Thursday, October 11, 2007

Ignore economic policy sadists - learn to live with & love prosperity

The economic news was positive today – the unemployment rate in Australia fell to 4.2% which was the lowest since 1974 – 13,000 jobs were added in September.

It is wonderful news that almost all Australians can get a job. The tight labour markets improve labour’s bargaining power and offer the best chance for long income households to get economically established. Over the years I have known skilled people who were unable to get jobs – one former colleague was so desperate and so disheartened by being unemployed that for a time he took voluntary work with a church group rather than spend his days unoccupied. People have short memories but unemployment should be clearly understood for the disaster it is. We all complain about our jobs from time-to-time but not having a job is demoralising and, of course, economically inefficient.

It surprises me that the low unemployment outcome is portrayed in negative terms by emphasising the possible consequences for a rise in interest rates. Federal Opposition Leader Kevin Rudd in an absurd statement says if the Government wants to take credit for the jobs figures, it must also accept responsibility for interest rate rises. What stupidity to cast doubts on the value of getting people employed and from a Labor leader.

The case for increasing interest rates is based on the presumption that inflation will re-emerge to be 2.8% next year compared to 2.1% this year. This fear is based in part on the past view that excess demands for labour have driven high inflation. The RBA I suspect also fears the prospective election of a Labor Government that will damage the economic gains generated in Australia enjoyed over the past decade. The current international environment now is very different from that experienced in the 1980s – even with oil price shocks inflation is muted partly because China and other newly developing countries are putting a competitive seal on labour costs. In addition, the Australian dollar is the strongest it has been for 23 years and looks like it will continue to increase in value. This will put deflationary pressures on exports. I think the case for a further interest rate hike is unwarranted.

The economy is being held prisoner to fears about resurgent inflation. Even with massive Federal Government budget surpluses ($10.6 billion projected in 2007/08) cannot be given back to the tax payers who own it because of inflationary fears. This is bizarre.

I think that macroeconomically Australian policy makers should ‘cool it’ a bit. Allow unemployment to continue to recede and to accept that automatic exchange rate stabilisers will work to put pressure on Australian exports.

John Howard should offer the promise of tax relief in 2008 and the RBA should keep interest rates at current levels. Generally we need to accept the fact that the Australian economy is likely to perform strongly for the next 20 years at least – unless an inexperienced Labor Party stuffs things up. Strong performance is unambiguously a good thing and should not be taken as a sign that we all need to suffer.

3 comments:

conrad said...

That people worry about the bad and not appreciate the good shouldn't suprisize you. Remember what Kahneman taught you, and what you probably teach to first years? Its just the way life is, and obviously Kruddy is good at exploiting that. I imagine he has advisors telling him to do just that.

whyisitso said...

"unless an inexperienced Labor Party stuffs things up"

You're talkng about that as an "if", Harry. I see its as a "will". We're at late October 1972.

The main difference today is that Rudd is just a figurehead, unlike God-gh, who was really in charge back then. Gillard is the one who's in charge, watched closely by Combet and Shorten. We're dead.

conrad said...

Speaking about worrying that the negative is worse than the positive is good, you look like a classic example whyisitso.