Jim Chalmers’ big-picture economic vision put to the test
There’s a new dynamic playing into the Treasurer’s approach to repairing a budget he admits is unsustainable. On the eve of the new parliament’s first gathering, prominent economists characterise his approach.
One of Australia’s top former Treasury officials in sporadic conversation with Jim Chalmers says there has been a noticeable change in the Treasurer since the election in May. “His level of engagement and interest have stepped up,” the former official says. “He understands the opportunity that Labor now has since the election. What that something is, we’ll see.”
Chalmers probably doesn’t even know what that is, in part because an economic reform roundtable in August may surprise him with fresh ideas. His own economic philosophy is also hard for many economists to understand, adding to some concerns from the Prime Minister’s office that the political collateral earned from a record majority election win may be about to get squandered.
His first-term economic policy could be characterised as pragmatism or, as one Labor politician called it, survival, with a raft of big government spending including handouts for voters such as energy rebates, first-home buyer relief, increased paid parental leave and childcare subsidies, free TAFE and plans for student loan relief.
Chalmers cut taxes, not usually the first thing on a Keynesian economist’s list unless there is a recession, but also introduced big new regulations in industrial relations. There was a mismatch of micro and macro-economic approaches that puzzled economists.
In the past fortnight Chalmers’ big-picture economic vision has been put to the test. His housing target of 1.2 million new homes in four years was dismissed on Monday by his own Treasury Department as unattainable; his investment goal in renewables took a hit after the energy regulator said poor transmission could mean a third of solar power farms would be switched off by 2027; then there was the announcement of a taxpayer-funded bailout of two metal smelters facing imminent failure.
These economic tests are a world away from the uncertainty of Donald Trump’s trade war, yet Chalmers insists “global conditions will be the primary influence on our economy and on our choices in the government’s second term”.
Three challenges raised in the past fortnight all affect key areas for Chalmers – jobs, investment and votes – and are crucial to repairing a budget the Treasurer admits is unsustainable. Furthermore, it comes during lacklustre 60-year lows in productivity, which former Treasury secretary Ken Henry said this week had robbed the average worker of $500,000 in income in the past 20 years.
Chalmers says he is relaxed about such things as the housing target. He has ambitious plans.
Having accused neoliberals in his 6000-word essay Capitalism After the Crises in the February 2023 edition of The Monthly for the failures in the economy, Chalmers appeared aligned with a neo-Keynesian economic approach of government intervention, redistribution and regulation. But there’s a new dynamic playing into his philosophy: supply-side economics, the theory of boosting economic growth by increasing the supply of goods and services through tax cuts, deregulation and incentives for production and investment.
Supply-side economics has long been dominated by the political right, but Chalmers now is trying to plug into it after having read the book Abundance: How We Build a Better Future by American journalists Ezra Klein and Derek Thompson, which everyone in Canberra, on both side of politics, is reading – if they can get a copy.
The work of Klein and Thompson, self-proclaimed progressive liberals working at The New York Times and The Atlantic, respectively, gives further clues as to how Chalmers’ economic approach may be evolving.
“The reason that we are attracted to it is because it really is about working out, as progressive people who care deeply about building more homes, rolling out more renewable energy, how to make sure that the way we regulate that and approach that doesn’t get in our own way,” Chalmers says, joking that he should be collecting a commission for promoting the book.
The authors admit that supply-side economics is the domain of conservatives such as US president Ronald Reagan, who they refuse to acknowledge had any success using such an approach (despite US GDP growing at an average 3.5 per cent a year from 1983 to 1989, government revenue rising after an initial fall and inflation shrinking from 13.5 per cent to 4 per cent).
Regardless, Klein and Thompson urge the left to make such an economic approach its own, generating supply via government-directed spending and regulatory reform to suit its political values.
“The words ‘supply side’ are coded as ‘right wing’,” they say. “The supply problem has lurked for years, but it has not been the core of our politics. That is changing.”
