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

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Shares

Exploiting Warren Buffett

Growth investors are using Buffett to justify buying blue chip stocks at almost any price. It’s a recipe for potential disaster, as investors in market darlings like CBA and Cochlear may be about to find out.

Property

Population density trends and what they mean for housing

With Australia’s population moving through the fastest rate of growth since the 1950s, our cities and towns are naturally densifying. This is a look at the latest trends and how they will impact the property market.

SMSF strategies

The ultimate superannuation EOFY checklist 2024

We're nearing the end of the financial year and it's time for SMSFs and other super funds to make the most of the strategies available to them. Here's a 24-point checklist of the most important issues to address.

Shares

The outlook for Nvidia, from a long-time investor

Nvidia has taken the world by storm and is now the third largest stock on the planet - larger than Meta, Amazon, and Alphabet. Here is the latest take on Nvidia from a fund manager who first invested in the company in 2016.

Economy

Gross National Happiness?

Despite being richer, surveyed measures of happiness have been flat to falling in Australia. Some suggest we should focus less on GDP and more on broader measures of wellbeing, though there are pros and cons to that approach.

Shares

The power of dividends

In an era where growth companies dominate and the likes of Nvidia grab all of the attention, dividend paying stocks are flying under the radar. Some of these stocks offer compelling prospective returns.

Fixed interest

The best opportunities in fixed income right now

After more than a decade of pitiful yields, bonds are back offering better prospects for income investors. What are the best ways to take advantage of the market inefficiencies in Australian fixed income?

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.