The RBA has the tools to fix the economy, but is reluctant to use them

Thu, 05 Dec 2019  |  

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/rba-tools-reluctant-042742904.html

-----------------------------------------

The RBA has the tools to fix the economy, but is reluctant to use them

The Reserve Bank of Australia has made a range of serious policy errors over the past few years, and the Australian economy is weaker because of those mistakes and misjudgments.

Not only is the RBA on track to miss its inflation target for six years, and perhaps longer, the persistently high unemployment rate in concert with record low wages growth is the result of the RBA’s tardiness in cutting interest rates because of its textbook obsession with house prices and household debt.

It is a mistake that has cost the economy tens of billions of dollars in lost output; employment is many thousands of people below what could have been achieved; and all the while wages growth hovers near record lows undermining the wellbeing of the workforce. What’s worse, the RBA seems to have thrown in the towel on trying to meet its inflation target, even though that target was confirmed a month ago in the recent update of the Conduct of Monetary Policy between the RBA and Treasurer.

In this context, Deputy Governor of the RBA, Guy Debelle, gave a fascinating speech earlier this week on the topic of employment and wages.

He made the valid point, which is a truism from basic economic theory that “the surprising strength in labour supply has been one of the factors that has contributed to wages growth being slower that we expected”. Excess supply lowers prices, in this case the price of labour is wages.

But what Debelle failed to address in this talk is the shortfall in demand for labour relative to that unexpected lift in the supply of labour. He suggested that low wages growth is the ‘new norm’ for the Australian economy, in an extraordinary capitulation or admission that the RBA has run out of ideas or is unwilling to implement policies that will unambiguously lead to higher wages growth and higher inflation.

Lowe rules out likelihood of using available tools

A few hours after Debelle’s speech, his boss Governor Philip Lowe, effectively ruled out a range of policies that would make the economy grow faster! Lowe said negative interest rates were not on the RBA’s agenda, that quantitative easing was extremely unlikely, and if QE was to be implemented, the RBA would not be buying private sector debt or assets.

Under Lowe, the RBA will not use some of the policy instruments used by credible central banks such at the US Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and others as they engineered stronger economic growth, falls in unemployment and an acceleration in wages, with the policies largely ruled out by Lowe.

In Australia, like in the rest of the world, strong demand for labour will only be generated in an economy that is enjoying a rapid, productivity inspired expansion. Such an expansion can be facilitated by stimulatory monetary policy.

And to be sure, expansionary fiscal policy will help in that task. But with the government signalling to the RBA its political priorities including the rejection of fiscal stimulus, Lowe should do his job and set monetary policy to deliver full employment and get inflation back within the 2 to 3 per cent band. It is likely that this is the context which Deputy Governor Debelle says low wages are the ‘new norm’. If the policy levers are not used, then it will be difficult for economic and wages growth to accelerate.

In countries that embraced expansion monetary policy, there have been massive reductions in unemployment rates and decent increases in real and nominal wages growth.

These tools work overseas

Low wages are not the ‘new norm’ internationally, it would seem. Unless there is something specific to Australia, wages growth can pick up to a decent pace, but only if policy makers take the lead and set monetary, fiscal and structural policies so that they deliver the conditions that allow for stronger growth, rapid job creation and a tightening in the labour market.

While there are signs the Australian economy is passing the low point in the cycle, and that GDP growth will be stronger in 2020 than in 2019, progress in reducing unemployment and triggering higher wages growth appears limited. Easier policy would help lock that in, even if those policies are not in old-fashioned and redundant text books and are considered ‘unconventional’.

With almost 2 million Australians unemployed or underemployed, and another 10 million not getting decent wages growth, their best hope is that the RBA changes its mind on how to deliver a tighter labour market, higher wages growth and, importantly, inflation back near the mid point of the target band.

comments powered by Disqus

THE LATEST FROM THE KOUK

CLIMBING THE COVID MOUNTAIN

Wed, 29 Jul 2020

TEN ECONOMIC STEPS THAT FORM A PATHWAY TO THE TOP

THEKOUK and EVERALDATLARGE OUTLINE A WAY FOR THE PEOPLE OF AUSTRALIA TO CREATE AND MAINTAIN SUSTAINED PROSPERITY

Covid19 has opened a door for Australians to positively accept significant changes that will lead to a shared good. This rare opportunity enables us to achieve sustainable economic and social goals that create a new ‘normal’ as our way of life.

These Ten Steps are presented as non-partisan recommendations to the Australian Parliament in the firm belief that, if they embrace them, the Australian economy and society will be greatly enhanced after the Covid19 pandemic has passed.

*A job for you if you want one.
A significant increase in part time and casual employment can be created that will enable you to enjoy a more creative and peaceful lifestyle and to live longer and better. The traditional age at which you would have been expected to retire will become obsolete as a result. An access age for pension and superannuation will become your choice. This will enable you to remain in paid work for as long as you want to, on a basis that you choose, while boosting the productivity and growth of Australia.

*You will get wage increases that will be greater than your cost of living.
A demand for enhanced innovative skills at all levels of employment will be created as the economy grows in strength, thereby enhancing your stature in the workforce and enabling executive salaries and bonuses to drop to levels that are accepted as justifiable by employees, shareholders and customers.

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

---------------------------- 

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced.