How easy it is to sit in a comfy chair in academia, or in an editor’s office, or in an investment bank, and be an inflation hawk? No risk of losing your job, and even if you did you’d walk into a gig somewhere else. No concerns about meeting mortgage repayments, or how to pay bills if your partner lost their job. Your only exposure to the problem of housing affordability is working out how much money you can lend the kids.
From that privileged vantage point, the inflation hawks are currently flapping their wings and cawing away for an interest rate rise. There is no inflation to speak of — it’s below the Reserve Bank’s target band, though it’s expected to rise into the middle of that band over coming quarters. Instead, the hawks say the public are being indulged by the Bank, as if they are kids allowed too much sugar. “This is just an unhealthy level of interest rates at the moment,” said one today. Higher interest rates are “normal”, another argued, and it was urgent that we return to “normal” as soon as possible. All of these calls have been delivered via the Financial Review, which summed the view up best in today’s editorial: “Australia is becoming addicted to the Reserve Bank’s ultra-cheap money tonic.”
Unhealthy. Abnormal. Addictive. You get the morality theme coming through here. Low interest rates are a sin.
In the course of warning the Tsar about the perils of such sin, the anonymous author of the Fin’s editorial lied about the governor of the RBA. “Dr Lowe was right a couple of weeks ago when he suggested that Australia did not have the stomach for full-blooded tax reform that could actually sustain the stronger real wage growth that everyone wants.” Lowe never said any such thing. What he said was “… the slow wages growth is diminishing our sense of shared prosperity. If this remains the case, it can make needed economic reforms more difficult.”
The high priest of this morality cult is former RBA board member and conservative ANU economist Warwick McKibbin. McKibbin, it seems, never met a monetary policy tightening he didn’t like, and the Fin has never missed an opportunity to quote him. Over and over and over and over and over all the way back to 2012, McKibbin has criticised or warned the bank either to not cut rates or to lift rates. This week is only the latest.
McKibbin says the RBA has backed itself into a corner. It’s far more accurate to say it faces a dilemma. As Lowe said in the same speech, “if wages growth were to continue at around its current rate for an extended period, it is unlikely that the rate of inflation would average around the midpoint of the inflation target in the period ahead. Wages growth of 2 per cent and reasonable labour productivity growth are unlikely to make for 2½ per cent inflation on a sustained basis.”
This time around, the hawks are also arguing Australia must lift rates because everyone else is tightening monetary policy. Never mind that Australia never loosened monetary policy as much as other countries did. Or that Japan isn’t tightening. Or that China just eased reserve requirements. Or that the only really aggressively tightening country is the US where the administration is engaged in massive fiscal stimulus at a time of very low unemployment. Or that a damaging trade war is unfolding. Or that the Europeans are going to continue purchasing assets until the end of the year. Or the Bank of England just left rates on hold.
But the beauty of being an inflation hawk is never having to admit you’re wrong. You can criticise monetary policy for half a decade without anyone wondering why it is that, in the absence of the central bank following your logic, the economy has continued to grow and jobs growth has surged without inflation stirring. There are no consequences.
But should the RBA follow the inflation hawks and lift rates despite low inflation, there’d be plenty of consequences for ordinary workers, faced with rising mortgage repayments despite stagnant wages, for small and medium businesses who have to borrow to invest, for the workers they employ. But on their lofty perches, the inflation hawks don’t have to worry about them.
Meantime, yesterday in the AFR Adam Boynton ran the laughable line that the real credit for Australia surviving the GFC lay in the ‘ stellar budgetary position John Howard and Peter Costello had bequeathed Australia’. Odd. Every economist I know thinks that Howard and Costello squandered the mining boom buying votes and pandering to their mates.
As Carroll warned us, “Beware the Jubjub bird…”
The nonsense inflation hawks perched in the Tumtum tree of the Fin Revue?
Ahh, tax cuts for low income earners quickly gobbled up by rate rises and inflation; who would of thought? Of course, out of the $7225 for $200K earners (who apparently wouldn’t even notice such a paltry relative sum, using Hanson’s words), there’d be more than just a $few-thousand left for the sky rocket.
Well said. Overall, it is really amazing how facts do not really matter to those economists who think it is as if we live in a world where buyers know as much as sellers, where firms have no limit on the competition they face, and everyone knows what technologies are in use. How this accords with the huffing and puffing of the US about “technology theft” and about thei companies facing a choice between not entering the Chinese market and sharing technology with Chinese parties need not be explained. Nor does anyone bother to explain the long history of treating as a free choice the choice inventors make between not getting funding to market their invention or handing their technology over to a US start up firm.
Still, no doubt we should welcome all the steps the US will take to keep its technologies world leaders by sabotaging the attempts by other countries to pass them.
While it’s reasonable to say that interest rates have been at historic lows, if they are set in accordance with real data about what the economy is doing then there is little ill consequence. But if those low rates were coupled with lax or worse lending standards, then you end up in a situation where asset prices, like houses, are bid up, creating an inexorable vortex of stupidity chasing stupidity.
The fact that so many households are burdened with much larger mortgages than they should reasonably have is a weight on the rest of the economy. No money to spend because it is all going to paying off that anchor.