bank and the government are using to beat down inflation is to reduce the spending power of Australian households. Inflation is best defined as too much money chasing too few goods and services. That is what has happened here. And now the Reserve Bank and the government are aiming to reduce the amount of money Australians have at their disposal.

Today’s figures from the Bureau of Statistics show inflation jumped to 7.3 per cent in the year to September, its highest level since 1990, and was spread throughout the dozens of items in the consumer price index. By far the biggest contributor was the cost associated with buying a new house (stamp duty, conveyancing fees and so on). We can blame that on the Reserve itself and the Morrison government: the Reserve for keeping interest rates too low for too long, and Morrison and Josh Frydenberg for trying to win re-election by throwing more and more money at voters.

Chalmers forecast that gas and electricity prices will rise over 2022 and 2023 in the order of 50 per cent, mainly because of the fallout from Russia’s invasion of Ukraine. Yet so far they’re way short of that. While household gas prices were up 16.6 per cent in a year, the Bureau’s data contradicts many of the inflation narratives we hear: it found electricity prices were up only 3.2 per cent in a year, and household rents up 2.8 per cent, while childcare costs were down 5.4 per cent. After home-buying costs, food, fuel and travel are the other main costs driving inflation.

The Reserve Bank is severely shrinking the spending power of mortgagees and others in debt by rapidly hiking its cash rate. That will push down home-buying costs and the loose spending that breeds inflation. But it also makes people poorer, and voters angry.

Chalmers amiably pretends that Labor is tackling the problem by delivering five campaign promises — higher childcare subsidies, expanded paid parental leave, more social and affordable housing, lower pharmaceutical costs, and workplace relations reforms — as “responsible cost of living relief.” In fact, all those commitments predated the current fall in real wages; they are neither designed nor able to offset those losses.

If the budget forecasts are right, by the end of next year many households will be significantly worse off. Treasury predicts prices will rise 5.75 per cent in the year to June 2023, on top of the 6.1 per cent rise in the financial year just ended. It forecasts that wages will rise 3.75 per cent in both years, but on Treasury’s past form and the latest data on wage growth, that could be optimistic. Even if it is right, real wages will fall 5.1 per cent over the two years. If it is wrong, they will fall even more.

To make matters worse, as the Guardian’s Greg Jericho reminds us, the low- and middle-income tax offset, a significant tax break for working households, was abolished by the Coalition from this financial year. Labor has chosen not to revive it, nor has it offered households anything new (post-election) to cushion the fall in their living standards.

It is important to understand what’s happening here. Jessica Irvine covers it well in today’s Age/SMH. Faced with a crisis affecting millions of people who voted for it, Labor has taken the high road of responsible budgeting rather than come to the rescue. That is a different way of governing from the opportunism of the Morrison government, and economists will hope it is proved right: that wage growth will rebound while price growth shrinks and few people get badly hurt. But politically, Labor is taking a big risk.

After five months in which Labor has been untroubled by the opposition, this opens up a real issue for the Coalition to exploit by demanding relief for households (which of course would have to be funded by taking on more debt, to be repaid by future generations). Shadow treasurer Angus Taylor is correct in saying there are many ways to do that. But given the chronically irresponsible budgeting of the Coalition’s last twelve years in office — the final three years of the Howard government and the entire nine years of the Abbott/Turnbull/Morrison government — you’d expect them to take that road.

This budget forecasts that future budgets will remain heavily in deficit, averaging 2 per cent a year, for at least the next ten years — but it puts off the task of fixing that deficit by serious tax reform

As promised in the campaign, Chalmers has plugged some of the loopholes used by multinationals and others to avoid tax. Treasury estimates that various anti-avoidance measures will raise $4 billion from multinationals and $2 billion from others over the next four years. But that’s only a small first step towards tackling budget deficits forecast at $182 billion over that time.

Similarly, Labor says it has saved or deferred $22 billion of spending over four years by scrapping or “reprofiling” Coalition programs, such as infrastructure investments and community development programs. But compared with the size of the deficits ahead, that’s puny. It’s a start, and it pays for some of the cost of Labor’s own programs, but politically, that’s the easy stuff.

Australia should not be running budget deficits at all when jobs are abundant and its mineral export earnings are at record levels. The budget rises and falls with mineral prices. Thermal coal and gas prices are now sky-high, so company taxes are now forecast to raise $127 billion in 2022–23 rather than the $90 billion forecast in April — and so Treasury now forecasts a deficit of $37 billion rather than the $78 billion forecast then.

Conversely, a key reason why Treasury predicts that deficit will rebound within two years to $51 billion, and then stay at that level in real terms is that it forecasts commodity prices to “glide down over the December 2022 and March 2023 quarters to their assumed long-term fundamental price levels.” Given the abrupt slowing in China and the Western economies that’s certainly possible. It’s also sensibly conservative.

Another reason for Treasury’s alarm about the budget’s future is that, with the government’s approval, it has reduced its estimate of future productivity growth from 1.5 per cent a year to 1.2 per cent. Over time, such a shift has a big impact on cumulative economic growth.

Treasury justified its previous assumption on the grounds that productivity growth had averaged 1.5 per cent growth a year over the previous thirty years. But most of the rapid growth was in the 1990s, when we had that decade of “jobless growth.” Since 2005, the Bureau of Statistics estimates, productivity growth has averaged just 1 per cent. Even 1.2 per cent would be doing well.

The bottom line is that, on current settings, the budget would stay in deficit by roughly 2 per cent of GDP, $50 billion a year in today’s money. Without changes, within a decade the government would run up another $500 billion in debt — similar to what the Coalition ran up in its nine years in power.

Something’s gotta give. The International Monetary Fund estimates that Australia’s budget has been in structural deficit since before the global financial crisis. The Coalition promised to fix it, but once in office just made it worse. From 2019 to 2021, on average, the IMF estimated Australia’s structural deficit as 6 per cent of GDP, the third highest among the forty countries it groups as “advanced economies.”

What should Labor do? As I reported a fortnight ago, the consensus among many economists is that the answer, inescapably, is higher taxes. Australia is trying to provide First World services with a revenue base far lower than the First World average, and it’s not working. As both sides have shown us, it’s not politically feasible to make spending cuts on the scale needed, and in today’s world we can’t grow our way out of deficits like this.

Chalmers has been subtly making similar points; as Michelle Grattan points out, he clearly sees this as the start of a long campaign. In his budget papers and media shows, he cites Treasury’s estimates of the expected annual growth in spending over the next decade in key areas: interest bills (forecast to rise by 14.4 per cent a year) and the cost of the NDIS (up 13.8 per cent a year) lead the way, but other heavy items such as hospital costs (annual growth 6.5 per cent) and medical bills (5.4 per cent), aged care, defence and the age pension are all set to grow faster than the economy.

The escalating cost of the NDIS is a deep concern — Treasury says it is now the second most expensive government program behind the age pension, and it’s on track to overtake that by the end of the decade. I doubt that any of us thought that was what we were signing up for. It shows why the government has commissioned NDIS founder Bruce Bonyhady and former departmental head Lisa Paul to chair a year-long review of the scheme. This budget sets up an NDIS taskforce to investigate fraud.

But most of the rising costs stem from the reality that we’re an ageing society, and it’s expensive to  look after old people: pensions, medical and hospital costs, aged care services. It was simply phoney for former treasurer Josh Frydenberg to pretend these costs could be paid for while taxes were capped at 23.9 per cent of GDP. They can’t; Treasury estimates that on current settings, spending would climb to 27.9 per cent within a decade. In scrapping the tax cap, Chalmers has taken a sensible first step towards the tax debate we have to have.

Much will depend on whether Albanese and his colleagues — and others with a selfless interest in the issue — support him by joining that debate. It is important that we get the answers right, then implement them, rather than assuming, as the Coalition did, that if we don’t talk about it, reality will just disappear. It won’t; one day the markets will see to that, as they have in Britain.

So did Chalmers and his Labor colleagues get the budget wrong? No. Australia will need to take action to close the deficit, but it didn’t have to do it in this budget. By and large, Labor is moving in the right direction, generating a debate we have to have, and pointing out the hazards we face. Australia has time on its side, and the markets are unlikely to lose faith in a government that shows the right intentions.

But Labor could have done better. How on earth could it seriously claim to be cutting out “waste” while in the same breath committing $2.25 billion to Daniel Andrews’s pet lemon, Melbourne’s southeastern “suburban rail loop”? Victoria’s auditor-general has pointed out that on conventional cost–benefit rules it would deliver only 51 cents of benefit for every dollar spent on it.

The project has now finally been submitted to Infrastructure Australia, which might well come up with a similar finding. Why did Albanese and Chalmers commit now without even waiting for their advisers to report? They have made a rod for their own backs, and the Liberals and Nationals will whack them with it all over Australia — especially in regional Australia, where Labor cancelled every Coalition commitment without even trying to sort out the good from the bad.

Time will tell whether Labor has made the right call in ignoring the pressures on Australia’s kitchen tables. There are lots of ways to cushion lower and middle-income households’ loss of buying power, and Labor should get these solutions ready. Restoring the tax offset is obviously one. Bringing forward the proposed cut in the 32.5 per cent tax rate to 30 per cent would be another (while redrafting the stage three tax cuts to retain a 37 per cent marginal tax rate on income in upper middle levels).

The one surprise packet in the budget, the commitment to build a million new homes in five years from 2024 to 2029, could be upgraded. It’s not as significant as it sounds. A smaller Australia built more than a million homes in the five years to 2019 — and the Reserve Bank and others keep telling us that was not enough.

If the industry, the states and the federal government agree, they should aim higher (a million homes in four years?), target more precisely (at least 50,000 new social/affordable homes a year, and preferably more), and focus on areas of clear housing shortage, particularly in regional Australia. To me, pledging to repeat what we did before Covid is not a big advance.

Chalmers’s roll-up-your-sleeves rhetoric in his budget speech would lend itself well to taking on a new reform agenda: tax reform, and any unfinished business that would make the economy more productive and use our human and natural resources better. One example — his budget contained a little token pressie for pensioners: if you work a little part-time, for this year only, you can earn an extra $4000 without it affecting your pension. Wow.

If that’s worth doing, imagine what the gains might be if Labor picked up Joe Hockey’s lost crusade to gradually dial up the retirement age to seventy? When longevity is improving at a rate of knots, it is not unfair to ask its beneficiaries to spend some of their expanded lifetime in the workforce, rather than taking the lot as retirement.

And why not pick up the sound proposal from the aged care royal commission to lift the Medicare levy by half a cent in the dollar to pay for the cost of improving aged care? I’m pretty sure Australians would accept a tax rise like that if they can see where the money is going.

There are many fertile, exciting ideas Labor can explore. This budget has been a good start. As Chalmers immodestly put it yesterday, the adults are back in charge. Australia is better off for it. •

The post Chalmers’s long game appeared first on Inside Story.

This was the decade in which Heinz Arndt’s classic study of the Australian economy, A Small Rich Industrial Country, was published. Arndt’s title was not as prosaic as it might sound today: it was a dig at nostalgia for a largely imaginary past in which Australia was an agricultural country peopled with miners, small farmers and shearers. That vision of Australia had been evoked by Russel Ward’s highly successful book, The Australian Legend, published in 1958.

In reality, Australia had always been urban. As early as 1900, more than two-thirds of the population lived in cities and large towns. But nostalgia for “an Australia that grows things” was reflected in decades of policies aimed at encouraging economic activity — notably including the often-disastrous soldier-settlement schemes — outside the major cities.

Just as the industrial economy displaced agriculture in the mid twentieth century, it was displaced in turn by the service sector towards the end of the century. By 2000, services represented three-quarters of output and employment. Construction remained strong, but the overall share of employment in “making things” (manufacturing, mining and agriculture) was steadily declining. These transformations changed working life in all sorts of ways, but they didn’t fundamentally challenge the assumptions of capitalism.

A capitalist society’s central driver of growth has always been investment — in buildings, equipment and infrastructure — and investment requires capital. The proceeds from the sale of goods and services, after deducting wages and input costs, must earn a return for the owners of that capital. This is as true for cafes as it is for car factories.

All this changed with the emergence of an information economy. In economic terminology, information is a non-rival good, like Norman Lindsay’s magic pudding. Using information doesn’t reduce the amount that’s available to other people. Information is also cumulative: the more we know, the more we can find out. And information from different sources can be combined to produce new and different information. In economic terminology, the production of information displays economies of scale and scope.

But just as the plot of The Magic Pudding centred on the question of who owned the pudding, control over access to information can be immensely valuable and hard-fought. And there is no necessary relationship between producing information and controlling it.

This changes the nature of investment. Rather than investing in land, building and equipment to produce goods and services, investors focus on securing control of information and profiting from that control. The result is the economic system summed up by Jonathan Haskel and Stian Westlake in the title of their 2017 book, Capitalism without Capital.

Haskel and Westlake described how physical capital has been replaced by “intangible capital,” a concept as hard to grasp as the name implies. Examples of intangible capital include research and development, design, business process re-engineering, market research and branding. Typically, the assets created in this process take the form of intellectual property — patents, copyrights, trademarks and so on — or control over networks and platforms like Facebook and Twitter.

Some items classed as intangible capital are relatively straightforward extensions of familiar concepts. The best-known — the research and development expenditure that goes into developing new products — is as much a part of the cost of producing those products as are the labour and machinery used to produce them.

But other forms of intangible investment, such as branding and marketing, are more problematic. As Haskel and Westlake recognise, it is far from obvious that branding enhances the value of the goods and services it promotes: the efforts of one brand to promote itself through advertising largely cancel out the efforts of its competitors. There is some evidence of a net positive effect overall, but it is fairly thin.

Intangible assets differ from tangible assets in the same way information differs from ordinary goods and service. As Haskel and Westlake put it, “Those characteristics are summed up in four S’s, namely that intangible assets, relative to tangible assets, are more likely to be scalable, their costs are more likely to be sunk, and they are inclined to have spillovers and to exhibit synergies with each other.”

The spillovers and synergies mean the benefits of distributing information will often flow to people other than those who produce it. The most obvious examples are Alphabet (owners of Google) and Meta (Facebook), whose most valuable asset is not their computers and buildings but the information to which they provide access. Facebook’s information is supplied in the first instance by its users, but in many cases consists of links to content elsewhere on the internet. Google’s search engine relies entirely on information produced by other people and organisations.

In other words, the connection between investment and profit has broken down. The scalability and sunk costs of intangible assets exacerbate this effect by creating a winner-takes-all model, enabling those with an established position to capture all or most of the benefits of information.

The results are evident in the market value of companies, and particularly the value of the large tech companies that dominate the information economy. Most of the time, we’d expect the value of a firm to reflect the capital invested in it, as captured by Tobin’s Q, a measure of the ratio of market value to capital stock developed by Nobel prize–winning economist James Tobin.

Q ratios were generally near one during the twentieth century. High ratios were seen as a signal that existing capital was yielding a high return and further investments were likely to be profitable; low values suggested lower demand for investment. But this relationship has broken down in spectacular fashion. Alphabet has a market value five times the book value of its assets. The ratio is ten for Amazon, fifteen for Microsoft and twenty-one for Apple. Even Meta, which is clearly in decline, manages a ratio of three. By contrast, General Motors, the classic twentieth-century corporation, rates just under one.

The difference can’t be explained by R&D spending, which is relatively small. The real intangible here is likely to be monopoly power, generated either by intellectual property laws or control over platforms.

The tone of Capitalism without Capital was cautiously optimistic. Haskel and Westlake thought the rise of intangible investment would offset the decline in traditional forms of private investment over the course of the twenty-first century. While acknowledging the growth of inequality and other problems, the pair concluded that “strategies that go with the grain of the long-run rise of intangible investment… are more likely to secure prosperity than those that go against it.”

But in the wake of the pandemic and the (first?) Trump presidency, the problems are clearly much more severe than they seemed — as the subtitle of Haskel and Westlake’s new book, Restarting the Future: How to Fix the Intangible Economy, makes clear. “When we think about the state of the economy today, it is hard not to think, it wasn’t supposed to be like this,” they write. “The world is richer than it has ever been, remarkable technologies are transforming every facet of our lives — and yet, everyone seems to know that, from an economic point of view, something is wrong.”

Many of the things that are wrong can be traced, they say, to problems with intangible capital. Their examples include:

Stagnation: Despite impressive technological progress, economy-wide productivity growth has slowed. Investment in intangibles has declined; so too has economic dynamism, as measured by such variables as the number of new firms. Most notably, the IT sector is now dominated by five firms: Amazon, Apple, Microsoft, Facebook/Meta and Google/Alphabet. Using a combination of incumbency and acquisition, the same firms have maintained their dominance even as the sector has been transformed by cloud computing and other web services.

Inequality: Having increased throughout the developed world since the 1980s, inequality has become the subject of steadily increasing concern. It is aggravated by the scalability and synergies of intangible investment, which reward a relatively small number of companies and wage earners.

Dysfunctional competition: Ideally, with many firms in the market, competition offers better products at lower prices. But once markets become sufficiently concentrated, competition tends to take the form of zero-sum efforts to weaken the position of competitors or extract unearned rents. At the extreme are the “patent trolls” who make intellectual property claims over well-known ideas and methods, then extract licence fees from anyone seeking to use this idea.

Inauthenticity: In an intangible economy, it is difficult to distinguish between spurious branding efforts and investments that genuinely enhance the usefulness of products. The result is the general feeling of “fakeness” that accompanies much of modern life.

Fragility: The intangibles economy is vulnerable to both internally generated crises like the global financial crisis and external shocks like Covid-19. In part, this fragility arises because intangible investments are “sunk.” Once an enterprise fails, intangible investments in organisational structure, corporate culture and so on are lost. By contrast, buildings and equipment can be sold when a business is liquidated, saving much of its economic value.

Although Haskel and Westlake frankly acknowledge all these problems, they don’t conclude we should slow the shift to an intangible economy. Rather, they want to change our institutions to complete what they see as an unfinished revolution. To do this, they propose improvements in the financing of research and development and the financing of investment, and offer some worthwhile but tangential suggestions about urban design and school reform.

The standard solution to the problem of financing R&D is for governments to fund “pure” research while private enterprises fund “applied” research, or the development of marketable products. But the characteristics of intangible capital, particularly its spillover effects, mean that producing intangibles is more like pure than applied research.

Haskel and Westlake are sceptical of traditional modes of public research funding. They suggest prizes be used more often to stimulate goal-oriented research (an idea that goes back to the competition that led to the discovery of a method for determining longitude at sea) and subsidies be made to open-source software and data collections. They also endorse the general preference of economists for less stringent patent and copyright protections.

Their analysis of financing focuses on the decline in the neutral real interest rate — that is, the interest rate (adjusted for inflation) at which monetary policy is neither expansionary nor contractionary. Correctly linking the rate’s welcome decline to reduced investment in intangibles, they propose ways of encouraging pension funds and venture capitalists to fill the gap. In a world of very low real interest rates, they also recognise the need to shift away from inflation targeting as the basis of monetary policy.

What’s striking, though perhaps not surprising, is that Haskel and Westlake don’t consider the possibility of an end to capitalism, or even a substantial change in the role of government. To the extent that intangibles are public goods, mainstream economic theory suggests they would best be provided by governments. Private firms can rarely capture the spillover benefits of intangibles without imposing access restrictions that reduce their social value.

Haskel and Westlake discuss traditional spheres of government activity — the defence-related R&D that gave us the internet, for example — but they don’t consider whether governments should become active investors in intangible capital.

The possibilities are full of promise, but also potential pitfalls. Governments could expand the informational role of public media services like the ABC, reversing the cuts of recent decades. They could systematically strive to make information of all kinds available in an easily searchable form, bypassing advertising-driven search engines like Google. And they could provide platforms for social media on a common-carrier basis, requiring easy interconnection and discouraging the use of “algorithms” (a misnomer) to keep people inside a “walled garden.”

It’s easy to point to the problems that would arise if these possibilities were pursued in a world where trust in governments is low. But these are the kinds of arguments that need to be made when the existing economic model is failing so clearly.

Despite the limited scope of the reforms they consider, Haskel and Westlake’s work tackles fundamental questions considered by few other writers. Restarting the Future is essential reading for anyone interested in the future of capitalism, or in the possibility of a post-capitalist future. •

Restarting the Future: How to Fix the Intangible Economy
By Jonathan Haskel and Stian Westlake | Princeton University Press | $34.99 | 320 pages

The post Go with the grain appeared first on Inside Story.

We must assume Truss didn’t intend these outcomes. But she can hardly have been surprised by them. They were the direct and immediate result of her first major policy initiative, a “mini-budget” announced on 23 September by her new chancellor of the exchequer, Kwasi Kwarteng. Describing it as the government’s “Growth Plan,” Truss and Kwarteng declared that it would set the country on a new course for economic growth.

The centrepiece of the statement was a huge package of financial support to cushion households and businesses from the steep rise in energy prices following the Russian invasion of Ukraine. From around £1300 in 2021, the average household energy bill in Britain had already risen to almost £2000, and, had nothing been done, was projected to hit around £6000 next year. So the government announced that it would be capping domestic bills at an average of £2500 for the next two years. At the same time it would subsidise energy use by businesses for at least six months.

The cost of these measures will depend on how far wholesale gas prices rise over this period. But Treasury’s estimate for the first six months was an eye-watering £60 billion. To put this in context: the cost of the government’s furlough scheme to keep people in work for eighteen months during Covid was £70 billion.

The general verdict on these measures, nevertheless, was favourable. Costly, yes, but necessary — with the added bonus, as Kwarteng noted, that they reduced the headline rate of inflation, since the government’s subsidy is defined as cutting the price of energy, rather than adding to households’ incomes.

But it was not this part of the budget that caused such a reaction. It was the rest of it. Alongside the energy measures Kwarteng announced a £45 billion package of tax cuts, the largest made in a single fiscal statement since 1972. They included the repeal of an increase in National Insurance contributions introduced by Boris Johnson’s government just a few months before; the abandonment of another Johnson commitment, an increase in corporation tax; a cut in the stamp duty on house purchases; a cut in the main rate of income tax from 20 per cent to 19 per cent; and — in a move that took everyone by surprise — the abolition of the 45 per cent top rate of income tax, levied on people earning over £150,000 a year.

How was this largesse to be paid for? The government had nothing to say on that topic at all. Not only did the budget contain not a single revenue-raising measure; Kwarteng had explicitly prevented the independent Office for Budget Responsibility from publishing its usual analysis and forecasts. This was indeed why he was at pains to call it a “mini-budget”: had it been a proper budget, the OBR would have been required by law to publish an analysis of its impacts.

The UK’s think tanks, of course, were quick to fill the gap. They calculated that the government’s plans would require over £400 billion of extra public borrowing over the next five years — with no end in sight beyond that. That would represent a 50 per cent increase on last year’s level of borrowing every year — taking annual borrowing to five times its pre-pandemic level.

The response of the financial markets was immediate. The interest rate (or yield) on government bonds shot up, and the pound plummeted. If the government was going to borrow so much more, lenders were inevitably going to charge them more to do so. Indefinite higher borrowing suggested a government with no plan.

In reality, part of the pound’s weakness reflected the strength of the US dollar; but since the pound fell against other currencies too, there was no doubt it was also a verdict on the British government and the country’s future economic prospects.

The shockwaves were rapid. Banks started withdrawing mortgage products, as it became clear that interest rates were about to rise even further and their mortgage offers would soon be unprofitable. Pension funds revealed they could rapidly become insolvent; they were having to sell government bonds to cover heightened risk, but the value of these had plummeted. In response, the Bank of England announced overnight an emergency program under which it would buy up to £65 billion of bonds to shore up their value and prevent financial contagion.

By now — just days after Kwarteng’s fiscal statement — the financial markets were in turmoil. The Bank of England was not meant to be buying bonds — it was in the middle of a “quantitative tightening” program that involved selling bonds to push interest rates up.

A vicious spiral was now in prospect: the combination of tax cuts, monetary loosening and a falling pound would push inflation up, forcing the bank to raise interest rates further and more quickly. As interest rates rose the cost of government borrowing would increase, requiring even more borrowing to cover it. Rising mortgage rates would hit household spending and could lead to a housing market crash, both of which would exacerbate the recession into which Britain was now predicted to fall.

And just to add insult to injury, the IMF at this point decided to flout its usual rule of not commenting on individual fiscal statements in developed countries. The budget, it declared, would have serious negative consequences — not just in Britain but more widely across a still-fragile global economy. It urged the government to reconsider. Former US treasury secretary Larry Summers was just one of several financial commentators who likened Britain to an emerging economy, its currency under speculative attack and being told off by the IMF.

Extraordinarily, Truss and Kwarteng went missing for almost a week while this happened, refusing to calm the markets or reassure voters. When the prime minister did emerge, it was to do a series of local radio interviews, no doubt expecting them to be easier than national TV. Confronted by presenters keen to make their names, her performance was squirmingly bad (and of course, immediately broadcast on national TV).

Truss refused to apologise, frequently seemed stumped by the questions and repeated the same talking points with wooden monotony. Resorting to the classic politician’s defence that the policies were fine, it was all a problem of poor communication, her only concession was that she could have “prepared the ground” better. But that was hardly true — all the budget measures apart from the top rate tax cut had been leaked or announced in advance.

The reaction of the financial markets was only half the problem. The distributional impact of the government’s tax cuts was extraordinarily regressive. Income tax cuts always benefit the rich more than the poor, since the rich pay more in tax; and those below the tax threshold don’t benefit at all. But the abolition of the 45 per cent rate meant the beneficiaries of the budget package were concentrated among the very rich.

Analysis quickly demonstrated that almost half the gains of the overall tax package would go to the richest 5 per cent of households. A person earning a million pounds a year would find themselves £55,000 better off, while someone on £20,000 would gain just £157. Coupled with a separate decision to abolish the cap on bankers’ bonuses imposed by the European Union after the 2008 financial crash, the budget demonstrated a remarkable desire to give money to those who already have it.

In the context of a severe cost of living crisis, with inflation now running at 10 per cent and families on the lowest incomes facing choices about whether to “heat or eat” this winter — the use of charitable food banks has rocketed over the last year — it was a politically tin-eared approach. Radio phone-in programs fairly crackled with public anger.

Tory MPs, in turn, reacted with dismay. Unfortunately timed for the prime minister, this week’s annual Conservative Party conference gave them plenty of opportunity to express their views on TV and radio. Former cabinet members indicated publicly that they would vote in parliament against the abolition of the 45 per cent tax rate. As the revolt spread, it became clear that Truss would not be able to get it through the House of Commons. Nine days after announcing it, the government declared that the cut was to be abandoned. It was never a major part of the package, Kwarteng said, and had become “a distraction.”

But Truss’s travails were still not at an end. Abandoning the top rate cut would save only £2 billion; attention now turned to how the government would pay for the rest. Would it have to inaugurate a new period of austerity, with swingeing public spending cuts to bring borrowing back under control?

The prospect caused further alarm to Tory MPs. The National Health Service faces another post-Covid winter crisis, with long waiting lists and deepening staff shortages, and most other public services have been pared to the bone by a decade of austerity. So the only obvious target for cutting was the welfare budget.

When Liz Truss duly refused to say that welfare benefits would be raised this year by the rate of inflation — a commitment given by Boris Johnson’s government — uproar ensued. Few Tory MPs were prepared to support this; several openly declared that it would be immoral and wrong (not to mention “electoral suicide,” as one put it) to pay for tax cuts for the rich by cutting the incomes of the very poorest. They would vote against this too. Truss loyalists in turn accused the rebels of organising a “coup” against their leader.

As the Conservative Party conference descended into open blue-on-blue warfare, the prime minister made a defiant speech. Truss dismissed her troubles as the inevitable “disruption” caused by a radical program and declared herself determined to take on the “anti-growth coalition” that was now ranged against her.

How did it get to this? To understand that, we need to go back to 2012, two years after both Liz Truss and Kwasi Kwarteng entered parliament. The Conservative leader David Cameron had become prime minister at the head of a coalition with the Liberal Democrats. His pitch to the electorate was that the Tories had changed: no longer the Thatcherite “nasty party” of the rich and selfish, they were now “compassionate Conservatives” in favour of a caring society and protecting the environment.

Truss and Kwarteng demurred. Together with other new Tory MPs they set up a new Free Enterprise Group in the Commons and wrote a pamphlet entitled Britannia Unchained, a strident manifesto of free market economics and libertarian politics. Their solutions to Britain’s economic and social problems were simple: lower taxes, lower public spending, a less interventionist state, more deregulation, fewer workers’ rights, freer enterprise. Two decades after Thatcher left office — and just three years after financial deregulation had almost crashed the global economy — it was Thatcherism on speed.

Truss became a minister in Cameron’s government in 2012, Kwarteng in Theresa May’s in 2018. Now close friends and neighbours as well as colleagues, by 2019 they sat in Boris Johnson’s cabinet together. When Johnson fell earlier this year, Truss seized her chance. Her campaign for the Conservative Party leadership, strongly backed by Kwarteng, proudly boasted of her Thatcherite philosophy. And now she had a receptive audience.

Convulsed by the arguments over Brexit, which has seen almost all senior pro-European MPs kicked out of the parliamentary party — and others on the left and centre abandoning it — the Tories have become much more ideologically narrow. Despite winning the support of fewer than a third of Tory MPs, in the final ballot of party members Truss won convincingly against the “sound money” fiscal conservative Rishi Sunak, architect of the tax rises they so despised.

Truss and Kwarteng see themselves as revolutionaries. The chancellor’s first act in his new job was to sack the chief civil servant at the Treasury, an experienced and respected figure but someone the new Tories demonised as a representative of the old regime. Truss installed as her chief economic adviser the leader of the Taxpayers’ Alliance, a campaign for low taxes and deregulation. Other advisors were brought in from neoliberal think tanks such as the Institute of Economic Affairs.

Announcing his mini-budget in the Commons, the chancellor declared that “we are at the beginning of new era.” For he and Truss the last decade of Conservative rule has not been radical enough. “Treasury orthodoxy” had placed far too much emphasis on balancing the public accounts and reducing public debt. After the huge expenditures to support the economy through the pandemic, taxes had risen to a seventy-year high, which could only stifle enterprise and hold back growth. The state had grown too large.

In her Tory conference speech Truss declared her three economic priorities to be “growth, growth and growth.” In recent years, she declared, there had been far too much emphasis on redistribution and not enough on growing the economy. (As various commentators pointed out, this was a somewhat odd claim, given that the Conservatives had presided over stagnating wages and a huge increase in wealth inequality). And the way to get growth was to cut taxes, and to reform the economy’s supply side.

The government’s supply side reforms have not yet been spelled out in detail. But the Growth Plan indicated the general direction. “Investment zones” will be established across the country, where businesses will have lower taxes and fewer regulatory requirements. The planning system will be reformed to speed up infrastructure construction and housebuilding. The financial sector will be deregulated to make it more globally competitive. Childcare regulations limiting the number of children per worker, and environmental regulations affecting farmers, will be relaxed.

Such policies may or may not work to stimulate economic growth. The economic evidence on investment zones is weak, with most similar schemes simply poaching investment from other areas. Planning reform has been notoriously difficult, with Conservative MPs among the most vociferous opponents of new housing developments and infrastructure (such as windfarms) in their own constituencies. Financial deregulation did not go well last time round.

But the problem for the government is that, even if they are successful, none of these reforms will generate growth in the next couple of years. And while in theory tax cuts might provide a short-term boost, this will almost certainly be overwhelmed by the recessionary forces the government’s fiscal package has unleashed.

On the morning of the budget the interest rate on a typical two-year mortgage was well under 5 per cent. Now it is over 6 per cent. Hundreds of thousands of people whose fixed term deals are ending soon have been on rates between 2 and 3 per cent. So they will see their mortgage payments rise by hundreds of pounds per month, vastly outweighing the tax cut they will receive. Their disposable income will be lower next year, not higher. Many will not be able to pay at all.

Politically, this is disastrous for the Conservatives. Britain’s ten million mortgage holders, and the many young people who want to buy a first home, are among their core constituencies.

Across all polling companies, Labour’s lead has more than doubled to 23 per cent. In a general election, that would translate into a comfortable Labour majority. Keir Starmer, Labour’s leader, is now seventeen points ahead of Truss as “best prime minister,” and Labour leads on every significant policy issue. Truss’s approval rating has dropped to minus 37 per cent, a fall of 28 per cent in a week.

The next general election is still two years away. But it is now almost impossible to find a political commentator who believes Liz Truss can recover from these figures after such a disastrous first month in office. Many are predicting an electoral rout worse than 1997, when Tony Blair won a landslide victory to end eighteen years of Conservative rule.

The mood among Tory MPs has become correspondingly grim. Many are now privately telling journalists that Truss will have to be got rid of. No one thinks it would look good for the Conservatives to impose a fifth prime minister on the country in six years. But the economic turmoil she has precipitated, and the polling deficit the party now faces, make anything better than this. If she doesn’t reverse course, warn some, she could be gone by Christmas.

One veteran Tory, a minister in John Major’s government in the 1990s, put it even more starkly. Without a fundamental change of direction, he said, Liz Truss would be “quite probably the last-ever Tory prime minister.” •

The post The Truss effect appeared first on Inside Story.

In Xi’s China, things have come full circle. After decades of pragmatism, politics once again overrides everything — or, more precisely, the Communist Party and its needs trump everything. Beijing’s Zero Covid policy, which has bewildered much of the rest of the world, stands as the most striking instance of political considerations eclipsing all else, including rationality.

There was a time, in late 2021, when the Chinese Center for Disease Control and Prevention, the main government body analysing the data and formulating policy, gave cogent reasons why a hardline approach to the virus made sense. Based on the experience of countries in Europe and North America over the previous year, the centre argued that China, with its huge population, could never cope with the levels of hospitalisation that Britain, Italy and some other countries had experienced.

