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Category: Macroeconomics

  • Profit-Price Spiral: The Truth Behind Australia’s Inflation

    Labour Standards & Workers’ Rights, Macroeconomics

    Profit-Price Spiral: The Truth Behind Australia’s Inflation

    by Jim Stanford

    Author

    Jim Stanford

    Media release



    Profit-Price Spiral: Excess Profits Fuelling Inflation & Interest Rates, not Wages

    Workers in Australia have suffered considerable economic losses as a result of accelerating inflation since the onset of the COVID pandemic. Reaching a year-over-year rate of 7.8% by end-2022, inflation has rapidly eroded the real purchasing power of workers’ incomes; average wages are currently growing at less than half the pace of prices. Now, severe monetary tightening by the Reserve Bank of Australia (through higher interest rates) is imposing additional pain on millions of workers. Tens of billions of dollars of household disposable income are being diverted away from consumer spending, into extra interest payments made to banks and other lenders. Most ominously, signs of macroeconomic slowdown from higher interest rates portend job losses and even greater income losses in the month ahead.

    The pain experienced by workers through this inflationary episode contrasts sharply with an unprecedented upsurge in business profitability at the same time. Additional profits resulted from businesses increasing prices for the goods and services they sell, above and beyond incremental expenses for their own purchases of inputs and supplies. This dramatic expansion of business profits (taking gross corporate profits to almost 30% of national GDP, the highest in history) has been mostly unremarked on by the RBA and other macroeconomic policy-makers. They have focused instead on the supposed risk of a ‘wage-price’ spiral. However, new empirical evidence confirms the dominant role of business profits in driving higher prices in Australia – not wages. This suggests the focus of monetary policy on wage restraint is misplaced and unfair.

    Major findings:

    • As of the September quarter of 2022 (most recent data available), Australian businesses had increased prices by a total of $160 billion per year over and above their higher
      expenses for labour, taxes, and other inputs, and over and above new profits generated by growth in real economic output.
    • Without the inclusion of those excess profits in final prices for Australian-made goods and services, inflation since the pandemic would have been much slower than was experienced in practice: an annual average of 2.7% per year, barely half of the 5.2% annual average actually recorded since end-2019.
    • That pace of inflation would have fallen within the RBA’s target inflation band (equal to its 2.5% target plus-or-minus 0.5%). Even within the RBA’s own policy rule, therefore, current painful interest rate hikes would be unnecessary.
    • A second scenario considered below allows for modest nominal inflation in unit profit margins, consistent with the RBA’s 2.5% target – once again, above and beyond the costs of other inputs (including labour and taxes) and the growth of profits due to expanded real output. Even in this scenario, inflation would have averaged just 3.3% since the pandemic, only slightly above the target band, and current harsh interest rate changes would again have been unnecessary.
    • Analysis of the income flows associated with excess inflation since end-2019 confirm the dominance of corporate profits in the acceleration of inflation since the pandemic. Excess corporate profits account for 69% of additional inflation beyond the RBA’s target. Rising unit labour costs account for just 18% of that inflation.
    • The distributional dimensions of post-COVID inflation (falling real wages, falling labour share of GDP, and record corporate profits) are completely opposite from the experience of the 1970s (when real wages rose, the labour share of GDP increased, and corporate profit margins fell). This historical comparison confirms that fears of a 1970s-style ‘wage price spiral’ are not justified. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.



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  • Inflation: A Primer

    Macroeconomics

    Inflation: A Primer

    by Greg Jericho

    Author

    Greg Jericho

    Chief Economist

    Media release



    The Reserve Bank needs to acknowledge the failures of the inflation target

    Over the past year, inflation has accelerated both in Australia and in most advanced economies, to rates much faster than have been observed for many years. Not unsurprisingly, this has caused much concern among people whose cost of living has risen abruptly. It has also created great challenges for policy makers: the risks of tackling higher inflation are high, given that the conventional response is to reduce aggregate demand, economic activity, and employment in order to “cool off” spending and thus reduce price pressures. This can mean that the “cure” can be worse than the “disease” – especially if, as occurred in the 1980s and 1990s, a recession follows efforts to constrain inflation.

