My latest piece in The Guardian.

The long-running debate over “price gouging” should have been settled yesterday by the release of a report by Allan Fels, the former chair of the Australian Competition and Consumer Commission (ACCC). The report, commissioned by the ACTU, found that a wide range of Australian industries are characterised by limited competition, giving powerful firms ample scope to extract large profit margins.

Consistent with international evidence, most of the inflation observed in the wake of the pandemic was captured in the form of increased profit margins. Contrary to the dominant economic model – in which inflation begins in the labor market, with higher wages being passed on to prices – the recent inflation has seen wages lag far behind prices. In some countries, notably the US, real wages have recovered, but in Australia they are still well below the pre-Covid level for most workers.

The facts are clear enough. But they raise the question: why now? In addition to market power, much of the discussion of price gouging has focused on denunciations of corporate greed and on the various tricks (such as “shrinkflation”) that can be used to raise prices surreptitiously.

But personal greed isn’t new (it’s one of the seven deadly sins, after all). There’s no obvious reason to think that corporate managers have become personally greedier in the years since the pandemic.

More importantly: greed in the form of profit maximisation is the driving engine of capitalism. That’s why Gordon Gecko in Wall Street, echoing his real-life models Ivan Boesky and Michael Milken, said: “Greed, for lack of a better word, is good.”

In corporate-speak, this is usually shrouded in euphemisms like “shareholder value”, or softened by pledges of “corporate social responsibility”, but profit is still the main goal.

Devices like shrinkflation have also been around for a long time. In his classic 1933 work The Theory of Monopolistic Competition, which (along with the contemporaneous work of Joan Robinson) introduced the idea of imperfect competition, Edwin Chamberlin described this and other deceptive practices.

As for uncompetitive markets, this is certainly nothing new in Australia. It has mostly got worse over time, particularly as public infrastructure services have been sold off to private monopolies; but this trend hasn’t been uniform. Notably, the arrival of Aldi has provided some competition for the dominant supermarket chains, Woolworths and Coles. And there has been no particular change that would explain the upsurge in profit margins over the last few years.

Rather, recent inflation has resulted from the interaction between corporate market power and pent-up demand from forced saving during the lockdowns. Economic analysis, including my own work with Flavio Menezes (quoted in the Fels report), shows that increased demand allows firms with market power to increase their margins, exacerbating any initial inflationary shock.

Unfortunately, the process does not work smoothly in reverse. Because wages are slow to adjust, a policy-induced slowdown – such as that now being engineered by the Reserve Bank – will prevent wages from catching up to past inflation, effectively freezing higher profit margins into place.

What then, should be done?

First, instead of focusing solely on the consumer price index as the measure of the “cost of living”, we should be looking at profit margins – largely determined by the gap between prices and wages. Restoring wages is more important than a rapid return to an arbitrary target rate of CPI inflation.

In the longer term, we need to tackle the problems of an economy in which most markets are dominated by a handful of firms. In part, this can be achieved by strengthening the powers of the ACCC. Most importantly, as suggested in the Fels report, there is the possibility of breaking up firms that are already dominant in their markets – Qantas is an obvious target here.

But in an economy as small as Australia’s, dominance by a handful of firms is inevitable in many cases. One possible solution, suggested in the Fels report, is more extensive price regulation.

In the case of infrastructure utilities, the remedy in most cases is to abandon the failed experiments of privatisation and corporatisation and return to public ownership. Ideally, this would involve a statutory authority model in which the objective is to maximise social benefits rather than profits, while setting prices sufficient to cover operating and capital costs.

It’s another idea that’s been around for a long time. But it’s one that might be worth trying.

My latest piece in The Conversation, looking at Australia’s belated move to adopt fuel efficiency standards for light vehicles

Australia looks set to adopt fuel-efficiency standards after the Albanese government on Sunday revealed options for the long-awaited policy. The government says the reform would lead to more cars that are cheaper to run, eventually saving Australians about A$1,000 per vehicle each year.

The announcement comes a decade after the Climate Change Authority first proposed such a standard for Australia. The United States has had such a policy since the 1970s and the European Union implemented mandatory standards in 2009.

The Coalition has already sought to stoke fears among tradies and regional voters by claiming Labor’s policy threatens to take utes off the road. Labor’s policy is designed to address this concern – but the opposition looks likely to continue this scare campaign.

More generally, history tells us the road to fuel-efficiency reform in Australia is a bumpy one. The Albanese government has hazards to negotiate before its proposal becomes law.

Make better decisions – find out what the experts think.

A carbon price, by another name

Labor has outlined three options for a fuel-efficiency target, ranging from weak to aggressive. It describes its preferred middle-ground option as the sensible compromise.