Overtly, its advice recognised that China’s locally produced vaccines were less effective than those produced by Pfizer and Astra Zeneca. It also implicitly conceded that vaccination rates were relatively low. It was reasonable to argue that a liberal attitude at that time would have been at best risky and at worst reckless. But the experience in Xian early this year, and in Shanghai, Hainan and other centres over the past few months, has shown the prohibitive economic and social costs of imposing draconian lockdowns.

In Shanghai, the initially relaxed attitude of the municipal government was replaced by a much tougher approach ordered by Beijing. Shanghainese are among the most sophisticated, economically advantaged and vocal in the country, and the city’s middle class is regarded as the model of what a Chinese bourgeoisie might look like. But this cut no ice with Xi’s government. The good citizens of Shanghai were made prisoners in their own homes. Even the slightest infraction was deemed a crime.

Thus, the most assertive and confident group in China was given the sort of treatment that was once thought unthinkable. Xi seemed almost to be taking the opportunity to remind yet another group that in his China no one, repeat no one, was beyond the levelling hand of the party state. In the end — grudgingly, and perhaps with a residue of resentment that could persist — Shanghainese complied. But it took some persuading.

Events like a tragic late-night bus crash on 18 September in the southwestern province of Guizhou, in which twenty-seven people died while being compulsorily transported to quarantine, have raised yet more questions about the implementation of such an extreme policy. The online furore led to the dismissal of some local officials. “Will this ever end?” one person wrote on social media. “Is there scientific validity to hauling people to quarantine, one car after another?” That is the question increasingly being echoed by Chinese citizens weary of the endless fight to crush the disease and wondering whether they will be next to experience the full rigidity of the current policy.

Two worlds now exist — one that has, rightly or wrongly, declared Covid-19 a part of history, and China, which is trying to fight it to the bitter end. Xi’s government looks a little like Ahab in Moby Dick — heroically, obsessively fighting a foe that might only be defeated if it brings down its pursuers with it.

The economic costs of this purist policy have already become starkly clear. China is now, for the first time in many years, posting lower growth than many of its Asian neighbours.

Nor does the policy seem popular among a public once supportive of strict measures to deal with the disease. The great Chinese middle class, a key group for Xi’s nationalist style of politics, seems deeply unhappy about being cooped up in their homes, their financial prospects curtailed by the central government’s almost obsessive drive to implement a policy that is — it is increasingly becoming clear — unimplementable.

Will the famously pragmatic Communist leadership change tack? There is zero chance of this before the party congress is over. With the leadership changes decided at that meeting taking a little while to bed in, we are unlikely to see any backtracking this side of the new year. In 2023, however, everything will depend on economy and what priority the government give to reviving growth if it stalls.

The working assumption in the pre-Xi era was that the economy decided everything, and even the most entrenched policies could be changed if growth was squeezed or went negative. But Xi and his circle may simply continue pursuing the chimera of a Covid-free China. They may see a chance to prove, once more, that they can do what the rest of the world, with its slackness and lack of political conviction, can’t. This hubris might translate into success — but there is a good chance that it will instead create more challenges for the government and more economic damage.

It would be ironic indeed if it was a public health issue that caused the Chinese people to finally confront their government. The problem with conviction politicians (and Xi, with Chinese characteristics, is definitely one of these) is that that when they are right, they are very right — and when they are wrong, they are absolutely wrong. But that doesn’t mean that Xi and his circle won’t change their approach, slowly and subtly, without making much of a fuss.

In other respects, from its harsh treatment of Hong Kong to the even more worrying clampdown in Xinjiang, the Chinese government’s actions have only had negative effects on particular segments of its population. Zero-Covid is having an impact across the nation. A government that places ideology and political commitment above everything — even the public wellbeing and economic prosperity that lies at the heart of their legitimacy — runs risks like never before. •

The post “Will this ever end?” appeared first on Inside Story.

In the leadership election, held among the OECD’s thirty-seven member states, Cormann beat the Swedish former EU trade commissioner Cecilia Malmström, a centrist liberal. Campaigning for the job, Australia’s longest-serving finance minister made a point of toning down his economic opinions and record, particularly on climate change. Challenged by environmental organisations, he insisted that he was in favour of “an inclusive and future-focused recovery, including a green recovery” and “accelerating the transition to a lower emissions future.” Commentators assumed that in his new position, accountable to the wide range of economic policy views held by the OECD’s member governments, he would operate with a more plural and open economic outlook.

But recent events suggest that Cormann’s free-market instincts remain intact. Among his early reforms is a move to effectively shut down one of the OECD’s most innovative programs, the New Approaches to Economic Challenges, or NAEC, initiative.

NAEC was established in 2012 by the previous secretary-general, former foreign and finance minister of Mexico Angel Gurria, as a way of bringing new thinking into the institution after the global financial crisis. Gurria’s view, shared by many leading economists, was that orthodox economic thinking had helped precipitate the 2008 crash, and new economic ideas were required to get the world out of it. NAEC was to help the OECD lead that process.

The OECD has never been a source of what you might call radical economic thinking. Throughout its sixty-year history it has more or less dutifully followed the consensus of mainstream economics and economic policy. Originally broadly Keynesian, in line with the approach adopted by almost all developed economies in the 1960s and early 70s, it took the same free-market turn as they did in the late 1970s and 80s.

Often described as “neoliberalism” or the “Washington consensus,” the policy approach originally championed by Margaret Thatcher and Ronald Reagan — and then copied around the world — was based on the economic theories of Friedrich Hayek and Milton Friedman. They saw “free” (relatively unregulated) markets as not just the best means of generating economic prosperity but also the guarantor of political liberty.

Neoliberals wanted a smaller state, with lower taxes, privatisation of nationalised industries and public services, less government regulation and greater freedom for enterprise, unencumbered by trade unions. The OECD joined its fellow international economic institutions, the International Monetary Fund and the World Bank, in proffering such policy advice to governments throughout the 1980s and 90s.

For its critics, neoliberalism achieved its apotheosis in 2008, when the “efficient markets theory” — the idea that well-informed financial markets would always generate optimal outcomes — took something of a beating. Alan Greenspan, former chairman of the US Federal Reserve and neoliberal high priest, famously admitted to Congress that the theory had a “flaw.”

Yet neoliberal policy prescriptions had not yet been exhausted. Reacting to the global economic slump and the huge increase in government borrowing to which bank bailouts had led, many governments opted for “austerity,” slashing public expenditure and raising taxes in order to balance the books and reduce public debt. With interest rates reduced to near zero, central banks flooded the financial sector with printed money under a program of “quantitative easing.”

It was what the neoliberals had prescribed; but it merely succeeded — as the Keynesians predicted — in slowing economic recoveries and exacerbating wealth inequality, as asset values inflated far above wages.

In 2010–12 the OECD took the neoliberal position, praising Greece’s austerity program, which almost brought the country to its knees, and prioritising deficit reduction and public spending cuts in its advice to governments. As the decade developed, along with mainstream economists everywhere, the OECD puzzled over stagnant productivity, and why economic growth remained so weak for so long. It began to worry about rising inequality but struggled to relate this to quantitative easing and over-flexible labour markets. It did advocate taxing carbon to tackle climate change, but such taxes were never high enough to make a significant dent in emissions.

It was in this intellectual and policy context that Gurria launched NAEC. He was not sure precisely what those “new approaches” should be, but he knew that something better was required. The OECD’s member states agreed, providing the new program with a small but significant budget and encouraging its outreach to some of the world’s leading economists.

The result has been a decade of fruitful research, analysis and events, seeking to bring new economic thinking not just to the OECD’s own policy departments but also to the wider international community. Economists contributing to NAEC’s seminars, conferences and publications have included Nobel Prize winners Joseph Stiglitz, Esther Duflo, James Heckman, Angus Deaton and Robert Shiller, along with other world-leading figures such as Mariana Mazzucato, Thomas Piketty and Adam Tooze.

NAEC has focused on some of the key problems facing the world in the post-crash period, including reform of the financial sector, climate change and economic resilience after Covid. It has brought the relatively new field of complexity economics — which sees the economy as a complex, adaptive system rather than a self-balancing mechanism — to mainstream policymakers, and explored whether policymakers should now be seeking to go “beyond economic growth” to achieve environmental sustainability, reduced inequality and greater wellbeing.

NAEC has not fundamentally changed the OECD’s economic approach. The Paris-based institution employs hundreds of economists whose views were not going to change overnight, and most of its member governments wish to continue following largely orthodox economic prescriptions. But as Gurria wanted, it has provided a space for new thinking to be developed and debated, and some of this has been taken up both within the OECD and beyond it.

Cormann, it appears, is not impressed. He has reduced NAEC to a series of internal seminars for country delegates, ending its association with external economists and policymakers. In May he ordered a NAEC seminar on globalisation featuring a senior US senator and government official to be cancelled at the last minute. As a result of these changes, donors to the program have threatened to withdraw their support.

Now a group of twenty-six economists who have spoken at NAEC events have written an open letter to Cormann expressing their alarm at its demise. Including Stiglitz, Mazzucato and Tooze, the group originally wrote privately to Cormann in January praising NAEC’s work and asking him to maintain it. Cormann didn’t reply, and so the group has gone public with its concern.

In their letter the group notes that new forms of economic analysis and policy are needed more than ever, given the multiple crises currently facing the world. Many OECD countries are now heading for a period of “stagflation” — simultaneous inflation and recession — while many low-income ones are about to run into another debt crisis. What the economists call the “existential” challenge of climate change needs to be confronted urgently. In these circumstances, they say, it is important that an organisation providing advice to governments, like the OECD, “is at the forefront, not just of the present orthodoxy, but of competing views, theoretical frameworks and policy approaches.”

Throughout the history of economics and economic policy, the economists note, orthodox economic frameworks and policies have often been superseded as the empirical evidence changes and rival theories come to be more convincing. “This to and fro between received economic ideas and new ones is an important part of how intellectual and practical progress is made,” they argue. So it is not just the OECD, they conclude, but the wider international economic policy community that would benefit from NAEC continuing. They end their letter by offering to help Cormann and his staff in developing a new work program for NAEC.

No response has been received so far from Cormann or the OECD. •

Former senior OECD official Kumiharu Shigehara responds to Michael Jacobs’s observations about the OECD orthodoxy in the 1980s and 90s:

It is not true to say that the OECD’s advice followed that of the International Monetary Fund and the World Bank throughout the 1990s, at least when I was OECD chief economist from May 1992 to May 1997 and a deputy secretary-general from May 1997 to the autumn of 1999. I strengthened the OECD Economics Department’s work on inequality and, unlike the IMF and the World Bank, I spoke against too hasty liberalisation of international capital movements in emerging market economies, at an IMF seminar chaired by Michel Camdessus, then IMF managing director, and more openly at a number of other international gatherings and conferences.

My recollection is supported by an article, “Don’t Blame the Victims of Asia’s Crisis,” by Anthony Rowley, a reporter for the Business Times in Singapore, who wrote: “It is instructive that a Japanese national [Mr Shigehara] writing from Paris [the OECD offices in Europe] should be able to analyse the situation with such clarity. It seems that the ideological miasma in which Washington-based institutions such as the IMF and the World Bank have become entrapped, by virtue of their proximity, to the US administration and Congress, render such clear thinking impossible on their part. They dare not blame the system of unthinking trade, investment and capital market liberalisation to which they have co-opted, so they blame its victims.”

The post Trouble at the OECD appeared first on Inside Story.

For example: Leigh tells of the Australian middle-distance runner Peter Norman, who once stood on the Olympic podium with two Black American placegetters as they raised their fists in protest against their country’s racism. Norman, white, a devout member of the Salvation Army, and wearing the badge of the Olympic Project for Human Rights, was in full support.

This was in 1968, when the White Australia policy still hadn’t been fully dismantled. On his return to Australia Norman copped sometimes vicious criticism, in the midst of which he was invited by a Methodist minister in suburban Melbourne to preach from his pulpit. The minister was Leigh’s grandfather. More than four decades on, in 2012, the minister’s grandson moved a parliamentary motion in posthumous apology to Peter Norman for the obloquy he had endured. The motion was carried, unanimously.

Along with a fluent pen, a family tradition of Christian socialism and gilt-edged training in economics, Leigh owes a debt to organised sport. He’s a self-confessed sports tragic who competes in triathlons, marathons and the like, and his latest book Fair Game: Lessons from Sport for a Fairer Society & a Stronger Economy pursues the nice idea that if Australian “business” were as well organised and competitive as Australian sport, the economy would be as productive as the field of dreams.

Where hyper-competitive and well-regulated sporting Australia has gone from one success to another, corporate Australia has been given an easy ride and grown fat, not very competitive, not very innovative, not very good at lifting productivity or wages, and very, very profitable. In other words, Australian capital has enjoyed a thirty-year romp on the back of a disempowered working class.

Leigh doesn’t use such dirty language, of course, and he refrains from mentioning that the romp really got going under a government led by a Labor prime minister trained in economics and a treasurer surrounded by staffers and financial journalists dazzled by the newly fashionable neoliberal version of economics. Leigh is constrained by his day job, and he is limited by his discipline, particularly when he uses its lens to examine things other than the economy. Education, for example.

Schooling was a particular interest of Leigh’s when he was a professor of economics at the ANU. His work found, among other things, that the productivity of schooling has been falling since the 1960s (more spending, worse outcomes), and that declining “teacher quality” (ie. lower entry standards) is associated with lower “teacher effectiveness” (ie. student scores in standardised tests). From there it is but a short distance to conclude that if we fix teacher quality, up will go effectiveness along with the productivity of schooling. In sport, he says, great coaching makes all the difference; so too teaching in schools. He even suggests that “attracting and retaining great teachers is perhaps the best single thing that we could do to create a more affluent and equitable society.”

How come? Well, careful studies by economists have shown that with more schooling comes increased self-control, reduced crime, more civic engagement, better health and higher incomes. So, QED, more great teachers make more happy, healthy, wealthy and wise citizens, and hence a more affluent and equitable society.

Well, it might look like that to economics, but it’s not necessarily like that at all. Coaching can change who wins, but it doesn’t make more medals. Income, health, civic-mindedness (and the lack of them) are less products of schooling than properties of the destinations, the lots in life to which schooling allocates. If we look inside the box of schooling, which economics doesn’t, we can see the workings of the machine made visible by ATAR, the Australian Tertiary Admission Rank, a tyranny of merit of just the kind Leigh admires in sport and, quite rightly,wants for business, but not what will provide twelve worthwhile years of schooling for all comers. More great teachers won’t change that game. •

Fair Game: Lessons from Sport for a Fairer Society & a Stronger Economy
By Andrew Leigh | Monash University Publishing | $19.95 | 96 pages

Comment to: dean.ashenden@unimelb.edu.au

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Menand’s account of contemporary central banking is not entirely convincing, and his remedies for its problems are specific to the United States and unlikely to be adopted. But in focusing on the change wrought in central banking by the global financial crisis and the pandemic he identifies the most important issue in central banking.

Compared with the implications and consequences of this change, many of the monetary policy issues we are debating today in Australia — issues now the subject of a government-initiated inquiry — are interesting but not fundamental. Should the Reserve Bank of Australia be charged with targeting a certain band of consumer price inflation, or some other band, or even a different measure of economic activity? Should more professional economists sit on the Reserve Bank board? Should interest rates have been even lower in the years before the pandemic? Should Reserve Bank governor Philip Lowe have been more ambiguous in his “forward guidance” on interest rates during the pandemic? All these are worthy questions, but no longer the main point.

For Menand — and his argument applies equally outside the United States — the main point is that in 2008 and (to a vastly greater extent) in 2020 central banks busted conventional expectations of what they could do, with consequences as yet unknown.

Menand, a former Fed official and a senior Treasury official in the Obama administration, brings to his task an understanding of financial structure and economics, law and history, as well as a clear and logical mind. He reminds us that the pandemic’s first economic effect was a global financial crunch. That crunch was so quickly quelled by the Fed and other central banks (including Australia’s) that we have almost forgotten the grave danger of financial collapse in March 2020. This was what triggered central bank intervention, though that support was soon extended much more widely during the pandemic.

Startled by the unknown consequences of the emerging pandemic, financial markets sold off assets. In just six weeks, US shares fell by nearly a third from their peak at the end of January 2020. Investors who had borrowed money to buy shares were forced to sell bonds and other financial assets to meet demands for cash repayments. Bond prices fell and interest rates rose, spooking markets that had expected to see the opposite happen. Suddenly everyone, remembering 2008, wanted cash rather than securities.

US primary dealers, who borrow cash to buy bonds, using the bonds as security, discovered lenders wanted their cash back. Already falling, bond prices fell more as dealers sold bonds to meet those cash calls. The panic spread rapidly through other financial markets in the United States and elsewhere.

Taught by the experience of 2008, the Fed responded by providing cash to the market and accepting bonds and other financial assets in return. Even compared with 2008, the Fed spent big: between September 2008 and the end of that year it acquired assets of US$1.3 trillion; from February to May 2020 it acquired US$2.9 trillion.

The central banks’ response to the pandemic came in two major phases, both of them extending the usual perimeter of their activity. The first phase aimed to stop an immediate financial panic by sharply lowering interest rates and lending cheap money to financial businesses that needed it. The second phase aimed to support household and business demand through the long pandemic in two ways: directly, by keeping interest rates very low and freely lending money to banks and then to a wider category of businesses that needed it; indirectly, by buying government bonds issued to finance deficit spending.

Whereas the cash splurge from the Fed peaked at not much more than US$1.3 trillion during the global financial crisis, by February 2022 it had spent close to another $2 trillion. Its assets were now nearly four times bigger than at their peak in 2008.

In Australia, where shares fell just as sharply (and by a little more) in early 2020, the Reserve Bank spent much more as a share of GDP. In the second week of March 2020 it held $89 billion in Australian dollar assets. By the fourth week of May that amount had more than doubled to A$200 billion as the bank grappled with similar issues of financial instability and also began supporting fiscal policy by purchasing Australian government bonds. At the peak, in March 2022, the Reserve Bank would own more than six times the value of Australian dollar assets it held at the beginning of the pandemic, a total of well over half a trillion dollars.

This enlargement of the role of central banks matters to Menand for reasons that don’t necessarily matter to us in Australia. He is bothered because the US Federal Reserve is doing things Congress didn’t intend when it set up the federal reserve system. In this respect, he is taking an “originalist” approach. Congress is supposed to control tax and spending, yet the Fed is commanding resources by issuing money without congressional authorisation.

Menand wants Congress to be more active in responding to crises. That would be more democratic, he says, and also more egalitarian. Interest rate cuts stimulate increases in asset prices, helping rich people. Government spending, by contrast, can be targeted in a fairer way to support demand.

All of that is true, but a financial crisis doesn’t wait around while parliaments debate the proper response. Nor is the role of central banks in creating money to buy bonds during downturns necessarily inegalitarian. In principle, bond purchases facilitate government spending, with the character of that spending determining its distributive effect.

The legal remit of the central bank concerns us less in Australia because the federal government has the authority (never used, but there) to instruct the Reserve Bank to pursue, or not pursue, specified policies. Moreover, the Treasury secretary sits on the bank’s board and could convey a government view if he or she chose to do so, and by convention the governor of the bank and the treasurer of the day make a point of staying in close touch. Legally, the Reserve Bank is closer to being the monetary policy arm of government than its US counterpart. Its independence is conferred upon it, not required.

Had the Reserve Bank refused to buy bonds during the pandemic in the same way its predecessor, the then Commonwealth Bank, refused to finance deficit spending by the Scullin government beyond a certain point during the Great Depression, the consequences would have been fascinating. Central bank thinking has moved on and the issue didn’t arise. So has the legislative framework for central banking, partly reflecting Labor treasurer Ben Chifley’s determination in 1945 to prevent the central bank acting as it did during the Depression.

Menand rightly blames the shadow banking sector for the US financial crises of 2007–08 and early 2020. These institutions borrow cash to buy higher-yielding securities, or lend money with limited supervision and without a government guarantee for depositors. In the run-up to the 2007–08 crisis, investment banks like Bear Stearns and Lehman Brothers were borrowing in the overnight money market to buy home mortgage securities and other higher-yielding assets. When the crisis made the value of these home mortgage securities difficult to determine and hard to sell, overnight lenders wanted their money repaid rather than allowing it be rolled over. The Fed was forced to support these shadow banks by lending them cash and acquiring mortgage securities, but not before Lehman went down and plunged American and European financial markets into years of grief.

Australia’s financial crises in 2008 and 2020 were quite different. Shadow banks play a much smaller role in the bank-dominated Australian financial market (though in 2009 the Reserve Bank and the government found they had to support the market for bundled or securitised home mortgages and prop up lenders in the car loan market).

The Reserve Bank’s big job in 2008–09 was to protect Australian banks when, at the height of the crisis, they were no longer able to roll over their substantial US dollar-denominated loans from offshore institutions. The bank provided liquidity, including in US dollars. When other central banks guaranteed domestic bank deposits and other borrowing, the Reserve Bank was obliged to follow suit.

Though the circumstances were different in each country, the 2008 crisis greatly extended the scope of central bank actions. When a similar flight to cash began in February 2020, central banks knew what to do.

The central bank’s response to these two crises has left us with questions we are yet to work through. For example: the Reserve Bank of Australia now owns more than a third of the net debt of the Australian government. It is paid interest on that debt, amounting to something in the order $3 billion a year. As it retires its Australian government debt holding, the federal government will need to sell additional bonds to the private market (or increase taxes — not a live option) to finance its repayments.

Over time, the government will need to repay more than $200 billion (by redeeming bonds) to return the bank’s balance sheet holding of official debt to its pre-Covid size. That will mean higher interest rates than otherwise, higher taxes than otherwise, and less spending than otherwise on other things like nuclear submarines or disability support. How much of that $3 billion or so in interest payments should the Reserve Bank return to the government as profit on central banking operations? Even at the most ordinary of times, that question opens up a tense conversation.

And given that the bank bought those bonds with cash it created out of nothing but expects to be repaid out of taxpayers’ pockets or by the issuing of additional bonds to the private market, will governments begin to find the obligation inconvenient and seek to negotiate their way out of it? Will they ask why the bank needs — and what it will do with — all the cash it gets from government in return for its bonds? Treasury might find itself discouraging the bank from running down its bond inventory, or even encouraging the bank to add to it.

In tough times, these possibilities will all come to mind. The Reserve Bank is, after all, another arm of government, another agency of the Crown. Central banks can destroy as well as create money so the Reserve Bank could choose to extinguish payments from Treasury, at the same time extinguishing the corresponding accounting liability. But to extinguish payment from taxpayers looks odd.

The bank might well argue that it will need the cash from the redeemed bonds to buy bonds during the next downturn. Cash would then move from the Treasury to the Reserve Bank in good times, and from the Reserve Bank back to Treasury in bad times, confirming the bank’s new role as a participant in fiscal policy.

If the next downturn is far enough away, that might be a useful and workable reimagining of fiscal and monetary policy. The bank would assume a responsibility for fiscal stabilisation while the Treasury assumes a responsibility for economic stabilisation, the opposite of their declaratory roles in past decades. If it was to work, however, it would need to be discussed and agreed and publicly known, all of which is unlikely.

That issue is one aspect of the changed relationship between fiscal and monetary policy consequent on the changed role of the central bank. For decades, economic policy in Australia has been run on the official understanding that the Reserve Bank would smooth the ups and downs of the economy using interest rates while the government’s budget would be designed to achieve balance “in the medium term.”

During the pandemic Treasury secretary Steven Kennedy pointed out that the Reserve Bank cash rate was near zero, the effective limit of what the bank could do to stimulate demand using interest rates. While the government had spent a vast amount in pandemic support, Kennedy suggested, it could certainly spend a great deal more if necessary. The implication is that fiscal policy could become the active arm of economic stabilisation while the Reserve Bank slowly recovered its interest rate flexibility.

In the event, recovery from the pandemic was stronger than expected, and fiscal and monetary policy have been tightening at the same time. Whether or not fiscal policy emerges as the preferred stabilisation tool, a transfer of the focus of day-to-day economic policy from the Reserve Bank in Sydney back to the Treasury in Canberra waits on the character and timing of the next big downturn. •

The Fed Unbound: Central Banking in a Time of Crisis
By Lev Menand | Columbia Global Reports | US$16 | 176 pages

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In the event, the swing to Labor was less than 3 per cent. Labor had been wrong-footed by Malcolm Fraser’s announcement of a national wage freeze. Its candidate was unimpressive. But inevitably the blame fell primarily on Hayden.

It was Labor’s third successive election loss, and a new mood of pessimism descended on the party. Frantic behind-the-scenes activity culminated in senator John Button, an astute and respected Labor figure who had been a close ally of the opposition leader, writing to Hayden on 28 January 1983 after unsuccessfully trying to persuade him to make a peaceful transition to Hawke.

Button’s letter summed up the mood of senior figures in the party. “You said to me that you could not stand down for a ‘bastard’ like Bob Hawke,” he wrote. “In my experience in the Labor Party the fact that someone is a bastard (of one kind or another) has never been a disqualification for leadership of the party. It is a disability from which we all suffer in various degrees… I must say that even some of Bob’s closest supporters have doubts about his capacities to lead the party successfully, in that they do not share his own estimate of his ability. The Labor Party is, however, desperate to win the coming election.”

Six days later came one of the most extraordinary events in Australian political history. On 3 February, Fraser, hoping to maintain the momentum generated by the Flinders by-election and fearful that Labor could change leaders, asked governor-general Sir Ninian Stephen for an early election. At the very same time, but without being aware of Fraser’s decision, Hayden announced his resignation to a meeting of shadow cabinet.

Hayden had been convinced by Button’s letter, which he called “brutal but fair.” Nevertheless, it was a wrenching decision. “I am not convinced that the Labor Party would not win under my leadership,” he told the media. “I believe that a drover’s dog could lead the Labor Party to victory the way the country is and the way the opinion polls are showing up for the Labor Party.”

Fraser had been outmanoeuvred. When he went to Government House, he was expecting to fight an election against Hayden. When the governor-general granted him the election, his opponent was Bob Hawke, although still to be formally endorsed by the Labor caucus five days later.

With the economy in recession, a government in its third term and the public popularity Hawke had developed over the years, only a disciplined Labor campaign was needed to ensure victory. That was not quite the foregone conclusion it seemed in retrospect, particularly after Hawke reacted angrily to a question from the ABC’s Richard Carleton about whether he had blood on his hands over Hayden’s demise. If voters had a concern about Hawke, it related to whether he had the right temperament to be prime minister. Carleton’s question touched a raw nerve in Hawke: political assassinations are never gentle affairs, however much he might have pretended.

But he was a model of statesmanship and responsibility for the rest of the campaign. He exploited the recession and condemned what he argued was Fraser’s divisive approach to government. He adopted Hayden’s campaign themes of national recovery and reconstruction and added his own “r” — reconciliation.

As well, Labor promised a big spending program, tax cuts and petrol price reductions to tackle the recession. Fraser tried a scare campaign against Labor’s “mad and extravagant promises,” saying people’s savings would be safer under their beds than in the bank. Hawke responded with a clever quip harking back to the “reds under the beds” bogy that the Liberals had used against Labor in earlier times: “They can’t put them under the bed because that’s where the Commies are!”

On 5 March 1983, at the age of fifty-three, after decades of frustration and a period of self-doubt, Hawke became prime minister. Labor’s win was convincing: the two-party swing of 3.6 per cent came on top of the 4.2 per cent it had achieved under Hayden in 1980, resulting in a final Labor vote of 53.2 per cent — the highest support it has ever received in a federal election.

The vote gave the new government a majority of twenty-five in the 125-member House of Representatives, compared with the Whitlam government’s nine-seat majority in 1972. It was all the more impressive considering that Labor had suffered a devastating loss in 1975 and some had questioned not only its legitimacy as a governing party but its very survival.

The day after the election, Treasury secretary John Stone came to see Hawke and the new treasurer, Paul Keating, with a reality check: the projected budget deficit for 1983–84 was $9.6 billion. Adding Labor’s election promises could take the figure up to $12 billion — the highest since the second world war. Hawke had received an inkling of the deficit figure before the election, leading him to qualify his election promises. It was the signal that the economy would come ahead of election promises and that pragmatism was the priority.

In truth, the $9.6 billion figure was not a measure of anything tangible but a projection that Treasury typically calculated on pessimistic assumptions. But it was the excuse Hawke and Keating used to abandon most of their promises on spending and tax cuts. And it was the political weapon that they used relentlessly to attack the Fraser government’s economic legacy.

From the very beginning, Hawke was intent on laying the foundations for something that had eluded federal Labor for all its history — long-term government — and with it the opportunity to entrench Labor policies, and even, in his fondest hopes, to become the party of natural government.

Resentment lingered within the party over how the Coalition had never accepted Labor’s legitimacy after Gough Whitlam had returned it to power in 1972. That attitude led to breaches of convention such as the Coalition parties’ blocking of the budget and culminated in the sacking of Gough Whitlam by governor-general John Kerr. But there also was a recognition of the failings of Whitlam’s government.

This is why Hawke drew an immediate and deliberate contrast with his Labor predecessor. In his victory speech on election night he promised not excitement or a great wave of reform but “calmness and a sense of assuredness.” It did not sound like a revolution, socialist or otherwise, and that was precisely Hawke’s intention. Determined not to allow a repeat of the indiscipline of the Whitlam government, his first focus was process — the orderly management of government.

Under Whitlam, all ministers were members of cabinet, meaning decision-making was unwieldy and sometimes resulted in those who lost in cabinet appealing to caucus to reverse the decision. Instead, Hawke created a cabinet of thirteen from the ministry of twenty-seven elected by caucus. Ministers, including those from the outer ministry who participated in cabinet discussions in their area of responsibility, were required to support cabinet’s decisions in caucus. In a strictly formal sense, the supremacy of the Labor caucus in decision-making was preserved but in practice it was greatly weakened.

A second contrast was on foreign policy. Where Whitlam was intent on carving out a more independent foreign policy, sometimes at the cost of criticism from the United States, Hawke went out of his way to build good relations with president Ronald Reagan and secretary of state George Shultz, despite their conservative credentials. The Americans trusted Hawke and that was a political asset in Australia.

Third, Hawke drew a sharp distinction with the Whitlam government on economic policy. Whitlam had shown little interest in economics and it became one of his government’s biggest liabilities.

In many areas, Hawke left the running to his ministers, avoiding delving into the detail of policies unless there was a pressing political need to do so. But economic policy and foreign affairs were exceptions. He had studied economics at university, prepared national wage cases for the Australian Council of Trade Unions, served on the Reserve Bank board for seven years as ACTU president, and been a member of a committee of inquiry into the manufacturing industry, headed by Gordon Jackson, the head of CSR.

Within a month of coming to government, Hawke presided over a national economic summit that brought together leaders in federal and state governments, business, unions, and welfare and community groups. The epitome of Hawke’s consensus approach, it attracted scepticism, including by some within the new government. The opposition portrayed consensus as compromise when what was required was bold decision-making, and characterised the Hawke approach as corporatism — those in positions of power stitching up the game for themselves.

Significantly, the summit was held before the resumption of parliament and the venue was the House of Representatives chamber. The symbolism was clear: Hawke, no fan of parliament, was substituting the quest for agreement for the parliamentary clash that emphasised differences.

Hawke confronted the summit with “the gravest economic crisis in fifty years” and laid out his remedies: a budget with a deficit of $8.5 billion and the Accord between the government and the ACTU. The Accord was a distinctive feature of Labor’s economic policy, designed to subordinate wage increases to the overall demands of economic policy — in other words, to ensure that the kind of wage explosions that had occurred under both the Whitlam and Fraser governments, and for which Hawke carried some responsibility as leader of the trade union movement, would not be repeated. It traded off part of the wage increases that strong unions could achieve and that tended to flow on to the rest of the workforce under a centralised industrial system for the so-called social wage. This included universal health insurance under Medicare, more generous and targeted welfare benefits, and compulsory superannuation.

The government’s economic policy won endorsement from everyone present at the summit, with the sole exception of Queensland National Party premier Joh Bjelke-Petersen. The summit was also a success when it came to public opinion: voters liked the idea of community leaders agreeing on what was best for the country rather than playing politics. In reality, there was plenty of politics involved; it was just that it was being played more subtly than usual. Within months of coming to government, Hawke’s approval rating had shot up to 70 per cent.

The new government had luck on its side. The drought broke, bolstering the economic recovery already under way. Hawke was blessed with an exceptionally strong team of ministers, including Keating as treasurer, Gareth Evans as attorney-general, Hayden as foreign minister, Button as industry minister and Neal Blewett as health minister. Others who made their mark later were Peter Walsh in finance, Kim Beazley in defence, John Dawkins in education and Brian Howe in social security. In cabinet, Hawke was a skilled chairman, letting ministers have their say and striving for consensus. His own working style was methodical and diligent.

Three days after the election, the government had accepted Reserve Bank advice and devalued the dollar by 10 per cent, thought to be large enough to stop the damaging speculation in the currency. But almost immediately the dollar came under more pressure, as did the system under which officials set its value.

In the first week of December, the Reserve Bank spent $1.4 billion on buying foreign exchange to counter the overseas money flooding into the country. The Reserve Bank was advocating a free float of the dollar, as was Hawke’s senior economic adviser Ross Garnaut. But Stone, the formidable Treasury secretary, resisted, concerned about losing control of an instrument of economic policy and fearful that the Australian economy would be at the whim of international speculators. When Hawke concluded the lengthy internal debate by saying the dollar would be floated, Stone told him, “Prime Minister, you’ll regret this; you’ll come to see this as a terrible decision.”

The float became the Hawke government’s most significant economic decision, exposing the economy to the full force of international competition. It was a step that had ramifications for most other aspects of economic policy. No longer could the exchange rate be used to cushion against inflation that was higher than overseas or to protect inefficient industries.

Further steps towards financial deregulation removed the ceiling on interest rates and allowed foreign banks into Australia as a means of increasing competition. The latter was a controversial decision inside the Labor Party, but Keating sold it with the same zeal and political skill that he had used to oppose it when John Howard as treasurer had proposed it under the Fraser government.

