Other economics

The RBA’s fear of full employment

The Reserve Bank’s explanation for its decision to leave interest rates at 4.35 percent reads like a novel with an ending lifted from a different work. It describes an economy with weak output, eased wage pressures, and low growth in household consumption, but it concludes that “the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome”.

RBA
They have good jobs

In justifying that determination it makes the unsupported assertion that it does not see inflation returning sustainably to its target range of two to three percent until 2026. This is in spite of recent data on consumer prices, and in national accounts, indicating that inflation is already well below two percent.[1]

The RBA’s concern is that because the economy lacks the supply capacity to match present demand, demand has to be suppressed, and that is achieved by keeping interest rates high.

That’s the model taught in Economics 1, but according to many economists it’s becoming more detached from reality.

Writing in The Saturday Paper – How not to battle inflation – Stephen Long, quoting extensively from former RBA Governor Bernie Fraser and other economists, points out that monetary policy, as presently practised, is ineffective in combatting inflation. It doesn’t stop price gouging; it doesn’t stop price rises resulting from climate change; and it doesn’t touch spending by the rich, who actually find they have more money to spend when interest rates are high.

The ABC’s Ian Verrender looks at productivity. Another basic Ecomomics 1 verity is that real wages cannot grow unless productivity is rising. Because productivity in Australia has collapsed, any wage rise above inflation shows that wages are running ahead of the economy’s supply capacity and are therefore the drivers of inflation.

The trouble with that logic is that it isn’t clear what “productivity” is. It has a clear meaning in some mass-production industries, but it’s a devilishly hard thing to conceptualize and measure in intrinsically labour-intensive human services, particularly services such as teaching and nursing delivered in the public sector. More specifically, the practice of central banks (and of right-wing governments) in seeking a rise in unemployment to ease demand for labour can discourage firms from using labour more productively. If labour is plentiful, why bother investing in capital equipment to make labour more productive, particularly when monetary policy is making capital more expensive?

Verrender is even more concerned about the influence our resource-extraction industries have had on our economic structure and on incentives to innovate and improve productivity. If money is pouring in to the economy from mining, an elevated exchange rate wipes out trade-exposed industries, and there is little incentive to improve productivity.

Besides targeting inflation, the RBA is also supposed to sustain “full employment”, which doesn’t mean a zero rate of unemployment, but rather a rate of unemployment that stops wage-inflation breaking out (the NAIRU model). Alan Kohler has a short video explaining why the usual economics of higher interest rates resulting in unemployment worked in the past but isn’t working now. The RBA won’t succeed in lifting unemployment when there is a strong supply of immigrant labour.

Why should the Bank want to see unemployment rise? It seemed to be distressed that the unemployment rate was 4.1 percent. They would like to see it go higher. They probably regard Thursday’s labour force figures, revealing that unemployment has fallen to 3.9 percent, as a bad economic signal. Economists are strange creatures.

Do they consider the full cost of unemployment? That is not only the cost experienced by those without work, and the associated forgone output. It’s also about the way workers’ power weakens when unemployment rises. They lack the power not only to bargain for higher wages (the RBA’s intention), but also the power to improve conditions, to move to more productive employment, and to walk away from bullying bosses.

Kohler brings to our attention the RBA’s charter, which is summarized in three clauses. The Bank is directed to exercise its powers for the ”greatest advantage of the people of Australia”. Its monetary and banking powers should contribute to:

He suggests that the Board may have lost sight of the third of these targets.

The RBA’s next meeting is on February 5-6, a week after the December quarter CPI is released on January 29. For several reasons, including Christmas demand and the timing of Medicare safety nets, the December quarter CPI is often above trend. In view of the RBA’s pattern of selecting series and time spans most likely to support its contention that inflation is stubbornly high, it will probably use a seasonally unadjusted figure to justify its decision. Nevertheless the ABC’s Michael Janda believes that the RBA will find it hard to resist pressure to cut rates, particularly if there is a deterioration in the labour market: Reserve Bank governor opens door to February interest rate cut, but will she walk through?.

