In Tuesday’s statement that accompanied the March rate hike, Reserve Bank governor Philip Lowe said it looks like inflation has peaked in Australia and growth has slowed.
By its own admission, therefore, the RBA is hiking interest rates into a growth slowdown with falling inflation; the only question seems to be whether that means there has already been one, two or three rate hikes too many, and how ugly the recession will be. We’ll find out later this year.
So what is going on? Why has the RBA hiked rates for the 10th time while saying that inflation has peaked and is still talking about doing it again next month, albeit with slightly less gung-ho language.
And why are our elected representatives reduced to hand-wringing spectators as the nation’s biggest social and economic drama plays out on centre stage?
The answer to the first question is that the RBA is making absolutely sure, and also that we are caught in what might be called the mean/marginal conundrum.
The RBA, and economists in general, deal in parcels of means and medians delivered to them each month and quarter by the Australian Bureau of Statistics. Based on those deliveries, everything looks fine. Households are starting to feel the pinch, on average, but the data does not yet point to a crisis, savings remain high and unemployment is still very low.
But on the margins, it’s anything but fine. Food charities and counselling services are being inundated and anecdotes of distress are easy to find, but the ABS, and therefore the RBA, don’t deal in anecdotes. They deal in data.
Means and medians
But in time the marginal becomes the mean. It starts off with, say, the 5 per cent of families with the highest debt-to-income ratio doing it very tough, lining up at food banks and cutting back where they can, and then their misery spreads to another 5 per cent, and then to another 5 per cent, and so on.
This is part of the reason it takes a while for monetary policy to work: One reason is that mortgage repayments don’t all increase immediately because of fixed-rate loans and, just as important, the transmission of marginal misery to the many takes time.
Philip Lowe recognised the lags in his statement on Tuesday, but didn’t delve into the reasons or speculate how long the lag is. Does the recession start in three months? Six months? Next year? We’ll see.
Of course, the RBA never actually admits to engineering a recession, and says it’s trying to get inflation down while keeping the economy on “an even keel”. But it does acknowledge that the “path to achieving a soft landing remains a narrow one”, which may be central banker-speak for no path at all. We’ll see.
As for the second question about why the government is on the sidelines talking lamely about RBA independence and about providing “cost-of-living relief”, well, they are out of the game and have been for years, which means monetary policy simply has too much work to do.
There used to be three horses pulling the macroeconomic stagecoach – wages policy, fiscal policy and monetary policy.
End of wages policy
Wages policy was sent to the knackery in the 1980s by enterprise bargaining and the death of centralised wage fixing. Some of it survives in the minimum wage case, but that’s got little to do with economics and everything to do with bargaining and judicial compromise by the Fair Work Commission.
Fiscal policy is in a retirement paddock serving the mares of politics, because the political classes have retreated from doing anything that might be unpopular.
Managing the economy is lovely when you’re boosting demand in a crisis by giving everyone money, as in the GFC and the pandemic, but taking money away from them to reduce demand? Forget it.
We’ll leave that to the RBA, thanks, while providing cost-of-living relief – responsibly, of course, without interfering with the RBA’s work of doing the opposite and increasing the cost of living to restrain demand, which is a joke, or rather empty words.
Everything is left to the market
In any case, neoliberalism has been the dominant political and economic paradigm of the past 40 years and has decreed that governments should leave everything to the market because they’ll only stuff it up.
Politicians, including those on the left, only want to be nice and have readily complied, except in a crisis, when deficits and debt don’t matter and fiscal policy can be dusted off and its immense power exhibited.
When it was set up in 1959, the RBA’s goals were, and still are: “The stability of the currency; the maintenance of full employment; and the economic prosperity and welfare of the people of Australia.”
And then in the 1990s, after the “recession we had to have”, two things changed: First, politicians thought ‘bugger this, we’re not going to be blamed for recessions any more’, so they retreated from macroeconomic policy and made central banks independent, and second, central banks, including the RBA, adopted inflation targeting as their entire raison d’etre.
Inflation target became everything
The inflation target became everything because it’s definite and achievable.
“Full employment”, it was felt, is unachievable and anyway interferes with the inflation target, and was redefined to mean enough unemployment to keep inflation down, and “prosperity and welfare” are vague, wishy-washy notions quite unsuited to the rigours and precision of economics.
Politicians will never again take responsibility for reducing aggregate demand by increasing taxes or cutting spending as macroeconomic tools, so we can forget that sort of fiscal policy ever returning, although they will always reserve the right to dispense borrowed money in a crisis.
Which is why a suggestion by economist Nicholas Gruen in 1999 – in a paper written for the Business Council of Australia – might be considered.
He suggested that one way to revive fiscal policy might be to “give statutorily-appointed fiscal officials some responsibility to make small across-the-board adjustments to tax rates within one or more major tax areas (e.g. personal income tax, corporate tax and/or indirect tax).”
That is, a sort of fiscal Reserve Bank, completely independent of government but with the power to move taxes within a prescribed band for purely economic reasons.
It would take pressure off monetary policy, and thus off mortgagees, who are the hapless cannon fodder in the war against inflation.
Alan Kohler is founder of Eureka Report and finance presenter on ABC news. He writes twice a week for The New Daily