The float and further financial deregulation triggered a wild ride during the 1980s, with the dollar crashing in value, a boom in credit, skyrocketing interest rates and big corporate failures culminating in a severe recession. Bob Johnston, the Reserve Bank governor at the time, subsequently told the author Paul Kelly, “It’s just as well they did not foresee all the consequences, otherwise we might not have got the change.”

For a Labor government, deregulation was a particularly bold decision, although one driven by circumstances, given the rapid growth of international currency markets trading in huge amounts of money. In opposition, Labor had opposed the Fraser government’s first moves towards financial deregulation. Effectively subjecting economic policy to the whims of the free market was the very antithesis of Labor dogma. Many on the left of the party accused the government of selling out, seeing its actions as justifying the resistance they had shown to Hawke’s becoming leader.

It is easily forgotten how vehement these complaints were. In the early years of the government, Labor’s national Left, a broader grouping than the parliamentary party but with caucus members playing a prominent part, periodically held news conferences to criticise government decisions, particularly on economic policy. Stewart West, the only left-wing member of the first Hawke cabinet, resigned after eight months because he could not support a cabinet decision on uranium mining. Brian Howe, a left-wing minister outside cabinet in the first term, accused the government on one occasion of having a “deficit fetish” and on another of policies that he compared to a mule — like the animal that cannot reproduce, they had no future.

The Left also took its grievances to Labor’s national conferences which, in theory, were the supreme decision-making bodies of the party. The debates were robust and the votes close, with the government relying on the Right and Centre-Left factions carrying the day.

But Hawke and Keating were dominant in cabinet and were strongly backed on economic decisions by employment minister Ralph Willis and by finance minister Dawkins and the fellow Western Australian who succeeded him, Peter Walsh. This meant their authority was rarely challenged successfully by the full ministry or caucus, even though caucus had the final say on decisions. On one occasion after an economic policy announcement following a meeting of the full ministry, science minister Barry Jones asked communications minister Michael Duffy, “How did that happen?” “It’s purely a matter of numbers,” Duffy replied. “There’s four of them and only twenty-three of us.”

The government had another advantage: on the hardest economic decisions, such as the float, financial deregulation more broadly and, in subsequent years, tariff cuts, privatisation and labour market deregulation, it had the support of the opposition, and particularly John Howard, first as shadow treasurer and from 1985 as leader. All these Labor decisions were in line with the philosophy of the Liberal Party, or at least that of its conservative wing led by Howard, who had tried unsuccessfully to persuade the Fraser government to adopt some of the same measures.

The way for these decisions was smoothed by one of Hawke’s underrated achievements: the skill he brought to decision-making, particularly on contentious issues. He would come to cabinet meetings well briefed but would first listen patiently to his ministers, making them feel their contributions were valued. Then he would sum up the debate and conjure up a solution to what sometimes seemed intractable issues — one that satisfied most of the concerns or, if not, that his colleagues felt they could live with.

Enjoying an extended honeymoon in the opinion polls and wanting to avoid separate elections for the House and Senate, Hawke decided to go to the people in December 1984, only twenty-one months after the 1983 victory. Labor strategists were counting on a repeat of Neville Wran’s success for Labor as NSW premier, when he followed up his narrow victory in 1976 with “Wranslides” in 1978 and 1981, setting the party up for long-term government.

But Hawke was overconfident. He opted for an unusually long campaign of seven-and-a-half weeks in the expectation that he could destroy his opponent, Andrew Peacock. Instead, he gave the Liberal leader a platform as alternative prime minister. As well, Hawke campaigned poorly. He broke down in tears at a news conference over the heroin addiction of his daughter. Wracked with guilt over the neglect of his parental duties, “I was within minutes of resigning from office at that time,” he said later.

Peacock proved to be an effective campaigner, hammering away day after day to get a plain message across to voters: that, “as certain as night follows day,” a re-elected government would bring in new taxes. Peacock based his claim on reforms introduced in Labor’s first term — an assets test on the age pension and a 30 per cent tax on lump sum superannuation, both of which he promised a Liberal government would repeal.

Labor’s defence was muddied by Hawke’s off-the-cuff commitment during a radio interview to hold a tax summit after the election. It meant Labor could deflect questions about the specifics of tax changes until after the election, but at the same time it added ammunition to the Liberals’ scare campaign. But Hawke emphasised another commitment: that under a second-term Labor government there would be no overall increase in taxation as a proportion of national income, and the same would apply to government expenditure and the budget deficit.

This “trilogy” became a means of enforcing harsh discipline in future budgets. But in the election campaign voters were more inclined to believe their taxes would be going up than that Labor would keep its promise.

Not for the first time, the result of the 1984 election defied predictions of a thumping victory for Labor. Instead of a swing to Labor, the opposition gained 1.46 percentage points after preferences, cutting Labor’s majority from twenty-five seats to sixteen. With 51.8 per cent of the vote after preferences, it was a solid win for Labor but, given expectations of a landslide, it was the Liberals who were celebrating — except for Howard, who had expected to become opposition leader after the election loss. As for Hawke, the political messiah had been reduced to a mere mortal. •

This is an edited extract from Bob Hawke by Mike Steketee, part of the Australian Biographical Monographs series published by Connor Court.

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It was a success according to its intentions. But that won’t take us very far. Its directors managed to evade almost completely an issue that is crucial to how Australia is to tackle the many, deep social problems spelt out by speakers on the floor of the Great Hall of Parliament House. I’ll come to that shortly.

The summit was intended to show Australians that our political climate has changed with the new government — and it did. The participants, speakers and moderators were mostly female. There was an abundant sprinkling of young faces, of non-white faces, of foreign accents. It looked and sounded like Australia.

The vibe was overwhelmingly positive. Political differences were set aside (except by the absent Peter Dutton). Everyone was given a chance to speak at some point, and most were worth listening to. Their contributions were mainly constructive.

The PM was his avuncular self, the friendly, trustworthy Uncle Albo, heir to the good Labor leaders of long ago. He urged the summit: “We have not gathered here to dig deeper trenches on the same old battlefield… Australians have conflict fatigue. They want politics to operate differently.” The contrast between his positivity and Dutton’s sniping showed why Australians, according to Newspoll, prefer him by a 61–22 margin.

This summit was a stage production. The cast spoke when they were meant to, and not otherwise. I didn’t see any debate on day one, though ANU vice-chancellor Brian Schmidt started some when he took the chair on day two. Mostly, if anyone wanted to disagree with what was being said, tough luck: they had no opportunity to do so. The “consensus” Anthony Albanese praised was more staged than real.

The summit was intended to produce a set of policy outcomes — and in a sense, it did. Soon after it ended, the government published a fourteen-page document listing what Treasurer Jim Chalmers described as thirty-six “concrete steps [it] intends to take… as an outcome of this… summit” plus a similar number of priorities for future discussion. Everyone got something to take back to their constituencies.

Seeing the speed with which the document appeared at the end of the summit, a cynic might wonder if, rather than responding to what it heard on the floor, the government took these decisions well before the summit, but held back the announcements to make it look like they came from the floor.

The summit was intended to highlight the importance — economic, social and political — of getting more women into work, into decision-making and into higher-level roles in the economy. And it did. Its three main policy themes were: how to fix the skills shortages in Australia’s workforce; how to change wage-fixing rules so that workers get a bigger share of the cake; and how to lift participation in the workforce. In the presentations, women’s work was central to all three.

Grattan Institute chief executive Danielle Wood sounded the bell in her opening keynote speech. Australia has one of the most gender-segregated workforces in the OECD, she noted, and market realities are now in sync with fairness in dictating that we tackle the underpayment of female-dominated caring occupations.

She cited an example: childcare workers are paid as little as $22 an hour, less than they could earn washing dishes at McDonald’s. No wonder we are perpetually short of them. Every year, Australia needs more than 33,000 more aged care workers, but they are grossly underpaid and overworked, so a huge turnover means a constant search for workers.

We can’t put off this issue anymore, and Labor’s leaders clearly recognise that. Treasury’s paper for the summit estimated that a quarter of Australia’s gender pay gap comes from low pay in the female-dominated caring and education professions. The Fair Work Commission is now hearing a case in which unions are seeking a 25 per cent pay rise for aged care workers. The government has promised to pick up the tab. That is where the action is.

But the obvious stage management of the summit should not obscure its genuine achievement. For two days, leaders of business, unions, community groups and federal, state and territory governments focused on contributing their knowledge, identifying the problems, finding common ground and scoping out solutions. They didn’t solve Australia’s problems, but they made progress on some fronts, and established good working relationships for future dialogue.

Yet the progress they made was marginal to the key issues facing Australia. Getting consensus meant the organisers could not allow the conference to tackle issues where consensus was impossible. Danielle Wood and fellow economist Ross Garnaut, the dinner speaker, certainly touched on some of them, but they were not targeted in any session.

One of them is crucial to almost every issue the summit addressed. It is tax.

The federal government is running deficits of $75 billion or more a year. While claimants were putting urgent cases to the summit for more spending in this area and that, Labor still insists on delivering an already-legislated tax cut, mainly for the rich, that will reduce tax revenues by 3 to 4 per cent. Where is it going to find the money to solve the problems the summit presented to it?

Garnaut pointed to the elephant in the room. “We have to stop kidding ourselves about the budget,” he said. “We have large deficits when our high terms of trade should be driving surpluses. Interest rates are rising on the eye-watering Commonwealth debt.

“We talk about the most difficult geo-strategic environment since the 1940s requiring much higher defence expenditure, but not about higher taxes to pay for it. We say we are underproviding for care and underpaying nurses, and underproviding for education and failing to adequately reward our teachers…

“[Yet] in the face of these immense budget challenges, total federal and state taxation revenue as a share of GDP is 5.7 percentage points lower than the developed country average.”

To put it another way, our governments every year raise roughly $120 billion less than they would if our tax rates were at the Western average. With that money, we could tackle every issue raised at the summit. The government, if it chose, could finance 25 per cent pay rises for aged care and childcare workers, raise the dole to $70 a day, restore the funding the Liberals took from universities, invest in research and new technology, pay the states 50 per cent of hospital costs, give state schools their fair share of funding, etc., etc. — and close the deficit.

There are many good ways to raise revenue. Australia has an abundance of tax loopholes allowing companies and individuals to avoid tax: negative gearing is a classic example, but as the International Monetary Fund once suggested, Australia could apply the same principle to business, and stop firms deducting interest bills from their tax.

In the June quarter, the Australian Bureau of Statistics tells us, the total wage bill for Australia’s millions of corporate employees was $164 billion, while its mining companies made a gross operating profit of $81 billion. In just three months! If any country ever had cause to levy a tax on super profits it is Australia, now. Jim Chalmers needs to make this a centrepiece of his October budget.

But no one in the sessions I heard mentioned tax in their speeches. Like all those who argue for more spending on worthy causes, they urged more spending without a word on how the government should find the money to pay for it. Tax is the issue we don’t talk about. The summit would have had more cutting edge if some delegates had dared do so.

There’s been little argument over the summit “outcomes” because they are mostly agreements on principles, aspirations, processes or short-term supports to be applied while longer-term outcomes are negotiated.

They are modest: first steps, not solutions. Maybe they needed to be to get tripartite agreement between government, business and unions. And having tripartite agreement on sensible first steps in the right direction gives the government more freedom to plan bolder steps to solve the problems.

One of the summit’s big moves to tackle the skills shortage, for example, was to increase the permanent migration target for 2022–23 from 160,000 a year to 195,000. Almost all that increase will comprise skilled workers and their families, mostly sponsored by state governments (who are primarily chasing health workers) and employers in the regions.

No one objected to that. Nor should they, because if the target follows current patterns, it will make little difference. In recent years, two-thirds of permanent residence places were awarded to migrants already in Australia, working or studying on temporary visas.

And while the government would like to bring in new migrants to help reduce our skills shortage, particularly in hospitals and aged care, it has an even more urgent priority: tackling the scandalous backlog of unprocessed visa applications piled up by the Department of Home Affairs under the Morrison government.

Immigration minister Andrew Giles told the summit Labor inherited a backlog from the Coalition of almost a million unprocessed visa applications. It was an unbelievable number, including applications from all types of people: separated partners, skilled workers, overseas students, business. Brian Schmidt recalled the department taking twenty-one months to process the ANU’s applications to bring in some Indian academics — for three-year appointments.

Giles said the government has now swung an extra 180 staff onto clearing the visa backlog, and has so far reduced it by 100,000. One of the thirty-six “outcomes” was that it will now spend an extra $36 million to lift visa staff by 500 people for the rest of this financial year.

But the waiting list includes a staggering 330,000 people who are already in Australia on bridging visas until their applications are processed. It’s fair to assume that many, maybe most, of them are applying for permanent visas. Given the scale of this backlog, an increase of only 35,000 in the migration target seems extraordinarily timid. Labor will have to revisit that, and soon.

The big “outcome” for the young unemployed and school leavers was the agreement by the prime minister and premiers to pump $1 billion into TAFE in 2023 to provide 180,000 extra fee-free places while they negotiate a longer-term agreement to reform the sector. Again, you applaud the direction — and in this case, the boldness and the federal–state cooperation — but it’s only a short-term solution.

Another “outcome” was Albanese’s announcement that, as an inducement for older workers to keep working, or retirees to return to work, pensioners will be allowed to earn an extra $4000 — just for this financial year — without losing any of their pension.

Good, but I think the PM is safe from being knocked down by a stampede. For a few months, it might induce some pensioners to put in a few hours a week at some nearby workplace. But why make it so small? Why end it on 30 June? It’s almost as if it was designed to avoid having any substantial impact. It’s tokenism, when big gains are possible from a comprehensive policy to extend working lives for those who want to keep going.

Chalmers and finance minister Katy Gallagher routinely fob off questions about spending proposals such as raising the Jobseeker allowance by declaring sympathetically, “There are lots of good ideas out there, and I wish we could fund them all. But we have inherited a trillion dollars of Liberal debt…”

Someone must call that out. First, Table 9.2 of the 2022–23 budget papers implies that Labor inherited $979 billion of gross debt from the Liberals — but $303 billion of that was inherited in 2013 by the Liberals from Labor (who in turn inherited $64 billion in 2007 from the Liberals, and so on). It’s Liberal and Labor debt. It’s Australia’s debt.

Second, gross debt looks at just one side of the balance sheet — which is why we focus on net debt. Table 9.2 estimates Labor inherited $631.5 billion of net debt from the Liberals, who in turn inherited $161.6 billion of net debt from Labor back in 2013. It’s a cheap, false political point.

But on the first part of its routine line, Labor is right: there are a lot of good ideas out there, and the government can’t fund them all. Its job is to sift through them and set the priorities. And if it picks a bad priority, such as backing the Liberals’ stage three tax cuts, it sticks out like a sore thumb.

These cuts were Morrison at his worst. They do not take effect until mid 2024, yet became law in 2019 — with Labor’s support, because it was frightened of being depicted as a high-tax party. This is the legislation that will give tax cuts of almost $175 a week to someone earning $200,000 a year, and $2 a week to someone earning $50,000.

The Parliamentary Budget Office estimates the cuts will deprive the government of $243.5 billion of revenue — 3 to 4 per cent of budget revenue — over their first nine years alone. The PBO says 78 per cent of that will go to the richest 20 per cent of households: by definition, those who need it least. And that, at a time when the budget is perpetually in deficit, and the government assailed on all fronts for spending too little.

The summit’s speeches ranged far and wide. Many speakers gave interesting accounts of what they were doing, or their experiences dealing with the systems now in place. Highlights are on YouTube, and the entire summit can be seen on Parliament’s video stream.

Transcripts regrettably are not available, except on ministerial websites and those of some speakers. I recommend Danielle Wood’s challenging and probing overview of Australia’s economic potential, which castigated business leaders for their risk-averse “economic funk,” and called for Australia to adopt “full employment as our lodestar” and remember that, if we want to raise living standards, in the long run, “productivity is almost everything.”

Peter Davidson, principal advisor to the Australian Council of Social Service, also made a lot of challenging points in urging Labor to reform the employment services system. “The system [has] not been working for a long time,” he said. “Jobactive was more of an unemployment payment compliance system than an employment service. It sent people out into the labour market and when they didn’t find jobs, told them to search harder. People were literally told: ‘It’s not our role to find you a job.’”

Ross Garnaut’s dinner speech recounted the reasons for Australia’s success in the postwar era, and the challenges reformers faced then — and in the Hawke-Keating era — and now. “I grew up in a Menzies world of full employment,” he recalled. “Workers could leave jobs that didn’t suit them and quickly find others. Employers put large amounts of effort into training and retaining workers. Labour income was secure and could support a loan to buy a house. Steadily rising real wages encouraged economisation on labour, which lifted productivity.”

In the postwar era, and in the 1980s, Garnaut said, “success was based on using economic analysis and information to develop policies in the public interest; on seeing equitable distribution of the benefits of growth as a central objective; and on sharing knowledge through the community about economic policy choices. This built support for policies that challenged old prejudices and vested interests.

“Personal and corporate taxation rates were much higher than before the war. Full employment and a wider social safety net supported structural change and much larger and more diverse immigration… Menzies’s political success was built on full employment — helped by Menzies insulating policy from the influence of political donations to an extent that is shocking today.”

Garnaut ended by exhorting Albanese and Chalmers to follow the path of Hawke and Keating, strong politicians who took big risks to bring in reforms when they were clearly needed. “We have to raise much more revenue while increasing labour force participation and investment,” he said, urging two radical reforms he advocated last year in his book Reset: a guaranteed income scheme, and a shift to cash flow taxation of business.

But Albo is not Hawke and Chalmers is not Keating. Like the business leaders who have dragged down Australia’s business investment to the lowest share of GDP ever recorded, they are risk-averse. Their priority is to retain power, and they see the way to do that is by giving people what they want, not trying to persuade them that tackling tough reforms is in the national interest.

It is possible, though, even likely, that they will end up having no choice. The crisis in aged care, in hospitals, in GP practices, in childcare and in teaching will force an end to governments’ model of saving money by underpaying those who work for you (or whose wages you pay indirectly). Australia’s system of doing government on the cheap has been tried, and failed. We are going to have to learn from how the rest of the West does it, and that means raising taxes.

Many have noted that the Hawke government, like this one, began its term by staging an economic summit, which brought business and union leaders to Old Parliament House with the similar aim of “bringing Australia together” to tackle its economic problems. But we should also recall that its follow-up two years later was to invite a similar cast for a tax summit.

That is what Albanese and his team should start planning for. We cannot solve our problems without an honest national dialogue on the need for higher taxes, and where we should be looking for increased revenue. It could be combined with the announcement of a super profits tax on mining companies and the big banks. Reform needs to start now. •

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I rode up an escalator from Somerset station into a small park shaded with trees — another thing Singapore does well. In the distance I saw an old man standing on a path, holding up a pile of books for sale. As I got closer, I recognised him: Singapore’s long-time opposition leader, J.B. Jeyaretnam. Bankrupted and driven out of parliament by repeated defamation suits from the Lee family rubber-stamped by compliant courts, the former London-trained barrister was now reduced to selling his own books in a park. Thank God Australia’s not like this, I thought.

Twenty years on, I found myself in Singapore again, a tourist seeking to escape Australia’s long lockdown and rejoin the world. We’re free to fly anywhere, but in fact there are fewer than fifty flights a day out of Australia, and almost a third of them are Singapore Airlines and its budget carrier Scoot flying to and from Singapore. Well, I thought, why not? The Covid paperwork was demanding but not oppressive, and everything we’ve come to like about Singapore is still there: the sheer efficiency of the place, the buzz of modernity in its architecture and technology, the trees everywhere deflecting the heat, the range of experiences on offer, great food and even great coffee just around the corner.

I had a ball. But my mind kept coming back to the place itself: it must have changed, but how? It’s thirty-one years since its formative leader, the bullying genius Lee Kuan Yew, stepped aside to become “senior minister” to his successor, Goh Chok Tong. In 2004 Goh in turn stepped down for Lee’s eldest son, Lee Hsien Loong, who remains Singapore’s leader today.

The Lee dynasty will end with him. The mere suggestion of a third generation evoked so much opposition that his children (all of whom spell their names Li) ruled out careers in politics. But rule by the People’s Action Party appears set to continue indefinitely. It has not lost an election since 1955, and it has no intention of allowing that to happen anytime again.

Singapore, writes commentator Cherian George, is still a country where you have to weigh up the potential consequences for your career before expressing opposition to any government action. (And George speaks from experience: his own criticisms of the government led to his being repeatedly rejected for permanency at the prestigious Nanyang Technological University.)

It is not feasible for a tourist to organise interviews while on a trip, so books became my way of discovering how Singapore has changed. Interesting to note that Singapore’s government allows itself to be criticised in books, but not on film. You can find books on the political opponents monstered by Lee Kuan Yew in Singapore’s bookstores, but a much-praised film interviewing some of them, To Singapore, with Love, remains banned. The rationale? Ordinary people don’t read books on politics, but they do watch films.

Four books came home with me: three by people who want Singapore to be more open and  democratic, and one examining how Singapore got many things right by doing them its own way.

Jeevan Vasagar, a British journalist of Sri Lankan Tamil ancestry, was the Financial Times correspondent in Singapore, and his Lion City: Singapore and the Invention of Modern Asia is an excellent introduction to today’s Singapore. Chua Mui Hoong, a columnist for Singapore’s main paper, the Straits Times, is a wary social critic whose Singapore, Disrupted brings together some of her favourite columns. And Cherian George, once her colleague, has recently published a collection of more substantial essays as Air-conditioned Nation Revisited. (Lee Kuan Yew once famously said that the air conditioner was the greatest twentieth-century invention because it allowed people in the tropics to keep working rather than fall asleep in the heat.)

Within Singapore’s establishment, legal academic and diplomat Tommy Koh is a prominent figure at the liberal reformist end of the spectrum. In editing Fifty Secrets of Singapore’s Success, he celebrates things Singapore has done well: from monetary policy to its national airline, fighting corruption, the Singaporean maths system, parks, public toilets, Changi airport… There’s a long list, all worthy, even if some chapters are superficial.

Singapore has a lot to celebrate. It also has a lot that needs changing. Its rulers have a great appetite for celebrations, but very little appetite for political reform.

Singapore in 2021 is a richer version of Singapore in 1981. Economic success cohabits with political repression. Its economic choices have become more complex as it has become a rich nation, but it remains a stand-out performer. Yet there has been little growth in social and political freedom, where it is a stand-out non-performer, lagging far behind its potential.

Take the economy first. On the usual measure for comparing countries, real GDP per head, Singapore sure is a stand-out: the International Monetary Fund ranks its GDP per head, adjusted for price differences, as the second-highest in the world, behind only Luxembourg, and twice Australia’s.

But that is meaningless. The scale of corporate profit-shifting means tax havens now dominate the top of that IMF ranking — and Singapore is one of them. Comparisons of household consumption per head, though imperfect, are a better measure of real living standards.

On the World Bank’s measure, Singapore in 2020 enjoyed the seventh-highest consumption of goods and services per head of any country, in real terms, behind the United States (first) and just ahead of Australia (ninth). I’d take that with a grain of salt too, but there is no question that what was once an impoverished colony has become a rich country, and is on track to become one of the richest.

The title of an old book on how Singapore did it, Strategic Pragmatism, sums it up well. Rather than follow the precepts of eighteenth-century economic liberalism, Singapore has carved out its own way, testing what works and designing its own solutions. Taxes are low, but as Vasagar puts it, whereas in Hong Kong the tycoons used to dictate to the government, “it is the government that is supreme in Singapore.” Through its investment arm, Temasek Holdings, it is the major shareholder in a third of the companies on Singapore’s Straits Times index. And its reach is everywhere.

You want to buy a home? Well, the vast majority of Singapore’s housing is owned by the government and simply leased out to buyers. You can buy a home, but only for the remaining length of its ninety-nine-year lease, and then you have to surrender it to the government. (At least that’s the official line: it will be interesting to see whether they stick to it when the crunch comes.)

Singapore has 5.5 million people on an island of just 729 square kilometres, so 95 per cent of homes are apartments. If you want to buy one, you need to check first that doing so would not disturb the racial balance of the apartment complex. Apart from its worker dormitories for those it calls “non-residents” (we’ll come to them), Singapore enforces a racial mix in every block, to break down racial stereotypes and prevent ghettos forming.

You want to buy a car? Well, you’ll have to bid for a licence to own one. That alone will set you back around $50,000 (the Singapore dollar currently is virtually on par with the Aussie) because the government enforces a quota on car ownership. That effectively means only the well-off can own a car. Again, it’s for good reasons: roads already occupy too much of Singapore’s limited space, so the government has invested to create world-class train and bus services instead.

You want to go on strike for a wage rise? Think again: Vasagar tells us the last legal strike was in 1986. Singapore’s core economic strategy has been to make itself a haven for foreign investment. It has tailored its economic policies to make itself irresistibly attractive as an operational centre for global players. Allowing strikes, or rapid wage rises, doesn’t fit with that goal.

It is true that Singapore practises small government in one sense: there are few welfare payments — no pensions, no unemployment benefits — and healthcare is basically user-pays unless you run into really big hospital bills.

But the government can avoid those costs because it requires workers to put 20 per cent of their modest salaries into the government-run Central Provident Fund. You can dip into those savings, on certain conditions, to buy a home or pay hospital bills. The system also originally served a second goal by providing the government with cheap funds for its large infrastructure agenda, but gradually the focus has shifted more towards meeting the saver’s needs.

The common thread in all of this is that government plays the central role. Since it was divorced by Malaysia in 1965, Singapore’s government has established or expanded centralised systems to deal with issue after issue. It runs one of the world’s most activist industry policies: it decides which industries it wants and what it will offer to get them, and then pursues the big global players to get them to locate some of their operations in Singapore.

Initially, the focus was on establishing Singapore as a base for manufactured exports, and that remains a core part of its policy. Singapore’s manufacturing output has swollen threefold since the turn of the century, whereas Australia’s has grown barely at all. Singapore remains a big producer of semiconductors and other IT and electronics goods, a huge centre of oil refining and petrochemicals, and a growing global pharmaceuticals hub. Manufacturing still comprises 20 per cent of Singapore’s economy, whereas it has shrunk to just 6 per cent of Australia’s.

But over time, Singapore’s focus has expanded to logistics and services. Having inherited a great seaport from the British, Singapore has kept investing heavily to expand and modernise the port to make it the best in the world. It applied the same attitude in reclaiming coastal land at Changi, building a new airport and constantly upgrading it to keep it the world’s best.

The books by Vasagar and Koh explain well how its leaders realised in the mid 1980s that manufacturing alone was not enough; Singapore must equally become a leader in service industries. Its traditional role as the commercial hub of Southeast Asia was expanded to make it one of the logistics centres of the world. It wooed global service companies as keenly as it had sought manufacturers, offering tax holidays and permanently low taxes if they set up regional operations centres in Singapore. (That’s the policy that led to its becoming a tax haven.) And it set out to make Singapore the financial centre of Asia.

Another crucial decision Singapore made around that time was to change the goal and methods of its monetary policy. At a time when countries like Australia were allowing financial markets to set the value of their currency, and telling their central banks to target low inflation, Singapore went in the opposite direction. It decided its monetary policy should aim to provide stable exchange rates, reducing the risks for industries competing in global markets. The Monetary Authority of Singapore built up a large war chest it could use to prevent the markets taking the dollar outside its comfort zone.

It is the polar opposite of the policy successive Australian governments and the Reserve Bank adopted when they allowed the mining booms to send the Aussie dollar skyrocketing, at the cost of firms competing in global markets. From the start of the first mining boom in 2004, Australia’s manufacturing output per head slumped by an astonishing 25 per cent over the next fourteen years, as the inflated dollar made otherwise viable firms uncompetitive.

Even now, on the IMF’s estimates, Australia’s price level is the seventh-highest in the world, comparable to prices in Scandinavia and remote Pacific islands. By contrast, Singapore’s dollar has been held at levels that keep down production costs. The US dollar buys 83 per cent more goods and services in Singapore than it does in Australia.

This did not happen by accident. The best chapters in Koh’s book — including Peter Wilson’s chapter on monetary policy, and Gopinath Menon’s on transport policy — provide a quick sketch of the choices policymakers faced, and why they chose the policies they did. I wish the book had fewer, longer chapters that might have explained the same process in other areas; some former policymakers who contributed chapters used their pages simply to pat themselves on the back.

Vasagar sums up lessons from Singapore’s success that we should never forget. “Singapore works because it appoints diligent and talented people to positions of leadership,” he concluded. “The system roots out corruption. Its leaders are unabashed about stealing effective ideas from elsewhere… There is a strong emphasis on managerial ability rather than effectiveness at campaigning or winning battles of ideas.”

And that is the link between Singapore’s advanced economy and its retarded democracy. Its ministers don’t need to worry about campaigning or trying to win the popular argument, because the system makes them electorally invulnerable. And so, as Lee Kuan Yew put it memorably in his 1986 National Day speech, “We decide what is right — never mind what the people think.”

The common theme of the books by Vasagar, George and Chua is that Singapore’s leaders need to cast off that mindset. The rule of Goh Chok Tong and Lee Hsien Loong has softened the way Singapore’s authoritarianism is applied, but without changing its fundamental role. The state is just as powerful as it was twenty years ago. The people are just as powerless.

Every institution with power in Singapore is effectively an arm of the government. There is no free press: the media is either government-owned or controlled by the government’s right to appoint its boards, and the opposition has little access to it. There is no independent judiciary; no minister has ever lost a defamation case in Singapore’s courts. There are no trade unions independent of government. The relatively few NGOs must operate warily to avoid incurring the wrath of the ministers and officials whose decisions they comment on.

There is no right of assembly: to hold a meeting of five or more people requires a permit from the police. There is no ombudsman, no charter of human rights, no freedom of information legislation. Singapore has world-class engineering infrastructure, but little of the infrastructure of democracy as we know it.

It does have free elections. But even they are held on boundaries drawn up by the government to maximise its chances, including a strange system of dividing most of the city into seventeen winner-take-all wards electing four or five candidates on a single ticket. (That partly backfired at last year’s election when the Workers’ Party won two of the wards, and opposition slates came close in two others.) And those elections are held in an environment in which the government has all the power, and has shown ruthlessness in using it to maintain its control.

Cherian George cites a telling example. In Europe, Australia and elsewhere, governments have been grappling with ways to deal with fake news and baseless slanders on the internet. Singapore has acted — but solely to give the government the right to require Facebook and the rest either to post its response to any online posts it considers inaccurate alongside the original comment, or to remove the posts. Only the government is protected against fake news, and only it can decide what is fake news.

Initially, the government allowed debate on the fake-news legislation. But when it appeared it was losing the argument — with even the publishers of the Straits Times urging that an independent regulator rule on disputes — it cracked down. The debate suddenly ended, critics were shut out of the media, and their patriotism was questioned by government MPs. George adds: “Such nationalist dog whistles unleashed troll attacks, in a style reminiscent of… populist movements overseas.”

Why doesn’t the government trust Singaporeans with the freedoms people have in countries like Taiwan, South Korea, Indonesia and the democracies of Europe, America and the South Pacific? George argues that most Singaporeans would re-elect it anyway, because they think it’s mostly doing a good job. Perhaps it is the lack of crisis that explains its refusal to open up: since it likes having all the power, and faces no threat of defeat, why bother with popular reforms?

George cites another example: the succession. Lee Hsien Loong will turn seventy in February, and has had serious health issues. In the previous parliament, one of his two deputy prime ministers was a widely admired Tamil economist-turned-politician, Tharman Shanmugaratnam. Chosen by his global peers to chair the ministerial committee overseeing the International Monetary Fund from 2011 to 2015, Tharman was seen by Singaporeans as a progressive reformer. A poll in 2016 found 69 per cent of Singaporeans would support him to be prime minister, twice as much as any other candidate. Why not do so?

“Tharman is uniquely equipped to guide Singapore,” George writes. “He is a world-class policy wonk who also happens to be extremely popular. He has won over the public, not with empty rhetoric or simplistic solutions, but through his palpable sincerity in wanting to build a country where people are treated with dignity and (their needs met), whether those needs are economic or more intangible.”

But to appoint a Tamil as prime minister of a predominantly Chinese country? It was too much for the People’s Action Party. In late 2018, Lee announced that Tharman, then just sixty-one, would step down to become senior minister, and the new deputy prime minister — effectively the heir apparent — would be fellow minister Heng Swee Keat. Too honest for his own good, Heng later told a university forum that the older generation was not ready for a non-Chinese prime minister.

It was a near-fatal misreading of a proudly multiracial people. At the 2020 election, Heng almost lost his seat, while Tharman’s slate won the highest vote in the country. A year later, Heng stepped down, and the succession is now unclear. Another opportunity to move forward was lost.

Let’s close by noting three interrelated issues confronting Singapore’s society and government.

The first is common to all the new rich countries of Asia: South Korea, Taiwan, Hong Kong and even China. The workaholic culture and rising expectations that have fostered their economic success have also seriously eroded their fertility rate — so much that Chinese Singaporean women now give birth at the rate of just 0.94 babies over their lifetimes, and Indian Singaporeans 0.96. (Malay Singaporeans, who tend to be less well-off, have a far higher fertility rate of 1.82.)

The overall fertility rate of 1.10 is barely half the rate needed for zero population growth. It comes despite a hefty baby bonus: $8000 for the first two children of a marriage, $10,000 for subsequent ones. Falling fertility is a problem in Australia too, but at least our rate is 1.58 — a record low, but far higher than in any of our rich neighbours.

Doubtless other factors contribute. Singapore is far from having gender equality, low wages surely deter some would-be parents, and politicians and society frown on anyone having children outside marriage. But when women feel forced to choose between having a career and having children, increasingly they are giving priority to their career.

For Singapore, the risk of a falling population is exacerbated by a dirty little secret: the city hosts a vast underclass of “non-resident” workers on temporary visas. Some are in well-paid jobs (and resented by locals for that), but many others do dangerous or low-status jobs as construction labourers, factory hands and domestic servants.