Chalmers wants to take the gamble with this version of supply-side economics – but will it clarify or further confound his caring capitalist-style economic philosophy?
The philosophy
There are a range of thoughts about the current economic philosophy of Chalmers, whose views rely on everyone from former treasurer Wayne Swan through to Italian-American economist Mariana Mazzucato’s interventionist neo-corporatism and, of course, Paul Keating, who delivered significant supply-side economics in the 1980s and 90s and was the subject of Chalmers’ PhD.
Critics including Judo Bank chief economic adviser Warren Hogan say if Chalmers has a philosophy it’s not readily apparent.
“He has no coherent economic philosophy as best I can tell,” Hogan says. “Economic thought is a subservient and flexible tool to be employed as needed for political ends, both internally within the party and across the community.”
That may seem harsh, but Assistant Minister for Productivity, Competition, Charities and Treasury Andrew Leigh, who Chalmers says introduced him to the Abundance book, says there is no label.
“The philosophy is very practical … the Treasurer has talked about the practical and pragmatic,” Leigh says.
Economic adviser to Labor prime minister Julia Gillard Stephen Koukoulas says: “I don’t know whether there is a label you can put on his forehead. Probably economic pragmatism?”
Outlook Economics director Peter Downes, a former Treasury and OECD official, says: “I’m not sure that he has one. Any economic philosophy he professes would be crafted to win the maximum support from the caucus for his next promotion.”
One economist, who declines to be named given their close connection to Chalmers in the past few years, tells The Australian with a sincere tone: “His economic philosophy is not having an economic philosophy.”
There is also some rolling of eyeballs from Labor colleagues when asked specifically about Chalmers’ big picture.
Placing Chalmers in a taxonomy of Australian treasurers may be an easier way to understand him.
AMP head of investment strategy and chief economist Shane Oliver, who has seen his fair share of treasurers, spreads the spectrum from the socialist Jim Cairns to Keating, who “was focused on supply side but he probably wouldn’t want to be aligned with it because that was Ronald Reagan’s policy”.
As former Reserve Bank of Australia economist Peter Tulip says, “Keating led the supply side” and there are glimmers of Chalmers trying to repeat some of that reform effort using Anthony Albanese as Keating used Bob Hawke.
Keating cut taxes, privatised government assets, introduced superannuation and deregulated financial markets, setting in train massive supply-side and productivity gains that lasted for decades. Then there was Howard government treasurer Peter Costello, who continued some supply-side initiatives with the GST that erased dozens of nuisance taxes, opening up business and helping fund income tax cuts.
“A lot of the treasurers since have been pragmatic, though,” Oliver says, noting that supply side wasn’t really any of their forte. “(Joe) Hockey was less supply side and was more against interventionism. He stopped subsidies to the car industry.”
Hockey says his legacy was declaring there needed to be an end “to the age of entitlement”.
“Then you had (Scott) Morrison and (Josh) Frydenberg who did a little bit on the supply side but were mostly pragmatic,” Oliver says, “Treasurers are mostly focused on micro reforms now.
The reforms are relatively minor. The focus is more on getting re-elected.”
Robert Breunig, a member of the Prime Minister’s Economic Inclusion Advisory Committee and director of the Tax and Transfer Policy Institute at the Australian National University’s Crawford School of Public Policy, thinks he knows what’s steering Chalmers.
“Jim is a big believer in government directing the economy a la Mariana Mazzucato,” Breunig says. “He worries a lot about market failure and little about government failure.”
Chalmers’ time advising Swan, who was treasurer during the global financial crisis, has likely left the scar of market failure on him, but Chalmers should be considering government failures.
Conveniently, Abundance focuses on the three exact areas of supply he has had to deal with in the past fortnight: housing, renewable energy and industry intervention. The book is not instructing the type of economic rationalist supply-side economics of tax cuts, massive deregulation and privatisation that is synonymous with the Reagan era. Instead, it is government directing the supply side.
