Dog Days - Q&A

In terms of disposable income, given that wage growth has been low during the Dog Days, how significant has the impact of massive energy cost increases been?

Gas (huge price increases in eastern Australia since the coming on stream of Queensland LNG exports a few years ago) and electricity (blowout in transmission and distribution costs and retail margins) are large in themselves, but small in the whole set of downward pressures on real wages and household disposable income.

You mentioned full employment until we reach inflation. At what point would you expect wages will rise again?

We would expect real wages to rise with continuing economic growth after full employment. In conditions as they were before the pandemic, I would have expected “full employment” to have been reached at about 3.5 percent unemployment—although we would not know until this was tested by falling unemployment, and it was never tested during the Dog Days 2013-19. The rate of unemployment, at which inflation starts to rise, may rise with reduction in immigration (less overall labour market flexibility and loss of some labour skills as a result of unemployment) but I would still expect it to be well below 5 percent through the years immediately ahead.

Is it fair to say at this point that neoclassical economics is a poor ideology by which to make fiscal policy decisions and it's time to abandon the experiment that started with Reagan and Thatcher, and happily adopted by both the Hawke/Keating & Howard governments?

The Hawke-Keating reforms were within a social democratic framework, which in ideological terms was very different to the Thatcher-Reagan reforms. E.g. Medicare; family payments; huge expansion of school and university education; etc. The Thatcher-Reagan policies can reasonably be called “neo-liberal” in the sense in which the term came to be used in the US. Neo-classical is something different—the authority on neo-classical thought, Paul Samuelson, was no fan of Thatcher-Reagan policies. Failure to recognise the difference between US “neo-liberalism” and Hawke-Keating social democracy allowed “neo-liberals” falsely to take credit for the equity and prosperity successes flowing from the Hawke-Keating reforms, and to undermine part, but no means all, of their social democratic content. Howard accepted a substantial part, but not all, of the social democratic content of the Hawke-Keating policies (e.g. unlike Trump and “Obamacare,” Howard did not seek to repeal Medicare).

How do you expect Australian trade and the current account balance to be affected? Do you reckon Australia will return to a current account deficit?

Quite likely that capital inflow will be lower and therefore the trade and current account surpluses higher (or deficits lower) in Australia if we have post-pandemic Dog Days; but more capital inflow and a higher trade and current account deficit for a number of years is possible if we have post-pandemic restoration of Australia with high levels of investment and net capital inflow.

What role (in your view) does low inflationary expectations have in contributing to the “Dog Days” stagnation, seen through high saving rates?

Low inflationary expectations and unnecessarily low growth in demand and output and unnecessarily high unemployment were all the result of excessively tight monetary policy, tight especially in comparison with other developed countries which were experiencing more rapid growth in output per capita. So, they are linked by having common causes.

Does it strike you as more than a coincidence that our fall in national productivity correlates almost directly with the diversion of government stimulus away from higher education and into subsidising mining and corporate finance?

Investment in education, including early years education, is very important for long term productivity growth. So falling efforts in these areas leads to lower productivity in the long run. The time lags are quite long, as young people have to move into and be influential in the labour force before good or poor education and training affects national productivity.

How much of an impact will China and the USA have on reaching full employment? Are they key to the outcome in your opinion?

The trade clash between the US and China is contributing generally to a slowing of global economic growth and reduced opportunities everywhere for productivity-raising trade and specialisation. These effects are more important in the developed economies that are relatively small and have skewed resource endowments—Australia more than nearly all others. The trade problems lower the wages that are consistent with full employment—we can still have full employment but have to accept lower living standards than in a world of globally open trade.

Do you think we can successfully wean ourselves off high immigration and return to something more sustainable, or is the federal government hooked on the headline GDP growth enhancement provided by rapid population growth?

Immigration has fallen to very low, for the moment perhaps, negative, levels during the pandemic. I address the question of whether and how far we should seek to get immigration back to Dog Days levels in Lecture 3.

Do you think elevated property prices will support or hinder Australia’s recovery?

Elevated property prices are mainly a result of low interest rates, enhanced by city population growth. The former element will remain present; the latter will be reduced to some extent. The overall effect will be some moderation of city property prices. (Rural property is another matter). That is good for equitable income distribution. Equitable distribution is a necessary condition of sustained productivity-raising reform. In the sense of the last sentence, higher property prices hinder restoration of Australia.