There are about 1.5 million of them among Singapore’s 5.5 million people, more than a quarter of the population. But that was all I could find about them in the statistics. These workers reside in Singapore — the labouring men and factory workers often in crowded dormitories that have become an ideal environment for spreading Covid-19 — but they have no path to permanent residency and are expected to return to their home country when the job ends.

Vasagar tells us these temporary workers, mostly men from China, India and Bangladesh, and women from Indonesia and the Philippines, make up three-quarters of the construction workforce that builds Singapore’s world-class transport infrastructure and apartment towers, and most of the workers on its factory lines: relatively low-paid jobs that Singaporeans don’t want. The migrants the locals resent are the skilled ones who take the well-paid jobs they do want.

But as Chua Mui Hoong points out in Singapore, Disrupted, even the low-income workers put downward pressure on wages for locals in the lower half of the income range. She too wants a more democratic Singapore, and keeps trying to persuade ministers that giving the people more power would not see the country collapse. But she also crusades against what she sees as rising inequality in a once-egalitarian land where almost everyone lived in government-built flats, relied on public transport, sent their kids to the local school and had similar incomes.

That is not the Singapore of today. The government’s latest statistics show median wages for full-time workers range from $14,167 a month (including superannuation) for in-house legal counsel down to $2000 for factory hands and shop assistants, $1535 for baristas, $1400 for waiters and $1300 for office cleaners and the assistants at food and drink stalls. And that’s monthly pay, for full-time work, with 20 per cent of it going straight to your super account. It’s not much to live on.

Australia has its versions of these problems: the workaholic culture, the plunging birth rate, a policy of importing temporary workers rather than raising wages, and low incomes in many jobs. Singapore has excelled in devising solutions to economic problems. But political stagnation may be impeding its ability to solve social problems requiring subtle and flexible minds. •

Postscript: The prime ministerial succession became clearer in June 2022 when Lawrence Wong — profiled for Inside Story by Michael Barr — was named as Lee Hsien Loong’s successor.

The post The Singapore grip appeared first on Inside Story.

Of course, opposition parties have held commanding leads three or four months before an election on earlier occasions, only to see their advantage vanish in the weeks before the ballot. The 2019 election was a case in point, 1993’s another. Yet today’s political circumstances suggest the Morrison government may have trouble turning opinion around. Typically the Coalition runs on a program of fiscal rectitude, accusing Labor of plans to tax, spend and run up big deficits. But with a deficit this year running second in Australian history only to last year, making that theme work will be harder. Unlike in 2019, Labor won’t be proposing big tax increases.

Likewise climate change and China. How we reduce carbon can be debated, but the government is committed to reduction targets, concedes climate change is a real problem, and accepts that coal is on the way out. Portraying China as the enemy helps consolidate the Coalition vote but unless and until Labor takes the bait it is limited in effect, and Anthony Albanese and his colleagues are resolutely refusing to take the bait.

Labor still faces a big challenge in winning the additional seven seats necessary to govern in its own right. The Coalition’s bastion is Queensland, where it holds twenty-three of thirty seats. Queensland out, and Labor holds a majority in the House; Queensland in, and Labor is seven seats short of a majority. Compared to the 2019 election result, which admittedly was a calamity for Labor in that state, the party needs a state swing of more than 3 per cent just to pick up one seat in Queensland, more than 4 per cent to pick up two and nearly 5 per cent to win two more. Still, it is a volatile electorate and a big swing to Labor in Queensland is suggested by the most recent Morgan polls.

So Labor has a chance in what will be a hard fought contest. What kind of economy would it (or the Coalition) face after it is elected and the pandemic’s impact wears off?

Last week the International Monetary Fund offered the cold thought that once the Australian economy has fully recovered, growth will slip to a long-term rate below the average of the twenty years before the pandemic. Output growth next year will be 4.1 per cent, it says, but will then slip to 2.6 per cent, a rate the IMF evidently thinks is as fast as it can go in the long term. Growth in employment will account for more than half of that 2.6 per cent. The rest will come from the long-term growth in output per worker, which the IMF evidently thinks will be around 1.3 per cent, or a little less. This is below the 1.5 per cent Treasury assumed for its recent Intergenerational Report, and a little lower than the Australian experience of the ten years before the pandemic. It is pessimistic but consistent with what is happening in other wealthy economies.

According to this IMF forecast the forthcoming election will be fought in a brightly recovering economy, obscuring the likelihood that the growth of living standards will then fall significantly — and stay that way for many years to come. It will also be an economy in which both fiscal and monetary policy are on long-term tightening paths — that is, interest rates will slowly be increasing and the budget deficit will be narrowing as a share of GDP. Short of recession, the budget and interest rates won’t be deployed to stimulate growth.

When the serious electoral contest resumes in February, much of the debate will focus on spending, taxing and the deficit, and much on our energy future, China and so forth. But the economic issue that really matters for our future is unlikely to be debated at all. This is a pity because whether Josh Frydenberg is still in the job post-election or has been replaced by Labor’s Jim Chalmers, it will be among the priority long-term issues Treasury presents in its post-election briefings.

This issue is productivity, or output per worker. One reason productivity won’t be much debated in the run-up to the election is that it no longer fits into the contesting narratives around which elections are typically fought.

Over the two decades to 2020 productivity growth was slower than in the 1990s, contributing to slower output growth, slower growth in wages after inflation, and slower growth in living standards. Productivity gains account for most of the growth of after-inflation wages, and of living standards.

In its recent report the IMF staff looked closely at productivity and came up with some surprising results. It found the decline in both business investment spending and productivity in the years before the pandemic may be related to the increasing concentration ownership of Australian businesses, and the associated decline in competition.

The IMF recommends Australia spend more on encouraging research and development spending by business. It argues that investment in research and development is associated with faster gains in output per hour worked, and that Australia invests less than the average wealthy economy and very much less than the leading economies.

Similar points were made recently by Reserve Bank assistant governor Luci Ellis. In an appropriately tentative way she argued that the slowdown in productivity growth in Australia and other wealthy economies in recent years may have something to do with increasing concentration of business ownership.

In its Intergenerational Report Treasury argued that the slowdown in the growth of output per worker may be linked to the increasing share of output accounted for by sectors in which there are only three or four big producers who can make it difficult for new players to enter. It may also be related to a slow take-up of new digital technologies. “Declining dynamism” is evident, it said, impeding the flow of resources from less productive to more productive firms. “Australian firms appear to be slower to adopt world-leading technologies” with the result that “non-mining businesses in Australian have fallen further behind the global frontier firms and appear to be catching up more slowly.”

Hardly a whisper of this shift in thinking among economic advisers and policymakers reaches the general media or comes through in the election contest. For Australia’s economic future, however, it is becoming an issue too big to ignore. •

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The problem arises from market distortions. Few markets are pushed around more by government policy than Australia’s housing market — on both the demand and the supply side — and few market distortions so limit the life choices of so many Australians. The good news is that governments have practical options for solving this problem. The bad news is that it first requires us to stop focusing on the wrong solutions.

On the demand side, there are good reasons why house prices should be rising despite our hiccup with immigration. Covid has seen Australians spending more time at home for both fun and work. With some of this looking to be permanent, it makes sense to upgrade your home, particularly when housing is a relatively safe investment during times of uncertainty.

But our tax system supercharges this investment in all the wrong ways. Because you only pay stamp duty when you purchase the house, buyers have the incentive to build bigger and hold for longer. Higher earners too often look to housing to shelter their income from tax. Negative gearing — which encourages people to invest in rental properties at a loss to reduce their income tax — means Australia has one of the most fragmented rental housing markets in the world, with few corporate investors. First-homeowner grants and subsidies merely inflate prices further.

This wouldn’t matter so much if the supply side of the market could respond easily. But governments are once again causing problems. State and territory rules stop new houses being built. Homeowners in leafy inner suburbs are particularly to blame: studies show that the housing markets with the largest constraints on development tend to be those where home ownership is greatest and owners use their votes to support parties that keep housing supply low and house prices high.

A study by economists Christian Hilber and Wouter Vermeulen compared two regions in England that were almost identical in every way except one: one region had much stricter regulations on housing development than the other. Prices in the more restricted region were 25 per cent higher than in the region where it was easier to build.

The ramifications of Australia’s housing crisis are enormous. Productivity and wages are higher in the cities. Policies that make it harder for people to afford a move to the city result in lower productivity growth and lower wages. In the United States, the lack of new homes has been linked to economic problems including slowing internal migration (which reduces wages), lower productivity and lower GDP.

It’s also bad for the climate. Big cities — where transport, infrastructure and energy are used more efficiently — are the most cost-effective built forms for reducing carbon emissions. Constraints on urban growth make it harder to reduce carbon dioxide emissions and harder to achieve net zero by 2050.

An economic policy in which growth relies on rising housing prices isn’t sustainable. Analysis by the International Monetary Fund shows that rising household debt boosts economic growth in the short term but starts to have the opposite effect after three to five years, when households cut back their spending to pay down debt. It’s short-termism at its worst.

The political consequences are just as big. Housing inequality is a major reason why many people across the rich world feel that the economy doesn’t work for them. It exacerbates tensions between the baby boomers in huge houses and the young families in crowded units. With young people shouldering the cost of Covid restrictions to protect the lives of the elderly, now is not a great time to be handing more wealth to old people at the cost of the young.

Luckily, although housing is in short supply, policy solutions are not.

New South Wales is looking to implement one of those solutions by allowing buyers to avoid the upfront cost of stamp duty by agreeing to pay an annual land tax. The Henry tax review recommended flattening the tax on savings to treat housing more like superannuation: not only would the tax rate on housing fall, so would the rate of deductions investors could use against their wage income.

We can also learn from overseas. New Zealand’s new, bipartisan policy allows up to three houses, three storeys tall, to be built on most sites without requiring resource consent in the country’s major cities. New York City’s system of “air rights” means that a property owner who builds shorter or narrower than allowed under the planning rules can use or onsell the extra space. Britain is looking at devolving planning and zoning decisions to street level, allowing developers to negotiate and compensate those directly affected in order to win the necessary support of 60 per cent of the street’s residents. An analogous program in Israel reportedly led to a 30 per cent increase in new housing starts.

Covid has revealed another solution. Thanks to the pandemic, city centres are full of empty buildings, providing a significant opportunity to revamp these large, prime locations into residential apartments. New York developers have been doing this for years. More than 45,000 people live in Lower Manhattan today as a result. The City of London believes it has room for an extra 1500 homes by 2030.

Together, these reforms would redirect investment to where people most want it and would result in more quality affordable housing. Yet all we hear from the major political parties are the same tired old debates about interest rates and monetary policy, and pointless policies like housing subsidies.

Housing affordability will be a major topic at the next election. Let’s vote for the party that stops complaining about it and instead puts forward real solutions. •

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Doshi makes much of what he describes as a “social science” approach to analysing China’s plans, drawing on Chinese Communist Party documents published over many decades. He cites documents identifying the United States as China’s principal opponent in world affairs, and others urging that China should “become a leading country in comprehensive national strength and international influence.”

China’s grand strategy, Doshi infers, is to replace the United States as the dominant world power and create a world order more congenial to its interests. I say infers because, on my reading and for all his effort, Doshi has not found a Chinese Communist Party leadership document that actually says so.

Let’s accept for a moment that China does indeed plan to supplant the United States as the dominant world power, and this intent can be ascertained by a reading of Communist Party documents. If true, what should the Americans do about it? What should Australia do about it? And can China achieve the global dominance Doshi says is its grand strategy?

Doshi recommends a strategy that (as he says) largely replicates China’s. China has blunted American naval power in its region by erecting missile defences, laying mines, deploying submarines and creating military facilities on islands. Doshi suggests the US counter-blunt by deploying carrier-based unmanned aircraft, hardening air and sea facilities on Okinawa to resist Chinese missiles, and developing greater mine-laying capacity to increase the cost of amphibious operations across the Taiwan Strait.

On the economic side, Doshi wants the United States to make it harder for Chinese businesses to acquire Western technologies. The United States should also crack down on China’s participation in US research projects. And he argues the United States should thwart China’s use of new multilateral institutions such as the Belt and Road Initiative and the Asian Infrastructure Development Bank by joining them and diluting Chinese control.

These suggestions would surely be unlikely to stop a truly determined China from ousting the United States as top dog, assuming that’s what it wants to do. Doshi’s is a program for a second-rate power to annoy a first-rate power.

If China really was planning to supplant the United States as the dominant global power, the most important part of the American response is not what Doshi suggests it do now, but what it has been doing for decades.

The United States spends three times as much on its military as China (and more than the combined total of the next twelve countries, China included). It has 750 military bases abroad in eighty countries, compared with China’s one (in Djibouti, jostling side by side with French, Italian, Japanese and US military bases). It has more than 5000 nuclear warheads to China’s 350. With its allies (Western Europe, Japan, Korea, Australia, and so on), it has long banned weapons sales to China and long maintained a policy of doing what it can to keep China one or two techno-generations behind the leaders. The United States has formal military alliances with many powerful countries; China has none.

By contrast with what the United States already does, the striking thing about Doshi’s program is its marginality. It is an implicit recognition that China’s size, success, strategic gains and integration in the global economy cannot now be undone. It cannot be bombed, invaded or disarmed — or not without the corresponding destruction of the United States. China’s biggest “blunting” of US strategic advantages occurred sixty years ago when it developed nuclear weapons.

China could conceivably be isolated economically through import and export bans and financial sanctions. But America can’t do that alone, and who else would support it? The disruption to the world economy doesn’t bear thinking about. China is now one-tenth of the global economy. It is the world’s biggest exporter of goods and services. Its household consumer market is considerably smaller than that of the United States, but much bigger than any other country’s.

Decoupling? Rightly, Doshi doesn’t recommend it. Last year US goods exports to China were higher than they had ever been, 2017 excepted. So far this year US goods exports to China are even higher than over the same period last year. While foreign direct investment around the world tumbled last year, foreign direct investment in China actually rose.

And is China’s threat to the world order one that now requires a novel response? China’s rise relative to the United States won’t continue inexorably. At market exchange rates China’s GDP is two-thirds of the United States’ GDP. It may well surpass the United States in economic size in a decade or two, though it may not. With all its troubles the US economy has done quite well overall, while China’s “miracle economy” phase is long over. Its workforce is declining, and productivity gains are harder to find. By the time it matches the United States in economic weight its growth rate will highly likely have slipped towards that of the United States. They will be roughly evenly matched in economic weight and in growth rate. China’s income per head will be one-quarter of the United States’.

Doshi has gone to immense trouble to collect and translate documents. But it should surely come as no surprise that China finds US global dominance unsatisfactory. This is how great powers behave, and always have. Whether or not China has a grand strategy, we can infer from its conduct that it seeks to exert its weight in regional and world affairs. It would be a historical exception if it did not. No surprise either that this pressure should grate against America, the current top dog.

Yet given that China’s immense economic success has occurred within what Doshi describes as the US-led liberal world order, and given it is very heavily invested in a world economy not unlike the one we have today, is a fundamental change in the global order in China’s interests? If an American-led world order exists, is not China its greatest economic success? •

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Ignore all the frustrations bursting out on the streets of Melbourne, on talkback radio and on the letters pages of Murdoch’s Herald Sun — and right now, of the Age as well. The polls tell us that if an election were held today, Victorians would re-endorse the man the Murdoch empire calls “Dictator Dan” with a thumping majority.

Newspoll reports that polling last week found Victorians would have re-elected Labor with a two-party vote of 58 per cent to the Coalition’s 42 per cent. That’s effectively unchanged from the 57.6 per cent Labor won in its landslide victory in 2018.

Another poll a week earlier by the Roy Morgan group reported an identical two-party split — although 15 per cent said they would vote for micro-parties or independents, compared with just 9 per cent in the Newspoll. Morgan’s figure sounds more plausible.

The Coalition scored 36 per cent of first preferences in Newspoll, but only 31 per cent in the Morgan poll. Labor got 44 per cent in Newspoll, 43 per cent in Morgan, and the Greens an unchanged 11 per cent in both.

Really? So two of the most tumultuous years in Victoria’s recent history have left the electorate unmoved? So unmoved it proposes an exact replica of the status quo?

To outsiders, that sounds implausible. On almost every count, Victoria has had the worst outcomes of any Australian state during the pandemic. It has 26 per cent of Australia’s population, but 66 per cent of all Australian deaths from the disease. It was home to 58 per cent of all the people infected in Australia: more than 110,000 of them, one in every sixty people in the state.

And to try to contain the virus, Daniel Andrews made Melbourne the most locked-down city in the world: for eight of the past twenty months, shops and schools were closed, and people required to stay at home except for a handful of reasons. You’d think that surely wasn’t a policy the voters warmed to — and when Melbourne alone, even now, is still developing 1000 new cases a day, it clearly failed to meet its objectives.

Not surprisingly, Victoria also suffered the worst economic costs. Last week the Australian Bureau of Statistics reported that Victoria’s economic activity has shrunk more than that of any other state.

In the year to June 2021, Victoria’s real output per head was 2.25 per cent lower than it was two years earlier. Adjusted for inflation, spending by households and business fell 7 per cent over the two years. Only the stimulus of a 13 per cent jump in government spending kept the slump from being deeper.

The Victorian economy has suffered real damage. Only time will tell how well it can recover, but it’s optimistic to think Melbourne will go back to being the same as it was before the lockdowns.

Yet if the polls are right, none of this has turned Victorians against Labor.

Perhaps that’s to be expected. In our part of the world, every government facing the voters since Covid arrived has been comfortably returned: in New Zealand, Queensland, Western Australia, Tasmania, the ACT and the Northern Territory.

But in 2022 the election outcomes could be less friendly to governments. The Morrison government has been trailing in most recent polls; the bookies have now installed Labor as favourite. The Marshall government in South Australia is no certainty to be returned in that state election on 19 March. And there are other signs that the Andrews government’s grip on power could at least be loosened when Victorians go to vote again.

For Matthew Guy, the ebullient forty-seven-year-old conservative who returned as opposition leader two months ago by successfully challenging Michael O’Brien, there’s no good news in these numbers. But Guy is an optimist by nature, and he will find other reasons for hope.

First, he has been here before. He was opposition leader in June 2017, when the Herald Sun headlined: “Victorian voters would dump Andrews government today, Galaxy poll shows.” Galaxy, a stablemate of Newspoll, reported that the Coalition was trouncing Labor by a 53–47 margin. A year and a half later, however, in the real election, Labor trounced the Coalition by 57.6 to 42.4 (adjusted to include Richmond, which the Coalition didn’t contest). In other words, polling this far out is not a reliable guide to the election outcome.

Second, while no poll in Victoria since 2018 has shown the Coalition ahead, other polls in recent months have suggested some movement its way. Two polls published when Melbourne was locked down again in June reported swings of around 6 per cent: not enough, but close to what it needs to get. A Resolve poll published in the Age in October failed to provide any figures for the two-party vote, but it implied a small swing the Coalition’s way.

Polling on state voting intentions is irregular, but Victorians have a decent proxy in the Essential Report’s frequent polling for the Guardian on what voters think of their state government’s handling of Covid-19. While the numbers bounce up and down depending on lockdowns, the Victorian government has consistently ranked last since July 2020, except for a few weeks in August and September when Sydney’s outbreak hit its peak.

In the second half of 2021, on average, only 49 per cent of Victorians thought their government had done a good job of handling the crisis. That compares with 51 per cent of voters in New South Wales, 63 per cent in Queensland, 65 per cent (but sliding) in South Australia and a stellar 81 per cent in Western Australia.

Source: Essential Report

On those figures, you wouldn’t expect Labor to get back with its majority intact. As the fourth wave now sweeping western Europe reminds us, a lot can happen in a year, and it can be unpredictable and uncontrollable.

Scott Morrison and his government are lead in the saddlebags of the state Liberals: Newspoll’s federal voting averages for the September quarter reported a 5 per cent swing to Labor in Victoria. Matthew Guy might be secretly hoping they lose office in May, so that by November any animosity towards the federal government will hurt Labor, not his team. Daniel Andrews might retire. Anything could happen.

Third, the timing of these polls didn’t help the Coalition. While they were being taken, the anti-vax street protests, with their extremist language and props — those notorious nooses and death threats directed at Andrews — virtually shoved mainstream voters in Labor’s direction, especially when some Liberal MPs featured as speakers.

To some extent, that was offset by Andrews’s authoritarian pandemic bill, which allows the premier to bypass parliament and normal legal processes during a pandemic. That certainly risks alienating voters who care about civil rights and the importance of having checks and balances to prevent governments misusing their power. But Essential’s recent finding that even 62 per cent of Coalition voters “strongly oppose” the anti-lockdown protests could cancel out fears about the government having too much power.

But the most important reason to take the polls with a grain of salt is that Andrews’s recent decisions to end the lockdown, open the borders and remove most restrictions — even before new cases had begun to turn down, and long before Victoria was out of trouble — suggest strongly that he was feeling under pressure, probably above all from his pollsters.

Melbourne exited lockdown when the state was recording 2000 new cases a day. A year ago, the Andrews government wanted lockdowns to continue until there were fewer than five new cases a day. Even now the state is still averaging more than 1000 new cases a day.

Andrews argues that the state’s high vaccination rate — 89 per cent of those twelve and over are now double-dosed — means opening up no longer carries the same risks. True, and it’s important to remember that vaccinations protect us from death and serious illness better than they protect us from infection. But Europe’s experience is salutary: countries with highly vaccinated populations such as Germany, the Netherlands and even Denmark are now experiencing bigger outbreaks than ever before. Whatever Andrews says, I’ll bet his decisions to open up were not based on medical advice.

Given Labor’s complete dominance of the Victorian scene, there has been little interest in the redistribution of state electorates, finalised late last month. Victoria’s state redistributions are usually done much better than the federal ones, and the latest is no exception.

It boldly takes the axe to no fewer than three electorates in the middle southeastern suburbs — Ferntree Gully (Liberal), Keysborough and Mount Waverley (both Labor) — to create new seats in the outer southwest, northwest and southeast (all Labor). It also bites the bullet to fix one of the anomalies of the past, by bringing all the Latrobe Valley towns into one seat (Morwell), which increases the odds that Labor will win it back from independent Russell Northe.

All up, Antony Green estimates that Labor would notionally gain two seats, one from the Liberals and one from Northe, giving it fifty-seven seats in the eighty-eight-member parliament. The Coalition would drop to twenty-six (twenty Liberals, six Nationals), the independents would drop to two, and the Greens would remain on three.

Our friend Antony further estimates that of the twenty-six Coalition seats, nine are held by 1 per cent or less, and fifteen by 5 per cent or less. That puts the Coalition very much on the defensive, and in a weak position to launch an attack.

On the other hand, a uniform swing of just 6 per cent against Labor would cost it its majority, leaving it with just forty-four of the eighty-eight seats. While the Liberals and Nationals would require an implausibly large swing to win office, it is just plausible that if things go their way in 2022, they could push Labor into minority government. But they’re a long way from that now.

One key issue that will come to a head in the last months of this parliament is the future of the voting system for the Legislative Council. Will Victorian Labor continue with the system that allows voters’ preferences to be decided by backroom deals between the parties?

In Western Australia, Labor is now moving to abolish “group ticketing” after this year’s state election saw the Daylight Saving Party win a Legislative Council seat with just ninety-eight votes. That will make Victoria the last jurisdiction in Australia that has yet to reform a system that denies voters the right to decide their own preferences.

One assumes the original aim of the major-party bosses was to give themselves the power to decide voters’ preferences. But as micro-parties have mushroomed, the system has been taken over instead by the “preference whisperer” Glenn Druery. He has made an art form of working out deals that allow micro-parties to win seats with tiny votes by directing preferences to each other — no matter how remote they are ideologically.

At the 2018 Victorian election, Druery excelled himself by delivering his clients nine of the forty seats in the Council. At the time, he was working for Derryn Hinch, so Hinch’s Justice Party won three seats with just 3.75 per cent of the vote, whereas the Greens — excluded from Druery’s system — won 9.25 per cent of the vote but ended up with only one seat.

In the Eastern Metro seat, the Greens with 9 per cent of the vote lost out to Transport Matters with 0.6 per cent. In Southern Metro, the Greens’ 13.5 per cent was defeated by Sustainable Australia’s 1.3 per cent.

The system cost Labor itself a seat in Northern Metro when Fiona Patten, co-founder of the Reason Party, organised her own preference swaps to upstage both Druery’s team and Labor. The Coalition lost three seats it would have won had voters been allowed to direct their own preferences, and the Greens between two and five.

Even with its landslide 57.6 per cent of the two-party vote in the lower house, Labor could win only eighteen seats in the forty-member Council. Still, with eight separate minor parties with whom it can deal issue by issue, it has found the Council malleable to its wishes until now. But its failure to consult most of them over the pandemic bill left it vulnerable when disgraced Labor powerbroker Adem Somyurek, after a long absence, decided to return to the Council to cast his vote against giving Andrews any more power.

Negotiations on the bill are now proceeding with the previously ignored micro-parties, through gritted teeth on both sides. It must focus Labor’s mind on reform of the voting system. The Liberals and Greens, who combined to push through the federal reform in 2016, would be willing partners. But you would not expect Labor to show its hand until as late as possible, since it still depends on the minor parties to pass its legislation.

The Greens and the Coalition were the main losers from Glenn Druery’s artwork last time. But if Labor does lose ground next year, it could become the main victim. A 5 per cent swing in Council voting could cost it as many as five seats, making the upper house almost unmanageable.

Difficult as Labor and the Greens find it to cooperate in Victoria, where they fight an endless war for control of inner Melbourne, it would be in their mutual interest to change to a voting system that allows the voters to decide their own preferences, and stop Glenn Druery doing it for them. •

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Economists are much less enthusiastic. Economists show that if “buy Australian” is forced on people, it raises the cost of living, hurting people on low incomes the most. It reduces productivity and cuts wages — again, hurting people on low incomes the most.

Is it any different when it’s the government that’s buying Australian?

First, let’s go back to basics. The reason “buy Australian” can be a bad idea is that trade is a good idea. If you disagree, you shouldn’t be going to hairdressers, dentists, mechanics or tradies. You should be doing all those things yourself.

Of course, as a sensible person, you don’t do those things yourself. Instead, you trade. You specialise in something you’re good at, you get better at it, you earn an income, and then you use some of that income to pay hairdressers, dentists, mechanics and tradies to perform those other services for you.

This is called specialisation. It’s what makes us a rich country. Specialisation drives productivity since people get better at what they do when they don’t try to do everything. Productivity drives wages and the long-run growth in living standards.

The same principle applies to international trade. Australia has scarce resources. We have finite amounts of capital, energy and materials, and a limited number of workers with which to make goods and services. Trying to make everything ourselves makes us poor because it means diverting resources away from the things we are good at making (think: high-quality agricultural produce) so we can make more of the things we aren’t so good at making (think: cheap, labour-intensive manufacturing).

If Australia specialises in the things we are good at, productivity goes up, wages rise, living standards increase, and we use some of the money we earn on international markets to import the things we aren’t good at making. This has been Australia’s strategy for decades and it has made us one of the richest countries in human history measured by per capita income.

Make no mistake, there are losers from trade. We absolutely need to do more to help the people who lose their jobs and businesses in this process. Why we don’t help these people is a question you might like to ask your local member of parliament. But to say trade is a bad idea is to throw the baby out with the bathwater. It is at odds with Australia’s lived experience.

But is the result any different if it is the government who is opting to “buy Australian” rather than your average punter? There are two possible outcomes.

The first possibility is that nothing happens. The government opens its wallet and goes out into the market ready to buy some high-quality Australian-made nuclear submarines, passenger jets and laptops, only to discover that we don’t make any of them. The policy is a fizzer.

The second possible outcome is that the government does manage to buy Australian-made goods and services that it previously did not. This raises the obvious question: why wasn’t the government buying these things before? The answer almost certainly relates to price: for a given level of quality, it was cheaper for the government to import the good or service than to purchase the Australian-made equivalent.

It follows that if a government “buy Australian” policy has any effect, it is not a free lunch. In fact, it could be a very expensive policy. If the switch to Australian-made products raised the cost of government purchases by a mere 2 per cent, the cost of this policy would be almost $12 billion every year — more than what we spend on childcare.

What would we get for a $12 billion increase in spending? The government would be receiving the same goods and services but would be causing all the problems discussed earlier: lower productivity, lower wages and a higher cost of living for poorer people. Not only does this policy have a $12 billion price tag, it also takes resources away from our high-performing sectors so that our low-performing sectors can be subsidised by the government.

US president Joe Biden is taking a similar approach with the exact same outcome. By one estimate America would gain a net 300,000 jobs if it got rid of its “buy American” rules, which allow American firms to charge their government up to 20 per cent more than prevailing global prices, an eye-watering burden on taxpayers. “Buy American” sounds good to Americans because the cost of this policy is rarely discussed.

To be sure, there are instances where these costs can be justified. International supply chains can be problematic if we find ourselves overly reliant on a single supplier (or on multiple suppliers in the same location) when there are no alternatives available and no new suppliers who could quickly start up shop. In this situation it would make sense for governments to support new suppliers.

Two further difficult questions emerge. The first: how does the government plan to pay for this multibillion-dollar increase in spending? Its options are to raise taxes, cut spending elsewhere, add to the existing stock of debt or print money. There are no free lunches in economics and all of these options have brutal trade-offs.

The second question: what constitutes an “Australian” product in the first place? If a foreign-owned company assembles a product in Australia using 100 per cent imported inputs and 51 per cent Australian labour, is it an Australian product?

Bureaucrats will have a field day designing the rules to answer that question, and corporate accountants will have a field day getting around them. Large companies with clever accountants will have no trouble creating holding companies, registering subsidiaries, shifting assets and changing names in order to get government business. The outcome could be a lot of churn for little practical change.

In sum, a government commitment to “buy Australian” might sound intuitive, but it will either have little impact in changing government decisions or will have a big impact but carry with it significant costs. Governments that announce such policies need to be transparent about whether they will work and, if they do, who’s going to be footing the bill. •

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But before we look at the criticisms of the RBA, it’s worth considering a few points about what has happened since I left.

Whatever might be alleged about the RBA’s caution in the decade to 2020, it has undoubtedly been very bold since then. At the end of last month it held almost $251 billion in Australian government bonds — a little under a third of their entire value, and eighteen times the value of those it held just before the coronavirus struck. In the first sixteen months of the pandemic, the RBA bought bonds equal to 70 per cent of the vast federal government deficit created by the pandemic. Among other actions, it also set the overnight cash rate at practically zero.

The Reserve Bank’s boldness was matched by that of the federal government. Even now, emerging from the pandemic, the federal budget deficit is the second-highest on record, exceeded only by last year’s. Before the pandemic Treasury expected the budget to be in surplus by now; on its latest projections, we will still be in deficit forty years hence.

But the revolutionary expansions, fiscal and monetary, are over now. Year by year the federal budget deficit will be reduced as a share of GDP. Year by year interest rates will go up. Tightening will be the backdrop of the economy and the political contest.

The tightening has already begun. The Reserve Bank has rightly given up on its attempt to hold the three-year bond rate steady. At its February meeting the board is likely to agree to phase out bond buying. When it comes, the next interest rate move will be up. This year’s projected budget deficit, meanwhile, is less than last year’s, and the figure is projected to fall each year over the next three financial years. By 2023–24, with spending cut by 1.4 per cent of GDP and taxes rising by a bit over 1 per cent of GDP, the deficit is projected to be half the share of GDP it is today.

But the vast household savings accumulated over the pandemic — savings we are now spending — mean we probably won’t feel the tightening for quite a while. Borrowing rates are so low compared with what we became used to before the pandemic that it will be a while before the contraction bites.

During the pandemic monetary and fiscal policy became far more closely connected. When both monetary policy and fiscal policy are tightened over a long period, there is a serious risk of miscalculation. The Reserve Bank needs to know what fiscal moves the government plans, and the government needs to know what the RBA plans.

If monetary and fiscal policy will be contractionary for some time, we need to think about other ways of lifting living standards. Increases in productivity — in output per hour of work — ultimately determine most of that rise, and on this measure Australia was already slowing, as were most wealthy economies. The big question is what we can do to speed it up.

But what of the years 2011–16, when I was a participant, like all other members of the board, in the RBA’s decisions on monetary policy? This was a period when the unemployment rate rose, and inflation — while mostly within the target band of 2 to 3 per cent — was generally closer to the bottom of the band than the top. An inquiry might well conclude that interest rates could have been lower without risk of serious inflation, and employment and GDP accordingly higher.

But critics sometimes overlook the fact that we were cutting interest rates throughout that period from 2011 to 2016, and quite vigorously. The cash rate was 4.75 per cent in June 2011. By July 2016 it was 1.75 per cent. That’s a pretty big cut. At 1.75 per cent, the cash rate in the middle of 2016 was lower than it had ever been.

Most of the time those rate cut decisions were sharply criticised. The Australian Financial Review was usually unhappy, arguing that tax and industrial relations changes were needed instead. The cuts generally went against the public advice of a “shadow” board of academics and others claiming expertise in monetary policy. The RBA cut a lot faster and deeper than most outside commentators expected, or preferred.

Nor were the cuts without effect. Mining investment was falling dramatically as projects were completed, and interest rate cuts in Australia couldn’t change the plans of global mining businesses. But what monetary policy could do, it did. The Australian dollar’s exchange value tumbled. Exports did well. Housing construction boomed. Household consumption growth remained firm. Overall, GDP growth averaged only a little under 3 per cent.

It is true there were no further rate cuts between August 2016 and May 2019, a nearly three-year period. But it is also true that the cash rate, by then 1.5 per cent, was the lowest on record. When output growth slowed into 2019 the RBA resumed cutting rates. By the end of 2019 the cash rate was just 0.75 per cent.

With perfect foresight the RBA might have cut a bit faster. But surely the main point is that in the circumstances of those years monetary policy could never be quite as effective as some of the bank’s critics — internal and external — believed.

