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Tag: Macroeconomics

  • The Reserve Bank needs to acknowledge the failures of the inflation target

    One clear example of the bias of a low-inflation target is the stagnant growth of real household income per capita during the years prior to the pandemic when inflation growth was below the Reserve Bank’s target rate of 2%.

    For a record 33 straight months from September 2016 through May 2019 while real household incomes flatlined, the Reserve Bank kept the cash rate stable at 1.5% despite throughout all this period inflation was below 2%.

    And yet as soon as inflation goes above the target ceiling of 3% the Reserve Bank seeks to increase interest rates quickly to reduce economic activity and also wages growth, even though wages lag well behind inflation.

    “As the Federal Government undertakes its review of the RBA’s mandate and operations, these broad political-economic dimensions of monetary policy must be considered carefully,” said Dr Greg Jericho, Labour Market and Fiscal Policy Director at the Centre for Future Work.

    “There is no evidence at all that a tight labour market, rising wages, or labour costs more generally have anything to do with the surge in inflation since the COVID pandemic. To the contrary, the evidence is clear that wages have had a dampening impact on inflation in this period.

    “The Reserve Bank and the Federal Government need to take a more careful, balanced look at the nature, causes, and consequences of the upsurge in inflation since the pandemic, before leaping to conclusions that are unjustified – and imposing policy responses that do more harm than good.

    “Since the end of 2019 real wages have fallen 3.1% and are expected to fall even further. The inability of wages to keep up with inflation has seen real wages fall back to 2012 levels. This highlights how the real victims of rising inflation have been workers, and the last thing they should be asked to do is suffer even more in the interests of pursuing an arbitrary inflation target.”

    The post The Reserve Bank needs to acknowledge the failures of the inflation target appeared first on The Australia Institute's Centre for Future Work.

  • Inflation: A Primer

    The Inflation Primer report investigates the history of Australian inflation and policy choices and provides a counter to the view that low inflation and the current inflation target is an unalloyed good. The period of inflation targeting has coincided with a strong shift of national income away from workers to company profits. It has also seen a tendency of the Reserve Bank to act decisively when inflation grows above the target and be much less active when, as we saw in the years prior to the pandemic, inflation slowed below the target range. The report also reveals that workers’ wages did not cause the current level of inflation and yet workers are being urged to accept historic falls in real wages in order bring inflation back within the Reserve Bank target.

    Our review of the causes of current inflation points to some clear policy conclusions, that should be kept in mind by the government, the Reserve Bank, and other stakeholders as Australia continues to adjust to these new inflationary challenges:

    1. Inflation targeting in Australia since 1993 has not been “neutral”. Inflation missed the target from below, far more often than from above. Moreover, that period of inflation targeting (especially the sustained periods when inflation fell below the target) was associated with a massive transfer of income and economic power from workers to businesses. As the Commonwealth government undertakes its review of the RBA’s mandate and operations, these broad political-economic dimensions of monetary policy must be considered carefully. Monetary policy has not been a technocratic exercise, intended to maximise public welfare in a general sense. It clearly reflects and continues to reflect, value judgments and priorities placed on how the costs and benefits of inflation management are distributed across society.
    2. There is no evidence at all that a tight labour market, rising wages, or labour costs more generally have anything to do with the surge in inflation since the COVID pandemic. To the contrary, the evidence is clear that wages have had a dampening impact on inflation in this period. Recent inflation is clearly associated with a further expansion of business profits in Australia, to their highest share ever. Attacking inflation by aiming deliberately to increase unemployment and restrain wage growth even further, is a “blame-the-victim” policy that will only make workers pay even more for a problem they clearly did not create.
    3. The current surge of inflation reflects a “perfect storm” of unique factors (mostly global in nature) sparked by the COVID pandemic: which has been, after all, the most dramatic and painful event in the world economy since WWII. It should hardly be surprising that after-shocks from those events will be felt for some time, and the surge in global inflation is clearly one of them. Responding to this unique and unprecedented challenge by simply reciting a monetary playbook formulated in a fundamentally different era (the inflation of the 1970s) is not just inappropriate. It will, if pursued, lead to a painful and unnecessary global recession that will almost certainly engulf Australia, too.