RBA governance changes

Laura Tingle, in an article about the politics of the RBA’s governance, points out that this could be the last meeting of the Bank’s present board. That’s because the government has finally gotten legislation through Parliament establishing the Bank’s two-board structure – one for interest-rate setting (the one we’re all interested in), and the other that regulates the banking system. Writing in The Conversation – The Reserve Bank will now have a separate board just to set interest rates. Here’s why that’s significant – John Hawkins of the University of Canberra and Selwyn Cornish of ANU suggest that this will make for a better decision-making process, effectively making the it more collegiate. But it may not result in much change in the Bank’s decisions: economists all seem to think the same way.

1. See the roundup of November 30 for evidence that the CPI is now in negative territory. See last week’s roundup for data from national accounts showing that the GDP deflator is now negative – minus 0.2 percent.. ↩

Public servants really do serve the public

One of the first moves of a newly-elected right-wing government is to take a knife to the bureaucracy. It can to be “draining the swamp” or “trimming the fat”. But over its time in office problems start to mount: tax refunds and social security payments are delayed; passports take months to prepare, promised new services don’t get delivered, and worst of all, ministers don’t get the service they expected. By the time they are thrown out of office the public service is once again on a growth path. This was the pattern with the Howard and Abbott-Turnbull-Morrison governments.

Right-wing governments like to say that they have cut the bureaucracy by N-thousand public servants, without pointing out that they have appointed N-thousand more highly-paid and less-experienced consultants and contractors in their place. (Sometimes the number is greater than N, because consultants are adept at recommending additional jobs for themselves.)

Martyn Goddard, in his Policy Post, provides a short history of the public service, up to the present government’s program of restoring the public service’s capabilities. Its capacity for policy research and advice, and for delivering effective program administration, had become badly eroded over years in which Coalition governments devalued and politicized the public service: The Public Service: back in from the cold.

Goddard describes how, over fifty or more years, the task of providing policy advice has shifted from the public service to ministerial advisers, whose numbers have swelled. Ministerial advisers are politically loyal, but they lack the corporate knowledge and research base of the public service, and their motivation is often to rise in the party ranks rather than to serve the public.

He provides details of employment numbers of both public servants and of external labour over recent years, showing how the present government is re-building the public service and how different employment patterns in different agencies reflect the government’s priorities. For example, employment in the High Speed Rail Authority has doubled – from 8 to 16. But the big increases in absolute numbers have been in defence and the NDIS. It’s also notable that the Australian Taxation Office has had a sizeable boost, as has the ACCC, to take a couple of examples of agencies that can use extra staff to do much in the short term to contribute to better resource allocation.

His main gripe seems to be that not enough of these new public service jobs have been in Tasmania.

It takes a murder to make us think about the moral failure of for-profit health care

Each day about 60 Americans are murdered by firearms. Such deaths don’t command much attention nationally or internationally.

That is, unless they are in the morning on New York’s 6 th Avenue, outside the Hilton Hotel, just opposite the Museum of Modern Art (probably one of the safest areas in the country), the victim is CEO of a very large company (the country’s largest health insurer) on his way to announce a revenue forecast of $US450 billion, and the murder has the characteristics of an assassination.

That was the killing of Brian Thompson, CEO of United Health Care.

The ABC’s Brad Ryan and Jade Macmillan describe the murder. Their account of the incident – Killing of CEO in New York highlights anger and danger for US health insurers – is about the probable motive of the killer conveyed in the words “Deny”, “Defend”, “Depose” written on bullet casings, and the public reaction to his murder. To quote one reaction from their post:

Columbia University professor Anthony Zenkus, in an X post that's been liked more than 100,000 times, wrote: "Today, we mourn the death of United Healthcare CEO Brian Thompson, gunned down … wait, I'm sorry — today we mourn the deaths of the 68,000 Americans who needlessly die each year so that insurance company execs like Brian Thompson can become multimillionaires."

Writing in The Atlantic – Murder is an awful answer for health-care anger – Nicholas Florko describes the torrent of comments on social media, ranging from a hope that the murderer is never apprehended through to expressions of deep hatred of the victim.

A little background explains the context of these remarks. At 17 percent of GDP, USA has the highest expenditure on health of all OECD countries. That’s almost twice the OECD average of 9 percent of GDP. Our expenditure, for example, is 10 percent of GDP.

Yet the USA has terrible health outcomes. For example life expectancy is well below that of other “developed” countries while obesity rates are the highest of all “developed” countries. The Commonwealth Fund, a 106-year old body promoting high-performing and equitable health care, ranks the US as having the worst-performing health care system of the 10 countries covered in its regular surveys.[2] It fails on health outcomes, access to care, equity, and administrative efficiency – four of the five criteria in the Commonwealth Fund’s assessment.

