Disappointing zero-sum economic thinking represents unlearning of hard-learnt lessons of the past

Regard for growing the pie – instead of focusing entirely on how to cut it up – would let us have more of everything. That is not what the government is delivering.

Australia’s living standards have improved very little in the past decade and have actually gone backwards in the past couple of years.

At the joint press conference announcing the government’s recent aged care reforms, Jim Chalmers said something very revealing about how the Albanese government sees economic policy.

“Aged care spending will continue to grow, but at an average of 5.2 per cent, not 5.7 per cent, over the next decade,” the federal Treasurer said. “And that means, as a share of GDP, over the next decade it will moderate from 1.5 per cent of the economy to 1.4 per cent, even with more people in the system and a higher standard of care at the same time.”

Seems like magic, right? The kind of positive-sum economic reform we became accustomed to in decades past. Sadly not. This statement reflects “thinking like an accountant” rather than “thinking like an economist”. Because Chalmers was referring to the fiscal cost of aged care and not its economic cost.

Because that was the focus of the reforms negotiated with the opposition and announced by the government. To increase the amount users pay for aged care so as to relieve the government of some of the burden.

Now, don’t get me wrong – making the budget more sustainable is an important task and the government deserves credit for chipping away at it. We have a big structural deficit to close and this reform will help. But we should not kid ourselves that it is economic reform.

Economic reform generates a growth dividend that enables our economy to afford better aged care. Indeed, better aged care would be just one of countless manifestations of the higher living standards afforded to us by a growing economy. But that is not what this government is delivering.

No, those better aged care ser­vices will come at a cost to those who will pay for them.

Yes, we can have them, but we’ll have to give up something to get them. Economic growth, on the other hand, lets us have more of everything.

Sadly, this zero-sum economic thinking pervades this government’s policy agenda.

Take the way it is approaching childcare, with a focus entirely on who pays and not at all on what it costs. The problem with childcare is not that the government doesn’t provide big enough subsidies. It’s that the services cost too damned much. And that problem will never be solved with subsidies which, if anything, make that fundamental problem worse.

Do we expect that regulating 15 per cent higher wages for childcare workers will lower the economic cost of childcare?

Do we expect that raising workers’ income tax burdens via bracket creep (the government’s only major projected source of new revenue) to fund higher childcare subsidies will improve their workforce participation – the thing the subsidies are intended to achieve in the first place?

The problem with childcare is that it is a wildly overregulated industry characterised by weak competition that offers minimal choice and flexibility to parents. The current childcare system generates no incentive to improve quality, to offer services that better suit parents and their children, or even – god forbid – to generate some genuine innovation to raise productivity in the sector.

Anthony Albanese visiting the Merri Community Child Care and Kindergarten. Picture: Nicki Connolly

Our obsession with heavily subsidising private childcare providers – turbocharged by the Morrison government, it should be noted – has served nobody except perhaps the providers themselves, and undoubtedly has shrunk the pie.

The government thinks our only way out of this hole is to keep digging deeper.

What about housing, by far our country’s greatest economic emergency? I don’t know a single credible economist who believes that anything other than a dramatic expansion of supply will solve this problem. It is as close to a silver bullet as we have in economic policy.

Yet the government’s housing policies will make such a small difference to housing supply it’s hard to understand what all the fuss is about. They are an order of magnitude (or two) short of the challenge.

Meanwhile, the government’s flagship housing policy, in which the government would co-invest in 40,000 homes, would have exactly zero impact on supply. A few lucky people who win the lottery will get a house that someone else would otherwise have had.

The government’s mooted curbs to negative gearing, far from boosting supply, will act only to make investing in new housing supply even less attractive.

It’s zero-sum economic thinking at every turn. What’s most disappointing is that it represents an unlearning of the hard-learnt lessons of the past.

Progressive governments focusing entirely on how to cut up the pie without any regard for growing it led us to ruin. But their progressive descendants learnt the lesson that before cutting up the pie, you have to have a pie in the first place.

The Hawke, Clinton and Blair governments really got that. But this isn’t just nostalgia. Today’s more enlightened progressive thinkers get it, too.

Here in the US, progressive writers such as Matt Yglesias, Ezra Klein, Derek Thompson and Jerusalem Demsas have all, in one way or another, advocated an “abundance agenda” that rejects the kind of zero-sum economic thinking that the Albanese government has come to epitomise.

Australia’s living standards have improved very little in the past decade and have actually gone backwards in the past couple of years. Our economy is not on a path that will generate the growth dividend to pay for the things progressives want. This way lies ruin. Perhaps some future Labor government will learn that lesson.

Steven Hamilton is assistant professor of economics at George Washington University in Washington DC and visiting fellow at the Tax and Transfer Policy Institute at the Australian National University.