    For all these reasons, the Reserve Bank and the Commonwealth government need to take a more careful, balanced look at the nature, causes, and consequences of the upsurge in inflation since the pandemic, before leaping to conclusions that are unjustified – and imposing policy responses that do more harm than good.

    The post Inflation: A Primer appeared first on The Australia Institute's Centre for Future Work.

  • Webinar on Wages, Prices, and Power

    Jim Stanford (Economist and Director) and Greg Jericho (Policy Director, Labour Market and Fiscal) from the Centre for Future Work are providing keynote presentations as part of this series. Below is a recording of the first of these presentations, presented by Jim.

    For other resources on inflation, how it is undermining real living standards for workers, and how to fix it (without throwing the whole economy into recession – an even bigger risk!), please see:

    The Wages Crisis: Revisited (Centre for Future Work overview of falling real wages, by Andrew Stewart, Jim Stanford, and Tess Hardy)

    An Economy That Works for People (ACTU Macroeconomics Discussion Paper)

    “The Cure of Inflation Looks Worse than the Disease“ (latest Guardian Australia column by Greg Jericho)

    The post Webinar on Wages, Prices, and Power appeared first on The Australia Institute's Centre for Future Work.

  • With a global recession looming the cure of inflation looks to be worse than the disease

    As policy director, Greg Jericho, notes in his Guardian Australia column, the outlook is not much better for Australia. The IMF is now predicting that in 2023 and 2024 Australia’s GDP will grow less than 2%. Such meagre growth in the past has been consistent with periods of recession.

    The report should serve as a stark warning to central banks around the world that their efforts to limit inflation by sharply raising interest rates is becoming more and more likely to end with a recession and the resultant massive loss of jobs that will follow. Experience from the 1980s and 1990s where similar recessions followed extreme tightening of monetary policy suggests it can take a long time to reverse the damage.

    While the Reserve Bank is somewhat constrained because it needs to be mindful of the rate rises in the USA that weaken the value of the Australian dollar, the IMF report should cause them to weigh much more the costs of sharply slowing growth through interest rate rises.

    We know that current efforts to limit inflation growth are mostly involving workers taking a real wage hit. Having to endure rising unemployment and a recession after 2 years of already extreme falls in living standards would be disastrous, especially while profits continue to rise.

    The post With a global recession looming the cure of inflation looks to be worse than the disease appeared first on The Australia Institute's Centre for Future Work.

  • They didn’t cause the inflation, but workers are expected to cure it

    In his Guardian column, Policy Director Greg Jericho notes that given real wages have already fallen for 2 straight years any further falls will take workers’ purchasing power backwards to where it was more than a decade ago. This however is viewed as being “worse than the alternative” of inflation growth above 3%.

    He notes that over the past 2 years the profit margins of many industries, and most especially the mining industry, have risen and have themselves fuelled inflation. But company profits are never expected to suffer, wages however are always viewed as either the culprit of inflation or the means to reduce it. The vast increase in mining profits, largely due to the Russian invasion of Ukraine, also highlights the urgent need for a windfall profits tax.

    Using the RBA’s own estimates Jericho calcuates that by the end of next year real wages will be back at 2008 levels and even with the most optimistic outlook they will not return to 2019 levels until 2030.

    The Reserve Bank’s strategy of sharply increasing interest rates risk slowing the economy into a recession even though real wages are already falling faster and for longer than they have in modern times.

    The post They didn’t cause the inflation, but workers are expected to cure it appeared first on The Australia Institute's Centre for Future Work.

  • The latest data shows just how bad housing affordability is

    But while the latest data from the ABS shows prices fell on average 2% across the nation in the June quarter, policy director Greg Jericho notes in his Guardian column that price remains well above what they were prior the pandemic.

    During the GFC the majority of the stimulus measures directed towards construction were on public works – most notably the Building the Education Revolution. During the pandemic, however, the Morrison government targeted the housing market with its HomeBuilder program in conjunction with the Reserve Bank’s cutting interest rates. These served to set fire to the market as prices soared and affordability plummeted.

    In June 2020, the average dwelling price in Australia was $689,400. That was around 13.4 times the average annual household disposable income of $51,487. Now the average household disposable income is up to $56,129, while the average dwelling price is now some 16.4 times that at $921,500.

    Even worse, ten years ago the average dwelling price was just 11.4 times.

