Michael Pascoe: In defence of the RBA (no, seriously)

There is stuff not being spelt out about the Reserve Bank, Philip Lowe, interest rate increases, politicians’ reactions and what is ahead – stuff that is largely in mitigation of the RBA’s stance.

Personally, I think the RBA was wrong to increase rates again last week – there was enough data to justify another pause and, if another hit was to be warranted, little if any harm would have been done by delaying it a month.

But I also understand why the bank thought it should move, trapped in its “narrow path” with its priorities set by the government. (It’s actually more like being on a tightrope than a path, with sharks on one side and crocodiles on the other.)

The Treasurer backed his dubious review of the bank without reservation, adopting all its recommendations without consulting the bank – so if Jim Chalmers wants the RBA to focus more closely on quickly lowering inflation, this is what it looks like.

The avalanche of ad hominem attacks on Dr Lowe have become a bit much, but that suits the government.

There are things Dr Lowe is personally responsible for: Taking years to acknowledge labour’s loss of bargaining power as a factor in deficient wages growth; not calling out governments’ public housing failure as a major factor in our housing crisis and not having called loudly and clearly for more direct investment in public housing – but the interest rate rises are the institution’s decision, not just the governor’s.

Theatrical roles

And I know politicians on both sides are merely playing their theatrical roles in their reactions to the interest rate moves.

Note that Treasurer Chalmers and Prime Minister Albanese haven’t said the latest rate rise was wrong. They’ve just wanted to give the impression that, yes, they were very concerned and, well, you know, that RBA mob, well, gee, they had better explain this, that Philip Lowe, hmmm …

A cynical soul might suggest the government is hoping rates have now peaked just as it announces Dr Lowe’s term is not being extended, making it look like it has taken action when it has not taken action.

As for our theoretical Opposition, forget it. Zero cred and less sense. No, the budget did not force the RBA to lift rates. Yes, to the extent that excessive government stimulus contributed to our present problem, that happened on the LNP’s watch, that’s where the biggest fiscal policy failures occurred.

It was under the LNP that the unemployment rate was brought crashing down. It was 3.7 per cent when the Morrison Gang lost office. It’s back up to 3.7 per cent.

The cruelty is that the very fine thing of bringing unemployment and under-employment down is the problem, given the limitations of our present tool set.

Cutting away the euphemisms and spin, the RBA and whoever happens to be in government right now want unemployment up above 4 per cent to 4.25 or 4.5 per cent.

The only way the RBA can do that is to keep pushing up rates until the economy breaks. That’s the orthodoxy they have to live with.

Inherently unfair

Initially the pain has been largely limited to people who took out mortgages in the past few years, sucking money out of their pockets, stopping them spending.

It is inherently unfair that a minority is being persecuted because of the behaviour of the majority and others outside anyone’s control, but that’s all the RBA can do.

And, as designed, the pain is starting to spread – the “transmission mechanism” working.

It’s being felt in retailing – watch for layoffs there as the crash in household purchasing power worsens, outweighing the impact of population growth.

That in turn means the companies that were able to increase their profit margins, pushing inflation higher, won’t be able to increase them further. In time, that period of inflating margins falls off the back of the CPI measurement and inflation falls. It’s already falling.

So despite the system’s shortcomings and the RBA being too hawkish, that’s the way it’s done.

The question beyond the RBA is what alternative might there be to lifting interest rates.

There has been an idea floated of a temporary compulsory superannuation contribution by individuals, or simply increasing income tax as more equitable ways of squeezing life out of the economy. But the politics of such ideas is beyond our politicians.  

The opposition, both in Parliament and media, would like the federal government to help increase unemployment by not employing people – but that still gets back to crashing the economy.

Price controls

With exquisite timing, the New Yorker last week neatly summarised the fall and rise and rise of Isabella Weber, a young University of Massachusetts economist who last year dared suggest strategic price controls could help in taming inflation without a recession.

In his best speech as governor, Dr Lowe in November explained why interest rates don’t work as well as they used to in fighting supply-side inflation and could actually make the situation worse. The RBA, with no other tool, has charged ahead with rate hikes anyway.

Associate Professor Weber argues targeted price stabilisation (i.e. price controls) can buy time while the supply issues are solved instead of crunching the economy, worsening the underlying supply problems. 

Price control? What sort of Communist dictatorship are we talking here? The sort that was necessary in the US during the Second World War.

And the sort that is slipping into wider use. The US government is regulating the price of oil, the European Union is regulating the price of gas, and even the Albanese government has temporary caps on gas and coal wholesale prices. Unfortunately, retail pricing is beyond the federal government’s power.

The obvious suspects screamed at the prospect of not making more of the undreamt of profits they were making in the supply crunch, claiming Christmas would be cancelled and everyone would be reduced to living in caves, claims faithfully echoed by like-minded political and media followers.

Their bluff called, life has gone on.

Price caps obviously don’t solve the underlying supply problem, but can provide an inflation modifier while supply is improved – instead of making the problem worse.

The Greens’ two-year rent freeze proposal appeals to the renter base they’re wooing, but is an inequitable step too far.

A temporary cap on rent increases, however, could help restrain the inflation beast a little – if state governments could be enticed to be interested while uniformly beholden to private sector landlords and developers.

Sticking with traditional dogma

Anything other than bludgeoning the economy to increase unemployment remains anathema to traditional dogma.

On the same day the New Yorker was publicising Isabella Weber, an economist contributor in the Australian Financial Review was attacking the idea that the budget’s energy price relief was disinflationary.

There should be no doubt in the mind of any economist that energy subsidies are expansionary, freeing up funds for consuming other goods and services,” he railed.

That overlooks how targeted the intervention is. Specifically lowering energy costs for the poor does lower inflation. The money that otherwise would have been taken by energy will be spent on other things – like food, which doesn’t embed inflation as much, or medical care, the price of which is remarkably inelastic.

The other side of the inflationary ledger can be smaller. It is not just a simplistic matter of whether aggregate demand is increased.

It would have been neater and more sensible if the energy price relief was funded by a windfall profits tax on Big Carbon – too bad the idea of any new “tax” is forbidden.

So, hey, let’s not try anything different, let’s just keep doing things the way they’ve always been done around here and make more people unemployed.

That way it can be painted as all Phil Lowe’s fault.

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