Fast and loose with the truth
There is no doubt that Australia has plenty of problems. Inflation is still running hot, rental properties are expensive and ridiculously hard to find, and profits for some companies – especially those in the mining sector – are, or at least were recently, at/close to record highs. Meanwhile, real wages are declining and the nation’s productivity over the last decade (the key driver of long-run real wages growth) was at a 60-year low.
These ailments have many causes. Some, such as inflation and mining profits, are at least partially due to the pandemic (global governments spending too much, partially monetised by central banks), while others such as housing and energy can be traced to a series of poor policy decisions spanning many decades.
But you run into problems when you try to oversimplify and trace the cause of every ailment to your preconceived worldview. Enter Ross Garnaut:
“There have been big changes over the 21st century that greatly affect Australia’s capacity to deliver rising standards of living to most people in a growing population.
“Most importantly, there has been a large increase in the rent component of total income. This has diminished growth in productivity and output, while reducing the share of income accruing to the general run of citizens.”
The metric Garnaut uses to support his claim is the profit share of income:
“Take mining out of the equation and the profits share is still historically high. This is at a time when the cost of capital in competitive markets is close to zero, and when low productivity growth demonstrates that high profits are not flowing exceptionally from innovation and entrepreneurship.
“The increased profit share reflects the increased role of economic rent in the Australian economy.”
I was going to fact check that claim but Garnaut – or the ABC editors – did that for me by providing this handy chart right below that paragraph:
Profits as a share of income are at record highs… but only because of mining.
Now I don’t know about you but if you take mining out of the equation, as done in the chart, it sure looks as though the profit share of income is close to historic lows, not highs.
But Garnaut didn’t stop there. Moving to housing, he claimed that:
“Rents are increasing because record-high immigration rates are lifting demand, and investment in new residences is low.”
Unfortunately this time there was no chart provided to support the claim, so I had to dig a few out myself. First new residence investment:
Low compared to what?
If the highest number of new dwellings under construction in a decade is “low”, then so be it; we probably do need more. But it’s still a dodgy claim to make – I would have preferred if Garnaut instead said something like ‘investment in new residences is lower than what we need to meet demand’.
But that’s a minor quibble compared to his other claims. Let’s take a look at rents:
Advertised rents were rising well before Australia’s borders opened.
What we can see in the image above is that rents started to take off in early 2021 (rents in the CPI lag advertised rents by 12-18 months), well before Australia’s borders began to open on 1 November 2021. If we look at the next chart, we can see that not only did Australia have negative net overseas migration in 2021, but the rise in 2022 was also the lowest annual increase since 2006:
How could migrants be driving up rents when they weren’t here?
So according to Garnaut, migrants were driving up rents before the borders opened. They also continued to drive up rents in 2022, despite net migration in that year being below every prior year since 2006 – a period during which migrants somehow didn’t drive up rents by as much, even though dwelling investment was lower? Garnaut clearly needs to reevaluate his model.
Now Garnaut is right that Australia needs to improve its competition policy. The states and territories should probably also look at royalty reform to automatically capture some additional rents when commodity prices reach the stratosphere. Zoning laws should absolutely be changed to fix the housing mess. And governments at all levels should be held accountable for their reckless, debt-financed spending during a period of full employment and high inflation.
But will Garnaut’s speech do anything to actually address these issues? Not a chance. And it’s a real shame, too: when people who are actually in a position to influence policy such as Garnaut play fast and loose with the truth, it does a disservice to everyone who wants to improve the very poor standard of policymaking in this otherwise fine country of ours.
Next time stick to the truth, Ross. It’s all you need.