Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 405

It's not all about interest rates: give me a 1980s petshop galah!

The notion that the RBA ‘chooses to allow’ the ‘voluntary unemployment’ of several hundred thousand Australians is something that may come as a surprise to many. Yet that is precisely the charge levelled at the central bank in a tome from economist Ross Garnaut. He claims that such unemployment was a consequence of the RBA running monetary policy too tight after 2012.

Now Ross Garnaut is no slouch. He was a senior economic adviser to then PM Bob Hawke during the 1980s and has written extensively and thoughtfully on economic policy issues for decades.

However, the charge against the RBA is largely a specious one.

For one thing, the average monthly unemployment rate from February 1978 (when the current series was commenced) to the end of 2012 was 7.0%. From that point to the onset of the pandemic it was 5.6%.

It might be interesting to find out who Garnaut puts in the frame for the even greater levels of ‘voluntary unemployment’ in the decades prior to 2012.

It's not only about monetary policy

Of course, hindsight is a wonderful thing, and the RBA may have run monetary policy a little too firmly after 2012. It is also probably true that the time has come to move on from inflation targeting as the overarching focus for monetary policy. Perhaps to one that explicitly embraces, among other things, an employment objective.

In the scheme of things, the RBA’s ‘culpability’ for unemployment levels is not deserved of the prominence that Garnaut and others give it. That prominence derives from an unbridled but misplaced faith in the efficacy of macro policy and a corresponding reluctance to consider structural measures that enhance the economy’s flexibility and adaptability.

The political wherewithal to consider such measures reached their apogee under the banner of ‘microeconomic reform’ during Paul Keating’s Treasurership.

By the late 1980s, as the then Treasurer put it, “every galah in the petshop was talking about microeconomic reform”. That agenda extended through the 1990s during his Prime Ministership and into the early stages of the Howard Government. (To be fair to Garnaut, he does canvass, albeit selectively, some measures of this nature.)

Where are the microeconomic reforms?

It was those type of microeconomic reforms, including measures to enhance labour market flexibility, that drove the ‘natural’ rate of unemployment lower, to the ‘4 point something’ now articulated by RBA Governor Lowe as a potential ‘natural’ rate, or perhaps even as low as the 3.5% Garnaut now posits.

But the current tacit refusal of both sides of politics not only to assign such ‘microeconomic reform’ measures to the ‘too hard’ basket, but in some cases reverse those reforms, looms as a bigger potential culprit in occasioning higher unemployment than any ‘failure’ to adequately fine-tune macro or monetary policy.

For the most part, however, every galah in the petshop now persists in talking about nothing else other than how an (easier) twist in monetary policy, including a turn to the ‘unconventional’, is a pivotal part of a panacea for our perceived economic ills.

But monetary policy is limited in what it can achieve and should be just one increasingly minor part of the overall policy armoury. Key global central bankers, including Governor Lowe, have been trying to tell markets, governments and academia this very fact for some time – apparently to little avail.

Meanwhile, historically high levels of monetary accommodation have unleashed a plethora of ‘unintended consequences’, such as asset bubbles and growing wealth inequality, excessive risk-taking and attendant financial stability concerns. Easy liquidity sets ‘moral hazard’ traps that debilitate economic performance by allowing ‘zombie’ companies to persist, ultimately delaying necessary economic adjustment and lowering the economy’s growth path by inhibiting its productivity, flexibility and dynamism.

That is not to say there is no role for macro policy in a post-pandemic environment. But an assessment of that role should include a revisiting of the objectives of monetary policy and, more importantly, a recognition of its limitations.

We need to use all arms of economic policy

Central banks, including the RBA, are not perfect. The galahs in the pet shop – gratuitously - remind us of this all too often. But central banks need support from, and need to support, other arms of economic policy.

So, I do wish - just occasionally - that those aged petshop galahs would sometimes advance an advocacy of the agenda that they pushed in the 1980s. An agenda that ultimately set up Australia for a globally unprecedented three-decade long expansion and one that has the best chance of navigating the economy safely to and through the post-pandemic world.

 

Stephen Miller is an Investment Strategy Consultant with GSFM, a sponsor of Firstlinks. He has previously worked in The Treasury and in the offoce of the then Treasurer, Paul Keating, from 1983-88. The views expressed are his own and do not consider the circumstances of any investor.

 

 

RELATED ARTICLES

A tale of the inflation genie, the Fed and the RBA

US rate rises would challenge multi-asset diversified portfolios

Yikes! Three critical factors acting on inflation and rates

banner

Most viewed in recent weeks

Where Baby Boomer wealth will end up

By 2028, all Baby Boomers will be eligible for retirement and the Baby Boomer bubble will have all but deflated. Where will this generation's money end up, and what are the implications for the wealth management industry?

Meg on SMSFs: $3 million super tax coming whether we’re ready or not

A Senate Committee reported back last week with a majority recommendation to pass the $3 million super tax unaltered. It seems that the tax is coming, and this is what those affected should be doing now to prepare for it.

How much do you need to retire comfortably?

Two commonly asked questions are: 'How much do I need to retire' and 'How much can I afford to spend in retirement'? This is a guide to help you come up with your own numbers to suit your goals and needs.

Meg on SMSFs: Clearing up confusion on the $3 million super tax

There seems to be more confusion than clarity about the mechanics of how the new $3 million super tax is supposed to work. Here is an attempt to answer some of the questions from my previous work on the issue. 

The secrets of Australia’s Berkshire Hathaway

Washington H. Soul Pattinson is an ASX top 50 stock with one of the best investment track records this country has seen. Yet, most Australians haven’t heard of it, and the company seems to prefer it that way.

How long will you live?

We are often quoted life expectancy at birth but what matters most is how long we should live as we grow older. It is surprising how short this can be for people born last century, so make the most of it.

Latest Updates

Property

Australian housing is twice as expensive as the US

A new report suggests Australian housing is twice as expensive as that of the US and UK on a price-to-income basis. It also reveals that it’s cheaper to live in New York than most of our capital cities.

Exchange traded products

The catalyst for a LICs rebound

The discounts on listed investment vehicles are at historically wide levels. There are lots of reasons given, including size and liquidity, yet there's a better explanation for the discounts, and why a rebound may be near.

Retirement

The new retirement challenges facing Australians

A new report from Vanguard has found an increasing number of Australians expect to be paying off a mortgage in retirement, or forced to rent. A financially secure retirement is no longer considered a given.

Strategy

Why aren’t there more Warren Buffetts?

Warren Buffett is widely regarded as the most successful investor ever. Rather than keep his secret sauce hidden, he's shared his knowledge for decades, so why aren't more investors able to replicate his methods and success?

Retirement

Finding joy in retirement

Retirement can last more than 30 years, necessitating thoughtful planning. Many miss workplace friendships, identity, status, expertise, and routine, but these can be replaced with renewed activities and purpose.

Shares

Bull and bear case for Australian equities for FY25

ASX market bulls point to corporate balance sheets and earnings, while bears highlight company valuations and persistently higher inflation. It's best to ignore short-term noise and focus on investing in quality companies.

Gold

How gold can help diversify your portfolio

As inflation is likely to remain stubbornly elevated, the correlation between bonds and equities could remain high, reducing diversification within portfolios. A gold allocation may help to better protect your investments.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.