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August 13 – 19, 2022 | No. 412
August 13 – 19, 2022 | No. 412
August 13 – 19, 2022 | No. 412
News
In the end, it became necessary to destroy the town to save it.
The infamous explanation by a United States Army major for the decision in 1968 to bomb and shell a Vietnamese town, regardless of civilian casualties, seemed to echo in Treasurer Jim Chalmers’ ministerial statement on the economy.
“Left untreated,” he told the nation via an address to parliament in its first sitting week after the election, “inflation which is too high for too long undermines living standards…”
Chalmers acknowledged then – and acknowledged again after the Reserve Bank increased rates again, by another 0.5 points this month – that the innocent would suffer. But hey, if you want to defeat the Viet Cong, or inflation, such casualties are inevitable.
And so the new Labor government, which campaigned strongly before the election against falling living standards, now concedes real wages will fall for at least three straight years.
That is what the economic orthodoxy dictates: to cut inflation, cut demand, and to cut demand, cut wages.
The problem is, there is nothing orthodox about the economic situation in which Australia finds itself.
The usual trigger for the central bank to raise rates is an overheating economy in which wages and prices chase each other upwards. That occurs when unemployment is low, meaning employers have to compete by offering higher pay.
The weird thing is that unemployment has been relatively low for years, except for a brief spike during the pandemic, but there has been negligible growth in wages, as Chalmers himself emphasised in the July 28 statement.
“We don’t have an inflation problem because workers are earning too much or because we are in some kind of a wage-price spiral,” he said.
“Real wages growth over the past decade has averaged just 0.1 per cent a year. In the year to March, real wages fell 2.7 per cent – the worst result in more than two decades.”
Unemployment fell below 5 per cent more than a year ago, and is currently about 3.5 per cent, the lowest in almost 50 years. While there is anecdotal evidence of wage pressure in some sectors, there is nothing yet to suggest wage growth is a significant contributor to inflation.
So why are wage earners being told they must cop a real cut to their pay and standard of living, as interest rates are lifted to deal with inflation?
“Because,” says Peter Tulip, chief economist at the Centre for Independent Studies, “past history in this country, and the current evidence from other countries, where wages have shot up, suggests it could happen here.
“I don’t think it’s certain. I mean, these relationships have a nature of being a bit surprising and changing over time. But past empirical evidence suggests it’s much more likely than not that wage and price growth will accelerate further.”
In other words, the Reserve Bank has opted to shoot on suspicion of wage inflation.
This troubles Nicki Hutley, a leading independent economist focused on social and environmental issues. “Before you think about what the solution is, you have to really define where the problem is,” she says. “This seems like something very different from what we have seen previously, in terms of an economic shock, but the policy response doesn’t appear to differentiate.”
Under normal circumstances, she says, the Reserve Bank would say “we raise interest rates, we lower demand, and that will solve the problem”.
“But that assumes that inflation is demand-driven, but much of what we’re seeing now is very specifically a supply-side problem.”
The root causes of the inflation problem are supply-chain issues caused by the pandemic, particularly by the Chinese government’s zero-Covid policy, and by the flow-on, via energy prices, of Russia’s invasion of Ukraine.
“Those things,” Hutley says, “would certainly not be addressed by interest rates.”
Professor Jeff Borland, a labour market economist with the University of Melbourne, has a similar view. “What we have at the moment is a price-inflation problem, not a wage-inflation problem,” he says. “That price-inflation problem is mainly being driven by the supply side of the market.”
Indeed, “trying to deal with supply-side inflation with a demand-side instrument” could make matters worse, he says, referring to higher interest rates. Hit the monetary brakes too hard and Australia might skid into recession.
Rising prices are already having a contractionary effect on the economy, Borland says. Putting the burden of higher interest rates on top, he says, risks “pushing output down, so you’re going to sort of have this double contractionary effect on the economy”.
So why do it?
One reason is that everyone else is doing it. Interest rates are going up all around the world and if Australia did not follow, says Tulip, the exchange rate on our currency would fall, making imports even more expensive.
Another reason is that even though real wages are falling, Australians are still spending big – or at least we were until very recently.
Data released this week by the Australian Bureau of Statistics showed total household spending was 10.2 per cent higher in June this year than in the same month last year. It was the 16th consecutive through-the-year increase.
In some spending categories, this was unavoidable. High petrol prices, for example, contributed to a 22.7 per cent rise in transport spending. But so did a rebound in air travel.