    The Inflation Primer report investigates the history of Australian inflation and policy choices and provides a counter to the view that low inflation and the current inflation target is an unalloyed good. The period of inflation targeting has coincided with a strong shift of national income away from workers to company profits. It has also seen a tendency of the Reserve Bank to act decisively when inflation grows above the target and be much less active when, as we saw in the years prior to the pandemic, inflation slowed below the target range. The report also reveals that workers’ wages did not cause the current level of inflation  and yet workers are being urged to accept historic falls in real wages in order bring inflation back within the Reserve Bank target.

    Our review of the causes of current inflation points to some clear policy conclusions, that should be kept in mind by the government, the Reserve Bank, and other stakeholders as Australia continues to adjust to these new inflationary challenges:

    1. Inflation targeting in Australia since 1993 has not been “neutral”. Inflation missed the target from below, far more often than from above. Moreover, that period of inflation targeting (especially the sustained periods when inflation fell below the target) was associated with a massive transfer of income and economic power from workers to businesses. As the Commonwealth government undertakes its review of the RBA’s mandate and operations, these broad political-economic dimensions of monetary policy must be considered carefully. Monetary policy has not been a technocratic exercise, intended to maximise public welfare in a general sense. It clearly reflects and continues to reflect, value judgments and priorities placed on how the costs and benefits of inflation management are distributed across society.
    2. There is no evidence at all that a tight labour market, rising wages, or labour costs more generally have anything to do with the surge in inflation since the COVID pandemic. To the contrary, the evidence is clear that wages have had a dampening impact on inflation in this period. Recent inflation is clearly associated with a further expansion of business profits in Australia, to their highest share ever. Attacking inflation by aiming deliberately to increase unemployment and restrain wage growth even further, is a “blame-the-victim” policy that will only make workers pay even more for a problem they clearly did not create.
    3. The current surge of inflation reflects a “perfect storm” of unique factors (mostly global in nature) sparked by the COVID pandemic: which has been, after all, the most dramatic and painful event in the world economy since WWII. It should hardly be surprising that after-shocks from those events will be felt for some time, and the surge in global inflation is clearly one of them. Responding to this unique and unprecedented challenge by simply reciting a monetary playbook formulated in a fundamentally different era (the inflation of the 1970s) is not just inappropriate. It will, if pursued, lead to a painful and unnecessary global recession that will almost certainly engulf Australia, too.

    For all these reasons, the Reserve Bank and the Commonwealth government need to take a more careful, balanced look at the nature, causes, and consequences of the upsurge in inflation since the pandemic, before leaping to conclusions that are unjustified – and imposing policy responses that do more harm than good.



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  • Profit share

    Macroeconomics

    Profit share

    Exploring data on profits in the Australian economy
    by David Richardson and Richard Denniss

    Authors

    David Richardson

    Senior Research Fellow

    Richard Denniss

    co-Chief Executive Officer

    The roles of profits, wages and costs in driving inflation has been widely discussed in recent months. Claims by the Business Council of Australia that profit shares are at a 20-year low are not supported by official data sources.

    In recent months the relative role of wages, costs of production and profits in driving inflation in Australia, and around the world, has been widely discussed. However, as is often the case in Australia, even simple questions such as ‘is the profit share rising or falling?’ and ‘have wages or profits played a bigger role in driving inflation?’ have become contested.

    For example, while the Australia Institute and the ACTU1 have argued that profit growth has contributed more to inflation than wage growth, and that the profit share of GDP is at historically high levels, the Business Council of Australia (BCA) is arguing the exact opposite. For example, the CEO of the BCA, Jennifer Westacott was recently reported as complaining that recent focus by the unions on the size of profits in Australia created an “us v them” narrative. Moreover, she was reported as saying that once mining profits were removed, the profits share of income had actually fallen to its lowest point in 20 years.2 While it is of course possible that Ms Westacott was misreported, no corrections have been issued. And while she may have provided data to support her claim, the journalist who wrote the story made no reference to it, nor has the BCA provided any data to support their claim on their website.

