The two men running the Australian economy are completely at odds, fighting each other while saying they’re not.
The one who is right is powerless, and the one with the power is wrong.
Philip Lowe, the Governor of the Reserve Bank, is trying to get wages up, but he can’t. Prime Minister Scott Morrison could get wages up but he is so deep in the habit of suppressing them that it’s an addiction.
So they’re at loggerheads. But the first rule of Fight Club is you don’t talk about Fight Club.
Both of them made big speeches this week. Dr Lowe was explicit about trying to get wages up and said the RBA expected to be working at it until 2024, using near-zero interest rates and money creation; Mr Morrison said everything is fine and it’s time to start reducing debt.
The Australian economy is a horse with two jockeys: One is whacking it with a wet lettuce and the other is pulling on the reins. Horse confused, likely to pull up.
On Monday the Prime Minister proudly said “the unemployment rate has fallen from 7.5 per cent in July last year down to 6.6 per cent in December”.
On Wednesday Philip Lowe said “the unemployment rate is higher today than it has been for almost two decades and many people can’t get the hours of work they want.”
Morrison said “we are not running a blank cheque budget”. Lowe said “wages growth will have to be materially higher”.
Morrison talked about the “medium-term strategy … to stabilise and reduce debt”.
Lowe reiterated: We “require significant gains in employment and a return to a tight labour market.”
Philip Lowe is an economist with a doctorate from the Massachusetts Institute of Technology who has been at the Reserve Bank for 40 years; Scott Morrison is a politician with a background in tourism marketing.
The politician is stuck in a paradigm that says higher wages cost jobs, so wage rises are bad.
The economist now understands that you don’t get more jobs by cutting wages, but you do get economic wellbeing from higher wages, and you get those by increasing employment, so focus on jobs, not wages.
But it looks harder to convince Morrison of that than it has been for him to utter the words “net zero emissions, preferably by 2050”, which he also said on Monday (and it’s now a small step for mankind for him to drop the word “preferably”).
Suppressing wages growth has been the main economic policy of two Coalition governments since 1996, based on the failed ideas of a previous pairing of an economist and politician – Milton Friedman and Margaret Thatcher.
After regaining power twice, in 1996 and 2013, the Coalition got out the neoliberal instruction manual: Crush the unions, strangle workers’ bargaining power, increase employment “flexibility” for business, and run high immigration, temporary and permanent, to flood the labour market. Wages will fall and employment will rise.
They did, and it didn’t.
Low wages growth is now the main economic blight on the country and the nemesis of the actual economists at the RBA.
Philip Lowe is now on the horns of an irony: Having cut interest rates to virtually zero to no avail (in getting wages growth up, that is), the central bank must now materialise money from thin air to buy government debt to try to stiffen its wet lettuce.
Volume 2 of the Friedman neoliberal economic instruction manual says government spending and debt are bad and printing money causes inflation. Dr Lowe also has that page of the manual open on his desk, but while he says he agrees with it, he is ignoring it.
In his National Press Club speech on Monday, the PM showed in a chart that the government spent $251 billion in fiscal support last year. What he didn’t mention is that federal government debt is now more than $800 billion, three times what it was when the Coalition came to power in 2013.
In his monetary policy statement the next day, Dr Lowe revealed that the RBA had so far printed – or, as he put it, expanded its balance sheet by – $160 billion. Tuesday’s big announcement was that another $100 billion would be materialised on the RBA’s computers to buy government debt this year.
It means a large part of what Australian governments have been spending to offset the pandemic is being supplied by the RBA money-creation computers, even while they all pay lip service to fiscal and monetary conservatism and bow at the altar of Milton Friedman.
That $260 billion, or whatever it ends up being, is very unlikely to be paid back. Why pay yourself back?
In fact, the RBA should buy all of the $800 billion Government debt, rising to $1 trillion this year, and cancel it. Just write it off.
Nothing would happen. That’s because, as Dr Lowe said on Tuesday: “The economy is expected to operate with considerable spare capacity for some time to come.”
Inflation is the result of an absence of spare capacity, not the printing of money.
Furthermore, the government should run a “blank cheque budget” until there’s full employment, just as the RBA is running blank cheque monetary policy to that end. With the RBA buying the debt, and the interest rate on it sitting at 1 per cent, there is absolutely no excuse not to.
Spend on what? Well, how about the immense cost of dropping the word “preferably” from “net zero emissions by 2050”, or even keeping it as “preferably”, and meaning it?
Other governments, including America now, are spending huge amounts of public money and creating a lot of jobs, building the infrastructure for renewable energy and for charging electric vehicles. Australia is doing nothing; in fact we’re taxing EVs.
In his speech on Monday, the Prime Minister said government policy is aligned with monetary policy.
That is the opposite of the truth. If they were aligned, he would be aiming government policy at getting wages up, as the RBA is trying to do.
Alan Kohler writes for The New Daily twice a week. He is editor in chief of Eureka Report and finance presenter on ABC News