Other economics
Cooking without gas
Sixty years ago winters in Melbourne were miserable. The atmosphere was thick with coal dust and the smell of sulphur dioxide, both emanating from brown coal briquettes being burnt for house heating. Before sitting on a park bench one was wise to wipe the black grime from the seat. And inside houses gas stoves and water heaters ran on coal gas – a gas produced from brown coal, rich in deadly carbon monoxide, and when burnt the source of a cocktail of other dangerous gases.
Natural gas was the saviour, particularly in households in Victoria and the ACT. In South Australia it was the wondrous clean way to expand electricity production as that state’s resources of low-quality coal were depleted.
In our belated shift to renewable energy, gas has been considered as the transitional fuel for electricity generation, providing power when renewable sources are unavailable (“when the wind doesn’t blow and the sun doesn’t shine” to borrow the industry’s phrase), and to provide stability to the grid (“firming”).
Now is the time for Australia to wean itself off gas, the source of 22 percent of our emissions, as revealed in a Grattan Institute report by Tony Wood, Alison Reeve and Esther Suckling: Getting off gas: why, how, and who should pay?. We don’t need gas as a transition fuel because coal-fired generators, when they retire, are being replaced with renewable resources and storage to provide peak capacity and stability.
Although only 9 percent of gas is used in residential buildings, and another 2 percent is used in commercial buildings, the Grattan report emphasises the opportunities for reducing gas consumption in cooking, heating water and heating buildings, particularly in view of the good returns to households and building owners in switching to electricity. Gas was once the cheap fuel, now it is the expensive fuel, and while electricity prices will fall in time, gas will go on becoming more expensive.
But there are impediments to this transition. Electric appliances, while low-cost to run, are expensive to buy, and renters are generally locked into the appliances and heating systems installed by the building owners. The best appliances – heat pumps and induction cook tops – are particularly expensive to install, often requiring new wiring. Even so, the authors point out, they soon pay for themselves in terms of lower energy bills. But as behavioural economists know, even when people can afford to make such sound investments they are put off by the upfront costs.
In fact households are replacing worn-out gas appliances with new gas appliances, and property developers developing new suburbs and building apartment blocks are including gas piping. The trend is towards an expansion of gas use.
The authors recommend a number of government incentives and subsidies to help cash-poor households cover the upfront costs of electrifying, to incentivize building owners to electrify their buildings, and to help state governments decommission the gas distribution network in a planned orderly way.
The report is rich in data on trends and on the costs and benefits on electrifying. Those weekend chefs who believe that they might hang on to gas cooktops should look at the chart on Page 45 of the report: with just one gas appliance households are still paying the gas companies’ high daily charges.
On the ABC’s Breakfast program Tony Wood explains the report’s recommendations, including the different timing and regulatory pathways to eliminate use of gas in households, in electricity generation, and in industrial applications: Calls for homes to “get off gas” to achieve net zero.
Cleverer ways to fight inflation
The RBA’s housing tool kit
There are two ways to build a house. One way is to rely primarily on a chainsaw, backed up with a sledge hammer and a few 150 mm nails. The other is to use a full range of tools and fasteners, each designed to perform a particular function.
As a means of combatting inflation, monetary policy, as exercised by the Reserve Bank, is in the former category.
Writing on the ABC website, Daniel Ziffer and Melissa Brown suggest policymakers pursue the latter approach: Beat inflation without raising interest rates? We can do it, but it's slow, hard and politically risky.
They all call on the government to lower inflation, but unlike economists from the neoliberal school, they don’t advocate the crude approach of fiscal austerity. To continue the metaphor, that is simply to substitute one chainsaw for another. Rather, governments should use specific interventions, focussing on reducing people’s cost of living and improving their social wage, while avoiding an inflationary breakout in nominal wages. Some of their recommendations, such as increasing the Medicare levy and lifting superannuation contributions, have echoes of the Hawke Government’s Prices and Incomes Accord. They suggest use of selected price caps in some sectors and improved competition in others. For the longer term they urge governments to find ways to encourage improved productivity. Without improved productivity there cannot be sustained real wage growth.