Setting the USA apart from other countries is its dependence on for-profit private health insurance. It has government programs – Medicare for people over 65, Medicaid for the “indigent”, and programs for veterans – but these government programs have to pay for care in a market where prices are set by interactions between for-profit insurers and for-profit health-care providers. Those with well-paid jobs are covered by health insurance paid for by their employers, but those in precarious employment, the self-employed, or those who are unemployed but don’t pass Medicaid’s means tests, are uncovered. They have to buy insurance on a market where they have no bargaining power (improved a little by Obama’s Affordable Care Act), or go without. And even those who are covered, unless they are on the very top plans, find that there is no assurance their claims will be paid: “Deny”, “Defend”, “Depose” describes their strategy.

Millions of Americans are uninsured or severely underinsured, and thousands die each year because they cannot afford the care that would be provided in other countries, usually through a single national insurer such as Australia’s Medicare.

People’s anger at the insurers is understandable, but is their Schadenfreude reasonable? Florko writes:

Although the governments of most wealthy industrialized countries provide all of their citizens some level of insurance, the majority of Americans rely entirely on the whims of private health insurers. The system is designed to keep costs down enough to turn a profit. In this way, the insurance industry’s eagerness to save money by denying people care is a feature, not a bug, of this country’s system. This aspect of the American system does cause real and preventable harm. But those cheering Thompson’s death are arguing that taking away sick Americans’ pills or denying them needed surgeries is immoral and should be punished by death. That logic is indefensible. People do have reason to be angry—but even justified anger does not justify murder.

Florko describes the way for-profit health insurance works. It’s the way unrestrained markets work. It’s the way corporate law works, obligating a company’s board and executive to attend to the shareholders’ financial interests. It’s about the way decent citizens who are caring for their neighbours and who obey the laws of the land do terrible things in their corporate lives. If that looks like the Eichmann defence it is because it is the Eichmann defence.

But the prime responsibility lies with those who set the rules – the lawmakers – and in a democracy that refers to the voters. Those are the millions of Americans who, fearful of “socialized medicine” without knowing what it meant, made Kamala Harris drop her former “Medicare for all” proposal, a proposal similar to that operating in the Nordic countries, UK and Canada, and similar to our original “Medibank”, from her platform for election.

Here in Australia we should be mindful that the same forces are at play, although they are very much attenuated. For 50 years the Coalition has been trying to destroy our government health insurer. Initially the battle was intense, even involving a double-dissolution election. In later times it became more a war of attrition, particularly when in 1997 the Howard government introduced a set of incentives designed to rescue private health insurance from terminal decline. In recent years, reminiscent of Harris’s backdown, Labor has lost the courage to pursue its original vision of Medicare as a single national health insurer, as it grapples with the unconscionable behaviour of health insurers.

America presents a stark illustration of the moral and economic consequences of for-profit health care. Are we willing to learn from it?

2. Australia, Canada, France, Germany, Netherlands, New Zealand, Sweden, Switzerland, UK, USA. ↩

Empty supermarket shelves

The recent strike by Woolworths workers at distribution centres exposes the way some businesses use performance management systems that objectify workers, strip them of autonomy, and leave them in continuous fear of losing their jobs.

There’s nothing new about performance management systems. All successful businesses monitor and manage their performance. But some systems focus entirely on front-line workers, answering calls in call centres, delivering parcels, operating factory machinery, and other functions for which it is possible to develop metrics of individual performance, usually the number of tasks performed over a time period.

There is nothing wrong with using such metrics, but they become troublesome when they are linked to piecework payment – a practice that dates back more than 100 years, known as Taylorism, or “scientific management” after the American engineer Frederick Winslow Taylor.

Piecework has traditionally been used in labour-intensive manufacturing industries, particularly in factories. In our old car, clothing and appliance factories its excesses were kept in check by strong unions who made sure that the base rates defining minimum standards were reasonable. That way they ensured that the award wage was a floor, and workers who worked with greater throughput were paid more – generally up to about 25 percent above award. In terms of motivational theory, they were based on reward, rather than punishment.

