27 MARCH

 The impeachment of Donald Trump is dead

The impeachment of Donald Trump, 45th president of the United States, died on Sunday in Washington with the release of the four-page summary of Special Counsel Robert Mueller's report.

That's the assessment of non-resident senior fellow Bruce Wolpe in The Sydney Morning Herald this week, and certainly seems to be a sentiment shared by senior Democrats in Washington.

Democrats are likely to bore in hard on the incomplete judgment on obstruction of justice. Democratic leaders have also demanded the full Mueller report and all the supporting evidence and documentation. But if they want to take Trump out, Wolpe writes, they will have to do it at the ballot box.

NEWS WRAP

Beto, Buttigieg & The Manchurian Candidate

• He's the name on everyone's lips, that few can actually pronounce. Pete Buttigieg (or "Mayor Pete") has surged to third place in a new poll of Democratic presidential candidates, ahead of Kamala Harris, Elizabeth Warren and Beto O’Rourke. Non-resident senior fellow Stephen Loosley, AM joined the 2020Vision podcast this week to discuss his meeting with Buttigieg (the 37-year-old mayor of South Bend, Indiana), and gives us his thoughts on the Mueller Report, Beto O'Rourke, and the modern day political parallels with 1962 film, The Manchurian Candidate. LISTEN HERE.
   

• As the campaign for the 2020 Democratic nomination heats up, a key foreign policy question is whether and under what conditions candidates support the use of military force. USSC lecturer and current Harvard visiting fellow Gorana Grgic wrote for War on the Rocks this week with Professor James Goldgeier about what lessons could be learned from the 20-year-old Kosovo War in guiding policy on US military intervention. READ MORE HERE.
   
• The global nature of violent white supremacy rarely garners much attention. In her column for The Sydney Morning Herald this week, honorary associate Nicole Hemmer looks at how the issue – which is often seen as a distinctly American problem – stretches to countries like Australia and New Zealand, and requires a global, not simply national, response. READ MORE HERE. 
   
• The Trump administration’s surprising move to invalidate Obamacare on Monday came despite the opposition of Health and Human Services Secretary Alex Azar and Attorney General William Barr, according to reports. In a new court filing, the Justice Department argued that the Affordable Care Act should be thrown out in its entirety, including provisions protecting millions of Americans with preexisting health conditions and allowing young adults to stay on their parents’ health-care plans. READ MORE HERE.
   
• As artificial intelligence and robotics technologies progress, the increasing autonomy of unmanned military systems will drive new operational concepts with the potential to transform modern war. In her new USSC policy brief, Lindsay Gorman takes a look at the future of unmanned warfare at sea as Chinese military modernisation presents the United States and Australia with deepening anti-access challenges across the Indo-Pacific region. READ MORE HERE.

There are some Democrats who are disappointed and I’ve said to five or six of them, the fact that the president of the United States is not in a criminal conspiracy with a foreign enemy is cause for celebration, not for disappointment. And if you get your head into a place where you think it’s a bad thing that the president is not a traitor, you’ve got to reorient your head.

Rep. Jim Himes (D-Conn.) on the completion of the Mueller Report.
26 March 2019

ANALYSIS

Productivity growth is still ‘almost everything'

Stephen Kirchner
Trade and Investment Program Director

Australian Opposition Leader Bill Shorten has declared the next federal election a ‘referendum on wages'. Unfortunately, we can’t just vote ourselves a wage increase. Productivity growth is the only sustainable source of real wages growth.

The relationship between productivity and wages has weakened somewhat in recent years and not just in Australia. In the United States, some have argued that there has been a decoupling of wages from productivity such that workers are no longer enjoying the benefits of greater prosperity, feeding into a broader debate about income inequality.

The ‘decoupling’ thesis typically focuses on the relationship between productivity and the median wage to suggest that the typical worker in the middle of the income distribution has not benefited from increased productivity. But economic theory does not necessarily predict a strong relationship between productivity and median wages. Indeed, it implies very little about the distribution of the income gains from increased productivity.