Spending was up in all categories, but it was way stronger for non-essential items than for essentials: hotels, cafes and restaurants was up 17.1 per cent; clothing and footwear was up 16.3 per cent; recreation and culture was up 15.5 per cent.
The strange thing is that even while we spend as if the good times are rolling, other data indicates we think things are grim. The Westpac consumer confidence index has fallen for eight consecutive months. In August it stood at 81.2, down almost 23 per cent since last November. A reading below 100 indicates pessimism, and we are collectively as pessimistic as were during the Covid-19 lockdowns.
This dissonance between our behaviour and our outlook is in part explained by what happened during the pandemic.
We had a couple of years in which we could not spend much – on travel or going out to eat or being entertained. Those of us who had jobs often did them from home, which saved travel costs. Those of us who could not do our normal jobs were paid by the government – in some cases more than we would have earned normally. There was, briefly, even free childcare. The money – estimated at $250 billion – piled up in households.
Another factor stoking demand, says Professor Warwick McKibbin of the Crawford School of Public Policy at the Australian National University, was government transfers to prop up businesses, fattening their balance sheets to the benefit of owners and shareholders.
Plus there was essentially “free money” to be had, because interest rates were so low.
“And now investment is picking up – private investment,” McKibbin says. “That’s further demand stimulus coming through – which is good from the long-term point of view of it’s going into productive assets, but bad from the short-term point of view.”
So while raising interest rates does nothing for the supply problems, it is necessary in “responding to the demand shocks – that is, excess monetary stimulus plus the fiscal stimulus”.
McKibbin says it remains something of an open question as to how high interest rates should go and how quickly. “But my calculation is that neutral policy right now, everything else given, [would] probably be around 3 per cent interest rate. It’s nowhere near that 1.85 we have now.”
There will be financial pain as a consequence of both inflation and the rate hikes that are supposed to cure it, but it won’t be felt equally – and for some it won’t be felt at all.
The pain of inflation will be felt acutely by job seekers, says Nicki Hutley. “They already, by and large, live below the poverty line. We seem to have forgotten about the need to raise the rate [of unemployment benefits]. With inflation over 7 per cent … it is really, really tough for those people.”
And there almost certainly will be more unemployed as a consequence of the fight against inflation, says Tulip: “I don’t think 3.5 per cent unemployment is sustainable.”
The recent 5.2 per cent boost to the minimum wage by the Fair Work Commission will ease some of the burden on the lowest-paid, says Professor John Quiggin of the University of Queensland school of economics, but others earning just above the minimum wage will struggle. “It is really going to be the next the next tier up – those earning low-to-moderate wages but above the minimum – who are going to be squeezed.”
People working in areas with labour shortages might be able to secure pay rises to offset the increased costs, but very few workers will get enough to offset them completely.
Everyone feels the effects of increased energy prices, which affect almost every point of the economy. And while exogenous factors play a big part, so do the failures of domestic policy. The steep rises in gas and electricity prices, says McKibbin, are largely a consequence of the long climate wars.
“This is actually what happens when you don’t get policy right,” he says. “You don’t get your energy policy right, your climate policy right. That entire problem should have been dealt with by the politicians and the fiscal authorities. But instead, everything kept being kicked down the road.”
The pain of higher interest rates will obviously be felt most acutely by people who have a lot of debt. In particular, that is young people and those on lower incomes, lured into buying homes to live in on the basis of the Reserve Bank’s promise that interest rates would not increase for years – a promise made just a few months before the central bank started raising them.
Those who could not afford to buy into Australia’s housing market – inflated by shortages of supply, low interest rates and excessive stimulus from government – are also suffering sharp increases in rents as property investors pass on their increased costs.
That is the broader story of this economic crisis: those whose incomes depend on their own labour are suffering disproportionately compared with those whose incomes come from capital.
The most obvious example of this is energy companies, which are profiteering from the disruption to global fuel supplies caused by the invasion of Ukraine. Last week the secretary-general of the United Nations, António Guterres, noted that the combined profits of the big energy companies were close to $US100 billion in just the first three months of this year. He called this immoral.
“I urge governments to tax these excessive profits, and use the funds to support the most vulnerable people through these difficult times,” he said.
Given that Australia is a major energy producer, and that coal and gas companies operating here are reporting revenues doubling or tripling, one might think the federal government would take heed of Guterres, or the host of other voices advocating a tax on windfall profits, including Nobel prize-winning economist Joseph Stiglitz, who met with Chalmers last month, or former Treasury secretary Ken Henry, who steered Australia through the global financial crisis.
But Chalmers has ruled it out. Instead, he and the government have left it to the Reserve Bank – which they continually stress operates independently of government – to deal with the situation.
