Wages Breakout versus Imagination Land

Once-were-inflation-warrior turned inflation capitulationist ‘Henry Thornton’ concedes:

if wages begin to surge, all bets will be off and the bank will need to hit the economy with additional rate rises until people demanding wage increases get the message.

If you like record-breaking growth rates in the labour price index, then you are probably going to love next week’s March quarter release.

Meanwhile, over in Imagination Land:

BRENDAN NELSON will today challenge Labor’s first budget a week before its release by claiming there was no need for spending cuts because Australia’s inflation crisis was “imaginary” and “a complete charade”.

posted on 06 May 2008 by skirchner in Economics, Financial Markets, Politics

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Interest Rates & Housing Affordability: Mike Rann’s Blame Shifting

SA Premier Mike Rann writes to RBA Governor Stevens asking him not to raise interest rates in order to ‘maintain housing affordability.’ As RBA Deputy Governor Ric Battellino noted in his recent presentation to the Senate Select Committee on Housing Affordability, mortgage interest rates in Australia are no higher now than in the mid-1990s, when housing affordability was at record highs.  Instead, Battellino suggests another culprit in record low housing affordability:

the rise in house prices has been much faster than that in construction costs, so the implication is that most of the increase in house prices has been due to increases in the price of land.

That would be the responsibility of state governments.

If APM are to be believed, higher interest rates are improving housing affordability as we speak.

posted on 30 April 2008 by skirchner in Economics, Financial Markets, Politics

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Australia 2020 or 1930

Henry Ergas finds little new in the 2020 summit:

This reliance on government, which sets the tone for the summit outcomes, is hardly “new thinking”. Rather, it brings eerily to mind W. K. Hancock’s great work Australia, published more than 70 years ago, where he noted the tendency among Australians to “look upon the state as a vast public utility, whose duty it is to provide the greatest happiness to the greatest number”. Though “generally matter-of-fact people who distrust fine phrases and understand hard realities”, Australians are, he concluded, “in politics, incurable romantics” who, out of intellectual laziness and profligacy born of the country’s wealth, “constantly confuse ends and means (and are) reluctant to refuse favours, to count the cost, to discipline the policies which they have launched”.

History shows all too clearly where that path leads: not to the glorious future the summiteers have in mind, but to waste and inefficiency, disappointed hopes and dashed expectations. If that is the best we can come up with, the road ahead will be painful indeed.

posted on 22 April 2008 by skirchner in Economics, Politics

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Ideas So Big, they Fit on Post-It Notes

Big ideas from the 2020 Summit:

Other “big ideas” on tax, captured on Post-it notes included:

■ Reduce the number of taxes;
■ Eliminate payroll tax and stamp duty.

Like no one ever thought of that before!  There has never been a shortage of ideas in relation to tax reform – just a shortage of governments willing to implement them.

At least Andrew Norton dissented from the final standing ovation.

posted on 21 April 2008 by skirchner in Economics, Politics

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Glenn vs Glenn

Alan Wood defends one Glenn against tabloid populism, while rejecting the claims of another Glenn who should know better:

I cannot recall a previous occasion where there has been such a scurrilous personal attack on the governor of the bank as the one on Glenn Stevens in Sydney’s The Daily Telegraph on Saturday, when he was labelled the most useless man in Australia for simply stating the facts about rising bank interest rates. This economically illiterate piece of populism is offensive but, fortunately, irrelevant in the broader debate on monetary policy…

However, what is disturbing is Glenn Milne’s report in his column on this page on Monday that Stevens “in the view of Canberra’s economic and governance elite is at a tipping point in personal, presentational and policy terms”. Milne also said there was a view at the most senior levels of the Rudd Government that Stevens needed to urgently improve his presentation, not least because he had spectacularly contradicted Treasurer Wayne Swan’s narrative that independent rate rises by Australia’s banks were not always justified….

