I was part of a panel who responded to this question for The Guardian
The economic situation facing the majority of Australian households is dire. However, the common framing of the problem in terms of the “cost of living” distracts attention from the real problem, which is the decline in the real purchasing power of wages. Having remained stagnant for years, wages have now fallen far behind inflation. Moreover, the average rate of tax paid is rising because of bracket creep and because of the expiry of the Morrison government’s low- and middle-income tax offset, which was not extended in the October budget.
Under our current policy approach, economic welfare is declining
Neither of these outcomes is likely to improve significantly during the current term of government. The budget papers predict a further decline in real wages this year, and only a partial recovery over subsequent years. And while those on high incomes will benefit from the stage-three tax cuts, there is nothing for those on incomes below $45,000. Even the indexation increases in pensions and benefits lag behind inflation by six months.
In response to this crisis, Albanese has said, in effect, that his hands are tied. First, he denounces relief for low-income earners as “a cash-splash, a one-off giveaway to buy a headline. Cheap politics and hugely expensive economics”. But the same is true, in spades, of the massive stage-three tax cuts, which Labor promised to implement for fear of losing a few marginal high-income voters.
If the stage-three tax cuts had been cancelled or deferred in the October budget, Labor would have had room to improve the position of the worst-off voters, while maintaining a broadly stable ratio of debt to GDP. But Labor was too frightened of negative headlines to grasp this nettle.
Albanese’s other argument is that any expansionary fiscal policy would be cancelled out by the RBA, which would raise the interest rate. He observed that “fiscal policy needs to work with monetary policy, not contradict it”.
There’s an element of truth here, but also a huge problem. As well as maintaining price stability, the RBA is supposed to act to achieve full employment and “the economic prosperity and welfare of the people of Australia”. But under our current policy approach, economic welfare is declining. Unemployment is expected to rise, and real disposable incomes to fall, even in a situation where GDP is growing steadily.
Under the policy of central bank independence, first introduced under the Howard government, there is nothing that can be done about this. The Reserve Bank pursues its inflation target without regard to the policies of the elected government. But this policy has not served Australia, or other countries that have followed this course, at all well. It was necessarily abandoned during both the GFC and the Covid lockdown. If fiscal policy must work with monetary policy, the reverse should also hold true.
It is clear enough that our current economic policy institutions are not fit for purpose. Sadly, that includes the policies of the Albanese government.
16 thoughts on “Can Labor provide cost-of-living relief without feeding inflation and interest rates?”
I am unconvinced both by the declining real wages story. and the claim that the RBA should be led by the nose by the Labor Party. .
The alleged wage decline is occurring despite record low unemployment, “we are hiring” signs everywhere, and casual empirical observations that many wages are in fact increasing strongly. Dishwashers getting $50+ per hour, untrained waiters demanding $100,000 annually (The Age, a week ago) and strongly increasing salaries in the construction and home maintenance sector. Try hiring a plumber to fix a water leak and you will get the picture quickly. Of course, there are areas in the economy – fast food work for example – where wages are not increasing but many of these jobs are taken by students working their way through college and a couple of day’s work a week that can get them $350 isn’t bad. It isn’t a “crisis”.
Perhaps there are problems with the way we measure wages. People are being promoted or reclassified into higher paid jobs and so on. But, whatever it is, something doesn’t stack up.
Of course we want an independent central bank. The Labor Party wants that too since it would otherwise face inevitable demands to not increase interest rates at a time of near full employment with inflation heading towards 8%. That would produce higher rates of inflation and inevitably savage fiscal and monetary policies that would wreck real havoc on labour markets. Most importantly, for Labor, it would mean they are kicked out of office as people react to their populist economic mismanagement.
To describe the current state of the Australian economy as being in “crisis” is exaggerated. With close to full employment and tight labour markets, almost all Australians are doing well. That would not be the case if workers care encouraged to pay catch up with inflation through industry-wide labour agreements and an RBA that paid low priority to escalating inflation. Those two developments together would produce a real crisis – a wage/price spiral and inevitably high levels of unemployment.
Harry’s two legged stool – usually one leg – unions / wages – but 2 this time…
HC: “I am unconvinced both by the declining real wages story. and the claim that the RBA should be led by the nose by the Labor Party”.
Harry, what is the third leg?
Harry, your continued respinse to JQ is now a well worn path. Do you have a third leg to respond to JQ’s assertion;
“Neither of these outcomes is likely to improve significantly during the current term of government. The budget papers predict a further decline in real wages this year, and only a partial recovery over subsequent years. And while those on high incomes will benefit from the stage-three tax cuts, there is nothing for those on incomes below $45,000. Even the indexation increases in pensions and benefits lag behind inflation by six months.”?