An inquiry could be interesting. But it is hardly relevant to where we are now. What does deserve examining is what is happening to productivity. This is an issue about which we don’t know enough — not the RBA, not Treasury and not the Productivity Commission. A conference of local and international experts would be a good place to start. Productivity is the most important question for our future, not the pace of interest rate cuts before the pandemic. •

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One of those ideas, raised most recently by the never-boring economist Steven Hamilton and the sometimes-boring OECD, is that we should cut income tax and fill the gap with a broader and higher GST. The GST is currently set at 10 per cent — lower than most advanced economies — and excludes things like fresh food, education and healthcare.

Dr Hamilton argued that Dominic Perrottet should use his newfound position as NSW premier to take the lead on this reform. The OECD made a similar recommendation in its latest economic survey of Australia. The proposal has popped up many times before that.

It’s a popular idea, but is it right? Sadly, reducing income taxes and filling the gap with a larger and broader GST would do next to nothing for the economy. It would involve a lot of churn for little gain. It might even send us backwards.

There are several reasons for this. First, the GST is about as close as you can get to a flat rate tax on wages. Because lower earners spend a larger share of their income on consumption, they lose a much greater proportion of their income to the GST. The higher the GST, the more regressive its effects, which is the opposite of what we expect from Australia’s income tax system.

Reducing the progressive income tax and increasing the regressive GST means poorer people would need to be compensated through the welfare system. But so will those who don’t receive government payments, such as self-funded retirees. People who spend a lot on healthcare, fresh food or education — all of which would be covered by a broadened GST — will call for, and no doubt receive, extra compensation. The argument that we could get away with compensating pensioners and welfare recipients based solely on the consumer price index doesn’t gel with the political reality.

The result would be a big increase in government spending. And this means that replacing revenue raised through income tax with a higher and broader GST is not a one-for-one trade-off. Every $1 we don’t raise from income tax will require an additional $1 raised via the GST, plus additional revenue to pay for this new compensation to households.

Broad-based consumption taxes (like a broadened GST) are good in theory because they are less likely to distort people’s decisions. If the government taxes apples but not bananas, people buy fewer apples and more bananas. The tax distorts consumer behaviour and doesn’t raise as much money as first thought because consumers switch away from the taxed good. But if you tax apples and bananas (and every other good and service) then people can’t switch away from the tax and thus the government raises more money without distorting the economy.

The problem is that these benefits from an expanded GST would likely be modest, and even those modest benefits would probably be offset by the increase in government spending needed to make the reform politically palatable.

The other claim is that raising the GST is a good way to stimulate investment. By taxing consumption instead of savings, the argument goes, we get more savings and thus more investment. But this argument falls flat in an open economy like Australia’s, where the link between domestic savings and domestic investment is weaker because we can (and usually do) borrow the shortfall from overseas.

Nor do we lack savings. In fact, our savings rate has gone through the roof during Covid-19. Corporate profits, share buybacks and dividend payments are all at elevated levels. Businesses and households are sitting on mountains of cash and could easily get more given historically low interest rates. Trying to boost investment by throwing even more savings at the economy is like giving a glass of water to a drowning person. There’s no evidence to suggest that our anaemic rate of investment reflects insufficient savings.

It’s also misleading to think that the GST is harder to avoid than income tax. Australia already has one of the world’s most comprehensive systems for withholding income tax — that’s why almost everyone’s pay packet has the tax already deducted — which forces taxpayers to justify any reduction in the amount they pay. Put simply, raising the GST won’t suddenly make tradies declare income for cash-in-hand services.

Collecting GST on imported services is also a problem. Given these are increasingly important in the global economy, a heavier reliance on the GST would mean a growing amount of lost government revenue.

To be sure, those calling for a greater reliance on the GST are correct when they say we should be doing more to remove investment tax barriers and improve the fairness and efficiency of savings taxation. But plenty more direct options exist. Lower and broader taxes on savings as part of a Scandinavian-style dual-income tax (where business income is split between labour income — taxed at progressive marginal rates — and capital outcome — taxed at a lower rate) would improve fiscal sustainability, economic resilience and fairness. A corporate equity deduction (where businesses can deduct the imputed cost of using their equity for investment) would help drive domestic investment.

And it is absolutely right to be focusing on the tax system. Covid-19 has devastated federal and state government budgets. The ANU’s Tristram Sainsbury and Bob Breunig have shown that government won’t return to a sound structural budget position simply by relying on “natural” revenue growth from current tax sources. Comprehensive tax reform will be needed to repair the budget and better align incentives to invest, save and work. Switching one tax for another will achieve neither of these things, and result in nothing more than pointless, and potentially costly, churn.

The NSW premier is already driving a push to replace stamp duty on housing with land tax, certainly the most difficult and substantial tax reform since the GST was introduced more than twenty years ago. Right now, this should be the main feature. Let’s leave zombie ideas for the late-night reruns. •

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Colourful and noisy, the Glasgow demonstrators waved a diverse range of banners and placards. But one seemed to dominate. “Make it a fair COP!” said the bright yellow hearts waving above the marchers’ heads. “Climate justice now!” It expressed the marked shift within the climate movement over the last few years, in Britain and elsewhere. This cause is no longer just about protecting future generations from the likely ravages of a warming planet. It is about defending the poorest peoples of the world from the devastating impacts they are experiencing right now.

After all, the idea of “climate justice” expresses a profound truth. Climate change has been caused by the burning of fossil fuels over two centuries in the richest countries of the world. It is indeed what has made them rich. But it is wreaking its greatest damage on the poorest countries and people; indeed, it is making many of them very much poorer.

I walked for a while alongside a group wearing brightly coloured national costumes. They came from some of the low-lying Pacific islands that will cease to exist if sea levels rise as currently predicted. Walking with them was Tishiko King, a Torres Strait Islander and campaigns director of the Australian youth environmental organisation Seed Mob. She was there, she said, to stand shoulder to shoulder with First Nations across the world fighting for the rights of indigenous peoples. “Too often our voices are missing when decisions are being made that impact our future,” she told me. “So if world leaders won’t hear us in the conference, we’ll make sure they’ll hear us on the streets!”

Nearby another Australian, Caroline Sherwood, held a homemade banner depicting Scott Morrison with his head in the sand in front of a massive coalmine. The Sydneysider said she was ashamed of her government. “Their plan to meet net zero by 2050 is nothing more than a public relations exercise: it has no substance,” she told me. Almost everyone I spoke to, wherever they were from, expressed similar shame or disappointment. They all noted the gap between politicians’ rhetoric and what they themselves saw happening.

At the “Fridays for Future” march the previous day, though, the mood had been different. This was the demonstration by the young people galvanised by Greta Thunberg’s weekly “school strikes” — around 20,000 of them — and they, like Thunberg, were angry. Though COP26 was only halfway through, Thunberg told the crowd, it was already a failure. The politicians were all talk and no action. It’s just “blah blah blah,” she said, repeating the catchphrase that has reverberated around the global media this past week.

To the young people I spoke to, almost all of them under twenty-five, climate change feels like an existential threat. One banner put it simply: “You’re stealing my future!” At a personal level, the prospect of living in an unstable world of frequent natural catastrophes and geopolitical conflict fills many with deep anxiety. A recent Pew poll of 10,000 young people in ten countries found nearly half admitting to climate-induced feelings of distress that affected their daily lives. Almost four in ten said they were not sure if they would want to bring children into such a world.

At a political level, the young people’s concerns are much more directed. They are angry with their parents’ generation. It is those born before 1970 — as several of my interviewees made pointedly clear to me (born 1960) — who have failed to act on climate change over the past quarter century. And it is they, the millennials and “generation Z,” who will suffer from our self-indulgent and selfish lifestyles.

And many of them are angry at capitalism too. This was a powerful thread running through the assembled slogans. “Systems change not climate change!” said one banner. “Uproot the system!” demanded another. And a third: “Environmentalism without socialism is just gardening.”

Wit aside, this was no throwaway rhetoric. These young climate activists offer a powerful critique. Capitalism has caused this emergency. So only getting rid of capitalism can solve it. It’s an argument fed by some serious scholars and bestselling writers. In her book This Changes Everything: Capitalism vs the Climate, the Canadian author Naomi Klein argues that the modern capitalist economy, run by huge corporations and financial interests, and feeding on mass high-carbon consumption, cannot reverse its core dynamic of material growth and human exploitation. Only economic transformation, based on the principles of ecological sustainability and social justice, can do that.

The core demand of the radical climate movement is for a “green new deal”: a thoroughgoing program of public investment in reducing emissions and restoring nature, combined with new rights and higher wages for workers and oppressed minorities, and constraints on financial capital. Its most famous champions are Klein — whose most recent book sets out the case — and the young US politician Alexandria Ocasio-Cortez, whose millions of followers on Twitter and Instagram attest to the power of her inspirational rhetoric (as well as her effective interventions in the US Congress). Thousands of young people have become local and national activists for a “GND” in America, Britain, and elsewhere across the world.

Listening to young people articulating these arguments it would be easy to dismiss them as the usual activist minority. But the Pew poll should make politicians ponder. Around 65 per cent of those surveyed around the world felt governments were failing young people. These are voters (or in some cases soon will be) and it is pretty clear that climate change will determine how many of them vote.

They have already shaken up the environmental movement. Only a few years ago that movement was led by the “big logos” — Greenpeace, WWF, Friends of the Earth and the like. Today the running is made by young climate strikers, direct action groups blocking roads and chaining themselves to bulldozers, and students forcing their universities to divest from fossil fuels. It’s Greta Thunberg whom the media now turn to first. Here at COP the dominant civil society voices are groups from the global South rather than their Western counterparts. The new political power of radical and predominantly youth-led climate activism is everywhere apparent.

And yet there is something paradoxical about this too. Because looking at the climate science — and there is also plenty of that on show in Glasgow — it is the urgency of the required action that presses most strongly. The Intergovernmental Panel on Climate Change warns that global greenhouse gas emissions must be cut by 45 per cent by 2030, en route to net zero by around 2060. It is difficult to imagine capitalism being overthrown in that kind of time. In practice, capitalism will have to solve the climate problem, or it will not be solved.

There are plenty of capitalists here who will tell you that this can be done. Companies with climate solutions are out in force: hundreds of them boasting of their new and cheaper green technology, their expert financial and consultancy services, their innovative new product just waiting for some government policy to make it profitable.

Their business rivals are here too, of course. Global Witness has enterprisingly counted the number of representatives from the fossil fuel sector registered for the conference and noted that, at over 500, it is more than any country has brought. Most of these companies are claiming to be turning green (if gradually), but few observers are very convinced. A recent report by the UN Environment Programme found that current plans for oil and gas drilling and coalmining globally amount to twice the level that would be allowable under a scenario in which global heating were limited to the COP26 goal of 1.5°C above pre-industrial times.

Can capitalism be greened? It is the question that underpins the entire conference, though it won’t be mentioned in the negotiating rooms and is too provocative for most of the fringe meetings. The answer in practice is likely to have two parts.

First, it won’t be greened by itself. Almost all the progress in environmental technologies and consumption patterns over the past thirty years has come about as a result of government policies. Energy efficiency standards, pollution regulations, renewable energy mandates, conservation orders, product bans, green taxes, emissions trading schemes, research and development subsidies: it is the panoply of state interventions in markets that have driven such progress as we have had. And it is much more far-reaching interventions that will be needed if fossil fuels are to be squeezed out of the global economy and investment in green solutions increased to the levels required. There might even be some people who would question whether an economy subject to such intervention should still be called entirely “capitalist.”

Second, this will be a continuous battle, for every policy put forward will be opposed by an incumbent interest. The fossil fuel representatives gathered in Glasgow are as nothing next to the number of their lobbyists who are being deployed in national legislatures. The banks and pension funds will carry on financing them until they are legally prevented from doing so. For every politician with green voters to satisfy there will be another — often the same one — with local high-carbon jobs at risk and consumers complaining about higher prices.

In this field of political conflict — one that will inevitably dominate the next decade — it matters that there are people on the streets and young people who are angry, for the demonstrators in Glasgow and elsewhere across the world are setting the terms of the debate. Climate justice, fairness for future generations, net zero, 1.5°C, a green new deal, green capitalism and anti-capitalism: we are only going to hear more of this argument. For those seeking to understand what the political and economic future might look like, this will surely be it. •

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People know the numbers. What they might not know is that Greece never really recovered. Unemployment remains at almost 16 per cent. GDP still hasn’t recovered to its pre-crisis level. Wages and businesses have been devastated, to say nothing about the immeasurable human cost of the crisis.

The name “Greek debt crisis” suggests the problem was debt. But this is misleading. Plenty of countries have more debt than Greece without suffering a crisis. The United States, Italy, Singapore and Portugal all have more debt as a percentage of GDP than Greece did before the crisis. Japan has more than twice as much.

The real culprit wasn’t debt. It was a shared currency. Those who advocate for having more shared currencies — a shared currency between Australia and New Zealand, for instance, or even replacing currencies with shared cryptocurrencies — should be careful what they wish for.

To understand the problem, imagine Australia had an economic crisis. At least three things would come to our aid: the Australian dollar would fall, our central bank would slash interest rates and our government would spend more to stimulate activity. None of these things was available to Greece, and the result was a prolonged, painful recession.

Greece’s shared currency — the euro — was to blame. It didn’t depreciate because, although Greece was in a crisis, the economic heavyweights in the euro area, Germany and France, were not. It also meant that Greece didn’t have its own central bank. The European Central Bank didn’t cut interest rates, which would have been right for Greece, because it would have been the wrong setting for the rest of Europe.

Nor could the Greek government spend to encourage economic activity. The debt limits imposed by the euro area meant that new spending was not an option. Instead, Greece’s shared currency created a vicious cycle.

If markets became nervous about the Australian government’s debt and stopped buying its bonds, our central bank would step in and buy the bonds instead. Markets would be reassured that the odds of Australia defaulting on its debts are exactly zero since the central bank can create new money to buy bonds that don’t sell.

Because Greece had closed its own central bank (a precondition for a shared currency) this wasn’t an option. As investors became nervous about the threat of default, they charged higher interest rates to compensate themselves for the increased risk. But those higher rates made default more likely, leading to even more nervous investors and even higher interest rates. So the cycle continued. Eventually, Greece required an expensive bailout from Europe and the rest of the world. But the damage had already been done.

In a nutshell, this is the problem with shared currencies. If one country suffers a crisis and the others don’t, you’re in big trouble. This isn’t to say that a shared currency can’t work. It definitely can. But the price of making it work — giving up most of your economic sovereignty — is no longer a price governments are willing to pay.

After all, Australia has a shared currency that works pretty well. Western Australia and New South Wales are very different economies, and a crisis in the mining sector would hurt one much more than the other. So, why can they share the same currency?

They can share the same currency because they don’t have sovereignty over fiscal policy. At least, not much. The federal government taxes the citizens of both states and distributes that money across the whole country. If Western Australia gets in trouble, its residents pay less tax to the Commonwealth (because their incomes fall) and receive more money from the Commonwealth (through unemployment benefits and grants).

This mechanism would have solved the Greek crisis. But Germany and France wouldn’t have a bar of it. Allowing the European Commission to tax German and French citizens and give that money to Greek citizens was beyond the pale.

So serious is this problem that a shared currency without a proper fiscal union will eventually kill the euro area. Future crises are inevitable. If the next crisis is in a big country — like Italy or Spain — the odds of the euro surviving, at least in its current form, are slim.

All of which means it’s strange that plenty of people still advocate shared currencies.

Sometimes this advocacy is direct. Some have called for Australia and New Zealand to adopt a common currency; others have called for ASEAN countries to do it, or even the whole world. None of these is a good idea.

But sometimes the advocacy of a common currency is indirect. Those who want countries to replace their currencies with a cryptocurrency (like Bitcoin) or a stable coin (like Libra) are also advocating a shared currency, whether they realise it or not. The fact that a currency is digital is irrelevant: a shared currency is a shared currency.

If Australia were to replace its currency with a cryptocurrency — either directly (through a policy decision by the government) or indirectly (if households and businesses abandoned the Australian dollar in favour of a digital alternative) — we would be in the same position as Greece in its debt crisis: too much water and not enough buckets.

Some countries have edged down this path. El Salvador, for example, has adopted Bitcoin as legal tender. But the counterfactual here is important. El Salvador already had a shared currency. Its official currency was, and still is, the US dollar, chosen primarily to help control inflation. Making Bitcoin legal tender in El Salvador isn’t replacing a sovereign currency with a shared one — they did that twenty years ago — it is about having two shared currencies instead of just one.

None of this is to say that cryptocurrencies are a bad thing. Cryptocurrencies and the technologies that underpin them will offer huge benefits to societies and economies. They offer the opportunity to substantially increase financial inclusion and help billions of people around the world who don’t have bank accounts. Technologies like blockchain could revolutionise supply chains and substantially increase efficiency in critical areas like health. Getting our regulations right will be the key to maximising the benefits of cryptocurrencies while minimising their risks. Cryptocurrencies might be game changers, but the rules of macroeconomics still apply. •

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Coalminers lived as vassals, housed in company towns, patrolled by company guards. They couldn’t leave the area without permission, and strangers couldn’t enter. They were paid by the ton for the coal they extracted, but no one was paid to make their workplace safe; this maintenance labour was derisively known to management as “dead work.” The mine owners habitually rigged the coal scales to favour their side of the ledger. All of this was illegal under Colorado law, but the state government turned a blind eye.

Violence was commonly used against the miners and their families; many were beaten by thugs working for the notorious Baldwin–Felts Detective Agency. In one famous case, a National Guard commander ordered a cavalry charge — sabres drawn — against a crowd of protesting miners’ wives because the women had dared to laugh when he fell off his horse.

When the United Mine Workers of America organised a strike for better pay and conditions at a mine owned by the Colorado Fuel and Iron Company, trouble soon came over the horizon. Twelve hundred miners and their families were evicted from the company town and moved to a makeshift union camp known as White City, where they lived in tents. Their new home was next to a railway depot called Ludlow.

On 20 April 1914, shooting broke out between the striking miners and the company militias. Three strike leaders were captured and shot dead. Seventeen women and children, including three infants, were killed when the militias set fire to the camp. For the next week, a civil war of violent skirmishes led to dozens more deaths on both sides. Peace was only restored when president Woodrow Wilson sent in the US army.

The man held most responsible for the disaster was John D. Rockefeller Jr, heir to the Standard Oil fortune, who part-owned the mine. The Ludlow Massacre is credited with cementing Rockefeller’s commitment to philanthropy, some say as an act of atonement. Until his death in 1960 he funded many and various good works. In 1922, for example, he financed the study of industrial relations in the economics department at Princeton University.

It’s a long way from Ludlow in 1914 to Princeton University’s Firestone Library in the 1980s. This is where the economists David Card and Alan Krueger first met and began to collaborate on labour economics, courtesy of Rockefeller’s original donation.

In 1994 the pair published a paper examining the widely held economic orthodoxy that an increase to the minimum wage led inevitably to higher unemployment. This was always a popular theory in business circles, probably because it accorded so neatly with the prejudices and interests of business owners. I’m sure it looked like common sense to J. D. Rockefeller Jnr. But it had never been studied in the wild.

In their paper, Card and Krueger pioneered the use of “natural experiments” to interrogate economic assumptions. New Jersey had raised its minimum wage in April 1992, but its next-door neighbour, Pennsylvania, hadn’t. This gave them a perfect opportunity to study and compare the real-world effects of giving the lowest-paid workers a little bit more. To do this they surveyed over 400 fast-food restaurants in both states.

And what did they find? They found that the restaurants in New Jersey, contrary to conventional wisdom, had taken on more workers. An economic shibboleth was toppled.

It turns out that lifting the minimum wage improves labour force participation among society’s poorest workers and increases their productivity as well. Business owners benefit from lower staff turnover and reduced training costs. The economy more broadly also benefits — from increased consumer demand — courtesy of having more workers, with more money, spending more.

Over the past twenty-five years Card and Krueger’s work has supplied the intellectual firepower for minimum wage campaigns across the United States and around the globe. In 2015, for example, Germany introduced a minimum hourly wage set at a uniform national level. Business — and some sections of the German media — warned of job losses in the hundreds of thousands. But a new study of the German experience has found that “the minimum wage significantly increased the wages of low-wage workers without lowering their employment prospects.” Rack up another win for Card and Krueger.

And then just a week ago came the ultimate accolade. Card was awarded the Nobel Prize for his work on the minimum wage. But not Krueger. Tragically, he died by his own hand in 2019 at just fifty-eight, and unfortunately a Nobel is never awarded posthumously. As Card told the New Republic, “He probably would have enjoyed getting the Nobel Prize more than me.”

It was once the orthodoxy to treat workers like serfs, despite the terrible costs — to individual lives, to society and to economic performance. And even now, despite the work of Card and Krueger, some people still believe it’s a good idea to pay as little as possible to low paid employees and tell them it’s for their own good. Perhaps this year’s Nobel Prize will finally lay that fallacy to rest. •

The post From the Ludlow Massacre to the Nobel Prize appeared first on Inside Story.

Johnson’s claim — made in an upbeat, joke-strewn speech to last week’s Conservative Party conference — looked like a novel way of brushing aside Britain’s current woes. The country’s troubles, he said, were just the growing pains of the country’s post-Brexit transition to a “high-wage, high-productivity economy” no longer dependent on immigrant labour. Castigating both Labour and Tory governments over the last thirty years for failing to deal with structural weaknesses, he declared that his administration would at last fashion a different and better kind of economy.

To most observers Johnson’s optimism seemed outlandish. Britain is currently experiencing a welter of economic problems. Tens of thousands of East European workers have gone back home since Brexit, leaving critical labour shortages in key sectors. A scarcity of lorry drivers has meant long queues at garages; too few seasonal fruit pickers has left produce rotting in the fields; an exodus of abattoir workers means healthy pigs are being shot on the farm. Not just supermarkets but toy shops are warning they will be short of stock at Christmas. As global gas prices rocket, meanwhile, Britain has been hit particularly hard. The government is subsidising vital fertiliser-making plants; energy-intensive industries such as steel and paper are desperately seeking government support to stay solvent.

The idea of drawing anything positive out of this might be dismissed as fantasy. After all, Johnson can’t argue that losing so many immigrants was simply misfortune: this was precisely what the “Leave” campaign he led during the Brexit referendum promised voters. With a small exception for 5000 lorry drivers (and only till Christmas), the government has steadfastly rejected business pleas to issue more visas for key workers, instead telling industry bosses that if they want more staff they should pay higher wages. Yet it is already painfully obvious that this won’t be enough: in key sectors there simply aren’t enough workers in the population both sufficiently skilled and willing to do the manual work previously done by East Europeans.

And yet Johnson also has a point. For it is indeed the case that over the past four decades Britain has become a predominantly low-wage, low-productivity economy. Since its dramatic deindustrialisation in the 1980s, the country has lost manufacturing jobs much faster than its comparator economies. Manufacturing now makes up just 10 per cent of GDP, compared with 19 per cent in Germany and 16 per cent in Italy. The financial sector, Britain’s major export industry, continues to provide high salaries and skilled work. But the country’s once-lauded “flexible” labour market has proved a powerful driver of low productivity.

Fifteen per cent of the UK workforce is now self-employed, many of them contracted to just one client — a convenient way for the employer to avoid paying social security and providing holiday and sick leave and other employee benefits. Almost a million people are on “zero hours” contracts, with their working hours determined just a few days (or hours) in advance, and no level of work guaranteed. This has kept employment levels high — much higher than in other European economies. But it has also kept wages low, and given employers little incentive to invest in the skills or capital equipment that would raise productivity. Output per hour in Britain is around four-fifths of German and French levels.

Where Johnson is wrong is on immigration. Contrary to popular belief, there is no evidence that immigration reduces wages. Though it does mean a bigger labour supply, it also means higher demand (immigrants are also consumers) and therefore higher employment. The two effects largely cancel one another out. And, as Britain is now painfully discovering, immigrants do (or did) jobs that Britons simply don’t want to.

If his views on immigration are put to one side, Johnson’s criticism of the British economic model is much more usually heard on the left. This is, after all, a classic critique of modern capitalism: dominated by financial capital, more concerned to extract short-term profit than invest in long-term prosperity, seeking to pay workers as little as possible. And the solutions too come more naturally from the left: a stronger role for government in directing investment through active industrial policies; stronger trade unions to bargain wages up; reforms to corporate governance and finance to end the fixation with short-term returns.

Johnson didn’t propose any of these things, of course. His conference speech was almost entirely rhetoric, with virtually no policy content. But the implication of his remarks was not lost on the Conservatives’ ideological bedfellows. “Vacuous and economically illiterate,” railed the free-market think tank the Adam Smith Institute. “An agenda for levelling down to a centrally-planned, high-tax, low-productivity economy.” It would be fair to say that they didn’t like it.

And the reason is not hard to identify, for Johnson is confronting the legacy of the Conservatives’ great heroine, Margaret Thatcher. It was Thatcher who initiated the deindustrialisation of the British economy; who deregulated the financial sector and let foreign capital flow in freely to buy up Britain’s most valuable companies; who destroyed the power of the unions and created the flexible labour market. The British economic model is of the Tories’ own making, and if Johnson is serious about reforming it he will have to break decisively with the party’s free-market nostrums.

This is not just about raising Britain’s productivity and investment levels. All of Johnson’s stated priorities will require leftish policies. He has promised to reform the country’s poor-quality social care system — and has already raised income taxes to pay for it. He has pledged to “level up” Britain’s disadvantaged regions — which are more or less everywhere that isn’t London and the southeast of England. But that will require both higher public spending and more directed investment; he has already established a state-owned National Infrastructure Bank for the purpose.

He is also committed to tackling climate change, with a goal of achieving a 78 per cent reduction in emissions (on 1990 levels) by 2035 and “net zero” by 2050. That will require even more extensive regulation of the energy sector and industry, and public investment in energy efficiency and sustainable transport. None of these policies is comfortable territory for the post-Thatcher Conservative Party, and his critics on the right have not been slow to say so.

It is still possible for Johnson to differentiate himself from the Labour Party and the left. The new battleground is Britain’s version of the culture wars, in which the Conservatives cast themselves as the defenders of British nationhood and tradition against the “woke” metropolitan liberals who criticise the country’s colonial history and proclaim their multiple identities, none of them patriotic. This political dividing line, virulently reinforced by Britain’s largely conservative press, may work to bolster Tory support of a particular kind. But it doesn’t look like a strategy to win elections.

And this, in the end, is how Johnson’s foray into a new ideological positioning will surely be judged. If he can succeed in reviving the British economy with interventionist policies and higher taxes and spending after the pandemic — and if his plans to reform social care, reduce geographic inequalities and tackle climate change begin to look as if they might work — then the next election, due in 2023 or 2024, could vindicate his optimism. But if the coming months spiral downward into a Shakespearean winter of discontent, and the prime minister’s rhetoric proves to be as unhinged from reality as it looks to many today, then all Johnson will have proved is that he can wield words with boisterous skill.

But that has never been in doubt. It is on whether he can govern competently that the jury of British public opinion remains out. •

The post Between the idea and the reality appeared first on Inside Story.

But a property crash in China would be vastly different from one in any other part of the world, and that’s because of the enormous amount of control the Chinese government has over the economy, the financial system, cross-border capital flows, labour markets, the media and the Chinese people.

Many believe that this level of control makes a systemic crisis less likely. This is true, but the optimism is misplaced. For China to achieve strong, sustainable and inclusive growth it needs an economy that sources its growth from productivity and innovation. History shows that these depend on well-designed free markets and a government that limits its interventions to delivering public goods and dealing with market failures. While government intervention is often required in crises, flexible markets are also much better at minimising their social and financial cost.

The Chinese government’s capacity to manage every facet of a property crisis — from the companies involved and the banks that lent to them through to cross-border capital flows, and what people do with their shares, savings and labour — reveals just how far China needs to go in liberalising its economy. It’s also a reminder of just how far backwards the country has gone under Xi Jinping.

A collapse of Evergrande is unlikely to significantly affect the rest of the world. China’s capital controls have limited the financial links between China’s property market and the global economy. While some foreign investors own bonds linked to Chinese property developers, most of the impact of the crisis so far has centred on specific Chinese firms within the property sector. Capital controls are preventing Chinese savers and investors from moving much of their money offshore, which would help limit falls in asset prices and relieve pressure to depreciate the exchange rate (which is also heavily managed by the Chinese government).

Property crises often spread through the banking sector. But a recent stress test of Chinese banks suggested the country’s banks are relatively stable. Although some smaller banks could get into trouble, the financial buffers across the system would be reduced by only 2.1 per cent in an extreme scenario. Evergrande is a big firm, but its debt amounts to just 0.5 per cent of total Chinese bank loans. And even if problems did emerge among banks, regulators have wide powers to clean up their balance sheets through forced mergers with other banks, forced reductions in the debt repayments being demanded by creditors, and forced “bail-ins” by shareholders, as well as direct bailouts and increased nationalisation.

The “shadow banking sector” is perhaps the biggest area of concern. These are the non-bank financial intermediaries that sit outside banking regulations. Almost half of Evergrande’s interest-bearing liabilities came from trusts and other shadow lenders in the first half of 2020. The opacity and lack of regulatory oversight, even by China’s standards, make it difficult to judge these risks. The offshore bond market is a similar concern given that Evergrande is the largest single issuer of dollar-denominated bonds through Hong Kong.

The direct financial implications for the rest of the world might be relatively muted, but that doesn’t mean there are no indirect effects. If the Chinese government pushed the economy away from property construction then China’s demand for other countries’ exports will change. With the price of iron ore already falling sharply, this is a particular risk for Australia.

Domestically, the Chinese government’s control over its economy has major drawbacks.

Its control of the country’s financial system stops savings from being directed to the entrepreneurs, startups and businesses that need them. That stops new businesses from forming, hurts job creation, reduces productivity, and results in a build-up of risk and speculation in asset markets.

Its control of labour markets prevents businesses from accessing the right workers, and stops workers from pursuing the jobs they most desire, reducing their productivity and efficiency.

Its control over the exchange rate has similar drawbacks. Its interventions have historically reduced the purchasing power of Chinese citizens, who then go without cheap goods and services so rich people in rich countries can have more.

And its control over cross-border capital flows stops citizens from getting the best possible return on their savings, crucial to funding their retirement given China’s weak social safety net. Foreigners can buy Chinese stocks 31 per cent cheaper than locals can. Why? Because foreigners have options and locals do not.

Nor is it correct to think that a trade-off exists between long-term growth and effective crisis management. Flexible economies are better for growth and better at preventing and managing crises. If people are free and able to leave industries, towns and cities to find new jobs, the effect of a crisis on employment will be smaller and the government won’t need to spend as much on stimulus. If businesses can easily close and redirect their capital elsewhere, the hit to GDP, incomes and savings will be smaller. If households are free to shift their assets, and prices, wages and the exchange rate are allowed to adjust, the economy recovers more quickly.

A liberalised Chinese economy is good for growth, and even better for crisis management. Sadly, China appears to be going firmly in the wrong direction under President Xi Jinping.

Xi’s campaign to rein in perceived capitalist excesses is increasing the government’s control over the economy. It is undermining the economic liberalisation China desperately needs. The government’s blocking of Ant Group (one of China’s biggest companies) from issuing shares, its punishment of Didi (a ride-sharing company) for listing its shares on American stock markets, its efforts to punish Evergrande, its banning of cryptocurrency trading, even its limitations on computer gaming are just recent examples of a steady increase in government controls.

China has achieved remarkable growth by combining modern technologies with an enormous population and an export-oriented growth strategy. But this is an old trick. It’s a model that only works for so long. Without sustained productivity and innovation, China risks getting old before it gets rich. •

The post China can easily manage a property crash. That’s the problem appeared first on Inside Story.

It was not to be. The creation of the AUKUS alliance shows we have been lured back into our old Anglosphere fold, prioritising relations with Britain and the United States.

Electoral considerations undoubtedly played a role. Having failed to protect us from Covid-19, Morrison is now banking on pledging to protect us from China. The Coalition has a long tradition of using fear of China to try to wedge Labor. Indeed, the 2019 election campaign showed signs that it was gearing up for an assault on Labor as too soft on China. As a result, the opposition has been treading very carefully in response to AUKUS, acknowledging legitimate fears about China while questioning aspects of the government’s approach.

The military and trade implications of the AUKUS alliance have been widely canvassed. Australians are rightly concerned about an increasingly authoritarian, assertive and aggressive China. But after the experience of Iraq and Afghanistan, not to mention Vietnam decades earlier, many Australians are also cautious about being too closely aligned with American military strategy. Polling suggests that most Australians want our country’s complex relationship with China to be managed carefully.

The trade implications don’t stop with our worsening relationship with China. They also involve France. Under the Turnbull government, France was to be not just a key defence ally but also a key friend in facilitating relations with the European Union now that a post-Brexit Britain could no longer play that role for us.

Nor should we forget the cultural and intellectual implications of this shift. Australia’s projected role as an intersection society involved a different conception of our national identity. The hope was that we could forge a more independent, multicultural and cosmopolitan identity while still valuing our links with Britain and the United States. It was a vision that seemed to be developing an element of bipartisan support, at least during Malcolm Turnbull’s moderate Liberal prime ministership.

But Scott Morrison (ably assisted by Peter Dutton) is increasingly sounding like John Howard–lite when it comes to issues of cultural and national identity. Howard repeatedly emphasised Australia’s Anglo-Celtic identity and its closeness to Britain and the United States, thereby distancing the Coalition from Labor’s more cosmopolitan and multicultural view under Paul Keating.

It’s true that the government’s defence policy has also embraced the Quad of India, Japan, Australia and the United States. But Morrison’s comments regarding India often depict it as an extension of the Anglosphere with common values, including a commitment to democracy and religious freedom. It’s a view that seems particularly inappropriate given prime minister Narendra Modi’s increasingly authoritarian, Hindu-nationalist India, and has echoes of John Howard’s somewhat banal highlighting of the two countries’ shared love of cricket and experience of British influence. Kevin Rudd, by contrast, had a much more nuanced understanding of India’s postcolonial history.