    Intriguingly, soon after Ms Westacott’s claims were reported the BCA’s Chief Economist, Stephen Walters, made a related, but significantly more cautious claim, namely:

    After excluding the miners and banks which are distorting this data and where wages are among the highest in the nation, the broader profit share actually has fallen.3

    Not only does Mr Walters suggest that it is useful to exclude the profits of two industries to understand what it happening to profits in Australia (rather than just the one identified by his CEO) he makes no claims about the relevant period for analysis (as opposed to his CEO’s claim about trends over the last 20 years). Neither Ms Westacott nor Mr Walters explain why they are excluding an arbitrary number of profitable industries from their analysis of profits. But, as discussed below, if the volatility or recent growth of profits in some sectors is the explanation for their exclusion then it seems unusual that sectors with volatile or rapidly growing wage bills would not also be excluded from their analysis.

    This paper presents a wide range of data from the Australian Bureau of Statistics (ABS) that suggests, contrary to recent claims made by representatives of the BCA, the profit share of GDP is rising.

    While the topic of this paper may seem esoteric, it is important to consider the consequences for policy debate in Australia of the inability of different groups to agree on thing as simple as whether profits are currently at historically high or low levels. As has been shown with climate change, if groups cannot agree on the nature of a problem it is difficult, if not impossible, for them to develop solutions.



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  • An Economy That Works for People

    Macroeconomics, Wages & Entitlements

    An Economy That Works for People

    by Jim Stanford

    Author

    Jim Stanford

    Selected media impact

    The new Commonwealth government is hosting a major Jobs Summit in September 2022, bring together representatives from a range of stakeholder groups to discuss the challenges facing Australia’s labour market, and how to achieve strong employment, job quality and security, and better skills and training opportunities.

    In preparation for the Summit, the Australian Council of Trade Unions is publishing a series of discussion papers to spark dialogue over key issues that will be discussed at the event. The first of these papers, on the failures of past macroeconomic policy and the need for better approaches, was prepared with input from Jim Stanford, Director of the Centre for Future Work.

    The 23-page report, titled An Economy That Works for People, first reviews the legacy of the last decade of one-sided macroeconomic and labour market policies from former Coalition governments. Boosted by government actions to reduce taxes, labour costs, and regulations, corporate profits have swelled to the highest share of GDP (almost 30%) in history. But that profit has not translated into investment or innovation: at present just 37 cents of each dollar in profit is reinvested in new projects. Meanwhile, the share of GDP going to workers has never been lower since records have been kept: falling to just 45% in 2022. This redistribution of income from workers to businesses is not just a moral failure. The impact of swelling profit margins on inflation, and the drain in spending power arising from uninvested profits, are holding back Australia’s economy considerably.

    An Economy That Works for People

    The paper discusses the causes and consequences of the current surge in inflation in detail, providing conclusive evidence the problem did not arise in the labour market. To the contrary, labour costs have servedto reduce inflation: nominal unit labour costs grew only 2.1% over the last 12 months (below the RBA inflation target), while unit profit margins surged (by over 14%).

    The paper also reviews statistical evidence on Australia’s productivity growth, and in particular on the failure of productivity growth to be reflected in rising real wages. Real put per hour of work has increased 13% over the past decade: not outstanding, but still positive and steady. Real wages, in contrast, have gone nowhere — and are now falling rapidly in the face of accelerating inflation. Rather than risking an economy-wide recession with rapid interest rate hikes (which impose the worst burden on workers and indebted households), the paper calls for a more multi-dimensional and targeted approach by government (supplementing actions by the RBA) to gradually bring inflation down without causing mass unemployment.

    The paper makes 6 specific recommendations for macroeconomic reforms to ensure working Australians share fairly in the benefits of future growth. The first is to elevate full employment in decent jobs as the central goal of macroeconomic policy, and to ensure that all policy interventions (including from the RBA, the Commonwealth government, and other regulatory agencies) are consistent with that top goal.

    Release of the paper generated extensive media coverage and public debate (which was its goal!): including stories in The Guardian, the ABC, The Sydney Morning Herald, The Australian Financial Review, and The Australian. In this feature interview with 2CC Radio host Leon Delaney, Dr Stanford discusses the main recommendations of the report, and whether it is really such a ‘radical’ idea to make full employment the top goal of economic policy:



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  • Are Wages or Profits Driving Australia’s Inflation?