The policy design for each of the options would set a national limit, averaged across all new cars sold, stipulating grams of CO₂ that can be emitted for each kilometre driven. This measure depends on fuel efficiency: that is, the amount of fuel burnt per kilometre. The designs differ in the stringency of the targets, the speed of the changes and the treatment of different vehicle classes.

The limit would not apply to individual cars. Instead, each supplier of new light vehicles to Australia would have to make sure the mix of vehicles does not exceed the limit. Low-efficiency vehicles could still be sold, but car dealers would have to balance this out by selling enough high-efficiency vehicles, such as electric vehicles.

Car suppliers that outperform the targets would earn credits that could be sold to those falling short. This system is similar to Australia’s renewable energy target for electricity and the safeguard mechanism for industry pollution.

All three are effectively a carbon price (though the political toxicity of that term means the government would never characterise them as such). Nonetheless, should the fuel-efficiency standards be implemented, Australia would end up with three carbon prices, one for each major energy use.

The government says the preferred option would lead to a saving of 369 million tonnes of CO₂ by 2050.

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Read more: Who’s holding back electric cars in Australia? We’ve long known the answer – and it’s time to clear the road

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What about utes?

One tricky path the policy must navigate is allowing for the supply of both small and large vehicles without further exacerbating the trend towards oversized vehicles on our roads.

The government’s preferred option achieves this by allowing higher – but still limited – emissions for heavier vehicles such as utes, vans and SUVs, to account for their natural tendency to use more fuel.

Heavier vehicles are a sticking point in forming vehicle emissions policy in Australia. Who could forget then-prime minister Scott Morrison’s 2019 claim Labor’s electric vehicle policy would “end the weekend” by banning larger cars used to tow boats and the like.

Following Labor’s policy announcement on Sunday, Nationals leader David Littleproud picked up where Morrison left off, saying:

If you take away particularly utes, they’re tools of trade, particularly for people, not just tradies in the cities, but also people in the bush. And if you put a tonne on the back of an electric ute at the moment, you don’t get far.

Anticipating the Coalition scare campaign, the Labor government’s preferred option has been designed with the aim of ensuring a wide range of conventional utes remain on the market.

In the medium term, we can also expect the trend towards larger vehicles to be weakened by measures in Labor’s last federal budget to roll back vehicle tax breaks for small and medium businesses. But that change doesn’t come into effect until mid-year, which means there may be a rush on larger vehicle purchases until then.

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Read more: Electric utes can now power the weekend – and the work week

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Ghosts from the past

Labor’s preferred policy option is broadly similar to that put forward by the Climate Change Authority in 2014. Then, the Coalition government appeared to consider the proposal for a time. But it eventually dropped the idea – in part, presumably, due to lobbying by interest groups including the car industry.

There are signs those same groups are gearing up again. The Federated Chamber of Automotive Industries, for example, said on Sunday the government’s targets will “be a challenge” to meet and may lead to more expensive vehicles, or gaps in the supply of utes and SUVs.

But the proposed policy has been welcomed by climate change advocates, the electric vehicle industry and motoring groups. The NRMA described them as “responsible and achievable”, saying “a business-as-usual approach meant that Australian families and businesses were not benefiting from the best technology designed to reduce fuel consumption”.

Progress, at last

The government intends to consult on its preferred model before introducing the legislation, with a view to enacting the policy in January 2025.

Assuming the policy is adopted, Australia would finally shed its unenviable status as the only developed country without such such standards. But we will still be at the back of pack, far behind the EU and only catching up to the US in 2028.

Despite the difficulties, it seems likely Australia will have fuel-efficiency standards in the near future. As with most measures to reduce emissions, the best time to introduce the policy was ten or more years ago. But the second-best time is now.

I’ll be presenting a talk at the Australasian Agricultural and Resource Economics Society conference. Title Irresistible Force* meets Immovable Object**

* Massive expansion in production of low-cost solar PV

** Entrenched resistance to deployment.

Shorter JQ: Irresistible force will win in the end

Presentation is here

Noah Smith has posted an interesting interview with Sarah Paine who looks at the distinction between maritime powers (in modern history, Britain and the US) and continental powers (everyone else). Paine sees maritime powers as beneficent creators and upholders of a peaceful and rules-based international order

It’s a distinction I’ve discussed in the past, but with very different views. Here’s a full-length response

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The maritime/continental distinction is crucial, but not in the way suggested here. The era of maritime dominance is over.

That’s partly because the UK is now negligible as a power, and the US isn’t as dominant as it was.

But it’s mainly because ships are an old technology that hasn’t advanced much over the past century or so, either in commercial or in military terms. Average speed has barely changed since the advent of steam. Meanwhile aerospace (including drones and missiles) and telecoms have advanced massively.