    Housing policy has for too long been driven by keeping prices rising, and combined with flat income growth, it has seen a generation of Australians left out of the housing market.

    The post The latest data shows just how bad housing affordability is appeared first on The Australia Institute's Centre for Future Work.

  • The biggest real wages fall on record

    In his column in Guardian Australia, Labour Market and Fiscal Policy Director, Greg Jericho, notes that while nominal wage grew 2.6% in the past year, real wages fell 3.3%. That fall has taken workers’ purchasing power back to 2012 levels.

    This lack of strong wages growth despite unemployment being at nearly 50 year lows highlights just how skewed the bargaining system is against employees. In the past, unemployment this low would have been delivering wages well above 4%.

    The weak public-sector wages growth also reveals the impact of public-sector wage caps. For 6 consecutive quarters the annual growth of public-sector wages has been below that of the private sector. No longer does the public sector guide and support private-sector wages. This is the result of instituting arrangements which prevent a natural bargaining process to occur and in a time of rising inflation produce a massive fall in real wages for public-sector workers.

    In the past year wages in the education system, for example, rose just 2.3% on average, meaning teachers real wages fell 3.7% in the past year.

    While the real wages fall is terrible, it is likely worse for many families.

    The Bureau of Statistics estimates that households on average spend around 60% of their weekly expenses on essential/non-dictionary items. But because the prices of those items rose by 7.6% over the past year compared to average inflation of 6.1%, any households that need to spend a greater share of their income on essential items would have seen their real wages fall even further. For a family that spends 80% of their weekly budget on essential items, real wages fell by 4% – a truly horrific experience.

    The wages data confirm that there is no wages breakout that is driving inflation, instead workers are being left behind while companies produce record profits.

    The Jobs and Skills Summit in September must address this imbalance.

    The post The biggest real wages fall on record appeared first on The Australia Institute's Centre for Future Work.

  • Rate rises look set to dramatically slow the economy

    This is expected to have a dramatic impact on the economy with the Governor of the Reserve Bank announcing that the RBA expects GDP growth in 2023 and 2024 to be just 1.75%.

    Labour market and fiscal policy director, Greg Jericho, in his Guardian Australia column, notes that this would be the the first time since the 1990 recession that there have been 2 consecutive years of growth below 2%.

    The steep rise in rates, and the prospect of more to come suggests that the Reserve Bank’s efforts to curb inflation are likely to come at a high cost for workers.

    The past year has seen the biggest fall in real wages since the introduction of the GST and current estimates from the Treasury and the Reserve Bank suggest further falls to come until the end of next year. By that point real wages would be more than 5% below pre-pandemic levels – a truly disastrous result in what is supposedly a recovery period.

    The post Rate rises look set to dramatically slow the economy appeared first on The Australia Institute's Centre for Future Work.

  • Interest Rate Hikes Will Hurt Workers to Protect Profits

    In this commentary, Centre for Future Work Associate Dr Anis Chowdhury challenges the wisdom of this strategy. Since current inflation is related more to supply chain disruptions and other global pressures, higher interest rates will do more harm than good – and shift national income even further toward the owners of capital, instead of working Australians.

    Interest Rates Hikes Will Hurt Workers to Protect Profits

    by Dr Anis Chowdhury

    The Reserve Bank’s latest interest rate hike, the fourth in a series and with more to come, will certainly slow economic activity and raise unemployment. It will hurt families, especially of the working class, who played no role in the current bout of inflation.

    Treasurer Jim Chalmers warned Parliament, “Families will now have to make more hard decisions about how to balance the household budget in the face of other pressures like higher grocery prices, and higher car prices and the cost of other essentials”.

    This is bad news, especially since many will also lose their jobs as the economy slows.

    But it didn’t have to be like this – had the RBA and other policy-makers cared to seriously consider what is driving inflation, and been less dogmatic about their inflation target and how to reach it. Many seem to have forgotten the Labor Government’s own successful experience of addressing inflation in the 1980s through social dialogue, reducing price pressures without causing unemployment to rise. Those lessons should be relearned today.

    What is driving current price rises?

    The primary source of current price pressure is not surging demand, soaring wages, or a household spending spree fueled by pent-up demand and one-off pandemic financial supports. Indeed, as RBA Governor Philip Lowe has acknowledged, “The household saving rate remains higher than it was before the pandemic and many households have built up large financial buffers”.

