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.

In my latest Guardian piece, I argue that, unless we pay attention to the purchasing power of wages, talk about the “cost of living” is like the sound of one hand clapping

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The policy debate about the cost of living is among the most confused and confusing in recent memory. All sorts of measures to reduce the cost of living are proposed, then criticised as being potentially inflationary. The argument implies, absurdly, that reducing the cost of living will increase the cost of living.

The issue here is that the “cost of living” is an essentially meaningless concept, rather like the sound of one hand clapping. The problem isn’t the cost of buying goods, but whether our income is sufficient to pay for those goods. For most of us, that means the real (inflation-adjusted) value of our wages, after paying tax and (for homebuyers) mortgage interest.

Photoshopped version of a Getty image

In the famous Harvester decision of 1907, Justice Henry Bournes Higgins of the Arbitration Court determined that a family of five could live in “frugal comfort” on 42 shillings ($4.20) a week, less than the price of a cup of coffee today. On this basis, he set the basic wage at 42 shillings a week, or about nine cents an hour for the then-standard 48-hour working week.

Looking back over the past century or so, the cost of buying a basic bundle of necessities (and some modest luxuries) has risen almost continuously. But, fortunately, wages and other incomes have risen much faster. So while people complain about the cost of living today, few of us would want to go back to the frugal comfort of 1907.

Looking at more recent history, the consumer price index rose faster for much of the 1980s than it has done over the last few years. Inflation was a significant problem for macroeconomic management and financial markets. But the “cost of living” was not a big issue because wages were indexed under the Prices and Incomes Accord. Some small reductions in real wages were compensated for by the reintroduction of Medicare and improvements in superannuation.

The Accord, focused on real wages, produced a gradual decline in inflation rates, while maintaining standards of living. By contrast, the current discussion of policy in terms of the cost of living has produced incoherent policies and declining living standards.

The natural policy response to concerns about the cost of living is to seek reductions in prices that are politically sensitive (such as petrol, electricity and basic groceries) and to provide ad hoc relief to groups seen as “doing it tough”. This has included wage increased to offset inflation for particularly “deserving” groups (minimum wage earners and aged care workers), even as the real value of most wages remains far below pre-pandemic levels. Labor estimates the value of their 2022-23 cost-of-living relief package at $14.6bn.

In the neoliberal context, any benefits given to one group of wage earners or welfare beneficiaries must be offset by costs imposed on another. The ad hoc nature of policy responses to the perceived cost-of-living crisis reflects the incomplete and inadequate nature of this framing of the issue. But it is not the worst consequence.

The crucial problem with “cost of living” thinking is the implication that the problem will be resolved by reducing the inflation rate, ideally with a rapid return to the Reserve Bank target range of 2-3%. In this way of thinking, the worst thing that could happen is for wages to rise enough to offset past inflation. Such an adjustment, it is claimed, could set off an inflationary spiral.

A rapid reduction in inflation, achieved by holding real wages below their pre-pandemic level suits the institutional interests of the Reserve Bank, which are centred on its primary objective of price stability. But Australian workers would be better served by a gradual reduction in inflation, without real wage cuts, as was achieved in the 1980s under the Accord.

If the decline in real wages wasn’t bad enough, the Albanese government has made matters worse by eliminating the low and middle income earners tax offset (LMITO), introduced in 2018 by then treasurer Scott Morrison as part of a tax reform program designed to culminate in 2024-25 with stage three, massively skewed towards high-income earners.

LMITO was supposed to expire in 2020, but the Morrison government repeatedly shied away from raising taxes on middle-income earners at a time when real wages were failing.

Jim Chalmers and Anthony Albanese had no such qualms and scrapped LMITO from 2022-23 onwards. Over the government’s remaining term, the resulting increase in taxes will more than cancel out all the cost-of-living relief trumpeted in the last budget. Meanwhile, the stage-three tax cuts will ensure that high-income earners are returned to the lowest average tax rates in recent history, last seen under the Howard government’s final package of tax cuts.

In the end, the “cost of living” isn’t about the prices on grocery shelves, it’s about the distribution of income. In Australia, income has shifted from wages to profits and from low- and middle-income earners to those in the top 10% of the income scale and, even more, to the handful of “rich listers” whose growing wealth has outstripped that of ordinary Australians many times over.

I’ve been working a bit on inflation and the highly problematic concept of the ‘cost of living’ (shorter JQ: what matters is the purchasing power of wages, not the cost of some basket of goods). As part of this, I’ve been looking at how particular prices have changed over time, focusing on basics like bread and milk.

One striking thing that I found out is that, until quite late in the 20th century, the standard loaf of bread used to calculate consumer price indexes in Australia weighed 4 pounds (nearly 2kg). That’s about as much as three standard loaves of sliced bread. Asking around, this turns out to be the largest of the standard sizes specified in legislation like the Western Australian Bread Act which was only repealed in 2004, AFAICT.

Going back a century or so further, the Speenhamland system of poor relief in England specified the weekly nutrition requirements of a labouring man as a ‘gallon loaf” of bread, made from a gallon (about 5 litres) of flour, and weighing 8.8 pounds (4kg). Bread was pretty much all that poor people got to eat, so the amount seems plausible.

But why one huge loaf rather than, say seven modern-size loaves? And turning that question around, why are our current loaves so much smaller?

Read More »

The New Year has barely started, but the world of academia seems to be back to work, and sending me a variety of gifts, some more welcome than others. Coincidentally or otherwise, it’s also the day I’ve moved to semi-retirement, a half-pay position involving only research and public engagement.

Most welcome surprise: an email telling me I’ve been elected as a Fellow of the Society for the Advancement of Economic Theory. In the way academia works, some friendly colleagues must have proposed this, but I had no idea at all

Most culturally clueless: A request for a referee report, due in three weeks. This is January in Australia – only the most vital jobs get done

Most interesting: An invitation to join the editorial board of Econometrics, an MDPI journal in which I have published an article of which I am quite proud, though of course it has received almost no attention. MDPI is a for-profit open access publisher, which regularly deals with accusations of predatory behaviour. A search reveals that the existing editors have resigned, something which is happening a bit these days.

I’m in n>2 minds about this. I think that journal rejection rates in economics are absurdly high, in a way that damages intellectual progress. Eric has expressed the same view regarding philosophy, which is closer to economics in cultural terms than any other discipline (Macarena’s post is highly applicable to econ).

On the other hand, I’m always dubious about the motives of for-profit firms (that includes the “reputable” firms like Elsevier and Wiley).

And on hand #3, I’ve just semi-retired, and I don’t feel like taking on a fight in which I have no dog.

So, I’ll probably stick with the plan of spending more time at the beach, working on my triathlon times, and trying not to get too depressed about the state of the world, at least those bits I can do nothing too change.

To all my readers. Best wishes for the festive season and for a better 2024

My latest piece in Crikey, responding to Bernard Keane’s argument that Labor should stick with the Stage 3 tax cuts. Also available at my Substack blog

That’s the title for my latest piece in The Conversation, reposted at my Substack blog. Comment here or at Substack.