In military terms, navies ceased to be useful long ago (once aircraft and missiles no longer needed carriers to cover vast distances). No one noticed until recently because there hadn’t been any significant naval combat (the Falklands war had lessons, but they were ignored). But the humiliating defeat of Russia’s Black Sea Fleet by a country whose own navy lasted one day in the Ukraine war tells the story. Ships can’t hide in the open sea any more, and they can’t escape from missiles and drones.

In commercial terms, air has replaced sea transport in most high-value goods trade (particularly passenger travel), and telecommunications has made transport of all kinds less relevant.

Ships are still important for bulk transport, but the economic importance of “vital trade routes” was always overstated, and is now negligible. If the current ME conflict continues, we’ll see this. Or rather we won’t see it because the economic impact of longer shipping times will be imperceptible against the general background noise of economic shocks.

Meanwhile, maritime powers (the UK, then US) have made up rules that benefit them (for example, Freedom of Naval Operations) and erected them into sacred principles. Attempts to coerce continental powers like China into respecting those rules will achieve nothing, while risking an accidental outbreak of war.

Continuing my discussion of the recent upsurge in pro-natalism, I want to talk about the idea that, unless birth rates rise, society will face a big problem caring for old people. In this post, I’m going to focus on aged care in the narrow sense, rather than issues like retirement income, which depend crucially on social policy.

Looking at Australian data on location of death, I found that <a href=”https://www.abs.gov.au/statistics/research/classifying-place-death-australian-mortality-statistics”>around 30 per cent of people die in aged care</a>, and that the mean time spent in aged care is around three years, implying an average of one year per person.

Staffing requirements in Australia amount to aroundone full-time staff member per residents. So the “average” Australian requires about one full-time working year of aged care in their lifetime, or about 2.5 per cent of a working life. This is, as it happens, about the proportion of the Australian workforce currently engaged in aged care.But what if each generation were only half the size of the preceding one? In that case, the share of the labour force required for aged care would double, to around 5 per cent.

If you find this scary, you might want to consider that children aged 0-5 require more care than old people, and for a much longer time. Because this care is provided within the family, and without any monetary return, it doesn’t appear in national accounts.

But a pro-natalist policy requires that people have more children than they choose to at present. To the extent that this is achieved by subsidising the associated labour costs (for example, through publicly funded childcare), it will rapidly offset the eventual benefit in having more workers available to provide aged care.

And that’s only preschool children. There’s a significant childcare element in school education, as we saw when schools closed at the beginning of the pandemic. And school-age children still require plenty of parental care. (I’ll talk about education more generally in a later post, I hope).

Repeating myself, none of this is a problem when people choose to have children, more or less aware of the work this will involve (though, as everyone who has been through it knows, new parents are in for a big shock). But it’s clear by now that voluntary choices will produce a below-replacement birth rate. Policies aimed at changing those choices will have costs that exceed their benefits.

This Crooked Timber post on declining population has prompted me to get started on what I plan, in the end, to be a lengthy critique of the pro-natalist position that dominates public debate at the moment. My initial motivation to do this reflected long-standing concerns about human impacts on the environment but I don’t have any particular expertise on that topic, or anything new to say. Instead, I want to address the economic and social issues, making the case that a move to a below-replacement fertility rate is both inevitable and desirable.

I’m going to start with a claim that came up in discussion here and is raised pretty often. The claim is that the more children are born, the greater the chance that some of them will be Mozarts, Einsteins, or Mandelas who will contribute greatly to human advancement. My response was pre-figured hundreds of years ago by Thomas Gray’s Elegy Written in a Country Churchyard. Gray reflects that those buried in the churchyard may include some “mute inglorious Milton” whose poetic genius was never given the chance to flower because of poverty and unremitting labour

But Knowledge to their eyes her ample page
Rich with the spoils of time did ne’er unroll;
Chill Penury repress’d their noble rage,
And froze the genial current of the soul.

Billions of people alive today (the majority of whom are women) are in the same situation today, with their potential unrealised through lack of access to education and resources to express themselves. Rather than adding to their numbers, or diverting yet more resources away from them, we ought to be focusing on making a world where everyone has a chance to be a great poet or inventor.

Foreshadowing future argument
The political difficulties of achieving the necessary redistribution are immense. We are unlike to achieve even the basic targets set out in the Sustainable Development Goals for 2030. But even supposing that the world were a fairer place, it is unlikely that we can provide the kind of education necessary for full participation in a modern economy while having more than two children each (that is, more than one child per parent) on average. The fact that fertility rates in all development countries are below this level is a reflection of economic reality, not the product of social decadence. I’ll be expanding on this point a lot, so I’d welcome it if the discussion focused on the main part of the post.