As evidence builds of fiscal policy effects on employment (and the ABS figures for unemployment in February are due out on Thursday), it’s worth asking if Kevin Rudd and Wayne Swan have created a straightjacket for themselves by locking in to an economic orthodoxy which may be out of synch with how the economy actually behaves. I look at such issues in my column for New Matilda this week.
Elsewhere: John Quiggin on interest rates.
Its getting to the point of absurdity.
We have to cut the carer’s pension to combat inflation because its the right thing to do and we are fiscal conservatives.
(btw - here are your $30 billion dollars in tax cuts)
Cutting government spending could have broad acceptance if it was seen as being necessary to fight inflation and the pain was being relatively equally distributed. The way its set up at the moment you have highly indebted homeowners and the poor getting the biggest hit. Rudd’s plan of using government spending to control inflation risks being seen as completely unfair.
Side note: is there a problem with live preview since the upgarde? Its not working on my computer.
Browser = Firefox version 2.0.0.12
OS = Windows XP
It’s not a pension it’s a bonus payment, they’re not cutting pensions, they may not even cut the bonus.
It’s fairly obvious that dropping the tax cuts would be the fiscally responsible thing to do. However, the memory of 11 years in the wilderness is pretty fresh. Can you really expect Rudd to drop the tax cuts, given the political cost? The average voter won’t be sure who to blame economic conditions on. They will have no doubt remembering who flip-flopped on tax cuts once they got in.
swio, there’s a thread on carers/pensioners here:
[link]
As to live preview, please note this has also been addressed in another thread:
[link]
Not all of the doodads have been ported over to the new server yet. Now that the DNS has propagated, they’ve restored service to us but the site upgrade is still ongoing.
I really like the Raoul Duke-like photo on the “New Matilda” article, all you need to make it complete is a cigarette holder.
I used to have one!
Quiggin on interest rates:
[link]
Mark,
While 4 per cent inflation would not ’spell doom’, international (and local) experience shows that once you get inflation above the 2-3 per cent band, if it persists for any length of time, people start to adjust their expectations of future inflation and factor it into their wage demands - the dreaded ‘wages break out’. At some point you hav to take your medicine, and it’s a lot less bitter to do it now than to flirt with a wages spiral.
I agree completely with your comment ‘we should be putting in place policy to increase our productive capacity and our labour productivity’. How do you rationalise that with the winding-back of WorkChoices? I’m much more concerned with the medium-term inflationary effects of that policy than I am about some tax cuts that are barely giving back bracket creep.
WorkChoices had nothing to do with productivity, Required. The evidence suggests that collective bargaining and productivity are correlated. And I don’t believe in any medium-term wages push effect, for the reasons that I gave last week:
[link]
And the reasons given by Ian McDonald in the Martin column to which I linked:
And actually, union bargaining power was pretty weak pre-WorkChoices if you look at the sectoral rates of unionisation.
Among the problems with the social science of economics is that it is mostly predictive, which is nonsense unless you want to sit around reading tarot cards or drawing up horoscopes.It doesn’t really know if its got the future economiuc conditions right, and it can’t admit it might get them wrong becuse rehatr would prove how useless they are. Yet Governments of all persusions are prepared to take sdvice from these professional bull-shitters in Treasury and the Reserve Bank, without really having any idea of knowing wherhewr their advisers actually know what trhe’re talking about, opr if they’re going to be right or wrong. Its about time these pseudo scientists were revealed for what they really are andignored the world over.
Mark,
I don’t agree that WorkChoices had nothing to do with productivity. AWAs were used in many industries to increase labor productivity (e.g. their popularity in the mining sector). And more to the point in the current context of a debate about inflation, WorkChoices was anti-inflationary to the extent that it reduced workers’ bargaining power. Whether you choose to believe in it or not, wage-push inflation is a factor that contribues to overall inflation. Your New Matilda article doesn’t actually provide any argument against that.
I got around to reading Ian McDonald’s paper (I think this is the one). It’s not a bad read, but it doesn’t support any of your points. To summarise:
McDonald uses a ‘range of equilibria’ model to estimate the minimum equilibrium rate of unemployment (umin). According to the model, if unemployment is above this level, expansion in aggregate demand will not lead to inflation. He estimates that umin is currently 2.5 per cent.