“Man, thermometer, one legged stool & vat of nitro
“1870. Alfred Nobel chose Ardeer, in Ayreshire, as the location of what was to become the largest explosives factory in the world. It primarily manufactured nitroglycerin, for the production of dynamite. Absolutely essential to the process was the one legged stool. This innovation of Nobel’s prevented the operator of the nitroglycerin reaction vat from falling asleep on the job. His job was to ensure an exothermic runaway of the reaction didn’t take place.
“Here’s an account from 1897, of a visit to Ardeer by H. J. W. Dam –
“The surroundings are rather trying to sensitive nerves – your life depends, at every moment, upon a thermometer and a man on a one legged stool.
The Australian Bureau of Statistics publication which reports the wages price index it has calculated includes a section on methodology. If there are experts who can suggest improvements to that methodology, it might be a good idea for them to contact the Bureau and offer those suggestions. I am not an expert. But I do know enough to recognise a methodology which would not be an improvement, namely this one: ‘Make a few unsystematic observations of wages going up; then make a few unsystematic observations of wages not going up; then add a few extra remarks to justify drawing the conclusion that you wanted to draw in the first place.’ For a non-expert like me, given the choice, the only sensible thing to do is to rely on the calculations of the Australian Bureau of Statistics, whatever their limitations, over the motivated reasoning of a blog commenter.
Westpac just said whike mianing about $5bn profit – “the recivery will be uneven” or similar.
They also have a two legged stool worldview. They just can’t bring themselves to elaborate the third “uneven” leg.
Oh, and we are paying for their losses – less savings rates for us dummies who have savings accts or higher rates biz loans, and less tax from their “loss” -from the sale of insurance biz – which they had no biz being in in the first place.
Note to self. Buy into the two leg stool business.
See also the Nobel prize -oops some bank – winners Modigliani & Miller. Debt or equity, it doesn’t matter.
And re wikipedia.org/wiki/Modigliani%E2%80%93Miller_theorem
… it is baked into AMEO risk premiums. YOURS and my water, electicity and gas bills!
Laughing – all the way > to the bank. Euphemism = trickle up.
History and a couple more “nible” prize winners.
JQ 2009 – “might lay the groundwork to convincing doubters of the inevitability of bank nationalisation.”
“The works by Diamond and Dybvig essentially explained why banks exist and the role they play in the economy by channelling savings from individuals into productive investments.
“Ben Bernanke fed into this by looking at bank behaviour during the great depression of the 1930s, and showed that bank runs during the depression was the decisive factor in making the crisis longer and deeper than it otherwise would have been.
“The observations behind the Nobel win seem fairly straightforward compared to previous years. Why are they so important?
“It’s the idea that banks that are otherwise financially sound can nevertheless be vulnerable because of panicking depositors. Or, in cases such as during the global financial crisis of 2007-09, it can be a combination of the two, where there is a problem with a bank’s fundamentals but it is exacerbated by panic.
“Much rests on digital central bank curency and if it is allowed as a retail bank product or central bank store.
JQ says in “Much rests on rescue plan” March 27, 2009
(JQ referncing Brad DeLong) re “the Geithner plan and the announcement, a few days earlier that the US Federal Reserve would create a $1 trillion loan facility to assist in the purchase of dubious asset-backed security.”…
…”might lay the groundwork to convincing doubters of the inevitability of bank nationalisation.”
MAY 18, 2003
“In addition to the stock market and the dollar, Baker is concerned about a bubble in housing prices. My instinct is to agree. But it’s worth noting that if there’s a bubble in the US, where real prices have risen 30 per cent, the situation here in Australia, where prices have nearly doubled in a lot of markets, is far more dangerous.”
. ..”Brad DeLong, who has been among the most prominent supporters of the plan …
“And, he says, it might lay the groundwork to convincing doubters of the inevitability of bank nationalisation. Writing in the New York Times, he says ‘“We tried alternatives like the Geithner Plan and they did not work” might well be an effective argument several months down the road.’
Genre: Financial thriller
“The Big Short
“The Big Short: Inside the Doomsday Machineis a nonfiction book by Michael Lewis about the build-up of the United States housing bubble during the 2000s.
“The Big Short (film)
“Written by McKay and Charles Randolph, it is based on the 2010 book The Big Short: Inside the Doomsday Machine byMichael Lewis showing how the financial crisis of 2007–2008 was triggered by theUnited States housing bubble.”
Any info on the missing third leg anyone? Genre: Financial thriller.
My sub editor’s rose coloured glasses were so steamed up she missed “whike mianing”
… while moaning …
Time for new glasses. Like Joo Janta 200 Super-Chromatic Peril Sensitive Sunglasses.
Any chance of a review JQ?
Monopolies, productivity, zombies. And wages and fiscal & monetary policy too.
“Why Australia is stuck with these low productivity rates
“Ultimately, the emphasis on productivity is symptomatic of a society conditioned to want more and more for less and less.”