    Macroeconomics, Wages & Entitlements

    Are Wages or Profits Driving Australia’s Inflation?

    An analysis of the National Accounts
    by David Richardson, Matt Saunders and Richard Denniss

    Authors

    David Richardson

    Senior Research Fellow

    Matt Saunders

    Senior Economist

    Richard Denniss

    co-Chief Executive Officer

    Labour costs have played an insignificant role in the recent increase in inflation, accounting for just 15 percent of economy wide price increases while profits have played an overwhelming role, accounting for about 60 percent of recent inflation.



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  • Post-COVID-19 policy responses to climate change: beyond capitalism?

    Climate Change, COVID-19, Macroeconomics

    Post-COVID-19 policy responses to climate change: beyond capitalism?

    by Mark Dean and Al Rainnie

    Authors

    Mark Dean

    Laurie Carmichael Distinguished Research Fellow

    Al Rainnie

    A sustainable social, political and environmental response to the “twin crises” of the COVID-19 pandemic and climate change will require policymaking beyond capitalism. Only by achieving a post-growth response to these crises can we meaningfully shape a future of jobs in renewable-powered industries shaped by organised labour, democratic values and public institutions. Anything less will merely create more markets and more technocratic fixes that reinforce the growing social and environmental inequalities that our current political system cannot overcome.

    As Australia moves further away from anything resembling a sustainable pathway to reach these goals (i.e., $90bn submarines that we will not see for at least 20 years but no meaningful action on climate change), a new Labour and Industry article – co-authored by Laurie Carmichael Distinguished Research Fellow Mark Dean and Centre for Future Work Associate, Professor Al Rainnie analyses four alternative responses proposed by Australian unions, climate change groups and grassroots community organisations.

    The purpose of this article has been to identify the range of options that government is capable of pursuing and which, with sensible political choices, can adopt as strategy today. Absent the current federal government’s political will to make long-term choices, Australia is yet to settle on a coordinated policy response that plans and directs the sustainable development of our economy.

    Urgent action is needed to shape policymaking with a strategic, long-term vision that restores the active, interventionist role of government in building an economy capable of overcoming crisis.



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  • Needle in a Haystack

    Macroeconomics, Wages & Entitlements

    Needle in a Haystack

    Searching for the Impact of Tax Cuts on Consumer Spending and Economic Growth
    by Jim Stanford

    Author

    Jim Stanford

    The latest economic statistics have confirmed that Australia’s economy is barely limping along – with quarterly GDP growth of just 0.4%. One of the weakest spots in the report was consumer spending, which recorded its weakest performance since December 2008 (amidst the worst days of the Global Financial Crisis). This was despite the supposed benefit of recent Commonwealth government tax cuts in boosting disposable income and stimulating more spending.

    Analysis from Dr. Jim Stanford shows that the tax cut is in fact completely invisible in the macroeconomic data.

    Among the major findings of the report:

    • Consumer spending stagnated despite expensive tax cuts provided by the newly-reelected Coalition government. Income taxes paid by Australians declined by over $4 billion in the quarter. But fearing future recession, Australians socked away those savings: personal savings grew by $6 billion in the quarter, more than taxes fell.
    • Because of the sharp increase in the saving rate, none of the aggregate tax savings showed up in new consumer spending. The propensity of Australians to consume from their pre-tax income actually declined in the quarter. In other words, the effect of the tax cut had zero measurable impact on aggregate consumer spending.
    • Wage growth slowed further in the September quarter – with the Wage Price Index increasing by just 2.2% over year-ago levels. With slowing wage growth and higher-than-expected unemployment, Australian consumers simply cannot afford to boost their spending, despite the tax cuts.
    • One-tax tax cuts have an insignificant effect on disposable incomes, compared to the benefits of restoring normal wage growth in Australia. In just one year, a restoration of normal wage growth would boost incomes by $12 billion – 3 times the value of the tax cuts. Compounded over just 3 years, normal wage increases would lift incomes by a cumulative total of $75 billion, and consumer spending by $50 billion. Restoring wage growth, not cutting taxes, is the key to turning around Australia’s flagging economy.



