Chalmers should be wary of conventional thinking about problems of unconventional origin. In the same way that the “coronation” did not resemble an ordinary recession because it was caused by government-imposed restrictions on the supply side rather than efforts to curb excessive demand, it should not use the restriction of demand to try to fix supply disruptions.
Inflation problems usually arise from an overheated economy leading to excessive wage growth. The standard solution will be to cut real wages to make labor less expensive. But we have had weak real wage growth for a decade.
The business lobby has been so consumed by short-sighted interests, so accustomed to going out in their own way, that we need a new government with the wisdom and strength to save businesses from their own madness.
Those who ideologically oppose the fiscal stimulus tell us that our stimulus has given us a hot, inflation-prone economy, as evidenced by our super-tight labor market. They conveniently forget to mention that the pandemic made us ban all imported labor for two years, but that this supply limitation has been lifted.
If excessive wage growth did not lead to high and rising prices, what did it do? The fiscal stimulus has led to a shortage of materials and workers in housing and construction, but most of the price increase has come from external supply constraints caused by the pandemic and war in Ukraine.
Nothing we can do can solve the problems of the rest of the world. But we must not forget that these are one-off price increases. And these import prices will fall at some point as the pandemic disruptions are resolved and the war ends.
It’s not that simple, of course. Why not? Because our companies do not seem to have hesitated to transfer their increased import costs to retail prices. This is not the beginning of a wage-price spiral, but the price-wage spiral. And the solution to the spiral of business and entrepreneurial groups is simple: allow only a symbolic increase in wages and inflation will go down in no time.
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This is the tacit doctrine that is the bastard son of the economic rationalist era: give business what it asks for and everything in economics will be wonderful. The business lobby has been so consumed by short-sighted interests, so accustomed to going out in their own way, that we need a new government with the wisdom and strength to save businesses from their own madness.
We need a government capable of seeing what businesses cannot do: that wages are not only a cost to businesses and a profit tax, but also the main source of income for the 10 million households that are the reason for which we have an economy and the expense of which in the things our companies produce is what generates their profits in the first place.
Collapsing workers by tolerating falling real wages is an exciting way to increase profits in anything but the short term. The greater the fall in real wages – and the government cannot prevent them from falling – the greater the risk of Labor joining the US and China in recession.
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That is why, in its dignified desire to keep large companies in the store, the government was wrong to ask the Fair Labor Commission to increase award wages by 5.1 percent just for workers. “poorly paid,” that is, only at the bottom. 12 percent of workers instead of 25 percent lower.
Do you really think that 88 percent of workers who depend on bargaining with bosses instead of a commission edict will get something like a 5 percent pay raise?
Former Reserve Bank governor Bernie Fraser said any fool could reduce inflation; all that needed to be done was to slow down the economy. Is this what the business would like? Undoubtedly, this is what the financial markets want, whose model of our economy is a footnote that says “see America” -.
As I am sure the Reserve understands well, we need to reduce inflation without causing a recession. And that means being patient about how long it takes. We were below the target range for six years; we can be there for a few years without the sky falling.
And remember this: If we were to fall into recession, the strategy of growing out of debt would explode. Not only would the economy grow more slowly than debt, but the “automatic stabilizers” of the budget would be reversed and the deficit would explode, greatly increasing debt.
On the other hand, Chalmers should be skeptical of the argument that one more reason why we should reduce the budget deficit as soon as possible is to reduce the need for interest rates to rise so far. Keeping inflation under control is not a big question, as long as we have patience.
The stated strategy of the Reserve is to change the position of monetary policy only from “emergency expansion” to “neutral”. That is, remove the foot from the accelerator, do not block the brakes. This means slowly raising the official interest rate to around 2.5 percent, so that the real medium-term interest rate is zero.
In theory, at least, this should not cause a contraction in the economy, or a great deal of pain for most people with mortgages. And it would be a good thing in itself to get rates to a level that is close to normal.
The real challenge of budget policy is to prevent us from going too far by proceeding with the tax cut of the third stage in its current time, size and form. It could be readjusted to make it more effective in relieving the cost of living pressures for the lower half.
Ross Gittins is the economics editor.
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