November 20, 2003 | Graham

John Howard follows my advice

According to the Financial Review today John Howard is being an “interest rate dove”. In other words he is pressing the argument that there is no need to raise interest rates any further, just as I suggested he should (don’t you love people who blow their own trumpet?).
Howard is quoted as saying: “The things that drive interest rates up, such as high inflation, high wage growth, perhaps a weak dollar, ….aren’t present. In fact, we have the reverse.
“We have a strong dollar, we have very low inflation and we have wages growing in a very sensible way because we have higher productivity and firms can afford to pay their workers more without that being inflationary,” he said.
“So the conditions are pretty good for interest rates.”
He has an unlikely ally here. A recent ACOSS study found that 1.3 million Australians lack jobs – twice the official unemployment rate. That suggests that while official unemployment figures may appear to be reaching the NAIRU figure (the lowest unemployment figure compatible with price stability) there is an untapped reservoir of potential workers that can easily enter the workforce. Good economic policy should try to eliminate that reservoir by drawing on it. That means increasing employment in the economy much further than where it is now, and the existence of the reservoir means this can be done with limited inflationary implications.
According to ACOSS women feature disproportionately in the hidden unemployment bracket, and they cite a lack of affordable childcare as a factor. Here’s some more advice for Howard – boost the government assistance provided to childcare. After allowing for paying some of these women the supporting parents benefit as well as the extra tax that all of them will pay as wage earners there is a good chance that this boost wouldn’t be so much an expenditure as an investment bringing more revenue and savings than it costs. Perhaps ACOSS could provide the figures on this? I’ll ask them. An added feature is that it would be more popular than the “baby bonus” which is only of real benefit to upper-middle class professional women.
I’m not sure that Reserve Bank Governor MacFarlane will be swayed by these sorts of arguments. His boffins appear convinced that Reserve Banks have a role in bursting bubbles. (Thanks to Jozef Imrich for the link). It’s not a view I necessarily disagree with in all circumstances, and if I spent more time on this paper I might change my mind. However, it is based on a mathematical economic model and getting across the maths will take more time than I have. Still, on a cursory examination I do have one niggling concern with the model – it assumes that a boom will have an overall expansionary affect on an economy.
Someone might like to correct me here, but isn’t it just possible that all other things being equal a bubble will merely redirect resources from other parts of the economy and have no real effect on expansion, one way or the other? Isn’t it also possible that while many people lose when a bubble bursts, those people who have sold into the bubble take their profits and invest them elsewhere? And isn’t it therefore possible that these two factors mean that with most bubbles there will be little real effect on the economy on the way up or the way down, all other things being equal? ? It certainly seemed to be the case in the US where the tech boom burst had little real impact on the domestic economy. Neither did the 1987 stockmarket bust.
If John is really reading these columns, perhaps he could dispatch a Treasury economist to give me the answers, it might be enlightening for both of us.

Posted by Graham at 3:22 pm | Comments Off on John Howard follows my advice |
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