And then there were three. The Productivity Commission, Treasury and now the Reserve Bank have all confirmed that a big part of Australia’s productivity challenge is declining competition and the ability of large, oligopolistic firms to increase their mark-ups, or the amount of profit they can make off each product.
A fortnight ago, the PC unveiled modelling showing a big rise in what it termed “economic rents” from corporations exploiting market power in recent years. The Treasury then released a paper last week for the economic roundtable that noted “there is evidence of increasing industry concentration and firm mark-ups. In 2018–19, the largest four firms in each industry made up around 43% of total industry sales on average, compared to around 40% in 2002–03. Firm mark-ups have also increased by around 5% on average since the mid–2000s.”
And yesterday, the Reserve Bank released a paper titled How Costly are Mark-ups in Australia? The Effect of Declining Competition on Misallocation and Productivity. The authors, Jonathan Hambur and Owen Freestone, concluded:
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Our key finding is that, if we were we able to return to mid-2000s levels of competition, productivity would be 1–3% higher as a result of better allocated resources. This shows that declining competition has been a significant drag on productivity, and therefore GDP and incomes … declining competition in the Australian economy can account for a significant portion of the slowdown in productivity growth …
Three per cent of lost productivity amounts, in their economic model, to around $3,000 per person in current dollars, although take that individual figure with the same scepticism as any other economic model output.
Hambur — the acknowledged expert on micro data at the RBA, who was previously at Treasury — and Freestone aren’t interested in inflation per se, and less interested in household welfare — they are focused instead on the misallocation of resources caused by more dominant firms being able to extract higher mark-ups. And they think their estimate is conservative:
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Accounting for the broader costs of mark-ups, in particular the effect of the level of mark-ups on firm choices about how much to produce (deadweight loss channel), leads to much larger estimates in terms of lost economic activity, though the range of estimates is quite large.
The observations are particularly pertinent coming from the RBA’s researchers given that, in the early post-pandemic inflation spike, the bank was front and centre in a campaign of gaslighting of the community by business, right-wing economists and the Financial Review that corporate profiteering had nothing to do with inflation. In effect, then governor Philip Lowe, backed by economists, the Business Council (BCA) and op-ed writers and economics editors at the AFR, asked Australians to ignore the evidence of their own lying eyes of the blatant profiteering going on.
For those of us who’ve been saying for years that lack of competition is stifling productivity and driving up prices — yes, we know we’ve sounded like a broken record at times — all we can offer to the RBA, Treasury and the PC is “better late than never”. We’re not holding our breath for an apology (especially not from the AFR, which had a political journalist cover the RBA study).
But between the views of the PC, Treasury and the RBA, including its Statement of Monetary Policy this week — seized on by the pet shop galahs — we now have a good handle on much of the “productivity crisis”. As it turns out, its causes are long-run (which might explain something that everyone has forgotten — that there was a “productivity crisis” under the Coalition as well).
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They lie in the growth of the more labour-intensive care economy, which is not hugely amenable to big productivity growth unless you simply slash caring services like aged care and disability care; in the ups and downs of our high-productivity but weather-affected mining industry, and in the declining level of competition that has enabled large firms to gouge other businesses and consumers, invest less and innovate less because of their greater market power.
If Hambur and Freestone are right, the impact of poor competition could be the biggest of all — and yet it is almost ostentatiously absent from the squawking of the galahs ahead of next week’s roundtable, especially the ones in the BCA — the lobby group for the worst, most avaricious and gouging corporate vampires in Australia — and the business press. But even the unions are curiously silent — too busy, perhaps, conjuring plans for bans on any worker ever being sacked, a four-day week, and blowing the budget on more spending.
Labor did undertake competition policy reform in its first term, and it was worthwhile, if unambitious. As we’ve noted before, the only person to suggest really shifting the dial on competition policy was Peter Dutton, backed by the Nationals, who called for divestment powers for big retailers.
Some Nationals like Bridget McKenzie wanted to extend divestment powers to other sectors like aviation, and were admonished for their heresy. Big business hates the idea. But maybe we should be listening to the Nats. Who cares where productivity ideas come from if they’re good ones?
Are huge corporate profits the real cause of Australia’s poor productivity?
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