McDonald suports the RBA’s inflation target, and the importance of anchoring inflationary expectations (p.
(therefore rejects your idea that we should consider going outside that target). He also states:
This suggestst that McDonald would support measures to increase aggregate demand, and would not expect any inflationary impacts from expansions in aggregate demand until unemployment was below 2.5 per cent. And what could we do to increase aggregate demand? Well, traditionally governments have used tax cuts. So he disagrees with you there as well.
Now I don’t think much of the range of equilibria model - it just doesn’t appear to reflect reality, particularly since the economy opened up from the early 1980s.
For example, Figure 1 (p. 5) plots McDonald’s estimate of umin against the actual rate of unemployment from 1964 to 2007. Over that period, the estimated uminwas between 2 per cent and 6 per cent. For the first 20 years of the sample, the actual unemployment rate and the estimated minimum rate were pretty close. However since 1983, with the exception of a brief period from around 1986 to 1989, the estimated minimum rate of unemployment has been more than 2 per cent lower than the actual rate - and at times has been more than 4 per cent. That suggests to me that either:
1) Post 1983, McDonald’s model has little predictive power or
2) Since 1989, the Australian economy has never once approached its potential
Given the episodes of inflation that we have had since 1989, the second point doesn’t sound convincing. So, I would have to conclude that McDonald’s model is not up to the job of predicting the minimum rate of unemployment that the Australian economy can tolerate.
Productivity per labour unit in unionised coal mining is much higher than in non-unionised mining.
Productivity improvements may have come through the removal of restrictive work practices, but that’s not something that flows naturally from AWAs per se. You can do it by negotiation collectively as well.
That remains to be shown - because WorkChoices tended to remove bargaining power where it was already low, as already demonstrated.
In any event, the thrust of the argument is that “fight inflation first” is a silly fetish, as I understand it.
[Whether you choose to believe in it or not, wage-push inflation is a factor that contribues to overall inflation. Your New Matilda article doesn’t actually provide any argument against that]
Required, the ABS stats show that wages are not a problem at present. Check out the Real Labour Costs.
[link]
Paul Burns and I agree,but for unusual reasons.If productivity increases come by students and work visa holders,and not by resident stay at home Australians,could it be said that in fact these figures for productivity gains are not real!?Or real as a part of an unknowledged cost of import!?And the further costs associated with Australians not working from the changing figures normally associated with unemployed to some form of employment.Or student to employment status!?If unemployed and students as groups are chasing the same jobs,what does this mean in terms of participation rates,because invariable the unemployed are directly pressured by the students chasing the same job!?So if fiscal management decides that a 4% unemployed pool is the upper limit but in fact,remains an inaccurate figure because the remaining unemployed are battling against students,and students already employed,if job seeking and getting are comparable.Is this inaccuracy fiscally responsible,or just accepted when these figures are collated?Another example is Census time,where the figures are obviously warped in terms of employment growth,under any definition of what full employment means, so that even if the figures are deemed accurate growth,they are in fact a government intervention in the economy!?So I sort of feel,because I couldnt say it is exactly a process of thought,that being fiscally responsible ,is terminology set up be economic graduates to hide the fact,they are scallywags..or scaleywags.
AWAs in mining have nothing more to do with productivity than the need to get enough bods on deck to keep shovelling the stuff to China.
Steven Mayne was on )Melb) ABC radio tonight pointing out how Australia is the only developed economy at the moment currently raising interest rates, because of our fear of inflation, while everyone else is lowering rates to stimulate their economies. Our debt levels, federal, state, corporate and personal have constrained us when we can least afford it. How in hell (this is rhetorical, of course, after 11 years of Howard) did we get ourselves into the position of living off credit right through an economic boom such as we’d never had before?
How can you be a fiscal conservative republican at all? If you support war spending, but not tax cuts, please defend the position here: [link] (I’ve been looking for an answer, and am now scrolling blogs, I really don’t intend to be abrasive).