Productivity growth is expected to raise wages on average, but the distribution of those gains is a function of a wide-range of other factors. Those who argue that the relationship between productivity and compensation in Australia and the United States is broken are mostly looking at the wrong measures.

When measured more appropriately, the long-run relationship strengthens, although there is still evidence for a weaker relationship more recently. But this does not mean we should rush to abandon competitive models of wage determination. Prior to the move away from centralised wage fixing in the early 1990s, the link between productivity and compensation really was broken. The Hawke-Keating government’s Prices and Incomes Accord with the unions sought to suppress real wages growth to allow productivity to catch-up with the excessive wage gains of the early 1980s.

The danger in confusing the issue of productivity growth with the distribution of income is that it may lead policymakers to neglect productivity-enhancing policies on the basis they won’t benefit the typical worker. But distribution of income gains is a second-order issue compared to the first-order issue of generating those gains in the first place. Paul Krugman famously said that productivity growth isn’t everything, but in the long-run, ‘it’s almost everything.’

Unfortunately, the politics of increased productivity growth is much harder than the politics of redistribution. Both sides of politics have increasingly neglected the former in favour of the latter. Weakness in real wages has also been coupled with weakness in nominal wages. Based on the wage price index, nominal wages growth has been running at 2.3 per cent. Reserve Bank Governor Philip Lowe has said he would like to see a return to wages growth beginning with a ‘3’, that is, at least 0.7 percentage points faster that the latest growth rate.

As it happens, inflation is currently running 0.7 percentage points below the central tendency of the Reserve Bank’s 2-3 per cent target range. While there is not a mechanical or necessarily contemporaneous relationship between consumer price inflation and wages growth, returning inflation to the middle of the target range would go a long way to restoring the nominal wages growth Governor Lowe says he wants.

One of the main influences on the wage setting behaviour of employers and employees is inflation expectations. Together with productivity growth, low inflation expectations largely explain recent weakness in nominal wages growth.

The Reserve Bank has focused attention on the supposed puzzle of weak wages growth coexisting with a tightening labour market and the weaker relationship with productivity growth, but has largely ignored the contribution of the variables for which it is most responsible: inflation and inflation expectations. The Reserve Bank expects a tightening labour market to gradually lift both wages and inflation without having to adjust monetary policy to a more accommodative stance, but this gets the relationship between monetary policy, inflation and wages backwards.

The Reserve Bank has undershot the middle of its inflation target since the end of 2014. It has left monetary policy on hold for more than two years, the longest period of steady official interest rates on record. Monetary policy has explicitly traded-off the inflation target against apprehended financial stability risks, but those risks have abated as credit growth has slowed and the housing market has turned down.

Like below target inflation, low nominal wages growth is partly a policy choice by the Reserve Bank, a choice that also constrains fiscal policy through income tax receipts. In aggregate, nominal wages has a close relationship with nominal gross domestic product (GDP). A nominal GDP target would effectively target nominal wages.

After the federal election, the treasurer would do well to renegotiate the policy agreement with the Reserve Bank to ensure that it better prioritises the inflation target.

Stephen Kirchner's report, Unbroken: Productivity and Worker Compensation in Australia and the United States, was released last week and is available on our website here.

DIARY

The week ahead

• Wednesday, 27 March: US House Armed Services Committee hearing on national security challenges and US military activities in the Indo-Pacific.
   

• Wednesday, 27 March: US Senate Commerce, Science, and Transportation Committee hearing on state of airline safety, focusing on federal oversight of commercial aviation.
   

• Thursday, 28 March: President Trump is scheduled to speak at a rally in Grand Rapids, Michigan.
   

• Tuesday, 2 April: Australian Prime Minister Scott Morrison will hand down the 2019 Budget at Parliament House, Canberra.

EVENT

 Microsoft President Brad Smith in conversation

VIDEO

Trump on Mueller: Shame our country had to go through this

THE WEEK IN TWEETS

#Mueller

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University of Sydney NSW 2006

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