Housing
The book starts with housing supply, promoting the supply-side policy of Democrat vice-president Kamala Harris to build three million new homes, although this was actually driven by the demand side first-home buyer handouts.
It highlights the failure of state governments and their regulations, insane levels of activism and the poor bang for buck from government building.
California is the central example and the book calls out the Golden State for having the worst homeless and housing affordability problems in the US, resulting in the loss every year of hundreds of thousands of people who are leaving for Texas and Arizona. More frightening for the liberal left, and a warning to Chalmers if he can’t meet housing goals, nearly every county in California moved towards Trump in the 2024 election.
Abundance records that California routinely used to build 200,000 homes a year in the 1960s but since 2007 it has never permitted more than 150,000 new homes. The San Francisco metro area issued 7500 new housing permits in 2023, while the Houston area in Texas issued 70,000: “This divergence is decades old and its consequences are clear. Houston has the lowest homelessness rate of any major US city.”
The book includes anecdotes about the layers upon layers of building regulations in the state and says a range of disputes occur regularly, such as unions protesting against the use of modular housing (though the modular housing factory had unionised staff).
Los Angeles former city controller Ron Galperin is quoted as being furious at the way government funding for housing just goes straight back into covering the cost of meeting funding compliance paperwork. “The way the money was structured, if you look at the inflated cost that comes along with all the regulations and rules and restrictions and limitations … basically all of this money is going to feed the beast of covering the cost of regulations,” Galperin says.
While the solutions are directed towards removing the regulations at state and local levels, it does not hold back on criticising federal funding as “probably more restrictive” than any other.
This differs from Chalmers’ plan of improving housing supply by incentivising reforms at state and local council levels, while suggesting the federal rules are fine.
Chalmers may be getting some support for this plan from NSW but there is resistance from councils. Labor Lord Mayor of Melbourne Nick Reece said last week the feds needed to take some blame.
“The commonwealth and state governments need to get to the root cause of what is holding Australia back and not chase red herrings like local government,” Reece says. “Governments keep blaming councils for putting the handbrake on development.
“But in the City of Melbourne alone there are 16,000 dwellings approved by council that are yet to see construction starting. It is not NIMBY councils stopping housing development, it’s broader issues in the construction sector alongside state and federal taxes.”
Tulip, chief economist at Centre for Independent Studies, has been focused on housing supply policy. He is annoyed with the demand-side handouts to first-home buyers that only push up the price for housing. But he likes Chalmers’ National Housing Accord and National Competition Policy that incentivises states and local governments to reform by giving them payments if they meet goals.
A $500m federally funded program to push councils into changing their planning rules such as allowing high-density housing development around transport hubs is smart policy. Tulip notes success in Sydney’s Inner West Council and that NSW is meeting its housing goals. “Payments for policy are difficult to measure; it’s a tricky and subjective exercise,” Tulip says, “But clearly the five-year result is measurable.”
The federal Treasury is less convinced; this week it leaked information that showed it did not think Labor would achieve its target of 1.2 million new houses in the next four years.
And as for immigration controls that might alleviate some pressure and increase housing supply quickly – that is considered by the Abundance book as no more than right-wing populism “wielding a cudgel against immigrants” and “seeking power by closing doors”.
Renewable energy
Reading Abundance must have given Chalmers some discomfort. As journalists, the authors could not shy away from mentioning at least some government failures. The book notes that in the Biden-Harris infrastructure bill there was $US7.5bn to build a network of 500,000 electric vehicle charging stations by March 2024. But more than two years after the bill passed only seven new charging stations were up and running.
Such a slow rollout led to the private sector fate suffered by Tritium, once an Australian Securities Exchange listed company from Chalmers’ hometown, Brisbane, that promoted its EV chargers to president Joe Biden in the White House and built a factory outside Nashville, Tennessee. The company, which reached a market capitalisation of $2bn, is now insolvent.
