I’ve never liked making free with the R-word until it’s an undeniable reality. Too many journalists refuse to recognise that if enough people in positions of influence predict bad things enough times, their predictions have a tendency to become reality.
But I confess I’m starting to worry that Reserve Bank governor Dr Philip Lowe – a man who, until now, I’ve always regarded as having steady judgment – is pressing harder on the interest-rate brakes than he needs to. And I don’t think I’m the only economy-watcher who shares that fear.
He seems to be seizing on any argument that says he should give the thumbscrews another turn, while ignoring all the arguments that say he’s already done enough. The Fair Work Commission has awarded the people whose wages constitute the bottom 10th of the national wage bill a 5.75 per cent pay rise. Oh, no! Give it another turn.
Employment grew by 76,000 in May and the unemployment rate went down a fraction. Oh, no! Give it another turn.
One of the rules of using interest rates to suppress demand is that they work with “long and variable lags” so that, if you keep tightening until it’s clear you’ve done enough, you’ve already done too much and will crash the economy. But Lowe seems to have forgotten this.
Another thing he seems to have forgotten is that, in times past, we’ve needed a big increase in interest rates to slow a booming economy because the boom has resulted in real wages growing so strongly.
Not this time. This time an unusual feature of the boom has been that real wages have been falling for several years. Do you realise that real labour costs per unit of production are now 6 per cent lower than they were at the end of 2019?
What’s been (conveniently) forgotten is that, in the early days of the pandemic, when we imagined we were in for a severe recession, employers were quick to demand a wage freeze, to which workers readily acquiesced.
Turned out that a couple of lockdowns don’t equal a recession, and employers did fine. But there was no suggestion of a catch-up for the wage freeze that wasn’t needed. Remember this next time you see Lowe banging on about the worrying rise in nominal labour costs per unit.
If Lowe knew more about how wages are fixed in the real world, rather than in economics textbooks, he’d have noticed that the union movement’s failure to talk about the need for a wage catch-up was a sign of its diminished bargaining power.
(He’d also be more conscious that the conventional economic model’s implicit assumption – that the parties to every transaction are of roughly equal bargaining power – doesn’t hold between an employer and an employee. Nor between a big business and a small business, for that matter.)
Then there’s Lowe’s invention of a new doctrine (one previously exclusive to bull-dusting employer groups) that workers need to produce more if they want their wages merely to keep up with inflation.
Lowe professes to be terribly worried about a fall in the productivity of labour in recent quarters but, as The Conversation website’s Peter Martin has reminded us, falling productivity (output per hour worked) is exactly what you’d expect to see at a time when falling unemployment is returning us to full employment.
Employers have preferred to hire more workers rather than buy more labour-saving machines. And, as the econocrats have pointed out, they’re having to hire more of the kinds of workers they usually prefer not to hire – the young, the old and the long-term unemployed.
That is, they’ve had to start hiring the less-productive. This is a bad thing, is it?
One reason I’m shocked by Lowe’s newly invented line that, absent productivity improvement, all wage growth above 2.5 per cent is inflationary, is that I was around in the 1970s when wage growth really was excessive and inflationary. It was to be condemned then; but anyone saying it now has moved the goal posts.
It was then that Treasury made so much fuss about labour costs per unit that the Bureau of Statistics began publishing the figures every quarter – the ones Lowe has been leaning on so heavily.
But when the Australia Institute think tank copied the method used by the European Central Bank (and now by the Organisation for Economic Co-operation and Development) to calculate profits per unit, the econocrats wrote learned treatises saying its method was “flawed”. Apparently, sauce for the wages goose is not sauce for the profits gander.
Speaking of flaws, the flaw in Lowe’s new-found argument that wage rises exceeding 2.5 per cent, but less than the rise in prices, are inflationary ought to be obvious to anyone not blinded by pro-business bias. It doesn’t add to the inflation rate, but it does add to the time it takes for the inflation rate to fall back.
So, what Lowe’s on about is the speed at which inflation is returning to (the now unrealistically low) target range of 2 to 3 per cent. And he’s in such a tearing hurry he’s prepared to risk causing a recession.
Why? Well, what I wonder is whether Lowe’s expectation that his term as governor won’t be renewed in September – so a new governor can make the changes the Reserve Bank review has recommended – is affecting his judgment.
There’s a concept in economics called “revealed preference” which says: judge people not by what they say, but what they do. Lowe says he’s aiming for the “narrow path” to low inflation without a recession.
But what he seems to be aiming for is low inflation come hell or high water. I wonder if he’s decided he prefers not to be remembered as the governor who let inflation get out of control, but left without fixing it.
If, to avoid that fate, he has to be remembered as the guy who plunged the economy into a recession no one thought was needed, then them’s the breaks.
The sad truth about independent central banks is that, if they really stuff up, it’s the elected government that gets blamed. Since there’s no voting for who’s to be governor, there’s no other way voters can register their disaffection.
So, if Lowe continues finding excuses to tighten the monetary screws, don’t be surprised if the Albanese government gets ever less muted in its criticism.
But if I were Treasurer Jim Chalmers, I’d consider postponing the reform of the Reserve’s procedures and extending Lowe’s term, so his mind could be fully focused on achieving the soft landing – or be around to share the blame if he crashes the plane. And help mop up the debris if he fails. This may also stop him acting so uncharacteristically.
