Ideas@TheCentre brings you ammunition for conversations around the table. 3 short articles from CIS researchers emailed every Friday on the issues of the week.
Australia’s vaunted economic miracle is looking a bit ragged after another sluggish quarter. There is still growth, but barely enough to match population expansion; and not enough to stop unemployment from rising.
There has been no shortage of advice to the re-elected government on what to do — one strand being that they must turn their attention to structural reforms to rev up the economy.
The reforms most advocates have in mind involve taxation; infrastructure; education and training; federal-state relations; industrial relations; energy supply and cost; competition; and regulation more generally (cutting red tape).
That is all very well. The economy would benefit as it did from the last burst of structural reform in the 1980s and 1990s. However, structural reforms work slowly, and their full benefits are not felt for many years. It would be a mistake to think of them as a short-term stimulus in the event of a recession.
There are also political obstacles to be overcome in implementing structural reforms. The electorate has not been prepared for policies that many voters would find confronting.
Not only did the coalition not campaign on a reform agenda, but it also ruled out several items that often appear on the reform menu.
The government also has to negotiate legislation through a Senate that — although less of an obstacle than it was in the last parliament — is still difficult.
Furthermore, some reforms would require the cooperation of the states and territories.
For all these reasons, it is not surprising that Morrison and Frydenberg give every impression of wanting to cover their ears to the barrage of advice they are receiving on structural reform.
The nation will be the poorer for the lack of an adventurous approach to reform. It may take an economic crisis of some kind to jolt the political system into action, but even then don’t count on it.
In the meantime, provided the world economy doesn’t fall into a hole, the Australian economy is likely to continue plodding along. However, if the world economy does fall into a hole, this time, we are likely to fall with it.
With last week’s cut, Australia’s cash rate has fallen to its lowest level in decades, possibly longer. Along with the usual roulette as to whether the banks will pass the full benefit on to customers, there is a growing chorus of voices criticising the decision; saying that monetary policy is now powerless, or that the RBA should hold its firepower in reserve for a real crisis.
While there are certainly real concerns over the level of interest rates, and the conduct of monetary and fiscal policy, it’s important to understand what the rate cut means — and what it doesn’t mean.
First, we need to dispense with the myth that low interest rates mean loose monetary policy (denoting the encouragement of an increase in inflation and nominal economic growth).
On the contrary, the way you determine whether monetary policy is accommodating or not is to look at the level of inflation and growth.
And right now, both figures are well below where they should be. Inflation, in particular, has been at or below the bottom of RBA’s target level (2% to 3%) for a number of years.
This is important because it is one reason why the argument that the RBA is powerless is incorrect. A more likely explanation is not that the RBA has been too accommodating (and has been ineffective), but that the RBA has been too timid.
After all, inflation has been at or below target for the last three years, yet interest rates remained unchanged. However, won’t that mean we hit 0% interest rates? Yes — and that is neither a disaster nor the end of the RBA’s tool chest.
This is the other problem with the idea that monetary policy is impotent: it relies on the assumption that tweaking the interest rate and hoping for the best is all the RBA can do. Implicitly it assumes, the RBA cannot generate inflation regardless of how hard they try.
No-one is suggesting that hyperinflation is a good idea, only that if the RBA wanted to boost inflation they could. That means that low inflation is — implicitly or explicitly — a choice.
In many ways, this is an understandable mistake: for most of the 20th century, the problem was far too much inflation, not too little. Central bankers remain hesitant to unleash the inflation genie, for fear they could not get it back under control.
We don’t want a repeat of the stagflation of the 1970s, but nor do we want to follow Japan into decades of dead deflation. Low interest rates, low inflation and low growth, is not a good place to be.
The RBA needs to do its bit to keep nominal growth high. The government needs to step up, as well.
However, this does not mean (as some would like to think) the government should run big, stimulatory deficits. The inaction by the government has not been deficit spending — of which there has been plenty — but the complete absence of microeconomic reforms that would generate real economic growth.
If we want economic growth, we need to encourage business investment. We need to generate more competition, and we need to unlock the power of the market.
This is the real limit of monetary policy: its influence is primarily on the nominal economy and will only keep slow economic growth at bay in the short term. It is not a replacement for good government.
This is an edited extract of an opinion piece published in the Canberra Times.
The AFP raids on the ABC and a News Corp journalist are alarming, but the discussion needs to go beyond press freedom. We must examine how we can better protect the fundamental freedoms of all Australians.
These raids have generated a tremendous response, and after being live-tweeted by an ABC journalist, were picked up in international media.
A meeting to discuss the implication of the raids has been held between ABC Chair Ita Buttrose and Prime Minister Scott Morrison. Many politicians and pundits have called for greater protection for freedom of the press.
It is great to see journalists unifying to fight for a common cause. However, we also need greater unity for the freedoms of all Australians. Because — as recent history has shown — we have much work to do in this area.
The Australian Human Rights Commission, through various legal instruments — most notably Section 18C of the Racial Discrimination Act — has overseen the prosecution and attempted prosecution of journalists, cartoonists, and university students. Where were the protests?
Israel Folau was recently sacked because he expressed his religious faith on Instagram. Where were the protests?
James Cook University fired Professor Peter Ridd because he raised questions about climate research. Where were the protests?
Whether you agree or disagree with what these people said or did is not the point. People should be allowed to express unpopular opinions, question scientific research, and express their faith.
Whether you use the language of ‘national security’ or ‘offend and insult’, the result is the same. We lose a little bit of our freedom of speech.
Our basic freedoms are not partisan. If you want to enjoy free speech, freedom of religion — or any other of our basic freedoms — you need to accept it for everyone.