This can take a while to understand.
With weeks before the Job Seeker rate was cut, one of Australia’s most respected economists had suggested that there were hundreds of thousands of potential Australians on unemployment benefits who shouldn’t be there.
Professor Ross Garnaut, a Professorial Research Fellow in Economics at the University of Melbourne, has condemned Australian economic policymakers for the situation.
But his critics point to how they have run the economy over the years, not just the last 12 months.
He is referring to the federal government and the Reserve Bank.
He said their decision to “let” hundreds of thousands of Australians languish in unemployment in recent years to curb wages and inflation, as part of the country’s broader economic policy settings, has hurt people and cost the economy hundreds of billions of dollars. economic activity.
In his new book, Reset: Restoring Australia after the pandemic recession, Professor Garnaut says our policymakers must abandon that policy and return Australia to its original full employment.
He said it meant an unemployment rate of 3.5 percent or lower – the lowest since the early 1970s.
The unemployment rate is currently 6.4 percent.
He said it is difficult to know for sure, but the lower unemployment rate will probably be the point where wages finally start to rise and inflationary pressures emerge. But we have to test it. It could be much lower than that.
“Sure, it’s lower than ‘well below 6 percent‘which Treasurer Josh Frydenberg thinks will trigger efforts to reduce the budget deficit, “wrote Professor Garnaut.
Problems with Australia’s economic policy architecture
This is a scathing judgment.
Between 1946 and 1975, when Australia adopted a formal policy of full employment, the national unemployment rate averaged below 2 percent.
Consecutive federal governments (both Labor and Coalition) budget deficits are deliberately recorded in order to achieve that full employment.
But since the 1980s, Australian policymakers have accepted higher unemployment rates, which they think are “reasonable” under prevailing conditions.
They developed a new definition of full employment: full employment means an unemployment rate that limits inflation (that is, one that stops wages and prices from rising too quickly).
The bad term for the “full employment” rate is NAIRU, or the unresponsive unemployment rate of inflation.
Professor Garnaut said Australian policymakers had repeatedly miscalculated NAIRU in recent years, meaning they often suspected that the economy was getting closer to full employment when it was away from that point.
For example, consider a situation where the national unemployment rate is 5.5 percent and falling, and the RBA estimates full employment (i.e. NAIRU) to be 5 percent.
That means the RBA expects inflation and wage pressures to increase soon, as the unemployment rate appears to be approaching “full employment”, so the RBA will be prepared to start raising interest rates.
However, what if, in this scenario, the economy would only truly become “full employment” when the unemployment rate was 3 percent?
That means the RBA will start raising interest rates prematurely, when the unemployment rate is 5 percent (not 3 percent), effectively shutting down momentum in the labor market before everyone who wants a job can find it.
Professor Garnaut said Australian policymakers should stop guessing where the full jobs are can Becomes.
“We can find out where by increasing labor demand until wages on the labor market rise at a rate that threatens inflation above the Reserve Bank range for an extended period of time,” he said.
He said the difference between the actual unemployment rate and the lower original full employment rate represented “unnecessarily unemployed” people.
“The unnecessary number of unemployed is actually bigger than this, because more people will be motivated to find work if the unemployment rate is lower,” he said.
He said the years since 2013 were terrible.
“On average, several hundred thousand fewer people are employed [from 2013 to 2019] than is likely to happen, “he said.
“At the current level of economic activity, it has several hundred thousand unemployed people who don’t need to hold onto the annual gross domestic product [GDP] drops about $ 50 billion below what it should be, and, all other things being equal, increases Australia’s public deficit by nearly $ 20 billion each year. “
Support for an idea promoted by Modern Monetary Theory
Professor Garnaut said Australia should use as much resources as possible to bring the unemployment rate down to 3.5 percent by 2025, as a matter of national urgency.
He said the budget deficit needed to achieve full employment must be funded “directly or indirectly” by the Reserve Bank, “at least until full employment is seen.”
That puts him right next to people like former Prime Minister Paul Keating, and economists from Modern Monetary Theory, who say the RBA has the power to create its own money to finance federal government stimulus spending, so there is no reason why federal government deficit spending should be supported by an explosion of Commonwealth government debt.
Currently, the Reserve Bank is waiting for the Ministry of Finance to sell new Commonwealth government bonds (through the Australian Office of Financial Management) to private banks, pension funds and insurance companies that form the so-called “secondary market”, before buying the same bonds from private entities. at the agreed interest rate.
It is this traditional practice of “raising money” from the secondary market for government purchases that has led to an explosion in Commonwealth government debt over the past year.
Professor Garnaut said there was no need.
“We really argue about angels dancing with pinheads when we talk about differences,” Professor Garnaut told Eureka Report reporter Alan Kohler this week.
“The only difference between the Government selling the bonds to the market and then the Reserve Bank buying it is that you give margin to a small number of players in the bond market, to the banks that participate in that trade.
“I think let’s grab their free lunch.”
Phil Lowe, Governor of the RBA, has repeatedly dismissed suggestions that the RBA should directly finance Government stimulus spending.
However, he never said it was impossible. He just said it wasn’t necessary.
“I want to make it clear that monetary financing from fiscal policy is not an option being considered in Australia, nor is it necessary,” he said in July last year.
“The Australian government is able to finance itself in the bond market, and can do so on very favorable terms.”
The longest period of income stagnation in Australia
Professor Garnaut has provided a brutal view of the economic achievements of Australian policymakers, particularly from 2013 to 2019 (seven years from China’s resource boom to the pandemic), a time period he has dubbed Australia’s “dog days.”
He said since 2013, Australia had stood out among developed countries because of stagnant production per person and continued high unemployment and underemployment.
“A lot of Australians are used to seeing Japan as an economic basket,” he said.
“Under the best of circumstances, by 2025, Australians will go through the longest period of real income stagnation in our national history.”
There is a need for an ‘economic stability council’
He said the task of rebuilding the economy after the pandemic would be enormous, and it would require new economic institutions, such as the Reserve Bank.
“The independent authority that is needed right now is not the Reserve Bank Board which only has the power to buy and sell government securities and change interest rates,” he said.
“Circumstances require the Economic Stability Council, with the power to limit demand in fiscal and monetary ways – to charge a surcharge on the main tax if it works better than raising interest rates.
“The power of the council to adjust some tax rates will be two-sided, with tax cuts on the agenda as growth sags below full employment rates and the scope for lower interest rates has exhausted.
“If we design an independent body to support economic stability now, we will make it an independent Economic Stability Council and not an independent monetary authority. So let’s make these changes for the future as part of us. [economic] restoration.”
This is similar to the idea proposed by leading Australian economist Nicholas Gruen.
Professor Garnaut has also provided his support behind the idea of a basic income guarantee for nearly all adults, paid the same rate as dole (known as universal basic income in the economic literature), and a major reconfiguration of how businesses pay corporate taxes.
Overall, he said, Australia needed to take the opportunity to rebuild a new economy in a post-pandemic world, rather than return to “hard times” from 2013 to 2019.