Chalmers should be wary of conventional thinking about problems of unconventional origin. Just as the “coronacession” was different from an ordinary recession because it was caused by government-imposed restrictions on the supply side rather than efforts to curb excessive demand, it should not use the restriction demand to try to resolve supply disruptions.
Inflation problems normally stem from an overheated economy leading to excessive wage growth. The standard solution will be to reduce real wages to make labor cheaper. But real wage growth has been weak for a decade.
The business lobby has become so caught up in short-sighted self-interest – so used to doing what it wants – that we need a new government with the wisdom and the strength to save business from their own madness.
Those who ideologically oppose fiscal stimulus tell us our the stimulus has given us a hot, inflation-prone economy – as evidenced by our extremely tight labor market. They conveniently forget to mention that the pandemic caused us to ban all imported labor for two years, but that supply constraint is now lifted.
If excessive wage growth didn’t cause our high and rising prices, what did? The fiscal stimulus has caused shortages of materials and workers in housing and construction, but most of the price increases are due to external supply constraints caused by the pandemic and the war on Ukraine.
Nothing we could do can solve the problems coming from the rest of the world. But let’s not forget that these are one-time price increases. And those import prices will drop at some point as the pandemic disruptions are resolved and the war ends.
It’s not that simple, of course. Why not? Because our companies do not seem to have hesitated to pass on their increased import costs to retail prices. This is the beginning not of a wage-price spiral, but of a price-wage spiral. And the business and employer groups’ solution to the spiral is simple: allow only a token increase in wages and inflation will come down in no time.
It is the unspoken doctrine that is the bastard child of the age of economic rationalism: give corporations everything they ask for and everything in the economy will be wonderful. The business lobby has become so caught up in short-sighted self-interest – so used to doing what it wants – that we need a new government with the wisdom and the strength to save business from their own madness.
We need a government that can see what business cannot see: that wages are not just a cost to business and a tax on profits, but also the main source of income for the 10 million households who are the reason we have an economy and whose spending on the things our businesses produce is what generates their profits in the first place.
Fucking workers by tolerating ever-decreasing real wages is a crazy way to increase profits in anything but the short term. The bigger the fall in real wages – and the government cannot stop them from falling – the more likely labor is to join the United States and China in recession.
That’s why, in its laudable desire to keep big business under cover, the government was wrong to ask the Fair Work Commission to increase awarded wages by 5.1% just for “low paid” workers. – that is, only the lowest workers. 12 percent of workers rather than the bottom 25 percent.
Do you really think the 88% of workers who depend on bargaining with bosses rather than a commission decree will get something like a 5% pay rise?
Former Reserve Bank Governor Bernie Fraser used to say that any fool could bring inflation down – all you had to do was bring the economy down. Is this what companies would like? This is certainly what the financial markets want – whose model of our economy is a footnote saying “see America”.
As I’m sure the Reserve understands well, we need to bring inflation down without causing a recession. And that means being patient with how long it takes. We were below the target range for six years; we can be above it for a few years without the sky falling on us.
And remember this: if we fell into a recession, the strategy of getting out of debt would explode. Not only would the economy grow more slowly than the debt, but the “automatic stabilizers” in the budget would reverse and the deficit would explode, dramatically increasing the debt.
On the other hand, Chalmers should be skeptical of the argument that an additional reason we need to reduce the budget deficit as soon as possible is to reduce the need for interest rates to rise so far. Getting inflation under control is no big deal – if you’re patient.
The Reserve’s stated strategy is to shift monetary policy stance only from “emergency expansionary” to “neutral”. That is, take your foot off the accelerator, do not lock the brakes. This means slowly raising the official interest rate to around 2.5%, so that the medium term real the interest rate is zero.
In theory, at least, this shouldn’t cause the economy to shrink, nor be it a big pain for most people with mortgages. And it would be a good thing in itself to bring rates back up to near-normal levels.
The real challenge for fiscal policy is to avoid sinking us further by proceeding with the third stage of the tax cut in its current timing, size and form. It could be revamped to make it more effective in relieving cost of living pressures for people in the lower half.
Ross Gittins is the economics editor.
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