Unlucky Jim undermined by his colleagues’ contradictory policies

What he misses is that other developed countries (apart from Japan) have short interest rates above their inflation rates and inverse yield curves, with short interest rates above long rates. We do not. They have tightened monetary policy by more than we have done and yet have not been driven into sharp recessions. The risk here is that we have not tightened policy enough. Goods inflation globally is falling, but domestic services inflation is sticky and needs extended policy restraint.

Wages have remained subdued here, but unfortunately unit labour costs have jumped because productivity has fallen more here than elsewhere. The Reserve Bank of Australia inflation forecasts assume productivity rises here back to historic norms. Despite this being a key assumption, it has published no research on why productivity fell here by more than elsewhere.

Former RBA governor Philip Lowe suggested it was because of lockdowns and former RBA chief economist Luci Ellis blamed faulty data.

Compared with overseas our productivity has fallen by more, but working from home is actually less than in Canada or the UK. The post lockdown surge in migration is another possible cause as students and backpackers fill the low productivity jobs available after lockdown. Canada has had a bigger surge in temporary migrants than us and yet, its productivity has fallen less.

Both of these factors could be temporary if WFH declines and net temporary migration falls as people return overseas after short-term visits.

The worry is our low productivity growth might be due to longer-term factors that will persist. The booming labour market suggests that companies prefer to hire extra staff to investing in expanding capacity.

One possibility is misallocation of capital with heavy investment in renewables replacing existing capacity and infrastructure spending with low returns. It is difficult to get new resource projects up because of regulation and lawfare, while construction costs have leapt as low return State infrastructure projects bid up labour costs.

Another possibility is that our inflexible labour market makes it hard to raise productivity. The US has high migration and wages are increasing faster than here, yet inflation is falling because its productivity is rising.

What Chalmers should really worry about is what his colleagues are doing to the supply side that makes an economic smooth landing less likely.

Climate Change Minister Chris Bowen is pushing up energy prices and increasing system unreliability with ever faster introduction of renewables. We need to ensure there is the backup needed as coal-fired plant close. Chalmers hopes export prices stay high, so we have a budget surplus despite leaping spending. Bowen hopes to phase down fossil fuel exports.

Burke is making the labour market more rigid and hoping it produces wage rises without productivity gains. That makes getting inflation down more difficult.

The government finances green and indigenous legal blocks to resource projects that push resource companies overseas, cutting exports and revenue.

Surging migration floods in low productivity labour. Whether the just announced measures will restrict migration much remains to be seen. High migration creates demand, but it also pushes up rents and inflation given the lags in expanding housing.

NDIS Minister Bill Shorten is reluctant to tighten NDIS eligibility and is pushing costs off budget when Chalmers needs real spending cuts to maintain a budget surplus.

Transport Minister Catherine King excluded more Qatar flights which protected domestic airlines, kept air fares higher and discouraged tourism.

Rather than Australia improving competitiveness we subsidise chosen industries. We raise energy costs, blow out construction costs and increase barriers to new projects. Yet, we hope to encourage local processing of the minerals needed for renewables.

This government is running in contradictory directions. Chalmers is hoping for a smooth landing on inflation, but the supply side policies of his colleagues make that less likely.

Maybe Lucky Jim has been fighting in cabinet, but I suspect he is focusing on the levers he controls. He likes to be popular and in any case without the support of Prime Minister Anthony Albanese he would win few cabinet battles.

Unless Albanese starts imposing the right priorities, unlucky Jim and Australia could be undermined by his colleagues’ contradictory policies.

Ed Shann is an independent economist who has worked in the public and private sectors.