At The Road to Surfdom, Ken Lovell deconstructs Tony Abbott’s latest contribution to the economic debate:
“If anyone has created the current inflation, it’s Wayne Swan, with his wild and irresponsible talk,” he said.
You can make of that what you like. The opposition were previously running the line that there was no inflation problem (in order to “defend the Howard record”), and this absurd nonsense is apparently how that message morphs when the inflation figure hits a 17 year high.
The chatter among economists and on the business pages for a while has been about whether the Reserve Bank should dump its 2-3% orthodoxy - because a lot of the push factors are in effect exogenous to the domestic economy - so as to avoid tipping the show into recession. I was writing about this almost two months ago, and copped a bit for my pains.
What really surprised me was the fact that the defenders of economic orthodoxy - the same mob who always bang on about a globally integrated economy - were apparently so sanguine about the degree to which any nation state can exert sovereign control over inflation within its territory. As I suggested back then, economic orthodoxy is a moveable feast, and Henry Thornton documents just how far it has moved by today - to a position where the “suspension” of inflation targeting is being mooted.
At the same time, the stock in trade of political journalism Glenn Milne style is still debating whether Wayne Swan will come up with a credible message to target voters with in the light of changed economic conditions. That’s about as useful as debating how many angels can dance on the head of a pin. Labor’s strategy last year actually demonstrated one big fact - voters were aware of how little the Howard government contributed to prosperity - and how precarious that prosperity is in an international economy. Labor has already grasped the nettle by adopting a position that the government will do its utmost to shield citizens from the impacts of global economic turbulence. Paul Keating’s message - that there’s a limit to what we can do to fence off our economy from the world - sunk in a long time ago. It’s taking an awful long time, seemingly, for some economic policy wonks, pollies and pundits alike to wake up to that fact and this fact - that here’s a new turf on which economic policy debates will be played.
Cross-posted at PollieGraph.
You think they’re out to lunch? I had a real WTF moment on Friday seeing The Daily Telegraph (NSW) headline that the $7000 in tax-relief to families with dual-incomes is “aimed at sparing those among Australia’s hardest-working further inflation pain”.
The story was picked up in all the News Ltd. state-based tabloids as well.
So before the election we’re told that giving out $30bn+ in tax cuts is inflationary, but now giving thousands to working families is helping them fight inflation.
By what economic voodoo do inflationary tax-cuts become inflation-fighting working-family handouts?
I don’t believe the Tele came up with this spin all by themselves - they’re not that smart - so they must’ve swallowed the government press release hook, line and sinker.
I wonder if the voters will buy it? My guess is “yes”…
I seem to recall it was the Coalition, during the election campaign, insisting the strongest possible terms that their proposed tax cuts - which were even larger than Labor’s - weren’t going to be inflationary.
It would be hard for them to argue the opposite now, but I’m sure Nelson Muntz will find a way
From everything I read the international factor that is causing inflation in food and energy is simply the US Fed flooding the world with dollars. It is causing a depreciation of the USD which is causing the cost of these things to go up as measured in USD. This is causing inflation in countries whose currency is linked to the USD. So the solution for Australia is to a let the Australian dollar rise against the USD to compensate. We either see a substantial rise in the AUD against the USD, perhaps even well past the point where an Aussie dollar is worth more than a US one, or we get high inflation. It will be interesting either way.
swio
As I understand it (which is not very much) the AUD is perfectly at liberty to rise [or fall] against the USD, on a daily, nay hourly basis. And has been slowly rising thusly over several months.
I’m more interested in this:
“If anyone has created the current inflation, it’s Wayne Swan, with his wild and irresponsible talk,”
We’ve become used to the view taken by the neocons that reality is what they say it is. If they say there is no global warming then all the data in the world doesn’t mean there is etc, etc. This seems to be part of a trend for them to shift to “the world is what our opponents say it is so everything that’s wrong is because they pointed to it.” We saw it with Pearson’s talk about how the left had wanted Iraq to fail, with the clear implication that this was why it had.
It’s a logical next step I guess, but its really pretty weird when you think about it.
Yeah, well you know, all this luvvie BS talk about discourse and all the rest of the cr*p is all very well in the groves of acadeem, but out here in the real world, where hard but fair pollies and savvy BS detecting journos ply their trusty craft, just talking about it is enough to bring it into being. That’s why it is important that only people who understand that fact should be allowed to talk.
I suppose sending the Parliamentary Liberal Party a copy of Alice in Wonderland as the basis for a political manifesto would be too subtle?
With heartfelt apologies to the memoty of Lewis Carroll.
Ambigulous,
I should have made the additional point that what decides whether the dollar rises is what we do with interest rates. If we let interst rates rise than our dollar will go up too. If we hold interest rates then our dollar may not rise and we’ll get inflation.
swio,a rising dollar should also contribute to inflation. Demand for imports rises with capacity to pay, and supply - again, should - rise to match it, with a concurrent rise in prices. We’ll be importing more, because we can afford to. And suppliers put their price up, because we can afford to pay it.
The Reserve only has interest rates to use. So they use them. What I’m more interested in though, is what other tools Government has to reduce expenditure. They all seem like blunt instruments. It’s not like we can find the specific people who’re helping drive inflation, and ask them to spend less (and save more).
What mechanisms could be put in place to limit spending that work work in a market economy?
Ken L, it seems, has discovered the secret of Liberal economics:
[link]
In places like Egypt, Mexico and the Phillipines where food prices are a very large component of the economy and where food prices are going through the roof due to global demand outstripping supply, I bet their central banks aren’t whacking up interest rates to “fight” inflation.
What they will be doing is banning grain exports; increasing bread subsidies etc. That’s the sort of shit you have to do in real economies. We haven’t yet felt enough pain to realise that we don’t control our economy by something as simple as flicking the interest rate switch. It gets a lot harder than that.
We have just sailed though many years of easy growth - that is coming to an end as other countries join our bread queue (and our oil queue etc.) We have become exceedingly fooled by the belief that the Market will provide.
The market does not provde - it just, on a good day, distributes. This planet is what actually provides.
swio,
Yes: interest rates here affect the AUD. But so does the volume of trade and the prices (paid for imports, received for exports) too, oui?
They used to tell us that currencies were solely affected by balance of trade, but now I think huge (partly speculative) capital flows are a larger factor. Can someone put me out of my ignorance, please?
“is what other tools Government has to reduce expenditure”
The GST would probably be a better means of controlling spending than interest rates as it would affect ALL consumers not just those with mortgages and and wouldn’t have as big an effect on businesses using debt financing.
Won’t happen though because of the BS promises about not raising the GST rate.
Well, if Tony Abbott’s theory is correct, WTF didn’t I win the $40m, last night?