Australian Economics

Health or the economy – a false dichotomy

In dealing with the pandemic Scott Morrison, New South Wales Premier Dominic Perrotet, and many who claim to represent “business interests” have been guided by an idea that there has to be some balance between health and economic considerations. Government commentators are even talking about maximising economic outcomes while minimising the burden on the health system: when people start talking about optimizing two variables at the same time we know we are dealing with some very sloppy thinkers.

Jim Stanford of the Australia Institute’s Centre for Future Work, writing in The Conversation, points out the illogicality of trying to “balance” health and economic outcomes: Healthy humans drive the economy: we’re now witnessing one of the worst public policy failures in Australia’s history. In brief, sick people aren’t particularly good workers, and they make other people sick. Also, when a potentially deadly virus is circulating people rationally restrict their business activities to the bare essentials.

Drawing on data on consumer spending, Stanford provides evidence that the policy of having let Omicron rip through the community has indeed resulted in economic harm. There has been far more damage to the economy than would have resulted from well-considered measures to slow the growth of the virus, as was almost certainly suggested by public health experts. Norman Swan makes the same point in Friday’s Coronacast.

Stanford correctly attributes this enfeebled way of thinking to Morrison and Perrotet, but the idea of policy trade-offs between “economic” and “social” objectives is not confined to people on the economic right. Many well-meaning people in NGOs, for example, talk about “economic” and “social” programs, not realising that such a division is a fundamental error of categorisation, and not realising that all public policy is, or should be, about society. [1]

1. Such an error of categorisation is akin to talking about “fruit” and “apples”, “Europeans” and “Germans”, or “dogs” and “kelpies”, rather than seeing the particular as a subset of the more general. This is far more than a semantic point. The consequences of such muddled thinking are serious: see How Covid-19 is reshaping the way we see healthcare in Inside Story, May 2020 .

If only firms’ owners could mind their own business

By most interpretations of the duties of board members and corporate executives, they are supposed to act in the interests of their shareholders. For much of last century that meant attending to the supposed financial interests of shareholders, a system reinforced by measures such as stock options that supposedly aligned the interests of directors and executives with the interests of the shareholding masses. That meant everything could run smoothly; directors could be re-appointed unopposed, and remuneration reports could be waved through corporate AGMs.

But what if those masses have interests other than their dividends and the market value of their share portfolio? What if they would be prepared to forgo a few cents in dividends if it meant not blowing to smithereens a cave with 46 000 years of human occupation? What if they would prefer to pass on to their kids a planet that’s safe to live in rather than another $5000 in their estate? What if they really believe workers should be paid a fair wage, even if that means their portfolios don’t perform quite so well according to financial metrics? And what if they are somewhat annoyed when directors and executives help themselves to huge financial rewards even when their performance is mediocre?

For the most part the shareholders – the real owners of corporations – hold their equity not in direct shareholdings, but through institutions, most notably superannuation funds. While executives and board members holding stock options may be mainly concerned about the company’s short-term performance in terms of share prices, dividends and capital buy-backs, superannuation fund investors have long-term interests stretching out many decades.[2]

That’s where entities known as “proxy advisers” have a role to play, helping superannuation and other fund trustees exercise their votes in the interests of their investors.

Without much publicity Treasurer Josh Frydenberg has introduced regulations that severely limit the capacity of proxy advisers to perform their role. The ABC’s Nassim Khadem explains the details of Frydenberg’s regulations: Superannuation fund investors are reinventing capitalism and their proxy advisers are under fire. Frydenberg seems to have some problems with the basic structures of capitalism when the interests of corporations’ owners do not align with the interests of the Liberal Party.

If parliament is re-convened before the election, Senator Rex Patrick, Labor and the Greens will move in the Senate to disallow the regulations.

2. Economists recognize this as a principal-agent problem, where the principals (members of superannuation funds) have a low discount rate, while the agents (board members and executives) have a high discount rate. Even the economists’ notion of “profit maximization” does not set clear guidance in this situation.

Macroeconomics 1 – the cost of loose money

Until he retired in 2011 Thomas Hoenig was president of the Federal Reserve Regional Bank in Kansas City, and held a seat on the Federal Open Market Committee. (Think of our Reserve Bank scaled-up by a factor of about 20.) He was also a lone dissident on that committee because of his opposition to loose monetary policy.