A shift towards the Anglosphere also has implications for our cultural institutions and academia, and not just because of the increasing scrutiny of university research on security grounds. Many academics hoped that Australia could become an intellectual intersection society — that our universities would draw on all that is best of the knowledge produced in European and North American universities and all that is best from the great universities of Asia. We argued that this would position us well in the changing geopolitics of knowledge that characterised the Asian Century and would position us differently from the European and North American universities with which we compete for international students.

Such a vision would have built on and transformed the initiatives of past governments, Labor as well as Coalition. After all, it was a Liberal foreign minister, Julie Bishop, who oversaw the development of the brilliant New Colombo Plan, whereby Australian students would be encouraged to study in Asia. Such intellectual exchanges seem far from the Morrison government’s priorities. Indeed, the Coalition has been accused of carrying out a culture war against universities, starving them of funding at a time when the pandemic’s impact on international student enrolments is wreaking havoc on their budgets.

For all these reasons, AUKUS signals more than a defence decision about submarines and sharing other technology. It also potentially signals a cultural shift that has major implications for Australia and its role in the world. We have to hope that Paul Keating is wrong when he claims that AUKUS marks the moment when “Australia turns its back on the twenty-first century, the century of Asia, for the jaded and faded Anglosphere.” Because that would not be a good move at all. •

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I departed Baltimore in the early evening. Interstate 95, the perpetually clogged corridor of the Eastern Seaboard, was emptier than I had ever seen it. Digital highway signs overhead declared “Save Lives Now. Stay Home.” I had never been in the vicinity of a war zone, but it occurred to me that it might feel something like this — only the most essential or foolhardy travellers on the roads, the rest of the world hunkered down.

Except there were no troop carriers or munitions haulers in this war zone. Instead, there were trucks. The majority of the few vehicles on the road were semitrailers, and the biggest group among them were Amazon trucks. I counted two dozen on the hundred-mile stretch between Baltimore and southern New Jersey, where it got too dark to see logos. I had seen many, many Amazon trucks on my travels around the country over the past few years. I had never seen a concentration anywhere close to this.

If we were in a war against the coronavirus, then Amazon was our troop carrier. In this war, mobilising to attack the enemy meant universal withdrawal and self-isolation, and Amazon was supplying that mobilisation by bringing us everything at home, allowing us to stay there. All at once, it had become our civic duty, our cause larger than ourselves, to fulfil our needs online. An act of convenience that had once been tinged — at least for some — with misgivings was now infused with righteousness. By placing a one-click order, one was flattening the curve.

The boxes came, in great numbers. Often, they sat on porches or in garages for a day or two in case they’d been tainted with viral particles by their delivery handler. When this quarantine passed, the boxes were allowed into the home.

The boxes came in such quantity, the orders were placed in such quantity, that the company famed for its peerless logistics operation was for once having trouble keeping up. It announced it was hiring 100,000 more workers at its warehouses, then a few weeks later announced it was hiring 75,000 more. It told buyers and third-party sellers that it was deprioritising orders deemed less than essential. In the most startling move of all, it briefly removed some of the web features intended to get shoppers to buy more from the site — Amazon was for once discouraging people from spending more money. The company had seen into the future, when it would truly be the Everything Store, the Be-All, End-All Store, but it wasn’t ready to carry it off. Not yet.

Such emergency measures were temporary. The usual buying goads returned, as did the non-essential items. It emerged that the company’s algorithms were in fact finding new ways to drive product makers to sell goods only on the site, rather than through other retailers. And as the peak of the spring 2020 national crisis passed, certain consequences became unmistakable. The pandemic had taken a series of related developments in American life and accelerated them to hyper-speed, like a film reel gone haywire.

The news organisations that had already lost the majority of their advertising revenue to Silicon Valley were now losing what little remained as a result of the halt in commerce. To try to survive, many furloughed their entire newsrooms, on rotating shifts, leaving them understaffed to cover first one huge story, the pandemic, and then another, the protests over George Floyd’s death at the hands of a police officer in Minneapolis.

The legacy retail companies that had survived the upheaval of the prior two decades were now careening towards extinction. JCPenney, Neiman Marcus and J.Crew filed for bankruptcy. Macy’s temporarily shuttered all 775 of its stores and furloughed nearly all of its 125,000 workers; after its stock fell by 75 per cent in two months, it was dropped from the S&P 500. Amazon’s Seattle neighbour, Nordstrom, announced it was laying off thousands. The toll was no less widespread among the country’s independent businesses. All told, 25,000 retail stores were expected to go out of business by the end of 2020, a figure that nearly tripled the mass closure figures of recent years.

Meanwhile, the companies that had for several decades been capitalising on the trends reshaping the economy were growing larger and more successful in what seemed like the exact inverse of the economic haemorrhage under way all across the country. By late May, the five biggest tech companies — Apple, Facebook, Microsoft, Amazon, and Google’s Alphabet — had added a stunning US$1.7 trillion to their combined market cap in just two months, a rise of 43 per cent. The combined value of only these five companies was now a fifth of the S&P 500.

And they were only going to grow larger: the five were sitting on a combined US$557 billion in cash. They used it to finance new acquisitions and raise their spending on research and development to nearly US$30 billion a year — more than NASA’s entire budget — even as their smaller rivals were retrenching. “What is unusual at this moment is the extreme divergence in the health of different types of companies,” wrote economist Austan Goolsbee, a former adviser to Barack Obama. “Many of the biggest are flush with money, while smaller competitors have never been in more precarious shape.”

The biggest winner of all was Amazon. Its first-quarter sales were up by more than 25 per cent over those the year prior — this, at a time when overall retail sales were plunging. Its stock surged so much in mid April — up by more than 30 per cent on the previous year, as the pandemic was nearing its deadliest period — that Jeff Bezos’s net worth increased by US$24 billion in the span of only two months. In late July, Amazon announced that its profit had doubled in the second quarter, with sales up by a stunning 40 per cent from those a year earlier. On the news, its share price surged yet higher — by early September, it was up by 84 per cent on the year, more than double the rise of other tech giants. “Simply put, Covid-19, in our view, has injected Amazon with a growth hormone,” wrote one industry analyst in a note to investors.

To handle the surge in business, the company had added more than 425,000 employees worldwide between January and October, bringing its total number of non-seasonal employees in the United States to 800,000 and its global total to more than 1.2 million — up by half from a year earlier and now behind only Walmart and China National Petroleum (and that tally didn’t even include the 500,000 drivers who were delivering its packages). To house these workers, the company went on a building and leasing spree, opening one hundred buildings in September on its way to occupying nearly one hundred million additional square feet of warehouse space by the end of 2020, a roughly 50 per cent increase. Its warehouses weren’t the only part of the company in high demand: its data centres were ramping up capacity for customers like Zoom, as hundreds of millions of daily human interactions shifted online.

The midsummer announcement of Amazon’s massive pandemic profits had come on the same day that the federal commerce department reported that the US economy had shrunk by nearly 10 per cent, the largest quarterly drop on record. In other words, Amazon was flourishing more than ever before at one of the lowest moments for the country as a whole: the fates of the company and the nation had diverged entirely.

Such profound imbalance in fortunes had contributed greatly to the political convulsions of the era. And, as the dread year of 2020 neared its close, it was plain that one of the first orders of business facing the newly elected president, Joe Biden, and his incoming administration would be deciding how to address the divergence. The nation could hardly afford for it to grow any wider.

In Baltimore, a twenty-six-year-old woman named Shayla Melton was trying to decide whether to go back to work at Amazon. She had been working as a picker at the Broening Highway warehouse, where the GM plant used to be, until she had her baby, her second child, just as the pandemic was arriving. Her husband also worked as a picker, but at the other Amazon warehouse, at Sparrows Point, and he, too, had taken time off from the job, because there had been a lot of coronavirus cases there.

The company’s initial reaction to the pandemic was to announce that it was seeding a charitable fund for its temp workers and contract delivery drivers who lacked health coverage and to encourage the public to donate to it. This met with some derision. It also promised two weeks of paid leave to anyone with a Covid-19 diagnosis and offered unpaid time off, without risk of being penalised for missing shifts, to anyone who wanted to stay home as a precaution. It offered a temporary US$2 bump in hourly pay to those who kept working. It set up temperature checks and Covid-19 testing stations for arriving workers. It issued masks and provided hand sanitiser and disinfectant.

Hector Torrez, who once had a highly paid tech-industry job, watched the measures go into effect at the warehouse in Thornton, Colorado, where he was now stacking, packing and loading. A small army of cleaners came in one day, wearing what looked like suits from Ghostbusters. The usual group stretching routine at shift start was cancelled, which made the physical work only riskier, as did the fact that jobs like loading boxes into trucks now had to be done solo, without a partner. What most upset Hector was the contrast with the company’s headquarters employees, who were being allowed — encouraged — to work from home.

Meanwhile, the new hires kept arriving. Several had backgrounds as elevated as Torrez’s own: a former industrial engineer, a former litigator, a former owner of a real estate firm. “What I see around me is a lot of people who don’t have much choice,” he said. “We’re economic refugees.” Many other workers were quite young, and Hector would strike up conversations with them and urge them to move on as quickly as they could. “Time passes,” he told them. “Get out when you still have time, and can still make a decision.”

At the company’s warehouses in France, union demands over safety measures had forced a weeks-long shutdown and an eventual deal that included a reduction of shifts by fifteen minutes, without a reduction to pay, to allow for more social distancing at crowded shift changes. In the absence of unions at the US warehouses, discontent took other forms. “Welcome to Hell” read the graffiti inside truck trailers, out of sight of warehouse cameras. “Fuck Bezos.” Workers began sharing their disquiet in online back channels, and at some warehouses, they organised protests, signalling that the pandemic just might set in motion a new era of workplace activism.

The company moved to head off any such swell. It fired a worker who organised a walkout at the huge warehouse in Staten Island, saying he violated safety protocol by coming to the warehouse while under self-quarantine for having had contact with an infected worker. It also fired two headquarters employees in Seattle who had spoken up for the protesting warehouse workers.

More than worker activism alone would be necessary to provide a check on so vast and powerful a company, as well as its fellow industry giants. It would require federal action. Joe Biden’s election victory showed a continuation of the political trends of the era: Democrats strengthened their hold on wealthy suburbs, while making up scant ground in the struggling rural areas and small towns that had elected Donald Trump. Ominously for Democrats, there were signs that, as they transformed into the party of highly educated urban professionals, their erosion of support in white working-class communities was spreading to Hispanic voters and Black men.

It will be up to Biden, his new administration and Democrats in Congress to decide whether to deal with that erosion, and the great class and regional imbalances that lie behind it, by challenging their party’s long-time natural allies in the tech industry. •

This is an edited extract from Fulfillment: Winning and Losing in One-Click America, published this week by Scribe.

The post When Amazon comes to town appeared first on Inside Story.

But imagine for a moment that you owned both restaurants — either outright, or as one of their shareholders. How much competition would you want to see? The answer: probably not much. Stealing customers doesn’t make sense since you’d just be stealing from yourself. A better strategy would be to get both restaurants to work together, share the market and agree on prices.

This cooperative outcome would be great for you, the owner, because it means higher profits and lower costs. No need for expensive marketing campaigns or investments to improve your business. But it’s a terrible result for customers, who get crappy service, less innovative products and higher prices, to say nothing of the workers, who get lower wages and poorer working conditions because fewer businesses are competing for them.

In a nutshell, this is the problem with common ownership, the term used to describe when a shareholder or an investor partly or wholly owns a competing business. If the two firms are wholly owned by the same person, then it is in the financial interests of the owner for both companies to behave like a monopoly and seek to maximise joint profits. Firms are more likely to cosily divide the market than to embark on a risky price war.

Common ownership is not just a theoretical problem. Many US studies have linked common ownership to worsening competition. In a 2018 study, economists José Azar, Martin Schmalz and Isabel Tecu found that common ownership among airlines operating on the same route correlated with ticket prices 3 to 12 per cent higher. The following year Azar, Schmalz and Sahil Raina found that common ownership of banks in a county led to higher fees and lower deposit rates. In pharmaceuticals, Joseph Gerakos and Jin Xie found that incumbent firms were 12 per cent more likely to pay a generic brand to stay out of the market when there was common ownership between the incumbent and the generic brand. Lysle Boller and Fiona Scott Morton found that common ownership increased stock returns for shareholders.

Those are all American studies. What about Australia? That’s the question the House of Representatives economics committee is exploring at the moment.

It is also a question Andrew Leigh and I examined in a recent article in the Economic Record. To get a better sense of ownership patterns in Australia we trawled through IBIS World Industry reports to find out which firms compete with each other across Australia’s 443 industries. We then matched that data to shareholding listings for each of the firms and analysed the extent to which they are owned by the same investors.

The results were troubling. We found that forty-nine of Australia’s 443 industries exhibit common ownership. These aren’t insignificant industries, either: they include commercial banking, fuel retailing, insurance, iron ore mining and department stores. They account for 36 per cent of Australia’s total industry revenues.

Among firms where we could identify at least one owner, 31 per cent share a substantial owner with a rival company. One way to put this problem into perspective is to think about market concentration, or the number of firms competing in a specific market. We measured market concentration across the Australian economy using the internationally recognised Herfindahl-Hirschman Index and then estimated a measure known as the Modified HHI, which takes account of common ownership. The result: market concentration in the Australian economy was effectively 20 per cent higher than previously thought.

This is a significant problem. Concentrated markets have been linked to a decline in employees’ share of national income, low productivity growth and low investment, as well as high prices, high mark-ups and rising inequality — which reads like a list of the problems that have plagued Australia in recent years.

So, who are these common owners? They are mostly institutional investors you might never have heard of, predominantly BlackRock and Vanguard. This isn’t surprising: either BlackRock, Vanguard or State Street is the largest shareholder in 88 per cent of S&P 500 companies in the United States.

But do these shareholders influence corporate decisions? Studies suggest they do. Economist Nathan Shekita has identified examples of common owner intervention across a broad set of industries, including pharmaceuticals, oil and gas, banking and ride-hailing services. In 2019, for example, BlackRock sought to influence decisions made by 1458 companies in forty-two different markets a total of 2050 times.

Martin Schmalz provides a case study of how this influence might occur. An activist hedge fund campaigned in 2015 to have DuPont’s management take a more aggressive approach to winning market share from its major competitor, Monsanto. The campaign was opposed by institutional investors, including BlackRock and Vanguard. Upon the news that the activist campaign against DuPont had been defeated, Monsanto’s shares rose 3.5 per cent. In Schmalz’s view, these institutional investors voted to maximise the value of their entire portfolio, which included significant stakes in both DuPont and Monsanto.

Our Australian study has plenty of limitations. We can only see Australian-listed firms, we can only observe shareholdings that exceed 5 per cent, and we can only see the largest competitors.

But most of those factors would understate the true extent of common ownership, meaning our results are the tip of the iceberg. They are worrying enough to warrant intervention: policymakers and regulators should monitor changes in common ownership over time and ensure more transparency about share ownership in Australia. We won’t know the true state of competition in Australia without it. •

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The boys grew up to become two of the most accomplished scholars, writers and administrators of their generation. Contemporaries in age — Wang Gungwu will be ninety-one in October and Amartya Sen eighty-eight in November — they both recently published absorbing memoirs of their lives as outstanding scholars and exemplars of a humble cosmopolitanism that is becoming increasingly rare.

Amartya Sen won the Nobel Prize for Economics in 1998 and has been an international public figure ever since. He has been a faculty member of Cambridge, Oxford and Harvard, Master of Trinity College, Cambridge, an adviser to governments and sought-after speaker.

There are many eminent Professor Wangs in the world, but anyone who has read into the history of Asia soon discovers there is only one “Gungwu.” As well as being an immensely productive and wide-ranging historian, Wang Gungwu has been a distinguished scholarly leader at the Australian National University and the National University of Singapore, and for nine years was vice-chancellor of the University of Hong Kong.

The professional lives are public knowledge. Many readers, however, will find the early lives of the two men tantalising. They provide an opportunity to ponder two questions: how the British Empire in its declining years affected two clever children; and the extent to which practices and traditions of China and India shaped two outstanding intellectuals.

As the titles of their books indicate, each has grappled with “identity” and the need to reconcile the values of family and mother tongue with the English language and the legacies of the British Empire. Wang was a national of China until 1949, when he became a citizen of the Federation of Malaya; later, in 1979, he became a citizen of Australia. Sen has remained an Indian citizen, in spite of being “very used to standing in long queues at passport checkpoints.”

Wang was born in 1930 in Surabaya in today’s Indonesia (then the Netherlands East Indies), where his father was headmaster of the town’s only Chinese high school. The Depression impoverished the school, and the family moved to British Malaya where his father became an inspector of Chinese schools in the town of Ipoh. When Wang was growing up in Malaya, “home” was China.

Sen’s experience of “home” was more certain and omnipresent. It was Bengal, perhaps the proudest region of India, and there was no dispute that Bengal was within India. His father, a PhD in chemistry from London University, taught at Dhaka University, but Sen was born at his mother’s home at Santiniketan in western Bengal. Until the age of eight, his family lived in Dhaka in eastern Bengal (today the capital of Bangladesh).

Three aspects of their childhoods contributed powerfully to making them the men they became. Their early experiences also highlighted similarities and differences between being Chinese or Indian in the last days of European empire.

First, both boys delighted in embedding themselves in the culture and languages of their families. “For many years,” Sen wrote, “Sanskrit was close to being my second language after Bengali.” He learned Sanskrit from an adored maternal grandfather, a teacher of Sanskrit and philosophy at Santiniketan, where the Bengali polymath Rabindranath Tagore had begun a progressive school before the first world war.

Out of empire: Sixteen-year-old Wang Gungwu with his parents, Wang Fuwen (left) and Ding Yan in front of their home in Green Town, Ipoh, Malaya, on the eve of their departure to China. From Home Is Not Here.

Wang Gungwu’s first language was “a variety of Mandarin,” and he soon learned “that there were many kinds of Chinese” — Hakka, Hokkien and the Cantonese he learned from the family’s servant. His father, a trained teacher of languages from what became Nanjing University, “decided to teach me classical Chinese himself.” Father and son sat together each night to read classical texts. “My father wanted me to learn a language that was not spoken and rarely used except in formal documents.”

It proved sound preparation for a scholar of Chinese history. Sen experienced a similar but less direct augury of his future when he discovered that “there was a strong complementarity between my interest in Sanskrit and mathematics.”

A second important element of the two childhoods was the encounter with English. Here their experiences differed, but the outcome was the same: both became masters of their third or fourth language.

In Sen’s family, there had been English speakers for at least three generations. It seems to have been expected that he would become fluent simply from lessons at school and occasionally hearing English spoken around him.

Wang’s father, on the other hand, was the first in the family to learn the foreign language. He had studied English in high school because he felt “he knew enough Chinese literature and needed to improve his understanding of the outside world.” He determined that his son should also learn and sent him to an English school in Ipoh. By early adolescence, with the help of lots of movie-going, “at a very basic level, I was now comfortable in both languages, Chinese and English.”

Sen, however, felt “my progress in English was very slow,” and even on the ship to Britain when he was twenty, he was perplexed by the question, “Would you care for some chocolate?” which, for a budding philosopher, opened up various possibilities about what caring for chocolate might entail.

The third great impact on both children was the second world war. For Wang it was close and personal. After the Japanese landed in Malaya and occupied Ipoh in December 1941, he and his parents fled the town and for a few weeks hid on remote rubber estates and in caves. When the fighting passed on, they returned to town, and eventually his father was absorbed back into the education system, now overseen by the Japanese.

To make ends meet, Wang and other children sold soap and small items in the bazaar. “One day, the Japanese came to the market entrance and placed several human heads on a high stand not far in front of our stall.” It was to warn looters. Later, he was part of a crowd that witnessed a beheading. “I was horrified and had nightmares.”

Sen’s experience was grim and insidious. In 1943 the “Bengal famine” killed up to three million people. In Calcutta, Sen saw human skeletons “dying on the streets.” Even in distant Santiniketan “perhaps 100,000 destitute people had passed through… on their long journey to the big city” where they hoped to find food. “The continuous cries for help… ring in my ears even today.”

His maternal grandmother told him to give one can of rice to anyone who came to the door, but only one — we “have to help as many people as we can.” As an economist, Sen earned a large part of his fame from his work on the causes and prevention of famine.

The war, however, had a curiously beneficial effect on both lives: it freed them from the regimentation of colonial school systems and from the rote-learning that had been part of classical education in China and India.

For Wang, these were wonderful “years of unfocused learning,” He mixed with people of all sorts — Malays, speakers of various Chinese dialects and Indian labourers with whom he occasionally drank toddy. In the two disorganised years after the war, he indulged his passion for movies, saw 400 films and, like a diligent historian, made notes about many of them.

For Sen, the war meant that he was sent away from Dhaka and Calcutta to the safety of Santiniketan. His education from the age of eight was “at the remarkably progressive school” founded by Tagore. The school’s emphasis was “on fostering curiosity rather than competitive excellence… I loved it.”

Moves to great colonial cities marked the end of childhood for both men. Wang left Ipoh for Singapore and the University of Malaya in 1949. Sen left Santiniketan for Calcutta and Presidency College in 1951. By coincidence, they both arrived in Britain in 1954 — Sen on the way to Cambridge, Wang Gungwu to the School of Oriental and African Studies in London.

There is much, much more in these memoirs than childhood reflections, and it would take a far longer essay to do them justice. They trace personal lives, careers and the circumstances that shaped research. Wang Gungwu’s two volumes include sections written by two of the women in his life — his mother and his wife Margaret, who co-authored Home Is Where We Are.

Sen’s is a great portmanteau of a book — the sort of suitcase you’d pack for days on the road with entertainments, lectures, historical visits, formal dinners and philosophical reflections. At one pole, there is a delightful dry humour and personal tales of ill health and undergraduate life. At another, there are exchanges with economists and philosophers, mini-essays on Indian history and ruminations on the research questions, such as social-choice theory or the economics of famine, that have occupied a lifetime.

Both men appear to have resolved the contests about where “home” is in favour of being “at home in the world,” concluding that friendship, respect and “home” can be found wherever we are — if we are curious and open to learn. It’s an enviable attitude in the current world of closures. •

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Two insights played a crucial role in this surge of interest. The first, associated mostly with the economists Thomas Piketty and Emmanuel Saez, rested on new historical data about the share of income flowing to the richest 1 per cent of households. Piketty and Saez found that the share of income going to the top 1 per cent was substantially larger than previously supposed, and growing rapidly. Most of the benefits of economic growth were flowing to a relatively small part of the population, while living standards for everyone else stagnated or even declined.

The second insight, reached by a broad range of researchers, was that social mobility was declining in the United States, and was lower than in more egalitarian countries in Europe. The chance that a person with parents at the top (or bottom) of the income distribution would end up in the same or a similar position, they found, was now higher in the United States than in Europe. Until at least the late twentieth century, there had been good reason to think that the opposite was true.

Low social mobility is partly a predictable consequence of inequality. Where incomes are relatively equal, only a modest improvement in income is needed to move up the scale.

But inequality is also self-reinforcing, challenging the common distinction between “equality of outcomes” and “equality of opportunity.” The greater the disparity in resources available to households, the easier it is for the better-off to give their children a head start. Since the desire to look after your children is both natural and admirable, there is no real way to offset this tendency except by resisting increasingly unequal outcomes using tax policies and other mechanisms.

One particularly striking piece of evidence, drawn from a study by economists Richard Reeves and Isabel Sawhill, is that rich kids who make bad choices do pretty much as well as poor kids who do everything right. Poor university graduates have only a 20 per cent chance of ending up in the top 10 per cent of earners, marginally greater than the chance of rich high school dropouts ending up there.

The combination of these various findings yielded the new and much gloomier picture of inequality presented most clearly in Thomas Piketty’s Capital in the Twenty-First Century, which became a surprise bestseller in 2013. In the absence of political action, said Piketty, growing inequality would ultimately return us to the kind of “patrimonial” society that prevailed in the nineteenth century. Those were the days when wealth and social position came primarily from inheritances, and marriage was used to consolidate fortunes.

To illustrate his point, Piketty referred to Jane Austen, Honoré de Balzac and other classic nineteenth-century novelists. In their narratives, every possible marriage is graded in terms of the wealth and annual incomes of the prospective partners. Romance might have required that the relatively impoverished heroine wins the affections of the wealthy hero, but reality meant that financial calculation usually triumphed.

This point is even more evident in the “industrial” novels of the later nineteenth century, whose plots are driven by the impossibility of ascending the social scale simply through hard work and intelligence. With the authors of these novels unable to contemplate a political solution, their characters’ dilemmas could be resolved only through “a legacy, a marriage, emigration or death” (in the words of the protagonist of David Lodge’s novel Nice Work). Either play by the rules of patrimonial society and win, or leave once and for all.

Is this the future that awaits us? Recent movements in the distribution of income and wealth suggest it is. Although the clearest evidence is from the United States, Piketty also found signs of growing inequality in Britain and France. Even in Australia, where the shift has been moderated by relatively progressive tax and welfare policies, similar trends are emerging.

The news on inequality in the United States is nearly all bad. The top 1 per cent might have lost more than most during the global financial crisis, but that was just a blip. Between 2009 and 2015, the top 1 per cent of American families picked up more than half of total growth in real income. Their share of national income reached 22 per cent, one of the highest points since income tax records were first collected in 1913.

The top 1 per cent have attracted most attention, but focusing on this group can be misleading. Within the top 1 per cent, like a set of Russian dolls, the pattern of inequality is replicated: the top 0.01 per cent, which may be seen as “the 1 per cent of the 1 per cent,” has done much better than the remaining 0.99 per cent of the top 1 per cent.

Within that group (about 16,000 families), the top 1 per cent (that is, the top 0.0001 per cent of households, amounting to a few hundred people) own substantially more than the bottom 50 per cent of all households. In the racially divided context of US politics, it’s worth noting that the top 0.0001 per cent own more wealth than the entire African-American population, even including billionaires like Oprah Winfrey.

Beyond the top 1 per cent, have high-income professionals and business owners benefited from shifts in income distribution? To some extent they have, but not nearly as much as is often imagined. When Emmanuel Saez broke the top 10 per cent of income earners into three groups — the top 1 per cent, the next 4 per cent, and the next 5 per cent — he found the top 1 per cent to have done very well indeed. Their share of total income bounces about because much of it takes the form of capital gains, but the upward trend is clear and strong. The next 4 per cent have also done well, adding around five percentage points to their share since the 1980s.

But the next 5 per cent haven’t done nearly so well. Their share of total income has barely budged since the 1980s and now appears to be falling. Households in this group have seen their incomes grow in line with the average growth of total income in the United States, which has been considerably slower in recent years than in the 1950s and 1960s. In other words, this group did better in postwar decades of relatively equal income and strong economic growth.

The picture is much worse for the rest of the population. Incomes among households outside the top 10 per cent have declined consistently in relative terms; for many, the decline has been absolute. These disastrous outcomes are reflected in, and reinforced by, a variety of social stresses, including an epidemic of opioid addiction and declining life expectancy for large sectors of the population.

The one apparent bright spot is that those at the top were more likely to earn than inherit their riches. In particular, most of the very wealthiest Americans have made their fortunes from the technology boom that began in the 1990s. This might seem like a refutation of Piketty’s prediction, but in reality it mostly reflects the time lags involved in building dynastic fortunes.

The fact that currently wealthy Americans have not, in general, inherited their wealth follows logically from the fact that their parents’ generation didn’t accumulate wealth at such a rate. Compared with earlier periods and with the current one, income and wealth were more equally distributed between 1950 and 1980. Inequality of income must precede growing inequality of wealth, since wealth is simply the cumulative excess of income over consumption.

So, given the current era of highly unequal incomes and social immobility, we can expect inheritance to play a much bigger role in explaining inequality for the generations now entering adulthood. That will include direct transfers of wealth, mainly via inheritances, as well as the effects of increasingly unequal access to education, early job opportunities and home ownership.

Australia typically follows the United States, with a lag. Between 2003 and 2017, the most commonly used measure of wealth inequality, the Gini coefficient, rose from 0.57 to 0.62 (the higher the number, the more unequal the wealth). By 2017, the top 20 per cent of households held 63 per cent of all wealth. Ownership of shares and other financial assets is particularly concentrated; with asset values increasing faster than wages, this implies an increase in the importance of inheritance.

For the mass of the population whose financial wealth is limited to a superannuation account, a different form of inherited inequality is becoming evident. With median house prices exceeding $1 million in Sydney, it is more or less impossible for young people on average or below-average incomes to enter the housing market unaided. Far more commonly, young people rely on parental assistance to provide a deposit and, in many cases, to guarantee a loan.

What will a patrimonial society look like? Most obviously, it won’t be pleasant for those born to families who lack the resources needed to give them a head start in life. More generally, it is likely to be economically and socially stagnant. A patrimonial society inevitably wastes much of its talent, instead putting its privileged children into positions of power and influence for which they may have little aptitude.

In a society of this kind, as Thomas Gray observed in 1751 in his “Elegy Written in a Country Churchyard,” most people’s opportunities are circumscribed from birth:

Full many a flower is born to blush unseen,
And waste its sweetness on the desert air.

Some village Hampden, that with dauntless breast
The little tyrant of his fields withstood;

Some mute inglorious Milton here may rest,
Some Cromwell guiltless of his country’s blood.

This doesn’t mean that no one can ever rise to the top. Given even the smallest opportunity, those of exceptional ability will rise in any society, as did both Oliver and Thomas Cromwell. But the odds against such an achievement are long.

Indeed, we have probably already passed the point where the growth of inequality and the accumulation of massive fortunes, particularly in the finance sector, have become a drag on economic growth. Even the OECD and other advocates of liberalisation recognise that the finance sector, which has created massive fortunes, has reached the point where it reduces growth, makes economies more vulnerable to crises and undermines the living standards of most households. In Australia, the governor of the Reserve Bank has expressed alarm at the consequences of stagnant or declining wages.

What, if anything, can be done about this trend? The Biden administration is pushing hard to reverse some of the measures that have increased inequality. Most notable is the proposal to tax the unrealised capital gains of assets passed on through inheritance, which would substantially reduce inherited inequality. Precisely for this reason, it is the object of vigorous attacks from lobbyists for the wealthy. In view of the Democrats’ narrow majority in Congress, it remains to be seen whether this measure will be passed, but the fact that it has been put forward at all is significant.

In Australia, by contrast, things are only going to get worse. There is no prospect of any kind of tax on wealth or inheritance. The Coalition’s stage three tax cuts, legislated with Labor’s support, will massively reduce the progressivity of the tax system. Worse, the magnitude of the cuts, rising to $30 billion a year over time, combined with the hangover from the pandemic, means that governments will have little or no capacity to spend money on any measures that might reduce inequality. The current government is already looking for cuts, and Labor has made it clear that the pro-equality proposals it put forward in 2019 are off the table.

Whether we like it or not, the patrimonial society seems to be on its way. •

This is an updated version of an article first published in July 2017.

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Until that point, the peaceful coexistence of humans and monkeys had relied on a delicate arrangement: the monkeys attracted tourists to the city, and the tourists bought bananas to feed the monkeys. Like almost everything else in 2020, this system was upended by the deadly new virus that emerged in China in January. When the world economy ground to a halt in March and the tourists suddenly dried up, the monkeys lost their main food source. The resulting anarchy revealed the fragility of the foundations on which normal life in the city was sustained.

In Shutdown: How Covid Shook the World’s Economy, historian Adam Tooze tells this story many times over: in the Philippines, twenty giant cruise ships stranded in Manila Bay, cut off from the outside world; on the world’s oceans, as many as 400,000 mariners living in a giant floating quarantine; in Pakistan, low-paid garment workers locked out of their workplaces; in India, the biggest internal migration since Partition in 1947; in South Africa, rhinos pre-emptively dehorned to deter poachers emboldened by the absence of safari tours. Wherever you were in 2020, distant, seemingly incomprehensible economic forces brought some degree of misery, misfortune and disruption.

Why did this happen, and what did it all mean? Shutdown is an attempt to answer these questions, to make a pattern out of this mounting pile of disasters. Its sprawling, loosely chronological account carefully recreates the unfolding chaos that overtook our newsfeeds for much of the past eighteen months. It is avowedly a first draft of history, an effort to “cast a narrative frame over the tumult.”

As any of Tooze’s regular readers will know, his scope is always dizzyingly expansive. He writes everything books, ambitiously framed and global in perspective. All of his recent work is cast as “grand narrative,” he says, the better to “do justice to the momentousness and complexity of the shocks and transformations” — political, economic, environmental — “we are living through.” History has not ended. We are in the midst of several global crises. Like it or not, he argues, “we are in medias res.”

Tooze’s previous book, Crashed (2018), provided a thorough and at times head-spinning account of the financial chicanery that brought about the 2008 meltdown and the eurozone crisis that followed in its wake. And as he writes in Shutdown, it was these interconnected crises that most profoundly shaped the policy response to the Covid shock. When the bottom fell out of the global economy in February and March last year, governments and central banks responded on a monumental scale. The fiscal and monetary taps were turned on almost overnight. Austerity, the disastrous byword of the years after the global financial crisis, was nowhere to be seen.

Also unlike the 2008 crisis, whose most profound effects were felt in the advanced economies on either side of the North Atlantic, the coronavirus pandemic was the first truly global shock of the neoliberal epoch. At the height of the emergency in March and April 2020, a collective decision was made to shut down virtually the entire world economy. At one point, almost 95 per cent of the global population was under some kind of restriction of their daily movements, either by choice or by compulsion. The effects were felt in both advanced and emerging market economies. In China, at least 130 million workers were laid off or displaced, the worst labour market shock ever experienced by any economy in the world. It was, writes Tooze, a “crisis like no other.”