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  • Tolerate Unemployment, but Blame the Unemployed

    Employment & Unemployment, Macroeconomics

    Tolerate Unemployment, but Blame the Unemployed

    The Contradictions of NAIRU Policy-Making in Australia
    by David Richardson

    Author

    David Richardson

    Senior Research Fellow

    Media release



    Chronic Unemployment a Consequence of Deliberate Economic Policies

    Selected media impact

    For the last generation macroeconomic policy in Australia has been based on the assumption that unemployment must be maintained at a certain minimum level in order to restrain wages and prevent an outbreak of accelerating inflation. Now, after six years of record-low wage growth – which weakened even further in the latest ABS wage statistics – it is time for that policy to be abandoned.

    In a comprehensive critique of unemployment and monetary policy in Australia, Senior Research Fellow David Richardson shows there is no stable statistical basis for the assumption that inflation will accelerate without end if unemployment falls below its so-called “natural” or “non-accelerating inflation rate” (NAIRU, commonly thought to be around 5%). And the economic and social costs of deliberately maintaining high unemployment are very large.

    Richardson’s paper, Tolerate Unemployment, but Blame the Unemployed: The Contradictions of NAIRU Policy-Making in Australia, has been published today by the Centre for Future Work. The study was reported in the Sydney Morning Herald and other papers.

    Among its major findings:

    • Officially recorded unemployment is only the tip of the iceberg of total underutilised labour in Australia. Counting underemployment, discouraged workers, and “marginally attached” workers, there are around 3 million Australians who would like to work (or would like more work) but can’t find it: far worse than the official unemployment estimate (currently around 700,000).
    • Recent disagreements between Treasury and the Reserve Bank of Australia over the precise level of the NAIRU (the former say it is 5%, the latter say it might be 4.5%) ignore the growing evidence that the core concept is invalid and unsupported by empirical evidence.
    • Numerical estimates of the NAIRU have been wildly inconsistent over time. This is partly because of a process called “hysteresis”: whereby the existence of even temporary or cyclical unemployment can create long-term barriers to employment that seem to inhibit subsequent job-creation. If policy-makers believe in an elevated NAIRU, and act to ensure that unemployment stays at or above that level, then it becomes a self-fulfilling prophecy – and economic performance is undermined for decades.
    • Monetary and fiscal policy should be shifted to aim to steadily reduce unemployment as low as, rather than targeting a certain minimum assumed NAIRU.
    • The economic benefits of reducing unemployment are enormous. Every one-percentage point reduction in unemployment results in 134,000 new jobs, $10 billion in additional output, and billions of dollars in additional fiscal revenue for governments.
    • There is an enormous contradiction between a macroeconomic policy that deliberately maintains unemployment, and a social policy that blames the failures of unemployed people (such as a supposed lack of “work ethic”) for their own hardship.
    • The long-term freeze in Newstart benefits (which have not changed in real terms since 199) should be abandoned, and benefit levels increased substantially. Since chronic unemployment is the outcome of deliberate policy, the least society can do is fairly compensate those who have been hurt by this policy.

    Australia’s continuing record-low wage growth, and sluggish economic performance, make the need for a change in policy direction all the more urgent. Even within the constraints of the NAIRU policy, the RBA and the government have failed to meet their own stated objectives: for example, inflation has languished well below the official 2.5% target for over 5 consecutive years. It is time for a fundamental rethink of macroeconomic policy, which should be focused on restoring genuine full employment as the top priority.



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  • Wages, Taxes and the Budget: How to Genuinely Improve Living Standards

    Macroeconomics, Wages & Entitlements

    Wages, Taxes and the Budget: How to Genuinely Improve Living Standards

    by Jim Stanford and Troy Henderson

    Authors

    Jim Stanford

    Troy Henderson

    This week’s pre-election Commonwealth budget will feature reductions in personal income taxes, as the Coalition government tries to overcome a disadvantage in the polls in the coming federal election. Public debate in recent weeks has been focused on the economic and social hardship caused by the unprecedented slowdown since 2013 in Australian wage growth. It is likely that the government will portray its personal tax cuts as a form of “compensation” for slower wage growth.