But the industrial landscape has changed, and those old unionised industries have largely gone. The worst performance management systems strip workers of all autonomy, and punish workers for not achieving minimum performance standards. The basis of those standards is not revealed to workers, and in many businesses the standards become harder to meet over time: this year’s time per task will be X percent lower than last year’s.

Lauren Kate Kelly, writing in The Conversation – Why Woolworths workers can’t sleep at night: inside the supermarket giant’s controversial “Framework” – describes the performance management system implemented by Woolworths:

Under the program, known as the Coaching and Productivity Framework or simply “the Framework”, workers say they face potential disciplinary action if they fail to achieve 100% adherence to a speed-related metric known as pick rates. This represents a sharp break from previous approaches in which a pick rate of 100% was a non-enforceable goal, rather than a basic requirement.

She describes the stress this places on workers – not only the physical stress of difficult-to-fill targets, but also the anxiety of being constantly watched and under threat of dismissal.

Another Conversation contribution by Tom Barnes of Australian Catholic University – The dispute causing empty shelves at Woolies is a test case for companies using AI and automation on workers – explains how artificial intelligence has added to the intensity of control in performance management systems.

Although the talk in corporations is about “teamwork”, systems based on surveillance of each individual’s performance actually discourage teamwork, because others become rivals rather than co-workers. Those at the top of the shop floor pecking order get the easiest tasks. Workers become indifferent to quality: they work to the metric, and become completely alienated from the firm’s objectives. That’s the cost of objectification.

The people who design these systems, often in consulting firms, have simplified views of production processes. They don’t understand that production systems cannot be fully routinized. Never having been involved in front-line work themselves they don’t understand the operation of Murphy’s Law – “what can go wrong will”. They don’t understand that the workers with the poorest metrics may be those who are taking most care. The call-centre workers with the longest calls may be those who ensure that customers remain loyal to the business. At the other end of the spectrum the fastest delivery drivers may be those who behave aggressively on the roads, displaying bad manners in trucks carrying corporate logos.

If the Woolworths workers have managed to kill the “Framework”, or to have it redesigned, they will probably be doing a favour to themselves, to the firm’s customers, and to its shareholders.

The economy is personal

If a disinterested observer were asked to give a report card on the Albanese government, it would probably be given high marks. Unemployment is low, the inflation it inherited from its predecessor has been brought down, and its fiscal management has been cautious. Economic growth is poor, but that’s because successive governments have avoided dealing with structural weaknesses which take a long time to address.

But as John Hewson points out in a recent Saturday Paper contribution, the economy is personal. When they come to the ballot box, voters are driven by the way they feel, rather than by hard data about economic performance. This is illustrated in the US election, where all the indicators of the US economy were positive, but Trump was able to use the question “do you feel better off now than you were four years ago?” as a campaign tactic. Note the emphasis on “feeling” better off.

Dutton is likely to use the same tactic to mask the reality that the Liberal Party has no policies that could improve people’s material living standards in the short term.

William Bowe’s Poll Bludger reports on a Resolve Strategic poll revealing that 59 percent of respondents say they have become worse off since the 2022 election, while only 13 percent say they are better off, and 36 percent say they believe Dutton would improve things over the next three years, while only 27 percent believe that the Albanese government would.

As Hewson says, “the Coalition persists in defending the myth, as did the Republicans in the US, that it is the better economic manager, even when the evidence is overwhelmingly to the contrary”, and people buy that myth. Journalists too seem to have bought it because they rarely challenge Coalition economic spokespeople when they trot out their lies about their own record or assertions about Labor’s supposed incompetence.

The Coalition’s job is helped, too, when journalists, including many in the ABC, talk about a “cost of living crisis”, as if we are all doing it tough, when the reality is that financial difficulties are concentrated on about 20 to 30 percent of households, including those living on income support payments, people who became heavily indebted when interest rates were high, and renters in some of our capital cities, while everyone else is coping rather well. (If you’re unconvinced by hard data wander into one of the upmarket shopping precincts such as the Parade in Norwood or Pitt Street in Sydney, or try to make a same-day reservation at an expensive restaurant.)

It is possible that, in spite of journalists’ attempts at making us all feel immiserated, most people’s subjective feelings about their economic conditions are improving. The Westpac-Melbourne Institute Consumer Sentiment Index has been rising strongly since its low point in the middle of the year.