Such a crisis called for extraordinary responses. In March and April 2020, governments in advanced economies abruptly abandoned any pretence of fiscal rectitude and opened the purse strings in a way that would have been unimaginable just a few months earlier. The American CARES Act — the rescue bill passed by an unusually productive Congress after just two weeks of negotiation — provided tax cuts and extra spending to the tune of US$2.2 trillion, no less than 10 per cent of the country’s gross domestic product. This was deficit spending on a scale that dwarfed the already massive 2008 response, the biggest “slug of fiscal support” ever delivered to an economy.

It was not simply an American phenomenon. By January 2021, the International Monetary Fund estimated that the total worldwide fiscal effort had topped US$14 trillion. Like their counterparts in the United States, eurozone policymakers were pushed into uncharted fiscal and monetary waters. In July 2020, almost a decade after it was first proposed, the bloc finally agreed to collectively issue debt — eurobonds — to fund the recovery.

Not to be outdone, China, the world’s largest emitter of greenhouse gases, committed to net zero emissions by 2060. As Xi Jinping declared at the UN General Assembly in September, “Covid-19 reminds us that humankind should launch a green revolution and move faster to create a green way of development and life.” It was a remarkable moment. Pre-empting future Western pressure, writes Tooze, he “unilaterally opened the door” to global decarbonisation. Of all the radical new steps taken by governments in 2020, it may prove to be the most consequential.

More technical but no less momentous were the drastic interventions of global central banks. In March 2020, as asset markets collapsed, unusual turbulence in the market for US Treasury bonds — the “safe haven” asset that underpins the entire global financial system — forced the US Federal Reserve into radical action. After slashing interest rates to zero, the Fed pointed a fire hose at both public and private debt. At the high point of this bond-buying spree, it was monetising debt at the rate of a million dollars per second. Within weeks, it had bought up 5 per cent of the entire US$20 trillion Treasury market. As the meme of the moment put it, “Money printer go brrr.”

Tooze is one of the pre-eminent interpreters and most thoughtful critics of radical central bank policymaking since the global financial crisis, at least for those not versed in the arcane lexicon of macroeconomics and high finance. His output is prodigious. Recently, for example, he produced compelling long-form profiles of some of the key architects of the post-1970s global economic system: the central bankers Janet Yellen and Mario Draghi, and the influential economist and columnist Paul Krugman. Over the past fifty years, he observed, all have re-evaluated, if not dispensed with, their faith in the power of well-ordered markets to bring about equitable economic growth. Slowly and sometimes reluctantly, these high-powered centrists have inched their way “towards seemingly obvious political conclusions.”

This is a key insight. Faced with a cascading series of systemic crises, central bankers have been forced to experiment with increasingly unconventional policy tools. In 2020, in order to support the system, the US Federal Reserve bought both corporate and municipal bonds. Japan’s central bank bought equities. The Reserve Bank of Australia pegged short-term interest rates near zero, committing to buying as many bonds as it took to keep them there.

The effect of these decisions, if not their stated intent, was to allow governments and businesses to spend big in order to support their economies through the shutdown. Indeed, it was these drastic and somewhat technical actions — things like asset purchases, currency swap lines and “repo” agreements — undertaken by unelected and often unseen technocrats, that staved off an utter economic catastrophe in March and April. But as Tooze notes, you did not have to share the politics of the most conservative critics of loose monetary policy to understand their bewilderment: What were central banks doing? Did they have a mandate? Who was overseeing the central bankers?

In 2020, by necessity rather than design, governments and central banks essentially acted in tandem. This was a complete reversal of post-1970s thinking about fiscal and monetary policy, in which independent central banks were instructed to pursue price stability and inflation targets without recourse to government priorities.

The crisis-fighting measures unleashed in 2020 offered a glimpse of the true spending power of governments, particularly in the advanced economies. The massive, temporary expansion of the social safety net in the West was particularly revealing. In many parts of the world, poverty rates collapsed. Gross inequality in these societies had always been a political choice. On this point, Tooze cites John Maynard Keynes: “Anything we can actually do, we can afford.”

All of which raises the question: was this a turning point, the beginning of the end of the neoliberal age? Tooze is sceptical. The radical policy choices of 2020, he writes, were “Janus-faced.” On the one hand, they did reduce inequality, pull people out of poverty and reinvigorate left politics. But the “basic logic” of these fiscal interventions was always conservative. There was no redistributive impulse behind them, no coherent program for societal change. The actions of governments and central banks, he writes, were not Keynesian but Bismarckian: “Everything must change so that everything remains the same.” It was an ad hoc, top-down, crisis-fighting response with the thoroughly unrevolutionary goal of preserving the system.

For all of Tooze’s mastery of the technical aspects of global finance and its bewildering maze of acronyms, it is his framing of the events of 2020 within much grander narratives that makes his account both urgent and compelling. His project, developed and finessed in the years since Crashed, has been to deconstruct the political economy of the hyperconnected global market-based system that has been built over the last four decades — or to put it differently, to show how the attempt to outsource politics to the animal spirits of the market was itself a political project.

What the coronavirus pandemic has made frighteningly clear, however, is that this hyperconnectivity brings with it several unpredictable and systemic “megarisks,” themselves increasingly invisible and abstract: the mutation of a microbe in a virus, the melting of a glacier in Antarctica.

Tooze put aside another book about the climate crisis and the history of energy policy to write Shutdown. It is not hard to see why. Covid was the first global crisis of the Anthropocene, a textbook case of “blowback” from an increasingly unstable natural environment. And it is the most dramatic episode yet in what environmental historians call the “great acceleration,” the profound transformation of humanity’s relationship with nature over the past seventy years.

Meeting these environmental challenges requires “technoscientific” fixes, supported and implemented on a global scale. Governments, policymakers and other elites need to think and act globally to manage the risks brought about by hyperglobalisation, financialisation, interconnected global supply chains and air travel. Yet these same elites are “unable to grasp how to actually govern the globalised world that they have created.” In Tooze’s view, this obvious unwillingness to prepare for these risks is nothing less than “organised irresponsibility.” It is a collective failure to acknowledge the reality of the world we have built.

This is neoliberalism’s fantasy: that markets, left alone, will govern themselves. If nothing else, 2020 made it unmistakably obvious that there is no possible way of separating humans, markets and nature. It exposed how dependent the system is on the stability of the natural environment, and how ill-prepared modern societies are to cope with the future challenges of the Anthropocene. “The monkeys were here before us,” a Lopburi business owner told a reporter in July. “We have to adapt to them, not the other way round.” •

The publication of this article was supported by a grant from the Judith Neilson Institute for Journalism and Ideas.

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Delta slammed on the brakes. Although another economic bounce-back is on its way, it will be smaller and more temporary than it was after the lockdowns in 2020. Worse still, these post-lockdown bounce-backs and unprecedented government and central bank supports have a nasty habit of acting as an anaesthetic: giving the impression of a healthy economy despite underlying conditions suggesting a difficult period once the sugar hits fade.

Increased productivity is the answer, and that won’t happen without changes in government policy. Even though it will be smaller than the last bounce-back, the post-Delta boom might well be the government’s last chance to bite the bullet during good times. Making necessary changes during hard times is much more difficult.

There are several reasons why the economic bounce-back after the 2021 lockdowns won’t be as big as what we saw after the 2020 lockdowns. For one thing, Australians haven’t cut their spending as much. People no longer fear economic collapse and have kept up their purchases accordingly. Spending fell by nearly 15 per cent across Sydney and Melbourne during the 2020 lockdowns but is down only 5 per cent in the current lockdown. This means less pent-up consumer spending will be unleashed on the economy once lockdowns are eased.

The end of 2021 lockdowns will also be a lot less dramatic than in 2020, when we thought Covid was beaten. “Living with Covid” doesn’t mean a return to normality. Many restrictions will persist. Limits on social gatherings, and mandatory isolation periods after visiting exposure sites will be a handbrake on economic activity. Freedoms will return in a trickle, not a flood.

Consumer confidence will be lower as well. Those who were eager to get out in the “Covid zero” world might be less enthusiastic about the “Covid greater than zero” world, particularly older Australians, those with compromised immune systems and those worried about the impact of Covid on unvaccinated children.

Government income support was also lower in 2021 than it was last year. The federal government has been less generous with its payments to struggling businesses and workers. The Reserve Bank is already dialling back its stimulus.

With a smaller economic rebound on the cards, the real question is what happens after that. The economic boom after the 2020 lockdowns was very welcome. But it distracted us from an unpleasant reality: an unhealthy economy being propped up by a one-off burst in economic activity, and unsustainable fiscal and monetary policies.

If the long-run driver of economic growth is productivity (which it is), Australia is in trouble. Every man, woman and child is $11,500 worse off thanks to the worst decade of productivity growth in more than half a century. Multifactor productivity fell for the first time in almost a decade last financial year, and we’re doing terribly on many of the things that boost productivity and support growth in the medium term.

Investment boosts productivity by fuelling research and development, and by giving workers more and better tools to work with. Unfortunately, investment growth is three-quarters below its long-run average. The pre-Covid economy was plagued by anaemic investment and it’s unlikely that the uncertainty generated by a global pandemic will do much to lift it.

Trade boosts productivity by directing our scarce labour and capital to the things we are good at making (which we then export) and away from the things we are bad at making (which we then import) — in other words, by allowing us to make more money with less. But a worsening relationship with our biggest trading partner, a gummed-up trading system struggling to cope with high demand and weakened supply, and growing calls to reduce our reliance on overseas suppliers make for a tough road ahead.

Education is another critical way to boost productivity in the long run. Again, Covid has wreaked havoc. Students in Victoria have missed more than 120 days of face-to-face learning since March last year. The effects will be felt for years to come. Universities have seen their budgets devastated by the closing of international borders and limited support from government, with an obvious impact on both research and student outcomes.

Productivity has been dragged down by inequality, and Covid has made that worse, too. A rise in the share of national income going to the rich means an increase in savings, which pushes down interest rates. This fuels more borrowing by the poor — whose share of national income has been slipping — creating a self-perpetuating cycle of rising inequality, weak demand, low growth and low investment.

Almost every facet of inequality has been made worse by Covid. Not only has it pushed interest rates down further, but it has also driven up the value of rich people’s assets. The poor, meanwhile, have borne the brunt of lockdowns, unemployment and uncertainty. Women have been disproportionately affected by school closures and increased domestic violence. Young people have lost life-changing employment, education and recreation opportunities in order to protect the elderly.

The biggest problem is that none of these challenges is new. The pre-Covid economy was no golden age. It was characterised by low wage growth, low productivity, low investment, below-average GDP growth and high inequality. Covid has made all these things worse. The post-Delta sugar hit should not distract us from these long-run challenges that are hurting our long-run economic trajectory.

Luckily, the post-lockdown sugar hit is also an opportunity. Tackling the myriad challenges outlined above will require reform, and reform is always easier during good times than bad times. The government has wasted many opportunities to undertake reform during good times: the boost from its tax cuts, the boost from its historically large supports during Covid, the boom after lockdowns were eased in 2020. The sugar hit from the post-Delta boom might be its last chance to fix the roof while the sun is shining. The government best start laying the groundwork now. •

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Crisis had grown normal. Hard times had lasted so long, and so shrunk their horizons, that many people grew sick of their housemates and the limits of their lives, constrained by this long emergency, and by uncertainty, and by the inexorable dwindling of their resources and the apparently ineffective actions to reverse the destructive inactivity that plagued their nation, and others. Their houses smelled of the few meals they knew how to cook and for which they could get ingredients, and also of fear.

For an invisible enemy lurked outside, one that had gathered strength in Asia and Europe, and now threatened to pour out its unreasoning malice on the United States. You couldn’t see it; you didn’t know which of your neighbours might harbour it. So you kept to the people you knew best, you did your work if you still had some, and you hoped that in the evening you might find distraction from the news, all of which was bad.

And then, towards the end of that winter, there was something new to hear, because American voters had made a decision about their country. Even as the unending crush of desperation grew ever worse, they decided to dispense with what they knew and try something else. They had grown tired of sleek men assuring them repeatedly that they needed only to have confidence in the fundamentals of American business and all would be well. They had been told they need not turn to the government in Washington, DC for help, although the government was giving money to help those same sleek, reassuring men, even while it was turning guns on other, poorer people who went to the capital city to ask for aid from their representatives.

So the American voters decided they wanted a different government in Washington, one that pledged itself to pull the nation together, to do its utmost to solve their problems and to fight the global contagion of fascism that threatened to engulf them. They voted for a New Deal that they had been promised would mean federal jobs, laws protecting workers, relief for farmers, and all manner of things that the wisdom of bankers and businesspeople had thus far mandated they ought not to have because recognising these rights would fetter American ingenuity.

And so, with that decision made, and a few last weeks of winter to get through before the spring on which so many had placed their hopes, the families huddled in American homes were able to take comfort one weekend, for the first time in a long time, in what the president of the United States had to say to them: that with the “money changers” out of power, it was time to “apply social values more noble than mere monetary profit.” The president promised the “joy and moral stimulation of work.” The country must pull together, and “realise as we have never realised before our interdependence.” None of us alone could survive, or prosper, so well as if we all worked to survive and prosper together. That way, we could ensure “the future of essential democracy.”

The New Deal mattered then, at the cusp of spring in 1933, because it gave Americans permission to believe in a common purpose that was not war. Neither before nor since have Americans so rallied around an essentially peaceable form of patriotism. The results of that effort remain with us, in forms both concrete and abstract; the New Deal therefore matters still because Americans can scarcely get through a day without coming into contact with some part of it.

It matters, too, as a message for Americans from the past: democracy in the United States, flawed and compromised as it was, proved it could emerge from a severe crisis not only intact but stronger. Even at that moment, in that winter, the nation of Germany was taking a different path than the one of “essential democracy.” When the New Deal began, fascism was on the march around the world and its agents were working within the United States; it ended with the United States and its allies triumphant over that ideology and establishing a New Deal for the world — or at least a framework for one — and an improved democracy within the United States.

We might do well to heed that message now, taking note of our predecessors’ successes and failures alike as we consider how we can find our way out of a hard, strange, isolated winter of our own.

When I started writing my new book, Why the New Deal Matters, I wanted to show how easy it was to demonstrate how much the New Deal matters to Americans’ daily lives. You don’t even really need to know where to look; you just need someone to tell you what you’re looking at: evidence of the New Deal is everywhere even now, nearly a hundred years since it started.

I walked for ten minutes, over to the library on the campus of the University of California, Davis, where I work, and sat in the reading room there. Readers and writers always crowd the desks; it is a fine spot for us on account of its high ceilings and the good light that fills the space. I wanted to count the windows myself so I could report them to you: there are nine, each nearly 200 feet square. There are also twenty-seven custom-designed, streamlined, aluminium chandeliers with frosted glass.

Under ordinary circumstances, anyone can walk in there, sit down, and read, or write, or just enjoy the northern exposure. Surely hundreds of thousands of people have done so since the library’s completion in 1940, although it’s impossible to say exactly how many have come in here: this is an open-stacks library with no turnstile, a genuinely public place.

This was a project of the Public Works Administration, or PWA, established in 1933 as one of the earliest agencies of the New Deal. It was created by an administration that would build libraries to save books at a time when the Nazis were burning or banning them. Eventually, the PWA published a glossy, beautifully illustrated volume of its achievements that begins with the words, “Men build temples to the things they love,” and — setting aside the exclusionary language; men are surely not the only creatures so inspired to construction — you might agree with the sentiment if you were to stand in this reading room. It is a temple to books and the love of reading, and it is a place open to all who share that love — ordinarily.

As I write now, you cannot visit it, nor can I, and I cannot say when either of us might again be able to: like so many of the nation’s shared spaces, it has been shut in the interest of public safety. To prevent the spread of the virus that causes Covid-19, states and municipalities around the country urged Americans to keep away from the places where we ordinarily congregate. Forced to retreat into our homes we — at least for the time being — surrendered access to our temples.

Perhaps, like me, other Americans were suddenly able to feel keenly during this time how precious these public things were, having lost them even momentarily. Parks, libraries, gardens, swimming pools, sidewalks, airports, seaports, schools, stadiums — all these things, suddenly shut, constituted the public sphere that Americans built for themselves under the New Deal.

My brother was going to take his family to visit our parents in Florida over spring break; they would have flown into Tampa International Airport, where a series of murals depicts the history of flight — murals commissioned by the Federal Art Project of the New Deal in 1939; it was part of the Works Progress Administration. That did not happen, nor did other Americans’ planned trips to state and national parks given shape and structure by the workers of the Civilian Conservation Corps.

But my parents, like millions of Americans sheltering in their homes, were still able to draw old-age pensions, just as millions of Americans filed for unemployment insurance — both legacies of the Social Security Act of 1935, a centrepiece of the New Deal. Stuck in our homes, many of us continued using electricity generated in dams built by the PWA. If we live in rural America we may well have sat somewhere literally powered by the New Deal, perhaps by the Tennessee Valley Authority or the Rural Electrification Administration. If the local government telling us how to handle the current crisis belonged to a Native nation, it was probably legally empowered by the Indian Reorganization Act of 1934; if we live near the range, the common pastures were set up under the New Deal grazing law of the same year.

Americans who have taken out a small-business loan backed by the federal government, have perused the financial disclosures of a corporation offering stock for public sale, or — right now — haven’t the slightest worry that the bank where we have parked our savings will block our access to our money, crisis or no, then we have benefited from the New Deal. As indeed we have if we have ever earned the minimum wage, drawn disability insurance, or joined a labour union. Even Americans living outside the United States are subject to the New Deal’s institutional legacy in the form of the organisations that regulate global finance and trade and seek to protect the international laws of human rights.

Sometimes Americans suffer, of course, from the New Deal’s failings, particularly its leaders’ willingness to bow to racism. For Japanese Americans, it is quite possible a family member was imprisoned without trial in a camp built by the Works Progress Administration during the second world war. Black Americans might live in a neighbourhood with inordinately high pollution and historically low home-ownership rates because residents have found it difficult, if not impossible, to take out a mortgage, and that is partly a result of the New Deal too. For such Americans who continued thereafter to cast ballots for the Democratic Party because they believed that, however bigoted it was, it was better than the alternative, that too is a result of the New Deal — because the 1930s marked the beginning of a historic shift that turned the Democratic Party into the party of civil rights.

The New Deal matters because Americans all live in it; it gives structure to their lives in ways we do not ordinarily bother to count or catalogue. When we Americans imagine the end of the world as we know it, the world we are thinking might end is the one the New Deal built. And if we tell ourselves we need a new New Deal to build the world afresh so it will be proof against crises like this one and the others that plague our imaginations — like, for example, the anthropogenic warming of the planet — we are drawing inspiration from the transformative project of the original New Deal and its concern for the sustainable use of natural resources.

Like the proverbial fish that does not know it is wet because it never leaves the water, Americans sometimes have trouble discerning the properties and extent of the New Deal because it is the medium through which we move all the time. We scarcely know where it begins. Which helps to explain why many of us, like that fish whose watery habitat is imperilled by poisons it cannot see, are not entirely aware of how the New Deal has eroded over the past few decades.

The New Deal matters most of all because it marked a dramatic shift of power away from corporate boardrooms and bank headquarters, a shift that accompanied an unmatched period of widespread prosperity. This change proved so popular among American voters that for a time even the most conservative of politicians did not dare challenge it directly. •

This is an edited extract from Why the New Deal Matters, recently published by Yale University Press.

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Financial markets went ballistic. During years of ultra-low interest rates to fight the global financial crisis, investors had searched overseas for better returns. Much of their money had gone to developing countries — places like Indonesia, India, Brazil, South Africa and Turkey — where interest rates were higher.

Bernanke’s remark had barely left his lips before the global financial system slammed on the brakes and shifted gears abruptly into reverse. Anticipating higher interest rates in the United States, investors began a fire sale of assets in developing countries and scrambled to send their money back to America. As the US dollar skyrocketed, developing countries saw their exchange rates crash, asset prices tumble and financial capital vanish.

Many of these countries were forced to raise interest rates to stabilise their exchange rates and buttress their financial systems. But the stability came at a cost. Economic growth took a hit; jobs were destroyed. Make no mistake: in countries struggling to reduce poverty, financial shocks like these cost lives.

Dubbed the “taper tantrum,” this abysmal absence of international cooperation looks set to happen again, and the timing for developing countries couldn’t be worse.

In their battle with the Covid-19 pandemic, rich-world central banks have quite rightly used a range of unconventional measures to push down interest rates. Asset prices have skyrocketed and stocks, bonds, property and cryptocurrencies have gone through the roof as investors bet big that low interest rates are here to stay.

If they’re wrong, we’re in trouble. Low interest rates are the key ingredient for many of these investments to make sense. Little wonder that markets are watching the inflation numbers nervously; any sustained rise in inflation could see central banks raise interest rates.

So far it’s not looking great. In the three months to May, inflation in the United States reached 8.3 per cent on an annualised basis, the highest since the early 1980s. Luckily, particularly for developing countries, higher interest rates aren’t an inevitable result.

One reason inflation is so high is simple maths. The 8.3 per cent inflation figure is a year-on-year measure: it’s going to be high in 2021 simply because it was so low in 2020. Even accounting for these “base effects,” though, prices are notably higher for durable goods like cars, furniture and household appliances because demand for those goods is outstripping supply. Why? Because households are unleashing pent-up demand accumulated during the pandemic.

Some global supply chains aren’t helping. Shortages of inputs like microchips and timber are also pushing up prices. In many US industries, customers are returning to businesses faster than their workers are, threating further inflation through wage pressures.

So, will interest rates rise? Given that most of the inflationary pressures are temporary, there are reasons to believe that central banks will hold fire. This is particularly the case for the Fed, whose current chair, Jerome Powell, has adopted a policy of allowing inflation to exceed its target for a period to “catch up” on the preceding period of anaemically low inflation.

Over the weekend, Powell said he believed that the current bout of inflation would be temporary and articulated a path for carefully tapering quantitative easing. But some are worried that the Fed might lose its nerve and increase interest rates if inflationary pressures are big enough for long enough. Other central banks have already started reducing their supports or announced they will soon do so, including in Canada, Australia, Britain, New Zealand and the euro area.

A sharp and disorderly increase in interest rates in the rich world could spell disaster for the developing world. More than a hundred developing countries have sought assistance from the International Monetary Fund as their health systems buckle under the pressure. An inability to obtain enough vaccines, thanks in part to the immoral hoarding of vaccines by the rich world, has condemned these countries — the very ones that desperately need growth — to a slow recovery.

Luckily, there are things the rich world, including Australia, can do to help reduce their financial impact on developing countries.

The biggest risk to developing countries is that investors withdraw their funds as interest rates rise in the rich world, causing their exchange rates to collapse. The debts of developing countries with lots of foreign-denominated debt (which is many of them) would surge, potentially triggering a crisis. To stop this, developing countries need reserves of foreign currency that they can use to stabilise their exchange rates.

The rich world should give developing countries the reserves they need. The International Monetary Fund has approved US$650 billion of support through its “special drawing rights” facility, but ironically the majority of this goes to rich countries. The rich world should voluntarily redirect this money to the developing countries most in need of support and ensure other IMF facilities can be accessed as easily as possible, with fewer strings attached than normal.

But more will be required. Rich countries should expand their networks of bilateral currency swap lines. The Reserve Bank of Australia, for instance, can allow Bank Indonesia to swap rupiah for Aussie dollars, use those dollars to stabilise its financial system, and swap them back later. These facilities are rarely used after they are announced because the mere announcement sends a powerful signal to markets that developing countries can continue to honour their international debts. Josh Frydenberg should increase the size of Australia’s stand-by loan with Indonesia to send a clear signal to markets that we’ve got their back.

Some developing countries will need more. Many of the debts accumulated during Covid-19 — debts they had no choice but to incur — won’t be sustainable when rich-world interest rates go up. This is an opportunity for the G20 to expand its debt-forgiveness program.

Finally, rich-world governments should better coordinate their policies, both domestically and internationally. Domestically, if inflationary pressures persist, governments should consider reducing their spending to take the pressure off monetary policy and their exchange rate. Internationally, governments should use forums like the G20 and APEC to communicate their policy intentions to developing countries, and carefully analyse the collective impact of their policy changes on the rest of the world and strengthen safety nets accordingly.

History will remember many things from the Covid-19 period. One of them will be the failure of the rich world to take care of those in the developing world. It’s one thing not to help developing countries. It’s another to actively make their lives worse. •

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The trend has shown no signs of declining since the pandemic set in, with the 2020 figure topping $372 billion. Correcting for inflation, the annual value of mergers and acquisitions each year in Australia is a whopping eight times bigger than it was back in 1990.

Should we be worried? Mergers and acquisitions have benefits and costs, and if the former are greater than the latter then they should be welcomed. But a growing body of research shows that their benefits, while large in theory, are not so big in practice. The costs, on the other hand, appear to be bigger and more persistent than ever.

Mergers and acquisitions have two main benefits. Bigger businesses benefit from economies of scale: their size and improved efficiencies mean they can produce more goods and services at a lower cost, boosting productivity. And bigger businesses can generate greater economies of scope, saving on costs a bit like a petrol station that also sells milk.

Mergers are an easy way for a business to gain these benefits by expanding into new markets, new locations and even new countries. They allow a business to expand from retail into wholesale, from wholesale into manufacturing, and from manufacturing into distribution and logistics. They can also be a way to save a failing business.

But mergers can create problems, and many of them relate to competition. When competing firms merge, we lose a competitor. This is not necessarily a problem if lots of other competitors exist or if new ones can enter the market quickly. But when a merger reduces competition, it causes all the things we are struggling with in Australia: high mark-ups, low wages growth, low investment and low innovation, all contributing to greater inequality.

Problems can arise even when a merger doesn’t involve competing firms. When mergers result in a business becoming vertically integrated, new competitors find it hard to compete with an incumbent that has its own manufacturing, wholesale, retail and distribution networks. When mergers allow businesses to sell bundled products or services, it becomes harder for customers to change from one supplier to another, reducing competition.

The most common argument in favour of mergers and acquisitions is a fallacious one: that Australia needs big businesses to compete internationally. Most of Australia’s economy isn’t “trade exposed,” and even the parts that are exposed to international competition don’t benefit from being allowed to become dominant — and often inefficient — in the Australian market.

The reason our athletes won so many medals in Tokyo isn’t that they were wrapped in cotton wool back home. They did well because they’ve spent many years competing fiercely against other Australians. The same is true for businesses. Allowing them to get big and lazy at home doesn’t make them more competitive overseas; indeed, it makes them less competitive. Competitiveness overseas first requires competitiveness at home.

The productivity benefits of mergers may also be overstated. Bruce Blonigen at the University of Oregon and Justin Pierce at the US Federal Reserve used detailed firm-level data to study the impact of mergers and acquisitions on productivity and market power across all US manufacturing industries. They found that mergers were associated with increases in average price mark-ups but did little to boost productivity.

The two economists also found little evidence of other claimed efficiency gains from mergers, such as reallocation of activity across plants and scale efficiencies in non-productive units of the firm.

Some studies question whether mergers provide much value to the acquiring company, too. Recent studies found that companies that make lots of small acquisitions tend to increase in value while big, one-off mega-deals tend to be riskier. Mergers might also be bad news for startups. The Economist reported that the FAANGs — Facebook, Amazon, Apple, Netflix and Google — are surrounded by a “kill zone” in which companies are either acquired or quashed.

Mike Driscoll, a partner at investment firm Data Collective, says that technology conferences increasingly “send shock waves of fear through entrepreneurs… Venture capitalists attend to see which of their companies are going to get killed next.” This has made some venture capitalists more reluctant to invest in customer-focused startups.

So what, if anything, should we do about the Covid boom in mergers and acquisitions?

As a first step, we should be more cautious about mergers in industries where there are already too few competitors. More than half of Australia’s markets are concentrated — meaning the four biggest firms control a third of the market or more. Mergers in these industries should logically attract more scrutiny than mergers in less-concentrated industries. Imposing a public interest test on mergers in concentrated industries, having more post-merger reviews, and making more firm-level data available for public scrutiny would lead to better decision-making.

Such measures are important because mergers are hard, if not impossible, to reverse. It would be unwise to allow a one-off pandemic to result in long-term structural changes that weaken the competitiveness of Australia’s markets. This would worsen all the economic problems we have been struggling with for decades.

Covid-19 will have many long-term consequences for Australia. Weakened competition shouldn’t be one of them. •

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As anyone with a HECS debt can tell you, education is no longer a process. It’s a commodity. At the non-compulsory ends of the education spectrum — early childhood at one end, university at the other — education is a business enterprise, even if the business is run on a not-for-profit basis. What if the right “policy lens” could help us understand the pressures and the competing interests better? Would that help us to better plan and deliver education and care to young children? After reading Neoliberalism and Early Childhood Education, my answer is a qualified “yes” — accompanied by nagging thoughts about where this book could have taken us.

Guy Roberts-Holmes and Peter Moss set out to do something potentially very powerful: to “emphasise the significance of the political and economic for early childhood education.” But their book is not a straight work of analysis: their purpose is forcefully subversive. They are here to explain not only how neoliberalism operates in early childhood education and care, but also how to resist it. They want to convince the rest of us that neoliberalism is “deeply problematic, eminently resistible and eventually replaceable.”

A historian by training, Peter Moss has devoted his academic career to interrogating the assumptions and ideologies that underpin early childhood policy and practice. His colleague at University College London, Guy Roberts-Holmes, is a former early childhood teacher who entered academia after several years working with children. They therefore bring experience to bear, along with a strong sense of mission.

The revolutionary framing might seem odd for a book about the early childhood education and care sector. At times, it feels that way — particularly when Roberts-Holmes and Moss draw their bows too long. Nonetheless, the pairing of these two subjects — neoliberalism and early childhood education — makes sense. As the authors note, neoliberal economics is the lingua franca of policymakers across the globe, and education systems have not escaped its reach. While there are piles of analysis on neoliberalism in the university sector and in schools, preschools, kindergartens and long daycare centres have received relatively little attention.

For those not familiar with how neoliberalism grew from a boutique economic theory to a manual for business and government, Roberts-Holmes and Moss only skim the surface. But they get away with it because they are writing not so much about neoliberalism as about resisting the dominant paradigm — which, at the moment, happens to be neoliberalism.

The authors define neoliberalism as a “meta-narrative” that “reduces everything to the economic.” The market mediates both economic and social relations, and citizens are replaced by customers. Their analysis has a strong sociological bent, and it takes a wide frame, describing “the conversion of non-economic domains, activities and subjects into economic ones.”

Roberts-Holmes and Moss survey the school education system to provide context for their study and get a head start on building their thesis. They are mightily displeased with what they see, mapping neoliberalism’s “infection” of education systems across the developed world, tracing it through the spread of policy ideas and assessment tools like the OECD’s Programme for International Student Assessment, known as PISA.

The book focuses heavily on Britain, although the policy environment there is familiar enough to be accessible for Australian readers. Elements of the story will ring a bell (or, for some, welcome heralds of change) among Australian readers. These include national control of previously disparate and diverse school curricula; standardised national testing; and a relentless narrative of “parent choice” in school selection, even in the public sector.

For the authors, the “marketisation” of early learning and care is objectionable largely because it has fostered the emergence of private, for-profit providers, who compete with government and not-for-profit providers in a mixed market. In Britain, the number of private providers skyrocketed over the course of the 1990s, driven by demand from working families. By 2019, commercial providers accounted for 82 per cent, by value, of the long daycare sector.

The private sector has not come to such prominence everywhere. In Germany and Norway, for example, not-for-profit providers still dominate early learning and care. Roberts-Holmes and Moss demonstrate market similarities across the Anglosphere, from the United States to Ireland, Australia and New Zealand, but private capital has also found opportunities elsewhere across the globe, particularly in Asia. By 2013, two-thirds of the kindergartens in China were privately owned.

So how and why did the private sector come to play such a significant role in early learning in so many countries? As the authors show, where rapid expansion of the early learning sector was required it was private providers who were ready to move quickly enough to meet demand. The dynamic runs thus: the government neglects early childhood education and care; the government has an epiphany and realises it needs more of those services, in a hurry; private capital mobilises to meet demand.

While Roberts-Holmes and Moss are trenchant critics of neoliberalism, they also argue that, even if we accept the terms and tenets of orthodox economics, the operation of the open market in early childhood education and care is not “a roaring success.” The authors identify particular elements of market failure in the system, beginning with the fact that competition can’t drive down costs for parents because staffing is by far the largest expense for all providers, and pay and conditions for early childhood educators can’t be cut any further.

Using research from Europe, they also highlight the role of poorly informed consumers in driving the market. Parents are generally time-poor and find it difficult to compare the quality of competing early learning and care services. They are a long way from embodying Homo economicus, so they have little capacity to drive up quality by only purchasing services from the best providers.

Neoliberalism and Early Childhood Education includes a detailed account of the governance and assessment systems for early childhood and school education introduced in England over the past twenty-five years. For Roberts-Holmes and Moss, the very notion of national frameworks, curricula and quality standards — and the data they generate — is frightening. Disturbed by this evidence of intensified “surveillance capitalism,” they predict that our current trajectory will lead us to “monitoring and measuring children’s emotions” and trying to make them more “compliant,” and to “mass surveillance of school populations.” It’s sweeping and Orwellian. It’s also a shame they didn’t look further afield, to Australia.

Australia has leapfrogged most of the world in codifying and regulating high-quality early learning and care, via the National Quality Framework, a rigorous set of principles, policies and practices designed to ensure high-quality early learning and care for children. The curriculum document that underpins the Australian system, the Early Years Learning Framework, does not (as Roberts-Holmes and Moss might expect) reduce young children to passive, two-dimensional economic units. It treats them as capable, wonder-filled people and active citizens. Interviews with the highly respected team of Australian pedagogues who developed the Early Years Learning Framework might have provided a very helpful counterweight in this book.

Of course, the book contains a kernel of truth. Measuring human beings’ attributes, knowledge and performance is highly contested territory, and has been for millennia. But the idea that we mustn’t engage in any measurement at all, because it is invariably reductionist and a neoliberal trap, removes any possibility that we can improve children’s learning, wellbeing and development by assessing what we’re doing right now.

