We have a budget deficit expected to be 5 per cent of GDP when it was announced – the largest outside the two world wars, excepting only the year before it. And when revenues turned out to be somewhat higher than forecast, we committed to spending tens of billions more.

We have unemployment at the lowest for 40 years (on the evidence, not yet full employment) and terms of trade the highest ever, and yet the budget deficit is immense. What would the deficit be with normal terms of trade and a less buoyant labour market?

Broadly shared knowledge is the foundation of good policy in a democracy. My old boss Bob Hawke understood that better than anyone.

Real wages over the past nine years have been stagnant for longer than ever before in Australia, and over the past year have fallen more rapidly than ever. Unit labour costs are the lowest in the half century since national accounts have been published in their current form, and the profit share the highest ever.

And yet the Australian elite says that the solution to an inflation problem is to cut real wages more rapidly than ever before.

The unit labour costs and profit share are numbers out of the rear-vision mirror. The Russian invasion of Ukraine had not entered the March quarter national accounts. Since then, we have seen increases of 500 per cent in gas prices and nearly that in wholesale electricity from last year’s levels in eastern Australia. There is only one exception: electricity in renewables-dependent ACT.

In the March quarter national accounts, the Russian war’s transfer of at least several per cent of national income from ordinary Australian household to energy businesses had hardly begun. These transfers will be relentless over the next two years or so as wholesale prices find their way into electricity and gas bills, and competitive businesses pass on cost increases to their customers.

And yet the Australian elite says the best way forward is to let the transfer rip. The Business Council even suggests that the solution is to reduce the corporate income tax rate. Records will be set by Herb Elliott margins for high profit share, low unit labour costs, and rates of decline of Australian households’ real disposable income per capita.

Giving full employment a chance

One good thing about the public policy discussion of the past two years is that full employment reappeared as a policy objective after a long absence. We seemed to be giving full employment a chance. Now we might never know what the rate of unemployment would have been at full employment – the rate of unemployment that triggers strong increases in wages.

We are aggressively tightening monetary policy before there are increases in real wages in the official statistics. (Incidentally, in the current Commonwealth budget fairyland, a few years of inflation may be the only way to reduce the burden of public debt.)

How did we get into this situation – the Dog Days, as I anticipated them in my 2013 book? By allowing vested interests to dominate the public interest in the policymaking process. By downgrading the role of analysis and knowledge.

How do we Reset, and begin the restoration of Australia – the question in my book early last year? First of all by recognising, as we did in earlier successful periods of Australian economic policy, that broadly shared knowledge is the foundation of good policy in a democracy. My old boss Bob Hawke understood that better than anyone. The April 1983 National Economic Summit and the political culture that grew from it allowed Australians to agree to changes that were impossible before they were done.

What changes now? I suggested a few possibilities in Reset. Shifting the base of corporate taxation to cash flow, to allow taxation of economic rent at reasonable rates without deterring competitive investment. Reforming taxation and social security to support living standards of low- and middle-income Australians without deterring participation in the labour force or employment of low-skill labour. Accelerating use of renewable energy and biomass resources to build Australia as the superpower of the low-carbon world economy.

The massive increases in energy prices suggest going back to variations on Henry tax review ideas of taxing mineral rent, or using one of several available mechanisms to drive a wedge between high international and domestic coal and gas prices for the duration of the Russian war disruption.

Policy reform and the elites

But more important than these or any other particular policy reform proposals is acceptance by the Australian elite that all is not best in the best of all possible worlds. We have to think harder about policy reform to achieve full employment with rising real wages and adequate provision for necessary public services. Political and business elites have to expand their understanding and acceptance of what is possible in policy reform.

Fail, as US elites failed on responding to similar imbalances, and we can expect US-style deterioration in the Australian democratic fabric. Systemic competition is a contemporary reality in our Indo-Pacific region. The long-term costs of failure are shockingly high.

The good news is that the recent election shows that our democracy is, for the time being, in good heart. A new government is talking about raising the living standards of ordinary citizens and building Australia as a zero-emissions energy superpower. It is led by decent and able people.

We have within the government’s parliamentary ranks three economists of exceptional professional quality. We have a spectacularly intelligent and accomplished crossbench, ready to play a role in restoring integrity to political institutions and leading Australia in new directions.

The central agencies in government, the Department of Prime Minister and Cabinet and Treasury, are now led by people of unusual competence, knowledge and experience.

Let us, at last, begin the task of working through the extreme imbalances and restoring Australia after the pandemic recession.