    Even the labour market tightening and skills shortages seen in some sectors are not the result of surging aggregate demand, but rather mostly due to the impacts of the pandemic on labour supply (including via restrictions on the inflow of migrant workers).

    Instead, the primary driver of current inflation is supply bottlenecks and blockages of goods, caused by a perfect storm of global problems: the pandemic, the war in Ukraine, and climate change’s effect on agricultural supply (and hence prices of food).

    Interest rate hikes cannot fix supply bottlenecks; instead, they will exacerbate supply problems, by discouraging investment in new capacity and infrastructure. Interest rate hikes will also impose collateral damages on government finance, in addition to causing job losses and economic hardship for struggling families.

    The Treasurer’s warning to brace for bigger real wage cuts than previously flagged is no comfort for the ordinary workers who already saw their income share in GDP steadily decline during the past four decades – while the share of GDP going to capital owners in profits continued to rise, setting record highs during the pandemic.

    A recent report from the Australia Institute found that rising prices in Australia are actually driving corporations’ profits to record highs amid a cost-of-living crisis for the rest of us. This has been enabled in large part by lack of competition. Big corporations in energy, transportation, supermarkets, and other sectors use their oligopolistic power to raise prices (and profits) far above what would be necessary simply to cover higher input costs.

    A recent study published in the UNSW Law Journal documented widespread price gouging in Australia: “a notorious practice” involving “pricing high-demand essentials at levels significantly higher than what is commonly considered acceptable, reasonable or fair”. During recent crises, including the Black Summer bushfires and then the COVID pandemic, unethical businesses exploited public desperation for basic consumer goods and services, such as hygiene products, staple foods, and utility services, to raise their profit margins.

    Why raise interest rates?

    The RBA knows it cannot fix supply shortages. Yet still it raises the interest rate, calls it a “forward-looking” strategy, and claims it will stem inflationary expectations and higher wage demands. Basically, this is a tactic to scare workers: in essence, saying to workers they must not ask for compensating wage gains or for restoring their share of domestic income, lest the Bank inflict more pain through losing jobs and livelihoods.

    Central bankers around the world sugar-coat this scare tactic by saying, “It’s short-term pain for long-term gain”. That’s easy for them to say, as no central banker ever lost his/her job for such actions, or have tasted this “short-term pain” (which can actually affect a worker and their family for decades via lost work and suppressed incomes).

    This view also ignores the fact that labour’s bargaining power has significantly declined compared to previous inflationary episodes, due to the erosion of collective bargaining and other institutional supports for wages, new technology, out-sourcing and globalisation. All these factors have driven the steady declines in labour income share and real wages. They also mean that fears of a 1970s-style “wage-price spiral” are not credible.

    The interest rate: a blunt tool

    The dogmatic stance of central bankers will cause more damage than it avoids. Even when inflation is rising, higher interest rates are not the right policy tool to tackle the problem for several reasons.

    First, the interest rate only addresses symptoms, not the root causes, of inflation. Inflation is often understood as the overheating of an economy. Like a fever, overheating of an economy can be due to many causes – fever and overheating are just symptoms. Interest rates, like Panadols or Aspirins, may relieve the overheating, but the treatment requires investigations into the root causes and appropriate medications.

    Second, changes in the interest rate affect all sectors – without distinguishing sectors that need expansion and hence credit support, from sectors that are less productive or inefficient and hence should be credit-constrained. Just as taking too many Panadols or Aspirins can have fatal side effects, hiking interest rates too often and too high can kill productive and efficient businesses along with less productive and inefficient ones.

    Third, the overall interest rate does not distinguish between households and businesses. Higher interest rates may encourage households to save, but will dampen business capital spending. Thus, overall economy-wide demand will shrink, discouraging investment in new technology, plant and equipment as well as skill-upgrading. Thus, higher interest rates adversely affect the long-term productive capacity of an economy.

    Fourth, higher interest rates will raise the debt burden for governments, business and households. Global debt burdens have been on the rise since the 2008-2009 global financial crises, and even more dramatically during the COVID crisis. Those debts (especially sovereign government debts) are manageable so long as economic growth remains robust and interest rates low. Current monetary policy, however, will negatively affect both factors: raising rates and slowing growth. That could set the stage for debt problems down the road.