According to Milne, Stevens has few friends in Canberra. If the view that the Rudd Government has lost confidence in the central bank governor became widespread, it could have dangerously destabilising effects on already unstable financial markets. Is it true? Having spoken to a few of Canberra’s “economic and governance elite”, I haven’t detected any loss of confidence in Stevens, with one government source describing his Friday remarks as spot-on.

Terry McCrann adds:

So the chairman of a group which had led one of those boom-time private equity - meaning, loaded with debt - buyouts of the Myer stores doesn’t like rising rates which cut consumer discretionary spending.

Now that’s a surprise. And an obvious lesson. We must immediately hand interest rate decisions to Bill Wavish.

McCrann is being ironic, but the fact is that we do allow retailers to sit on the RBA Board.

posted on 09 April 2008 by skirchner in Economics, Financial Markets, Politics

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Nelson, Swan and RBA Independence

Treasurer Wayne Swan, responding to opposition leader Brendan Nelson’s view that the RBA has gone too far in raising interest rates, says that:

The fact that Dr Nelson and the Liberals can’t decide whether they still support the independence of the Reserve Bank or not shows just how badly the Liberals have lost their way on the economy.

This is a common misunderstanding of what it means for the RBA to be independent of government.  At its most basic, RBA independence means that it is free to set interest rates without the approval of the Treasurer.  The RBA enjoys what is often called ‘operational independence.’

This is no sense precludes the government or opposition from taking a different view on monetary policy to the RBA or being publicly critical of central bank policy actions.  The RBA has been made progressively more independent of government precisely in order to facilitate differences of opinion with government.  Divided authority in relation to monetary and fiscal policy is a valuable institutional protection against macroeconomic policy mistakes.  Under the Reserve Bank Amendment (Enhanced Independence) Bill, the RBA Governor will enjoy such a high level of statutory independence that public criticism could hardly be viewed as a threat to the Governor’s position.

By the same token, the RBA would not be compromising its independence by speaking out on issues relating to its statutory responsibilities, provided it does so in a non-partisan fashion.  Former RBNZ Governor Don Brash would frequently lecture the New Zealand government on structural issues, because monetary policy is necessarily conditioned on structural factors over which the central bank has no direct control.  Brash would frequently point out that if politicians want strong growth, together with low inflation and low interest rates, then various structural measures outside the scope of monetary policy could assist in this task.  When he was Chairman of Federal Reserve, Alan Greenspan would also publicly canvass a wide-range of economic policy issues beyond the immediate scope of monetary policy.

In Australia, by contrast, mistaken notions of RBA independence are used to suppress public debate over economic policy.

posted on 08 April 2008 by skirchner in Economics, Financial Markets, Politics

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Glenn Milne’s Thinly Disguised Class Warfare

Glenn Milne joins the tabloid attack on Glenn Stevens, complaining that the RBA Governor is not phoney enough:

Central bankers might argue that they’re not meant to behave like politicians. But the reality of public life is that if you are the individual who is seen to have the power to decide whether people keep a roof over their heads, you must behave in an accountable fashion, or at least pretend to.

Stevens is not behaving in this way.

The whole point of having an independent central bank is to have economic policymakers who will tell it like it is and not give in to economic populism.  Milne says that ‘Stevens now has few friends in Canberra.’ That is how it should be.  A more adversarial relationship between the RBA and politicians would strengthen, not weaken, public accountability in the conduct of economic policy.

Then there is this bizarre and nonsensical bit of parochialism:

Stevens, with his Teutonic lustre and mid-Atlantic conference accent, comes from nowhere recognisable in the Australian suburban landscape…

Glenn Stevens can do no more about his appearance than Glenn Milne.  Stevens actually looks and sounds more authentically Australian to me than Milne, but what of it?  Milne is indulging in thinly disguised class warfare.

The unfortunate consequence of these tabloid attacks is that it will make the RBA’s senior officers even less willing to maintain a public profile, weakening the very accountability Milne says he is in favour of.

posted on 07 April 2008 by skirchner in Economics, Financial Markets, Politics

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