Abundance says the US is not building the transmission infrastructure required to make renewable energy work. It notes a report by Lawrence Berkeley National Laboratory of five major transmission projects with projected completion dates of 2021. Only one has been completed. Construction hasn’t begun on the other four.
Chalmers’ own light bulb must have gone off when forecasts by the Australian Energy Market Operator last week showed the slow rollout of transmission infrastructure such as key poles and wire projects in Victoria could severely limit the amount of power big renewables projects can produce.
The book says it’s “often easier to build renewable energy in a red state than in blue state despite Republican opposition to the cause of climate change” and that part of this is because “the environmental community has trade-off denial”.
In Canberra this week, former Treasury secretary Ken Henry delivered an impassioned plea to reform the Environment Protection and Biodiversity Conservation Act.
“Projects, be they wind farms, solar farms, transmission lines, new housing developments, land-based carbon sequestration projects, new and enhanced transport corridors or critical minerals extraction and processing plants, must be delivered quickly and efficiently,” Henry said. “I can think of other reforms to boost productivity … but if we can’t achieve environmental law reform, then we should stop dreaming about more challenging options.”
Abundance mentions the use of nuclear energy 12 times throughout the entire book, 10 in positive language about benefits to the environment and society, but Chalmers is still opposed to any changes to a moratorium on nuclear energy.
Picking winners
In his essay in 2023, Chalmers suggested “creating a new sustainable finance architecture, including a new taxonomy to label the climate impact of different investments”. This was passively picking winners by “direct investment to areas where there are financial and social returns available”.
Chalmers wrote that the focus of his economic approach was “Defining priorities, challenges and missions” and not “picking winners”. However, that is countered by the need to “facilitate flows of capital into priority areas” and “co-investment is a powerful tool at our disposal”.
Last week the government confirmed an imminent rescue package for two ageing Nyrstar smelters: Hobart’s zinc refinery and its lead smelter in Port Pirie, South Australia. The rationale is that such investment goes into shoring up the nation’s manufacturing and critical minerals capacity.
Chalmers embraces this as part of the government’s Future Made in Australia Act. “Our support for this industry is illustrated by the fact we’ve already got $70m jointly on the table for Nyrstar. We’ve got a $2bn aluminium fund.”
The government’s hand-picked Productivity Commission chairwoman, Danielle Wood, already has said that without a well-defined exit strategy the Future Made in Australia Act risks creating a class of businesses forever reliant on subsidies. “If we are supporting industries that don’t have a long-term competitive advantage, that can be an ongoing cost,” Wood says. “It diverts resources, that’s workers and capital, away from other parts of the economy where they might generate high value uses.”
Chalmers’ own light bulb must have gone off when forecasts by the Australian Energy Market Operator last week showed the slow rollout of transmission infrastructure such as key poles and wire projects in Victoria could severely limit the amount of power big renewables projects can produce.
Abundance may again go some way in explaining Chalmers’ economic philosophy on this.
The book dismisses concerns about governments picking winners. It notes a 2012 Economist essay that claimed governments had always been “lousy at picking winners” and “likely to become more so”, but then races to Chalmers mentor Mazzucato.
“As the economist Mariana Mazzucato pointed out in The Entrepreneurial State, it is strange that we still debate whether the government ought to pick winners when it is obvious that we live in a world that has amply picked for us.”
It then reaches for the interventionism of John Maynard Keynes’s 1926 book The End of Laissez-Faire quoting the economist: “The important thing for government is not to do the things which individuals are doing already and to do them a little better or a little worse but to do those things which at present are not done at all.”
Chalmers hopes his approach to supply-side economics, by lifting government intervention, redistribution and attempts at reforming regulation, will seem pragmatic.
Whether such an approach lifts productivity, economic activity and repairs a budget that he admits is unsustainable is the key test.
Its success or failure will be Chalmers’ legacy.
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