“Satyajit Das is the author of Fortune’s Fool: Australia’s Choices (2022) and A Banquet of Consequences – Reloaded(2021)
Here is a more nuanced discussed of real wage trends by Sue Richardson. It is difficult to measure real wage trends for the reasons she cites – most people not on awards, big salary jumps occur through promotions and changing jobs etc. But up until this year real award wages have risen in every year by about 1%. Fuel price hikes due to the Ukrainian situation crushed that trend recently.
Quiggin’s frustrations grow palpable. Echo mine, but I grow desensitised; apathetic yet always come back, because he reminds me of who and what I am- God was kind to me also, with a more basic BS detector, But desensitisation and discouragement would make a slob of me. when I read these things and remember, including what sort of world I’d like to see young people inherit, as I inherited from my wrinklies. I can’t just walk away and the wastage is appalling, so you cant allow a current state of affairs to pass uncommented on…no!
My brain doesn’t these days often bend towards macroeconomics, nor was I ever that good at it to begin with, but, yes I agree with JQ – there must be a way to help ordinary people avoid suffering without blowing up inflation.
Here in the US, for example, we could put a windfall tax on oil, and spread that money around. Things like that. (Would that increase inflation? I’ll go google that…) Instead of having a huge fight over it, we could just do it temporarily. (I fantasize. Of course, this is probably not possible politically. But we “could.”)
Also, I wonder, is it possible that inequality could be somehow feeding inflation? Like, the fact that so much cash is held by so few people – maybe that cuts down on the brakes somehow. Corporations simply have too much market power here. I just have issues with this idea that it was the aid that caused inflation.
Well the intergoggle didn’t answer my question, and I need to go mail my ballot. Maybe someone here will know.
N… intergoogle is severely testing my patience recently. DDGo doesn’t cut it sometimes.
Searched – quiggin “inequality” inflation
To save you having to do a PhD, read Independent Australian, The Conversation & blog posts first.
1st page results:
Scholarly articles for quiggin “inequality” inflation
scholar.google.com › citations
Globalisation, neoliberalism and inequality in Australia
Quiggin · Cited by 110
Social democracy and market reform in Australia and …
Quiggin · Cited by 140
Neoliberalism: Rise, decline and future prospects
Quiggin · Cited by 11
The case for higher wages – John Quiggin
johnquiggin.com › comment-page-1
11 May 2022 · … inflation into account), along with greater earnings inequality, lifted poverty rates as those with the lowest incomes fell behind.
Inequality is bad for (almost) everyone – John Quiggin
johnquiggin.com › 2011/08/12 › inequal…
In summary, the huge growth of inequality in the US has harmed everyone below … and inflation is the only tax the wealthy feel right now, clawing away at …
The 6-4-2 solution – John Quiggin
johnquiggin.com › comment-page-1
27 Apr 2022 · It has become evident that very low rates of inflation can be just as … “Analyses of the upsurge in inequality since the 1970s have …
The case for higher wages – John Quiggin
johnquiggin.com › comment-page-2
11 May 2022 · Inflation targeting, failed to prevent the Global Financial Crisis, … on Australian Competition Law, Economic Dynamism and Inequality”.
John Quiggin – Economic Society of Australia
esacentral.org.au › news › john-quiggin
12 Feb 2019 · Climate change and poverty/inequality are the most important … Top Economists see no prolonged high inflation, no rate hike next year (Q4) …
Poverty versus inequality – APO
apo.org.au › node
6 July 2009 · How does income inequality compare to more traditional measures of disadvantage, … John Quiggin’s advice is to promote equality and social …
Class in the 21st century: Asset inflation and the new logic of …
journals.sagepub.com › doi
A tale of two inequalities: Housing-wealth inequality and tenure inequality … of housing as a financial asset (Eslake, 2013: 7–8; Quiggin, 2004: 186).
Globalisation, neoliberalism and inequality in Australia – UQ eSpace
espace.library.uq.edu.au › view › jq-elr99
Globalisation, neoliberalism and inequality in Australia. John Quiggin. The Economic and Labour Relations Review 10(2), 240—59. EMAIL John.
9 Global Financial Crisis: Analysis of Economic Policy, 2008–2016
academic.oup.com › book › chapter
Quiggin (2010, 2011) refers to the political programme associated with the … The problem of global tax evasion and its implications for inequality also …
This is a dyor blog unfortunately. The mountain rarely regurgitates.
Do your own research.
And (trickle up) Forbes basically says the opposite of:
“Nobel prize-winning economist Joseph Stiglitz calls for windfall profits tax in Australia
“Tax is a ‘no-brainer’ after companies’ huge profits during Covid but corporate influence makes it ‘politically difficult’, Stiglitz says
In my (ignorant progressive) opinion, windfall taxes, if distributed ‘correctly’ would have a negligible impact on inflation.