To many “he is remembered as something like a cranky Old Testament prophet who warned incessantly, and incorrectly, about one thing: the threat of coming inflation”, to quote Christopher Leonard, in his Politico article The Fed’s doomsday prophet has a dire warning about where we’re headed. Leonard points out that Hoenig ‘s monetary conservatism is actually about his concern that sustained periods of loose monetary policy could “deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else.” He is a liberal, rather than some scrooge arguing for austerity.

Leonard’s article is in a US context, but with a few “find and replace” substitutions it could be written about our own Reserve Bank with its long run of vanishingly low interest rates, quantitative easing and indifference to early signs of inflation.

He explains the destructive positive feedback mechanisms that drive asset bubbles and enrich speculators while destroying the real economy. He repeats Hoenig’s point that speculation and rising asset prices shift money from the poor to the rich because the rich own the vast majority of assets. That point should be so obvious that it shouldn’t need repetition, but when everyone is celebrating record high equity and real-estate prices, it is easy to overlook such basic economic logic.

Leonard is author of The lords of easy money: How the Federal Reserve broke the American economy.

Real men drive Macks

Anyone who wisely decided to take to the road rather than risk the infectious environment of air travel in the holiday season would be struck by the number of semi-trailers and B-double trucks on our highways.

If they believe that there are many more of these monsters than in times past, they are right. In 1970 about 40 percent of freight moving between Melbourne and Sydney was carried by rail; it now only about 1 percent.

That’s one of the figures in Philip Laird’s Conversation article: Instead of putting more massive trucks on our roads, we need to invest in our rail network. Our rail network, hampered by changes in gauge, old tracks with load limits, height limits and speed limits, requires significant investment to bring it up to scratch. Yet, according to Laird’s conservative estimate, we are subsidising heavy trucks by more than $2 billion a year.

With most of our population and industries in discrete and widely-separated clusters, investment in rail should be a no-brainer, particularly in view of the fact that transport accounts for 17 percent of our greenhouse gas emissions. Surely that $2 billion annual outlay could be directed to building a decent rail infrastructure rather than constantly repairing road pavements torn up by monstrous trucks.

Cautious households mount a threat to Morrison

The monthly statistics of deposit-taking institutions published by the Australian Prudential Regulation Authority (APRA) generally raise about as much media interest as records of river heights and soy bean prices, but the latest highlights, covering the two years up to November 2021 (released on January 4) are worth a glance, because they reveal an outbreak of household saving over the period of the pandemic. In short, bank deposits have been rising while credit card debt has been falling.

Additional APRA data released to The Australian and reproduced by Rate City reveals that those fortunate enough to have a mortgage on their home are getting ahead in their repayments, with $48 billion put into mortgage offset accounts since the pandemic broke out. The average mortgage holder is now 45 months ahead in repayments.

These figures take us up to the September-November period, before the Omicron outbreak. The first ANZ-Roy Morgan index of consumer confidence for 2022 shows that we are still not in a mood to go out and spend.

Morrison has been urging Australians to loosen their purse strings, but surely it is wise for consumers to be cautious in the current economic conditions. Health experts agree that Covid-19 will be with us for some years, while economists point to the likelihood of inflation, higher interest rates and a less expansionary fiscal policy in the medium term. And even though opinion polls are promising, there remains the economic risk that the Coalition will be re-elected, guaranteeing an extension of their destructive economic policies. People would be well advised to have a few bob stashed away to deal with that contingency.

Population projections

Just before Christmas the Commonwealth published the latest Population Statement, projecting our national and regional population changes over the next ten years. It models the short-term effects of the pandemic, which result in net migration outflows in 2020-21 and 2021-22, before migration slowly recovers. Further out it projects a slow reduction in the fertility rate and in the rate of immigration. By 2031-32 annual population growth is projected to be steady at around 1.2 percent. (This compares with annual growth of 1.6 percent in the ten years before the pandemic.) It projects that our capital cities will continue to grow relative to non-capital regions, and that Melbourne’s population will overtake Sydney’s. Queensland will continue to attract a significant number of people from other states.

Anyone considering the policy implications of such trends would consider it to be painting a dismal picture. Our big cities will continue to grow, with their associated problems of congestion, long journey times, and unaffordable housing, while our other regions stagnate with ageing populations and a lack of rejuvenation through immigration. (Strangely the statement does not mention the recent moves out of our big cities, accelerated by the pandemic and technological opportunities for people to work remotely.)In fairness to the public servants at the Centre for Population it is only a set of projections, rather than a policy-related analysis, but it does expose our lack of a spatial settlement policy.