All the reasons interest rates are a bad way to manage the economy

 In outgoing Reserve Bank governor Dr Philip Lowe’s last speech, he made a striking acknowledgement: monetary policy – the manipulation of interest rates to encourage or discourage spending – “has its limitations, and its effects are felt unevenly across the community”. We should “aspire to something better”.He’s right. So, here’s my full list of monetary policy’s limitations.When the economy’s growing strongly, and the...

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Big business should serve us, not enslave us

When my brain was switching to idle on my recent break, I thought of two central questions. First, for whose benefit is the economy being run – a handful of company executives at the top, or all the rest of us? Second, despite all the hand-wringing over our lack of productivity improvement, would it be so terrible if the economy stopped growing?Then the whole Qantas affair reached boiling point. So we’ll save the economy’s growth...

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How Philip Lowe was caught on the cusp of history

Outgoing Reserve Bank boss Dr Philip Lowe was our most academically outstanding governor, with the highest ethical standards. And he was a nice person. But if you judge him by his record in keeping inflation within the Reserve’s 2 to 3 per cent target – as some do, but I don’t – he achieved it in just nine of the 84 months he was in charge.Even so, my guess is that history will be kinder to him than his present critics. I’ve...

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Jury still out on how much hip pocket pain still coming our way

It’s not yet clear whether the Reserve Bank’s efforts to limit inflation will end up pushing the economy into recession. But it is clear that workers and their households will continue having to pay the price for problems they didn’t cause.Prime Minister Anthony Albanese didn’t cause them either. But he and his government are likely to cop much voter anger should the squeeze on households’ incomes reach the point where many workers...

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Murray-Darling basin: farmers’ friends are helping them self-harm

Not only in America. If you think the United States has become dysfunctional and incapable of solving its pressing problems, I have three words to say to you: Murray-Darling Basin. Last week, federal Environment and Water Minister Tanya Plibersek announced a brave new plan to rescue the Murray-Darling rescue plan, which the feds, NSW and Victoria had agreed to give up as all too hard.Since the issue’s unlikely to be front of...

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How to make sense of Treasury's latest intergenerational report

Our sixth intergenerational report envisages an Australia of fewer young people and more elderly, with slower improvement in living standards, climate change causing economic and social upheaval, aged and disability care becoming our fastest-growing industry, and home ownership declining, while we spend more defending ourselves from the threat of a rising China, real or imagined.That does sound like fun, but remember this: just...

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Albanese's big chance to improve inflation, productivity and wages

Are Anthony Albanese and his ministers a bunch of nice guys lacking the grit to do much about their good intentions? Maybe. But this week’s announcement of a review of competition policy raises hope that the nice guys intend to make real improvements.The review, which will provide continuous advice to the government over the next two years, has been set up because “greater competition [between Australia’s businesses] is critical...

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Why Albanese's housing solution will help, but only a bit

If you rank our many economic problems in order of importance, the affordability of housing comes second – admittedly, a distant second – only to the need to limit climate change. And the good news is that Anthony Albanese’s latest deal with the premiers represents progress. The feds have made a start by offering the premiers a bag of money if they do the right thing.What climate change and housing have in common is their great...

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We won't fix inflation while economists stay in denial about causes

Led on by crusading Reserve Bank governors, the nation’s economists are determined to protect us from the scourge of inflation, no matter the cost in jobs lost.But there’s a black hole in their thinking about the causes of inflation, only some of which must be stamped on. Others can be ignored. Meanwhile, here’s another sermon demanding the government act to raise productivity.In your naivety, you may think that inflation is...

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RBA's double whammy: hit wages and raise interest rates

If the sharp increase in interest rates we’ve seen leads to a recession, it will be the recession we didn’t have to have. The judgment of hindsight will be that the Reserve Bank’s mistake was to worry about wage growth being too high, when it should have worried about it being too low.The underrated economic news this week was the Australian Bureau of Statistics’ announcement that its wage price index grew by 0.8 per cent over...

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Fixing inflation doesn't have to hurt this much

They say that the most important speeches politicians make are their first and their last. Certainly, I’ve learnt a lot from the last thoughts of departing Reserve Bank governors. And, although Dr Philip Lowe still has one big speech to go, he’s already moved to a more reflective mode.Whenever smarty-pants like me have drawn attention to the many drawbacks of using higher interest rates to bash inflation out of the economy, Lowe’s...

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Hate rising prices? Please blame supply and demand, not me

Have you noticed how, to many economists, everything gets back to the interaction of supply and demand? Understand this simple truth and you know all you need to know. Except that you don’t. It leaves much to be explained.Why has the cost of living suddenly got much worse? Because the demand for goods and services has been growing faster than the economy’s ability to supply those goods and services, causing businesses to put...

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Don't be so sure we'll soon have inflation back to normal

Right now, we’re focused on getting inflation back under control and on the pain it’s causing. But it’s started slowing, with luck we’ll avoid a recession, and before long the cost of living won’t be such a worry. All will be back to normal. Is that what you think? Don’t be so sure.There are reasons to expect that various factors will be disrupting the economy and causing prices to jump, making it hard for the Reserve Bank to...

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Universities teach us much about government mismanagement

I’m starting to worry about Anthony Albanese and his government. As politicians go, they’re a good bunch. Well-intentioned, smart and hard-working. Only occasionally got at by their union mates.They’re anxious to fix things, which is surely what we elect our politicians to do. Things the previous lot either neglected or worsened. But, like all pollies, their overriding objective is to stay in office.And I fear they lack what...

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Why you should and shouldn't believe what you're told about inflation

If you don’t believe prices have risen as little as the official figures say, I have good news and bad. The good news is that most Australians agree with you. The bad news is that, with two important qualifications, you’re wrong.Last week the officials – the Australian Bureau of Statistics – reminded us of a truth that economists and the media usually gloss over: the rate of inflation, as measured by the consumer price index,...

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NSW Treasury's new realism: productivity won't be speeding up

Have you noticed how people keep banging on about “productivity” these days? That’s because it’s the secret sauce of economics, the bit that comes closest to giving us a free lunch. But also because we haven’t actually been getting much of it lately.Unfortunately, that’s made productivity a happy hunting ground for bulldust propositions. So let’s spell out exactly what productivity is.A business – or a whole economy – improves...

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What a future: impossible climate, a life of renting and a crappy job

The older I get, the more I worry about the nightmare we oldies are leaving for our children and grandchildren. The obvious, in-your-face problem is climate change, but other difficulties are everywhere you look.Now the northern hemisphere has been introduced to the joys of bushfires and heatwaves with, I imagine, a cleanser of flooding to come, global warming has become global boiling. Climate change is now — and will get a...

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