This, says McKibbin, is not fair to the RBA, which has been left to “try and do about 15 things with one instrument”.
The blunt instrument of interest rates cannot target those profiteering from crisis. And while energy companies are the most egregious offenders, they are far from the only businesses to have taken advantage of supply-side disruptions and continued strong demand to jack up prices.
What is happening is an acceleration of a long-term transfer of income from labour to capital.
In 1975, the share of Australia’s national income going to wages was almost 63 per cent. At the start of the 2000s the wages share was 56 per cent. Before Covid-19 it was 53. Then Russia invaded Ukraine, and the wages share fell again, to 49.8 per cent.
Put colloquially, the bosses have been getting richer and the workers have been paying for it.
A report last month by progressive think tank The Australia Institute drove home the point that those worst affected by inflation, and by the economically orthodox response of hiking interest rates, are actually the least responsible for it.
The report analysed national accounts data and concluded that wage costs “played almost no role in inflation … over the period 2013 to 2021”.
Clearly the orthodox response is not working for the majority of people, so why not try other measures?
On Thursday, Chalmers said the government was open to hearing about alternative approaches to economic problems at next month’s jobs summit. All ideas welcome.
“It would be pretty strange if we said come along to a summit and only bring along ideas which have been pre-approved by the government,” he told ABC radio.
Then he set about pre-rejecting some proposals put forward by the union movement.
The Australian Council of Trade Unions has advanced a raft of measures that would shift the balance back from capital to labour and from wealthier to poorer Australians through greater government intervention in the running of the economy. Among them are: price controls to prevent gouging in the energy sector and other “heavily concentrated” industries; measures to limit property speculation, rent controls and more public housing; and reforms to enterprise bargaining.
The unions also want a super-profits tax – which Labor has already ruled out – and penalties for companies that pay excessive dividends to shareholders rather than re-investing in productive enterprise.
They are also pressing for the government to abandon stage three of the tax cut package, legislated under the previous Coalition government and due to come into effect in 2024, which will overwhelmingly benefit high-income earners.
Chalmers specifically ruled out abandoning the stage three cuts, despite a growing body of opinion that they should be dumped and the money redirected to areas of greater need. It’s a “no-brainer”, says Nicki Hutley.
It’s not brains that the new government lacks, though. It’s nerve. “The politics is more important than economics,” says Tulip.
He’s referring specifically to the stage-three tax cuts, but the comment applies more broadly as well.
Clearly, says Alison Pennington, senior economist at The Australia Institute’s Centre for Future Work, which was involved in compiling the ACTU submission for the jobs summit, the prevailing economic consensus of the past few decades is breaking down.
The inflation crisis, she says, just sharpens the focus on “compounding problems” that have grown over decades.
“Since 2013,” she says, “we’ve had the slowest sustained pace of wages growth since the Depression.”
And now, while corporations engage in what she calls “the exploitation of crisis”, we are told the only way to stop inflation cutting standards of living is to take further real wage cuts.
To, as it were, destroy the town in order to save it.
This article was first published in the print edition of The Saturday Paper on August 13, 2022 as “The end of orthodoxy”.
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Mike Seccombe is The Saturday Paper’s national correspondent.
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August 13 – 19, 2022 | No. 412
Edition 
August 13 – 19, 2022
News
‘No room for compromise’: China draws line on Taiwan
Front row seats at the Barilaro ‘shitshow’
How ‘tax bludgers’ are ripping off their fellow Australians
Labor’s reforms return the cashless card to its racist roots
Where Australia is going wrong on the economy
FBI raid of Trump’s Florida home sparks Republican fury
Opinion
Australia’s frayed anti-discrimination laws
Diplomatic, systematic, emblematic: Dutton’s ceased enlightening
Keeping politics above board
Letters & Editorial
Jon Kudelka cartoon, August 13, 2022
Domain of the charlatan
Ten witnesses
Culture
Writer and performer Diana Nguyen
Killing It
Melbourne International Film Festival 2022
Ultra Unreal
Daniel Dodds
Thirteen seconds
Books
Provocations: New and Selected Writing
Should We Fall to Ruin
Grounded: How soil shapes the games we play, the lives we make and the graves we lie in
Life
Grillade des mariniers du Rhône
What rampant inequality does to cities
The future of cryptocurrency regulation in Australia
Eddie Betts and the shameful legacy of the Crows’ camp
The Cryptic
Cryptic Crossword No. 412
The Quiz
By land area, which is the largest of New York City’s boroughs?
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