Published: 21 June 2023


Every time the Reserve Bank inflicts more pain to save us, I can’t help thinking of Galen and the old physicians who believed bleeding the body was a way to better health.

Once inflation is tamed the RBA wants us to be more productive. So does our state government. The $300m efficiency dividend in the latest budget is floated as a plan to produce the same for less. History shows lower cost usually means fewer services.

The trouble with a broad-brush solution is it ignores the inherent problems of labour productivity in services provided by state governments. It will always take four to play one of Mozart’s string quartet pieces. The same logic applies to a lot of services provided by state governments whose key role is service delivery.

Insisting on overall increases in national productivity runs the risk that crucial service deliverers are held to ransom by sermonising technocrats.

Paradoxically if you want to increase productivity in the health sector simply pay workers more. The contribution of the health sector to national income is measured by what it produces. As a government activity, that value is equal to the cost of the inputs. Wages represent the largest input. If wages increase so does output. Greater output means greater productivity. QED as my maths teacher used to say.

That’s not to suggest paying more will cure our ills or “fix” the health system. Rather, what it means is, wage setting in the service sector needs to be decoupled from the national productivity argument which is currently being used by some as a stick to beat workers. Monopoly and oligopoly players in the private sector who can more easily raise prices and hence profits and productivity are a world apart from the labour-intensive government service sector. How are midwives supposed to increase productivity? Faster births? We need a much more nuanced discussion of productivity than being told to work harder.

Most days we are reminded of the dangers of inflation. That in turn reminds me of the late Queen Elizabeth II who pointedly asked economists in the wake of the 2007 global financial crisis, “Why did no one see it coming?” History may not repeat but it often rhymes. Any sentry worth his salt should have spotted inflation long before it reached the castle walls.

There is anything but a clear diagnosis for current inflation. Nevertheless, the RBA’s chosen remedy is to purge the economy with higher interest rates.

We are also often reminded how much our economy is growing, slowing down, perhaps going backwards or whatever the case may be. But as most of us know, or at least suspect, the measure of what we as a nation produce is a flawed measure, not only due to what’s omitted but also what’s included.

Unpaid work is excluded. Rebuilding after natural disasters counts as growth even though at best it only replaces the unrecorded losses.

Another of the many anomalies is worth noting. Rents are included when calculating GDP. So too are imputed rents, the rents owner occupiers would pay if their residences were owned by third parties. This is so as comparisons can be made between countries with different home ownership proportions, and maybe to pre-empt the unlikely occurrence of renters suddenly purchasing the houses they’re renting, leading to a fall in GDP.

Hence some of our modest but declining growth is probably due to the imaginary rents paid by the better off to themselves. We can’t be sure how imputed rents boost growth figures. If nothing else, it confirms widening inequality. I tried asking the government. They said it was a bit complicated and suggested I contact the Australian Bureau of Statistics. Imputed rents make up about 8 per cent of GDP, that’s all we know.

The system is failing us. Those in the driving seat are charting a course based on outdated maps and wishful thinking. Is extra government spending the cause of inflation? Or is Russian President Vladimir Putin or Covid-related supply shocks to blame? Or maybe profit takers have taken advantage of the fog to push up prices. Their growing share of the national pie suggests this has occurred.

However, we shouldn’t overlook the role of private banks. Banks have a unique privilege. They are allowed to create money. They do so every time they make loans. Their business model is based on driving house prices as high as possible. With record indebtedness there are record amounts of money sloshing around the economy. Those at the bottom never have much. Rising interest rates are ensuring those in the middle are quickly losing what they had. It’s not too hard to guess who’ll end up with more. Those at the top who least need it.

All presided over by the RBA. Time for a new approach.


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