    But new analysis from the Centre for Future Work shows it is mathematically impossible for personal income tax cuts to offset the loss in family incomes resulting from years of wage stagnation. The report simulates the effects of ongoing regular wage increases on household incomes, compared to the “savings” of personal income tax cuts. Regular, compounding wage increases provide boosts in disposable income dozens of times larger than tax cuts. Moreover, tax cuts always come with a “cost” for households – in the form of foregone public services and income supports that also contribute to workers’ standard of living.

    Highlights of the new research include:

    • Every one of the government’s budgets since its first (in 2014-15) has wildly overestimated the growth of wages in its official forecasts. Every single year-forecast in every budget (14 year-forecasts in total) has overestimated actual wage growth. If workers’ wages had actually grown as fast as government budgets predicted, the average full-time worker would have $4000 per year in additional income today than they actually do.
    • Wage increases in Australia, already inching along at record-low rates, slowed down further in the December quarter – to an annualised rate of less than 2%. A temporary rebound in wage growth earlier in 2018 was mostly due to a stronger increase in the minimum wage (3.5%), which came into effect on July 1, but has now been absorbed by the labour market.
    • Personal tax cuts likely to be included in the 2019-20 Commonwealth budget will have only a small impact on disposable incomes for workers: worth less than 0.5% for most workers (and worth nothing for many workers). Moreover, the “savings” of tax cuts are offset by the cost of foregone public services, infrastructure and income supports which inevitably accompany shrinkage of the government revenue base.
    • In contrast, annual wage increases at traditional rates (around 3.5% per year, such as prevailed in most years prior to 2013) deliver much greater benefits to workers. Even after deducting taxes on their extra incomes, workers at various income levels receive much larger gains from normal wage increases than tax cuts – especially when those increases are compounded over consecutive years.
    • For example, a worker earning $60,000 per year would see a $210 increase in disposable income from the simulated tax cuts. But they would receive almost $1400 extra disposable income (almost 7 times as much) from a single 3.5% wage increase. And close to $6000 (over 20 times as much) from 3 consecutive years of normal wage increases.

    It is mathematically impossible for tax cuts to deliver ongoing improvements in disposable incomes, let alone of a scale comparable to the benefits of normal wage growth. To genuinely achieve rising living standards for working Australians, the emphasis of economic and budget policies should be shifted to strengthening the institutions (like minimum wages, the awards system, and collective bargaining) that could rekindle normal wage growth.



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  • Australia’s Economy Heads Into Election on a Weak Note

    Employment & Unemployment, Macroeconomics

    Australia’s Economy Heads Into Election on a Weak Note

    by Jim Stanford

    Author

    Jim Stanford

    The ABS has released what is likely the last quarterly GDP report before a Commonwealth election expected in May. Coalition leaders were hoping a strong report would underline their standard talking points about being the best “economic managers.”  But they were badly disappointed.

    The headline number was bad: Just a 0.18% increase in GDP for the December quarter, barely above zero. But the details, if anything, were worse.

    Some of the major takeaways from the ABS report include:

    • Real GDP per capita in Australia has now declined for two consecutive quarters: creating a so-called “per capita recession.” This is because the economy is growing more slowly than the population.
    • Consumer spending was the weakest in five years, suppressed by weak wage growth, falling property prices, andhuge consumer debts.
    • Net exports and housing investment both declined.
    • Business capital spending was very weak, despite growing profits. This may be the most damning refutation of the logic of “trickle down” economics: despite strong profits and a favourable policy regime, business is failing to invest more in real projects.
    • Workers’ share of the total GDP pie fell again in the December quarter – and for the 2018 calendar year, shrank to the lowest of any year since the ABS began reporting this data in 1959.
    • A broad measure of wages (total labour compensation per worker) grew just 0.3% in the December quarter, and just 1.9% over the year as a whole. This indicates wage growth is slowing down, not picking up.

    Australia’s economic growth in recent years has been fueled by three unsustainable factors: a property boom, rapid growth in consumer debt, and a spurt in resource exports (especially LNG) that has now leveled off. Those drivers are all shifting into reverse. More sustainable drivers of progress (including public and private investment, rising wages, and domestic demand) have been absent. These weak economic numbers should foster an important debate in the lead-up to the election: let’s get beyond slogans about who are the best “managers,” and start to think big about building an economy that is sustainable and socially beneficial.



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