Writing in The Conversation John Hawkins and Craig Applegate of the University of Canberra address the issue of productivity: We know how to boost productivity and lift wages – but it will take time and much tougher tax reform. They show that labour productivity growth is the lowest it has been in the last 60 years, and they explain the reasons for this decline. Their recommendations and suggestions draw heavily on the Productivity Commission’s five-yearly inquiry into productivity, the most recent instalment – Advancing Prosperity – having been released in March this year.
They expose a contradiction in monetary policy, as exercised by the Reserve Bank, with its desire to see wages suppressed. The theory is that if wages can be kept in check wage-push inflation will be dampened. That may be correct in terms of bringing down recorded indicators of inflation such as the CPI, but wage suppression has the consequence of suppressing productivity. If wages are low, firms have no incentive to invest in labour-saving technology, which is the general driver of improved productivity.
That’s a valid economic observation: indeed suppression of real wages was a deliberate policy of the Coalition government, which is one reason business investment and labour productivity fell over its last nine years in office. If labour was cheap to employ, there was no need to invest in labour-saving technology and machinery.
Also writing in The Conversation Mark Humphrey-Jenner of the University of New South Wales points to another way suppression of wages leads to lower productivity. It’s about the demotivating effect of falling wages: Tired of shrinking pay? The real drain on Australians’ productivity is falling wages. He writes:
Consciously or otherwise, workers whose real wages are falling might care less about their jobs. They might work more slowly, or they produce worse-quality goods or services. And their attitude might permeate to other workers and to clients, undermining productivity more broadly.
That’s in line with organization behaviour theory – a body of knowledge often overlooked by economists who have a simple carrot-and-stick model of labour markets.
Not everyone is suffering a squeeze in real wages, however. The 2023 Report on Board and Executive Remuneration, prepared for the Governance Institute of Australia, “has found that executives at some of Australia’s largest listed companies have recorded average pay rises more than double the rate of inflation over the past year”.
The link above takes one only to a few highlights of the report. The ABC seems to have been able to get hold of the full report. Michael Janda summarizes some of its findings: Wage inflation hits double digits … for chief executives, Governance Institute finds. Chief executives of ASX-listed companies enjoyed an average 15 percent rise in base pay last year – and that’s before considering performance bonuses. As one moves down the food chain the pay rises are less generous. This means that the pay gap between senior managers and front-line workers has continued to widen.
Janda finds in the report data on entities other than ASX-listed corporations. He reveals that “the median pay for charity CEOs was $228,000, with community housing and disability not-for-profits typically paying their chief executives just over $300,000 per year”.
Those who are considering making tax-deductible donations to charities before June 30 would do well to seek information on executive remuneration on the organizations’ websites.
All you need to know about macroeconomics
There is so much speculation about the probability of a recession in Australia it’s a wonder the sports betting firms aren’t running a book.
If there were such a book, it’s probable that the ABC’s Ian Verrender would have his money on a recession.
In a post on the ABC website – The temporary madness of modern politics: is our strongest market a harbinger of recession? – he explains the conventional theory of the relationship between interest rates, inflation, economic activity and employment. He notes that interest rates aren’t working in accordance with the theory: they aren’t bringing down inflation but they are causing a great deal of pain to borrowers. One reason is that in Australia, unlike in many other countries, mortgagees don’t have access to long-term fixed rate loans. Nevertheless the Reserve Bank is “being spurred on by a chorus of educated minds who see no alternative but to crash the economy with ever higher interest rates”.
If history is any guide, Verrender explains, our present very low rate of unemployment is the harbinger of a recession. He points to US experience going back to 1950. Over that 73 years there have been 11 recessions or sharp economic contractions, and the country is possibly headed for a 12th. Each time the recession or sharp downturn has been preceded by a very low rate of unemployment.
No doubt there will be soothsayers trying to assure us that “this time it’s different”, but the evidence Verrender presents is rather scary