The sense of doom grows as the book develops. Neoliberalism has forced us to see the long daycare centre or preschool as “a factory or processing plant… that will ready children for the future.” Roberts-Holmes and Moss loathe the term “school readiness,” and they have a point: it’s dangerous to imagine that early childhood education and care services should, for example, teach children to read and write. It’s also sound to insist that children are not “empty vessels” who need to be filled with knowledge and skills before they start school. But I’m not sure that most commentators in Australia have that in mind when they speak about “school readiness.” Mostly, people who talk or write about the importance of pre-primary education want to see children arrive at school confident and happy, ready to thrive and learn.

Roberts-Holmes and Moss also take a swipe at Nobel Prize–winning economist James Heckman. The “Heckman curve” has proven a very effective tool in explaining the importance of investing public funds in the first five years of a child’s life. But Roberts-Holmes and Moss are having none of it — not even in relation to children in vulnerable and disadvantaged circumstances. In fact, they dismiss talk of early education as a leveller, or a tool of equality of opportunity, because it “negates the need for more radical political measures,” such as government redistribution of wealth. To be sure, a Marxian approach would even things up, but in the meantime, is it so wrong to want all children to have the same chance at getting a high-quality early education?.

The final chapter of the book is a call to action, with the authors asserting that “neoliberalism is entering into crisis” and that “the end may well be nigh.” (Those who claimed the same at the time of the global financial crisis, only to be disappointed, might disagree.) Drawing heavily on Foucault, Roberts-Holmes and Moss call on their readers to resist. They hold up the prospect of radical action to create alternative pathways for early childhood education and care: for example, “scrapping a system of commodified private services competing in a market-place,” and replacing it with “a system of early childhood services based on cooperative networks and public provision.”

Their method for achieving this? To redirect public funding away from the private for-profit sector. Confusingly, they concede that “private, for-profit services will continue to exist and can continue to compete with each other, but will do so without the benefit of public money or public encouragement.” This raises the obvious question: if the goal is to create a nirvana for all children, why develop a bifurcated system? And which children get the “good” early learning and care (provided by government and community groups) and which get the “bad” alternative?

The conclusion highlights a weakness woven throughout the book: the binaries of “good” and “bad,” and what they gloss over or ignore. For example, Roberts-Holmes and Moss lament the rise of competition and choice in the early childhood education and care sector, looking back wistfully to the old days (pre-1980s) when parents simply enrolled their child in “a good local centre, perhaps provided by the local council, along with other children from the neighbourhood — a public service for the community.” But what if that local centre wasn’t so good? What if its opening hours didn’t match that parent’s work commitments (or job aspirations)? What if the “neighbourhood” was in a low socioeconomic status area and the council couldn’t invest the resources required to meet the needs of all those children?

For the authors, it’s as though neoliberalism has wiped the slate clean, leaving us in a wasteland dominated by new technocratic, managerial structures that are killing us. Neoliberalism has certainly draped itself like a veil over the top of what we already had in the West: community, government and economy (none of it perfect, mind you). But it hasn’t suffocated the world as we knew it. Parents still care about their children; early childhood educators are still interested in children’s welfare; early childhood education and care services still deliver good services for children and their families.

In essence, Roberts-Holmes and Moss over-egg the pudding. In order to demonstrate that neoliberalism has changed and challenged the early childhood education and care system, it isn’t necessary to prove that it has sucked all the goodness out of it. Because it hasn’t. As a piece of polemic, this book is impassioned; as a work of analysis, it is often frustrating; as a roadmap for how to improve early childhood education and care, it is incomplete. But the book is certainly thought-provoking — and perhaps this is what really matters, because any discussion about the importance of early childhood education and care is to be welcomed. •

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It remains to be seen whether these shifts will help Labor win the next election. The initial reaction was not promising, with an Essential poll reporting a sharp decline from 41 to 34 per cent in favourability for Anthony Albanese. And despite an appalling month for Scott Morrison, his commanding lead as preferred PM was unchanged.

We shouldn’t make too much of this. It’s always difficult to attribute changes in polls to particular current events, though this is exactly what the Labor “hardheads” have done in attributing the party’s narrow loss in 2019 to particular tax policies. By the same logic, it will be hard to disentangle the effects of Labor’s tax policies whether it wins or loses next year.

What can be said with more certainty is that, even if Labor wins the 2022 election, its capitulation on tax policy will make holding office for more than one term very difficult. The concession on negative gearing, while regrettable, was mainly symbolic. The lost revenue could be made up in other ways, or else with tolerance of a modestly higher budget deficit.

But the tax cuts are big. They will cost the budget around $15 billion in their first year of operation and the cost will rise steadily after that. That’s more than the entire annual value of the spending commitments Labor took to the 2019 election, which would have reached $11 billion in 2022–23, according to the Parliamentary Budget Office.

In other words, to offset this concession, Labor would need to abandon its entire program, and then find even more savings.

Richard Denniss and Matt Grudnoff of the Australia Institute have argued for a “Buffett rule,” inspired by American billionaire Warren Buffett’s views on the responsibilities of the rich, which would apply a minimum rate of tax on income for high-income earners before deductions. Although Anthony Albanese has advocated such a policy in the past, it’s hard to see him putting this, or any other new tax policy, forward before the election.

The other option is to allow the budget deficit to expand further. But the scope to do this is limited by the productive capacity of the economy. Unless employment can be increased greatly, additional recurrent public spending must come either at the expense of private spending or through higher imports. Domestic shortages or a fall in the Australian dollar will then cause inflation, reducing the real value of both public and private expenditure.

In this context, it’s worth pointing out the fallacy of claims by some (not all) economists associated with Modern Monetary Theory that tax cuts for “the rich” don’t fuel inflation because rich people don’t respond to changes in their income by spending more. Households with incomes between $200,000 and $400,000 have plenty of ways to spend more money, whether in Australia or overseas. And having paid down debt during the pandemic, many will be eager to spend any government largesse.

Labor is already preparing to be a do-nothing government. Announcing the party’s decision on the stage three tax cuts, shadow treasurer Jim Chalmers said Labor would be more responsible in its spending than the Coalition. “We think we can get better value for money for the Australian people. That means spending it more effectively on some of the priorities that we’ve identified.” In practical terms, this means that any new spending will be financed by cuts to other programs.

Labor will instead campaign on the argument that the Morrison government deserves to be kicked out for its failures in dealing with the pandemic. While that’s a fair judgement and a plausible election strategy, it’s scarcely a basis on which to form an effective government.

What options are open to those who would like to see a genuinely progressive government? The logical alternative is the Greens, a party that has long been closer to traditional social-democratic views than Labor. But it has remained stuck at around 10 per cent of the vote nationally.

There seem to be three main reasons for this ceiling on the Greens vote. First, there is an enduring association with a flaky New Age image. The pandemic ought to have dispelled this to some extent: rather than being dreadlocked Greens-voting hippies, the anti-vaxxers are dominated by the political right, including prominent government backbenchers like Matt Canavan and George Christensen. Labor hasn’t been spectacularly good either, most notably in Anthony Albanese’s attempts to work both sides of the street on AstraZeneca hesitancy. On economic policy, the Greens have been consistent and principled, unlike either of the major parties.

The second problem is that many people, including many political commentators, fail to understand how the preferential voting system works and imagine that a primary vote for Labor is more effective than a first-preference vote for the Greens with Labor ranked second. In the usual case, where the Greens finish behind Labor, the two ways of voting are effectively the same. And in the rare case where the Greens finish ahead of Labor, they are more likely to attract (mainly Labor) preferences and defeat the Coalition candidate.

The final obstacle to a Greens vote is rusted-on identity politics of the kind exemplified by Albanese himself, who regularly appears to equate voting Labor with barracking for the (traditionally working-class) South Sydney Rabbitohs. On this view of politics, Labor’s adoption of right-wing tax and expenditure policies is of no more importance than a decision by the Rabbitohs to poach players from the (traditionally silvertailed) Sydney Roosters. It’s loyalty to the team that matters.

Only the threat of losing seats to the Greens (and particularly seats that can’t be dismissed as being filled with inner-city elites) is likely to divert Labor from its current course. In the absence of that unlikely event, we can look forward to years of right-wing government, alternating between two parties with no higher ambition than to buy votes with tax cuts. •

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One of Tett’s colleagues once queried the relevance of her doctorate on marriage rituals in Soviet Tajikistan to her work at the FT. Using this as her starting point, she demonstrates how anthropology provided the training and intellectual framework she needed to scrutinise banking, business corporations, factories, international industrial collaboration and technological change.

It’s important to bear in mind that Tett is famous for being one of the few people to predict the global financial crisis — several years before it occurred, in fact, after she became alarmed by the peculiarities of capital markets, derivatives and securitisation. Following her instincts, she began exploring the culture of banking and finance using standard ethnographic methods.

First she learned the language. Banking jargon is replete with terminology that is almost impenetrable to outsiders. CDO (collateralised debt obligation) and CDS (credit default swap) mean little to a person taking out a mortgage, as does the fact that their debts might be “bundled” with others and “sold on” to investors. In her efforts to discern the patterns created by these exchanges of risk and debt, she discovered a clash between what these innovations were meant to achieve for banks — reduced debt — and what appeared to be happening — increased debt. The predicted “market correction” was simply not happening. “Risks,” she wrote, “were building inside this strange, shadowy world.”

Although she was accused of scaremongering and her characterisations of the financial world were heavily criticised, Tett was undeterred. Her methods required the ingenuity that is essential when studying powerful people and their institutions. She attended conferences, interviewed people, read a great deal, and generally immersed herself in the culture. All the while she was maintaining a critical eye, looking out for gaps in the narrative, for contradictions between what people said and how they behaved.

Describing her fieldwork in Anthro-Vision, Tett questions widely held assumptions about the “natural” functioning of market forces and exposes the fanciful reification of money and its exchange. She reveals how bankers and financiers can effect economic change in complex ways, and how and why impending financial disasters can sit comfortably in their blind spots.

To show another way of working within large organisations, Tett describes how Genevieve Bell, now the distinguished professor in ANU’s School of Cybernetics, broke new ground after she joined Intel’s research division in 1998. Bell began by launching a cross-cultural study of consumers in India, Australia and Malaysia, where her band of researchers discovered that people used their technological devices very differently from how their designers envisaged.

Other comparative research into facial recognition and artificial intelligence applications has found striking differences between attitudes, behaviour and use in the United States and China. Americans tend to see them as a form of invasive surveillance that threatens their privacy and personal freedom; Chinese people are generally more comfortable with scrutiny, viewing it as a form of state-endorsed security.

On the urgent topic of how best to manage contagious diseases, Tett argues for cultural sensitivity by telling the story of how Ebola was eventually contained in Sierra Leone, Guinea and Liberia. The early assumption was that people’s behaviour would change if they understood how Ebola is transmitted, and attended medical facilities immediately symptoms developed. Quite apart from the difficulty of getting treatment within an underdeveloped healthcare system, Ebola continued to spread because people could not abandon their customs surrounding death and burial. Family gatherings, at which the deceased’s body would be embraced, were a major factor that simple prohibition failed to stop.

Tett describes how Paul Farmer, a medical anthropologist at Harvard who heads Partners in Health, had for decades advocated community-based treatment that respects local cultures and social context. The advice he and other anthropologists provided to hospitals and health centres had a dramatic impact on the spread of the disease.

To date, Tett observes, anthropologists have had little influence over how Covid-19 has been managed. Attitudes towards face masks, and ideas about family gatherings and religious rituals vary greatly, yet policies have generally been top-down, informed almost entirely by medical scientists. Technical solutions, such as contact-tracing applications for mobile phones, haven’t prevented people from transmitting infection (although the use of QR codes to track people’s movement, at least in Australia, provides the means for isolating contacts after the event).

Rational measures derived entirely from medical science might seem simple, but cultural understandings of certain practices are constructed within “webs of meaning” that privilege some human actions over others. Thus, kissing the corpse and sitting in a small room with other mourners are intrinsic to West African ideas of honouring the dead. Failure to do so invites opprobrium and disaster. Thus, too, British prime minister Boris Johnson initially refused to don a face mask, even while exhorting other citizens to do so, because masking has negative connotations and is “foreign,” and controlling what British people wear infringes their individual rights. In London or Sydney, refusing to wear a mask can be considered an act that demonstrates individual autonomy and freedom — cultural ideals that not only are seen as natural in a liberal democracy but are also more highly valued than responsibility to others.

Anthropological techniques are obviously useful in market research, and many of Tett’s examples illustrate the complex interweaving of cultural assumptions, social values and consumer choice. She shows how widely anthropological research is used in the United States and how different ethnography is from surveys that simply collect factual data and make correlations based on categories such as age, gender and political allegiance.

Anthropologists investigate why people make choices, and much of the complexity they identify derives from the fact that social values change. Tett offers the case of a childcare company that asked anthropologist Meg Kinney to find out why enrolments were so much lower than rates of website searches — what was deterring interested parents from enrolling? Conventional data showed how parents were using the website, but didn’t explain why they failed to pursue the matter. Using video ethnography, Kinney observed parents in their home discussing the services offered. She found that the people designing childcare programs, mostly born before 1975, placed far more emphasis on education and reassurance than did “millennial” parents, who wanted their children to be adaptive and resilient.

Tett also explores how environmental sustainability and the challenge of climate change have transformed corporate notions of moral responsibility. She discusses the strategies of ESG (environment, sustainability, governance) that BP and other corporations have embraced in response to criticism, but points out that the persistence of the profit motive means that many changes are made with an eye to the market advantage that derives from being “green.” This is hardly a novel anthropological interpretation —many activists have been alert to “greenwashing” for decades — but Tett moves the argument along by bringing in her earlier work on financial organisations, which prompts the insight that “the words around ESG are changing the money flow” in positive ways.

Anthro-vision is written for a general readership and aims to convince people in the worlds of business and industry of the value of anthropological research. Tett does acknowledge that the information and insights an anthropologist can offer are not always the ones hard-headed business figures might want to hear. Anthropological advice to mining companies can certainly fall on deaf ears in Australia, where disasters such as the destruction of the cave at Juukan Gorge in Western Australia testify to the fact that anthropological knowledge continues to be seen as either irrelevant or obstructive to modern business practice.

In a postscript to anthropologists, Tett concedes that many anthropologists would rather not engage in research that enhances business operations, perhaps enabling them to increase profits and power in a profoundly unequal world. But she also emphasises the advantages of influencing policies that can promote change based on the recognition of both common humanity and cultural diversity. At a time when the social sciences and humanities are in the firing line in universities across Australia, her conclusions about the value of anthropology are particularly germane. •

Anthro-Vision: How Anthropology Can Explain Business and Life
By Gillian Tett | Random House Business | $35 | 282 pages

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“Geoeconomics” is the term being used to describe this phenomenon. This increasingly popular concept is based on the idea that economics has failed to recognise how foreign governments can use economic links to achieve geopolitical goals. To attack these Trojan Horses, geoeconomics recommends redirecting trade towards geopolitical allies, bringing sensitive production onshore, stockpiling imports and even nationalising some businesses.

Geoeconomics certainly has the attention of many policymakers. But there’s a problem: while the “geo” makes sense, the “economics” doesn’t stack up. Geoeconomics rests on a misunderstanding of how markets and international trade rules function. More importantly, it misunderstands the role markets and rules play in defeating economic coercion and buffering economies from their impacts.

To see why, consider some recent examples. China has hit a whole range of Australian industries — from barley and beef to wheat and wine — with trade restrictions. Many commentators warned of devastating consequences: goods perishing on shelves, whole industries collapsing as billions of dollars of revenue gets ripped out from underneath them. The reality, however, was very different.

While the value of these exports to China fell $11.7 billion a year, the value of those same exports to the rest of the world increased by $13.4 billion. Covid complicated things, but what happened is exactly what we would expect from well-functioning markets: prices fell, exchange rates adjusted, businesses pivoted and new customers emerged. While some suppliers have to put up with lower prices, the headline warning that billions of dollars of economic activity was about to vanish into thin air was based on a misunderstanding of how markets work. They found alternatives, buffered the Australian economy and defeated attempts at coercion without the government having to lift a finger.

We saw the same thing when it was supply rather than demand that vanished. When China restricted the export of rare earths to Japan in 2010, the fear was that whole industries in the electronics sector would be hobbled. The embargo caused disruptions, but the Chinese government quickly backed down after an adverse ruling against China in the World Trade Organization. Unfortunately for China, markets had already dealt their punishment: they had sought out alternative suppliers and, where none was available, started enticing new ones into the market by increasing demand and pushing up prices to encourage investment. Not only did China fail to achieve any political objective in pressuring Japan, it triggered a process that will cut it out of a highly lucrative market in which it could have maintained a global monopoly for years to come.

We saw a similar thing happen when China imposed tourism embargoes on South Korea after the government in Seoul installed THAAD anti-ballistic missile systems. Businesses diversified away from China and found new customers in new markets. Shifts in prices and exchange rates saw a boost in demand both within Korea and from other countries in the Asia-Pacific. China’s actions sparked a global wariness towards Chinese tourists — costing it dearly in markets around the world through reduced confidence and increased suspicion.

The same thing happens when the West is the aggressor. Donald Trump imposed tariffs on hundreds of billions of dollars of Chinese exports in a misguided attempt to punish the Chinese government, hurt its economy and create more jobs in America. Analysis from the International Monetary Fund found exactly what hundreds of years of economic theory would predict: that almost 100 per cent of the cost of the tariffs was paid for by American importers, not Chinese exporters. Tariffs are nothing more than a tax on your own citizens.

Trump’s tariffs on steel — claimed to be necessary on national security grounds — similarly backfired. They may have supported the US steel industry, which employs only 140,000 Americans and contributes only US$40 billion to the economy, but they did so at the cost of the industries that use that steel as an input, which collectively employ 6.5 million Americans and contribute more than US$1 trillion to the economy.

Similarly, when the United States imposed sanctions to prevent Europe from engaging with Iran, both parties found ways to work around them by creating new financial institutions. They have a long way to go, but the more America uses the dollar as a weapon, the more markets will seek to diversify and find alternatives, whether they are existing currencies, digital currencies or new reserves created through international cooperation.

All these examples highlight two critical things missed by the rhetoric of geoeconomics: the power of markets in buffering economies from any attempts at economic coercion, and the power of international rules in stopping those attempts in the first place. This puts the concept of geoeconomics in an awkward spot, revealing that heavy-handed measures like government-directed trade, local production and nationalised businesses make little sense in the context of well-functioning markets.

For those concerned about international economic coercion, the better solution is to build more flexibility into Australia’s markets so they can do an even better job at buffering the Australian economy and defeating coercive attempts from other countries.

For product markets, this means reducing barriers to entry and barriers to expansion so businesses can enter, expand and exit an industry as easily as possible. For financial markets, this means ensuring a flexible exchange rate, responsive monetary policy, and reformed credit and insolvency laws that make it easy for new businesses to replace old ones. For labour markets, this means having a strong social safety net with proper retraining and reskilling programs to help people move between industries and locations to find work. And for fiscal policy, it means having demand-driven programs in place that automatically direct financial support to the people and regions that need it.

Geoeconomics might sound tempting for troubling times, but when security masquerades as economics, we end up adopting policies that make us poorer and less secure. Australia’s security is underpinned by our prosperity, both of which have been built on developing flexible markets, strong institutions and predictable international rules. They’ve seen us through tougher times than this. Abandoning them now would be a fool’s errand. •

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There’s no chance of the plan’s being revived this side of the election given how united people with disabilities have become in expressing their outrage with the government. Or, as one of the architects of the scheme, John Walsh, puts it: “I can’t begin to say how angry I am about the way Australian governments collectively have let down people with disabilities.” Until recently, Walsh served on the board of the administering body, the National Disability Insurance Agency.

Yet, unlike most in the disability sector, Walsh agrees with independent assessments of the support NDIS participants receive, if not necessarily in the form the government was planning. The assessments were proposed by the Productivity Commission in its landmark 2011 report recommending the introduction of the NDIS — the inquiry on which Walsh served as associate commissioner. The problem now is that the government has lost the trust of a disability community that suspects its motives at every turn.

To recap, the NDIS, introduced by the Gillard government and supported by all parties in parliament, is the biggest social policy reform since Medicare. It replaced the hotchpotch of federal and state government arrangements described by the Productivity Commission as “underfunded, unfair, fragmented and inefficient.” And it has made a real difference. According to Bruce Bonyhady, head of the Melbourne Disability Institute at Melbourne University and another architect of the NDIS, “it is a scheme that is doing extraordinarily positive things for hundreds of thousands of people with disabilities.” More than 50 per cent of participants were receiving no assistance at all before it started, he adds.

Given that, Walsh’s anger requires some explanation. A quadriplegic who was heading for a career as an astrophysicist before a football accident at the age of twenty, he spent decades working as an actuary on no-fault state government accident compensation schemes. Their underlying principle of social insurance informed the development of the NDIS.

The Productivity Commission proposed much more than a welfare program: people would be given control over their affairs, choosing the supports they needed to live more independently, find employment and generally lead fulfilling lives. Its insurance principles stemmed from the reality that the lottery of life meant that any Australian could face a disability, thus giving us all a stake in managing this risk through the tax system. Treating it as insurance also meant taking a lifetime approach, emphasising early intervention to save higher costs later, and increasing the opportunities, including employment, for people with disabilities and for their carers. In short, its benefits to the broader economy, as well as to individuals, would be substantial.

Walsh’s beef is that this vision has been lost. “I don’t think the NDIS has ever been implemented,” he says. “Perhaps 10 per cent of people are self-managing” — given control of a package of funding to pay for agreed supports — “which is the real opportunity for people to be doing what was intended by the scheme.”

Meanwhile, he says, 40 per cent of NDIS funding is provided for the 7 per cent of people who live in group homes under the Supported Independent Living program, which was transferred from state and territory governments. “Many participants in SIL continue to have little choice or control over their circumstances but nevertheless have 86 per cent of their committed supports — in excess of $300,000 per person per annum — consumed on their behalf,” he told the joint federal parliamentary committee on the NDIS.

A substantial part of the rest of the NDIS budget goes to medical therapy for children. “This has become a much larger part than it was ever designed to be,” he tells me, and the figures bear him out. Of the 468,692 people covered by the NDIS, 193,814 — more than four in ten — are younger than fifteen. Autism (at all ages, although mostly among children) accounts for 146,412 participants compared with the Productivity Commission’s original estimate of about 75,000. Another 53,264 fall into the category of developmental delay. With the NDIS estimated to grow another 30 per cent before it is fully operational, these figures will continue to increase.

“It is not difficult to get an autism diagnosis,” says Walsh. “It’s a spectrum and there are many children who have signs of being on the spectrum but don’t necessarily need an individual support package to go and see a therapist.” For those in the disability sector, this is a brave statement, guaranteed to bring the wrath of parents on his head. But others agree with him and are prepared to say so. “A large number of children are being diagnosed with autism who don’t actually have it,” paediatrician David Roberts, a former president of the WA branch of the Australian Medical Association, told Inside Story in 2017.

“Over the past ten years,” said Roberts, “I have run across cases in the hundreds where the diagnosis has been made but the assessment has been conducted improperly and where there have been conflicts of interest in the diagnosticians.” Roberts hasn’t changed his view, telling me the rate of diagnoses has increased in the last four years. For a parent with a child on the autism spectrum or with developmental delay, though, an NDIS plan with guaranteed funding is a godsend, given the few government-provided alternatives.

Despite its problems, Bonyhady describes the NDIS as “an oasis in the desert.” An estimated 4.5 million Australians have some form of disability. The scheme was designed to cater for a minority who need the most support, with the Productivity Commission outlining a comprehensive strategy for the remainder, including mainstream services and community support. But funding for most of the lower-level programs, provided mainly by the states, has been withdrawn, so it is hardly surprising that people are prepared to move heaven and earth to get into the NDIS.

This is where the elephant enters the room. According to the latest “financial sustainability” report by actuaries, the scheme will cost a projected $28.1 billion this financial year, which is some $4.4 billion above the Productivity Commission’s 2017 costing for this year. By 2024–25, the actuaries project a cost of almost $41 billion — $12.2 billion more than the commission’s estimate — and by 2029–30, $60.3 billion, or $22.2 billion higher. The main contributors to the escalation are more people than anticipated entering the scheme, fewer leaving and average payments increasing by 12.5 per cent a year.

If the figures look scary, at least to budget-minded people, that’s precisely what the government intended when it released the report a few days before this month’s meeting of state and federal ministers. The idea was to concentrate minds on the need to cut costs.

It didn’t work, with the states and territories rejecting independent assessments and demanding more information about the financial assumptions used. There was some justification for their scepticism. Bonyhady says that up to October last year the government and the administering agency, the NDIA, were saying that the cost projections were in line with the Productivity Commission’s estimates except for two factors not taken into account in its calculations — the subsequent broadening of the definition of developmental delay in children, and the costs of people over sixty-five. While this older age group is not eligible for NDIS assistance, those who reach that age when they are already in the scheme continue to be covered.

Bonyhady says that new estimates were incorporated in this year’s May budget, followed by the actuaries’ report showing further increases. “The numbers just don’t change that quickly. It is very clear that there are now very different assumptions being built into the estimates. These are very complicated calculations, with literally hundreds, if not thousands of assumptions that go into these cost projections. It is impossible to know what to make of these numbers until one sees the detailed models and data.”

The government has stonewalled attempts by Bonyhady and others to see this material. Following the latest ministerial meeting, Linda Reynolds, the federal minister for the NDIS, promised to respond to state and territory ministers’ requests for more information on the costings. Still, the reality is that warnings from the auditors about cost blowouts were made as long as five years ago but have been ignored.

Even if Reynolds ends up convincing the states and territories, the federal government has lost the main weapon in its armoury — independent assessments. Rather than the present system of doctors and other health professionals familiar with the person’s condition helping draw up individual funding plans, the government wanted an allied health professional, unknown to the person, to assess the support he or she needed. This would be done in a session of up to three hours, using a checklist meant to even the playing field of assistance people received. It would overcome the “empathy bias” said to be inflating the plans that participants receive.

Whatever logic applies to such a change, the disability sector quickly saw it as a threat — a cookie-cutter approach with the main aim of saving money. Bonyhady gave it the damning label of “robo-planning,” a reminder of the disastrous robodebt scheme that saw welfare recipients pursued for debts through a faulty computer program that routinely assessed debts where little or no money was owed. His point is that it relied on a single assessment at a preset time using a checklist, when we know that  an accurate picture of disability  can only be obtained by a multidisciplinary assessment taken in multiple settings.

Moreover, one of the guiding principles of the NDIS was supposed to be plans tailored to individuals and starting with their goals. “The intention was that people get packages and flexibility in the use of their packages,” says John Walsh. “That cannot happen [under the present system] unless we are prepared to wear the cost of the scheme escalating to $40 billion. I don’t think the government will do that in a hurry.” He points to the experience of injury compensation schemes in Australia and New Zealand, where entitlements without independent assessments threat-ened the sustainability of the schemes, leading ultimately to restrictions on eligibility and benefits.

Bruce Bonyhady argues that participants’ goals are “absolutely critical to the culture of the NDIS.” As he wrote in a submission to the NDIA, “The focus is, and must continue to be, on what people with disability can do and the support required to exercise their full citizenship rather than what they cannot do.”

There are indeed some unfortunate parallels with robodebt. The government has focused increasingly on cutting costs, but enough examples have emerged of the government misdirecting money — from misspent JobKeeper dollars to sports rorts and commuter car parks — to raise the hackles of people with disabilities.

As well, the government has taken a hard-nosed approach to complaints about unfair treatment, again reminiscent of how the government often took robodebt cases to the brink before conceding that the Administrative Appeals Tribunal was unlikely to find in its favour. According to the NDIA’S figures, of the 3721 AAT cases closed by the end of last year, 3641 had been resolved before the hearing. Often the resolution came after people had spent enormous amounts of time and money, says Bonyhady, and in the vast majority of cases the NDIA conceded.

“All of these settlements are subject to confidentiality so they don’t set a precedent,” says Bonyhady. “The NDIA pushes it all the way in the hope that individuals will give up and then, if people push it to the point where they get to the AAT hearing, they literally settle on the steps.” Of the eighty NDIS cases that did go to a hearing, the AAT found against the government in forty-two. Proposals within the government for expanded debt-recovery powers have more echoes of robodebt.

Whether or not the latest actuaries’ figures are anywhere near accurate, there should be no argument about governments funding the NDIS generously. As the Productivity Commission put it in its 2011 report, “were government to be starting with a blank slate in determining its funding priorities, there would be a strong rationale for provision of disability services to be one of its highest spending priorities.” Nor is the current federal government in a strong position to argue that it is spending our money wisely and with restraint.

Rather, the question is whether any government would be prepared to fund a continuing rapid increase given contending demands. In the wake of the royal commission findings, should the government spend less on aged care and more on the NDIS? These choices will have to be made, whether we like it or not.

By giving the states and territories an effective veto power over major decisions, the current structure includes a safeguard against drastic cuts. But the states also are responsible for stumping up almost half the funding for the NDIS, although the increase in their financial contribution is capped at 4 per cent a year, with the federal government obliged to pay for the rest.

The issue of escalating costs will confront Labor if it returns to government any time soon. Shadow disability minister Bill Shorten, who helped create the political momentum for the scheme when the party was last in government, casts doubt on the claims of funding blowouts but nevertheless concedes some cost overruns. He blames it on such things as the $288 million the NDIA spent on consultants and contract staff in 2019, and the $17 million for legal expenses to fight cases in the AAT. But that still leaves a funding gap of billions of dollars.

Meanwhile, Bruce Bonyhady has developed a detailed alternative to the now-abandoned independent assessments and offered to work with the government to implement it. People with disabilities would be given a genuine say in the process, and the starting point would be the goals of individuals. Any questionnaires used for assessments would be tested and feedback sought, and expert reports would be considered. The emphasis would be on multidisciplinary teams conducting assessments, if necessary in multiple settings. Participants would be able to use their funding more flexibly, with a minimum of fixed categories.

The government has yet to respond. •

The publication of this article was supported by a grant from the Judith Neilson Institute for Journalism and Ideas.

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Similar measures are on the agenda everywhere, with the most sweeping of them regulating movement across national borders. International travel has always been subject to vaccination requirements, but these were impractical in the current pandemic until the vaccine became widely available. Now, travel to the European Union and between EU countries is being opened up with the Europe-wide Covid-19 passport. At the same time, new quarantine restrictions similar to those in Australia are being imposed on unvaccinated arrivals in countries including Spain, Portugal and Malta.

By the end of the year, it’s likely that nearly all national borders, except perhaps Australia’s, will open to fully vaccinated arrivals. Restrictions on unvaccinated travellers, already stringent, are likely to harden into permanent prohibitions.

The next stage in the process — the stage that prompted the protests in France and other European countries — is the exclusion of unvaccinated people from bars, restaurants and other indoor venues. With infection levels still high, it’s become evident that this is the only way the vaccinated majority will ever get back to a normal life.

The logic is depressingly simple. In the absence of restrictions and vaccination, the Delta variant has a basic reproduction rate of close to 5. In other words, in the absence of any countermeasures each person who catches the virus will infect an average of five others. To keep the disease under control, it is necessary to hold that number below 1, so that outbreaks fizzle out over time. To meet that figure, 90 per cent of the population would need to be fully vaccinated with a 90 per cent–effective vaccine (or, less reliably, immunised by a previous infection).

Purely voluntary efforts will get us nowhere near that. The only solution is a combination of incentives for vaccination (including negative incentives for not getting vaccinated) and restrictions on the unvaccinated, similar to those we have all endured over the past eighteen months.

The logic is having an effect even in the United States. After taking steadily more extreme anti-vaccination positions over many months, leading Fox News commentators and Republican politicians alike suddenly jumped off the anti-vax ship, announcing that everyone should be vaccinated as soon as possible. As usual in such cases, most of them claimed they had always supported vaccination, and that any suggestion to the contrary was a liberal smear.

Republicans are beginning to realise that this is a culture war they can’t win, or even play out long enough to mobilise voters for an election victory. The vaccination debate no longer fits the standard culture war playbook in which an easily demonised outgroup is imposing its way of life on decent (that is, white, heterosexual and Christian) Americans.

Campaigns of this kind can naturally be presented in terms of the preservation of liberty — not liberty in any abstract or universal sense, but the liberty of the dominant group to do things as they have always done them, whatever the effects on others. But in the vaccination debate, the roles are in the process of being reversed. As the proportion of American adults who have received at least one shot creeps towards 70 per cent, the unvaccinated are a declining minority, even among Republicans.

The result has been a political fracture, with some of the far right becoming even more extreme while others break ranks. Perhaps demonstrating accurate political intuition, Donald Trump has stayed on the sidelines, claiming credit for the development of vaccines but doing nothing much either to promote them or to support the vaccine resisters.

The painfully slow rollout of vaccines in Australia means we have yet to confront these issues. But the lockdown in Sydney is raising the same challenges here, with unpleasant implications. Even the state’s very effective contact tracing — which has kept infection levels much lower than Victoria experienced during its flare-up last year — hasn’t been the silver bullet it was once hoped to be.

In these circumstances, a massive increase in vaccination rates is urgently needed. New South Wales has the capacity to greatly increase the rate of vaccination. We have a huge stock of AstraZeneca, belatedly endorsed by the ATAGI expert group as the right choice for everyone given that alternatives won’t be freely available for months. What is missing are the measures to achieve high vaccination rates.

The failures of the past year, including the complacency brought on by early success and the bungled advice about AstraZeneca, mean that a strategy of “offer it and they will come” isn’t going to work. What is needed is an effort on the scale of our response to the initial outbreak. That means income support during the lockdown combined with substantial incentives for vaccination. Equally importantly, it requires continued restrictions on those who choose to remain unvaccinated.

We aren’t ready, as a society, for the arrival of vaccine passports. But unless the current outbreak is brought under control soon, we may have no choice. •

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