    Monetary tightening will have implications for fiscal policy, too. A slower economy implies less tax revenues and more social security payments. Government is already under pressure to continue pandemic support measures, such as financial assistance for workers without paid sick leave as well as cost-of-living supports. Planned Stage Three tax cuts, if they go ahead, would further undermine Commonwealth government revenues. For state governments, heavily reliant on stamp duties, a collapse of the housing market would devastate their budget bottom-lines.

    Paradoxically, higher interest rates can even feed into higher costs of living, as indebted households’ debt-servicing costs (especially on mortgages) rise. The cost of living would also rise if businesses with market power pass on their own higher interest costs to consumers through still higher prices.

    Policy innovation

    As mentioned earlier, the current inflationary surge is due to supply shortages of key products, such as food and fuel. Therefore, the long-term solution requires expansion of supply and removal of bottlenecks. Perversely, however, higher interest rates force overall demand to shrink down to match aggregate supply. That can slow price increases, but leaves underlying supply constraints for key products unaddressed – hence not addressing the underlying causes of inflation.

    Therefore, policymakers should consider innovative and more appropriate policy tools to respond to current price pressures. The focus of anti-inflationary policy should be changed radically from suppressing domestic demand to enhancing supply and productivity; from restricting credit indiscriminately to easing financing constraints for key and ‘sun-rise’ industries (e.g., renewable energy) while tightening financial conditions for inefficient (e.g., polluting) and speculative activities (e.g., real estate).

    This would mean designing macroeconomic policies to support industrialisation and economic diversification. Instead of reacting to inflationary symptoms with a lone blunt policy tool (the interest rate), policymakers should wield a mix of fiscal and monetary policy levers: using them to unlock supply bottlenecks, enhance productivity, and encourage savings and productive investments (especially to decarbonise the economy).

    Each of these goals needs innovative and customised policy tools, rather than a one-size-fits-all reliance on interest rates to throw cold water over the entire economy.

    Social partnership

    Inflation and responses to it inevitably involve social conflicts over economic distribution. The ‘social dialogue’ approach of Labor Prime Minister Bob Hawke contrasted with the more confrontational approaches of Margaret Thatcher and Ronald Reagan – and their deliberate use of punishing interest rates to inflict long recessions in the 1980s.

    In contrast, social dialogue in Australia not only brought down inflation and unemployment simultaneously in the 1980s, but also enabled difficult reforms – including floating exchange rates and lower import tariffs. That set the stage for sustained economic growth in years to come.

    The new Labor Government needs to earnestly begin rebuilding that model of social partnership to confront not only current inflation challenges, but the more existential threats of climate change and shifts in the global order.

    The government must also not miss the opportunity to review the RBA’s mandate and operations, including better balancing its board with a more representative variety of stakeholders (including workers). The economy does not work in a vacuum, and should not be entrusted to technocrats. Policies and reforms affect real lives and livelihoods. The RBA needs to understand, and hear, the voices and preferences of all Australians, not just financiers and employers.

    The post Interest Rate Hikes Will Hurt Workers to Protect Profits appeared first on The Australia Institute's Centre for Future Work.

  • A decade of real wages growth lost as prices soar ahead of wages growth

    Given prices grew 6.1%, but wages are expected only to achieve around 2.7% growth in the 12 months to June, it remains abundantly clear that inflation is not being driven by labour costs. Indeed given real wages have likely fallen around 3.4% in the past year, wages are currently extremely deflationary.

    Real wages have now fallen for 8 consecutive quarters sending the purchasing power of employees back to 2012 levels.

    While the economy has rebounded and profits have risen strongly with that of prices, the “recovery” from the pandemic has very much been on the backs of workers who have effectively lost a decade’s worth of growth in real wages.

    Even worse, given the greatest price rises have occurred for essential commodities, it is clear low to median income workers are hurting much more than those who devote less of their spending on essentials than does the average household.

    All this is occurring with unemployment at near 50-year lows. It is now abundantly clear that the labour market systematically disempowers employees and needs to be reformed.

    The post A decade of real wages growth lost as prices soar ahead of wages growth appeared first on The Australia Institute's Centre for Future Work.