And if we were in Denmark we wouldn’t even understand “windfall” as the system is wind rise the people, not windfall the people.
The new James Bond-Market movie title – “Windfall”]
But… politics & policy.
Thanks, KT2. Inequality has been a concern for years, for many good reasons such as you’ve said. I really don’t know if it’s a part of inflation – I was just wondering.
Whereas, it seems easy to make a case that centralized markets are a big piece of this. Ha, no one wants to talk about that.
Oh, I don’t mean you-all, when I say people avoid the subject. I mean, the pols. Ooopsie.
N, here is a personal example of my naive claim “In my (ignorant progressive) opinion, windfall taxes, if distributed ‘correctly’ would have a negligible impact on inflation.”
Covid support during the Pandemic.
“Many of us in long-term poverty were able to better our circumstances during the period the Covid supplement was introduced. I was able to re-train in my current field, move into a solo unit and re-engage with counselling. Others had major dental work done, invested in cars, paid off credit, bought new clothes, and were generally better able to improve their living situations.
“The return to below-poverty-line levels of welfare, further cemented by the current budget, and the continued use of “mutual” obligations are harming the same people who lived through robodebt, as well as new generations.
“Rather than recreating the circumstances that lead to robodebt, we should be having a discussion about how we can improve the lives of people who rely on income support.”
Thermal coal is NO LONGER CHEAP – around US$50/tonne in 2020, rising to a peak of US$457.80/tonne on 5 Sep 2022, now around US$339/tonne. https://tradingeconomics.com/commodity/coal
Australian east coast gas is NO LONGER CHEAP – AU$3-4/GJ before 2015, rising to around AU$23/GJ now. https://www.aer.gov.au/wholesale-markets/wholesale-statistics/gas-market-prices
Narrabri gas is expensive gas – expected production cost at a minimum of $7.28/GJ (per Core Energy), and only has 20.5 years reserves available at 73 PJ/year production rate.
Diesel fuel is NO LONGER CHEAP – Per AIP, the Australian national retail diesel fuel average weekly price has risen 44% in the last 53 weeks, from 163.6 cents per litre (week-ending 7 Nov 2021) to 236.0 cents per litre (week-ending 6 Nov 2022).
Australia’s diesel consumption cover is averaging at approximately 20 days in-country stocks – see Figure 12 in Matt’s post yesterday at crudeoilpeak.info headlined Only 3-4 years to replace/save 45 % of Australian diesel imports?
The European energy crisis shows us how quickly circumstances can change.
Data indicates global gasoil & diesel fuel production plateaued from about 2015 through to 2018 at around 26 million barrels per day (Mb/d) average, then steadily declined to below 23 Mb/d by mid-2021.
As diesel becomes scarcer, diesel fuel prices will rise further. Australia will have little (if any) control of this.
Top 5 oil producers in 2021 (barrels per day annual average):
#1 USA: _ _ _ _ _ 16,585,000 (18.5% global share)
#2 Russian Fed: 10,994,000 (12.2%)
#3 Saudi Arabia: 10,954,000 (12.2%)
#4 Canada: _ _ _ _ 5,429,000 (6.0%)
#5 Iraq: _ _ _ _ _ _ _4,102,000 (4.6%)
Per BP’s Statistical Review of World Energy-2022
Many U.S. oils lack the heavy compounds needed to make diesel but are good for making kerosene, jet and gasoline.
It seems Saudi Arabia’s oil production can’t be sustained near or above 11 Mb/d for very long – see 10-year crude oil production graph.
It seems Russia’s oil production can’t be sustained above 11 Mb/d for very long either.
Russia was a major diesel fuel producer before its invasion of Ukraine. Less diesel from Russia has exacerbated global diesel supply shortages.
It seems Canada may still have room for further growth in crude oil production, but for how much longer? Will Canada’s oil production growth be enough to offset the ongoing oil production declines from many other post-peak oil countries?
What if the OPEC+ alliance’s decision to cut oil production by 2 Mb/d from November 2022 is because OPEC+ cannot meet or sustain its October 2022 quotas?
Emilia Terzon, national business reporter for ABC News, presented a video report segment on ABC TV last night titled Volvo won’t sell petrol cars in Australia by 2026. Will Toyota and Ford follow? I think Volvo have the correct approach.
IMO, there’s a growing risk that new ICEVs being sold now may become worthless well before the end of their design lives, due to petroleum fuel supplies required to operate them becoming increasingly scarcer and more unaffordable.
IMO, Australia needs to rapidly reduce petroleum dependency fast, not just for climate ambitions, but also because accumulating data suggests the era of CHEAP AND ABUNDANT crude oil and petroleum fuels has ended forever. We need to get the cost of EVs down, & fast.
I would really like to see it become economically feasible to convert these older cars, too. Many of them are beautiful, and, they already exist. Right now people do it, but it’s very expensive.