Inflation has crept back up in Australia. With prices rising well above the RBA target and interest rates remaining high, it's easy to forget there are countries dealing with the exact opposite situation.
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One of those countries is a big one - China - and its predicament underscores the implementation risks of the so-called "abundance agenda".
Start with what's happening in China.
China's economy grew a whopping 10 per cent every year on average in the 1980s, 1990s and 2000s.
China's economy doubled in size every six or seven years over that period.
It took Australia 20 years to double the size of its economy in that time, and we only managed to do it once. China did it four times.
To be clear, China was an extremely poor country. Not only did we expect their economy to grow quickly, we needed it to grow quickly if it was to have any chance of addressing extreme poverty.
The problem is that China's economy has since slowed dramatically.
The International Monetary Fund reckons China's economy won't even grow 4 per cent this year - far too low for a country that still has a big poverty problem and now faces an ageing population.
China was meant to overtake America as the world's largest economy in 2025 (measured at market exchange rates) but that prediction has now been kicked decades down the road.
How did China's growth go from unprecedented to unimpressive?
In a nutshell, China has too much supply and not enough demand.
It has lots of homes, but not enough home buyers.
It has lots of EVs, but not enough EV drivers.
It has lots of consumer products, but not enough consumers opening their wallets.
This predicament has created a bunch of problems, and it's a warning for countries like Australia who are attracted to the so-called abundance agenda - the idea popularised by Ezra Klein and Derek Thompson that we should gear our policies towards a big increase in supply of everything from houses and healthcare to energy and electronics.
China's abundance has created four big problems.
First, big increases in supply have created a big deflation problem.
China has had several months of deflation this year - meaning prices have actually fallen, not increased - which is a part of a longer-term trend of weak price growth.
This might sound great to Australians, but deflation wreaks havoc on an economy. People delay consumption and businesses stop investing if prices are falling. Deflation is a serious handbrake on China's growth.
The second problem is around quality. Done poorly, an abundance agenda can result in policies which encourage crummy businesses to produce crummy products.
China is seeing this in a bunch of areas, but particularly in housing where apartments are in the wrong place and with the wrong level of quality - sometimes being knocked-down and never sold.
The third problem is productivity. Related to the above, an abundance agenda that encourages crummy businesses to produce crummy products is committing a core sin of economics: preventing creative destruction.
Creative destruction is where bad businesses fail and good businesses expand and take their place. It's a big driver of productivity which, in the long-run, is the only driver of living standards.
An abundance agenda that keeps bad businesses going will kill off the very thing we are trying to achieve: a higher standard of living.
The final problem China is facing is international. When a country produces too much stuff, it tends to get dumped overseas. This produces big problems politically, and sometimes economically.
China has flooded the world with EVs. For Australia, this is great news.
Australia doesn't make EVs and so the outcome for us is a cheaper climate transition.
But for countries that do make EVs - like those in Europe, and the United States - it's a different story. Politically, these countries are
getting very annoyed with China. Economically, there's a risk that these cheap EVs kill off their domestic industries and then, if China was to stop supplying EVs later, they'd have to rebuild whole industries from scratch.
What can Australia learn from China?
The abundance agenda is a great idea. The challenge is in how you implement it.
The core lesson from China is to make sure you properly diagnose what's restricting supply, and then harness market forces to fix it, rather than kill off those market forces and create perverse incentives.
Take an example. Australia's housing crisis will not be solved by pumping more demand into the system through subsidies and tax breaks.
Nor will it be efficiently solved by subsidising more supply or controlling prices.
The better solution is to remove bottlenecks by getting our regulations on planning and zoning right, and letting the market do the rest.
If we want businesses to supply more health, education or other services, investigate what's constraining supply before we jump to a subsidy or tax credit. Is it a workforce constraint? An input problem? A regulatory barrier? An inability to access capital?
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And when we do need to use subsidies or tax breaks to address a market failure, make sure we protect incentives to compete, innovate and maintain quality by not picking winners, not controlling prices, not controlling quantities and by directly attaching the support to the thing we want (e.g. producing more good quality products), rather than just writing blank cheques.
If there's one lesson that permeates economics, it's that incentives matter. China forgot this. Australia would be wise to remember it.
- Adam Triggs is a partner at the economics advisory firm, Mandala, and a visiting fellow at the ANU Crawford School and a non-resident fellow at the Brookings Institution.
