Australia

Fixing inflation is not difficult. Returning to healthy growth

See how we got stuck in a low growth trap? Weak growth means less capital spending, little productivity improvement, and even slower growth.

For a terrifying decade, the prevailing view among policymakers was that high unemployment was preferable to high inflation, which could persist. So, to keep inflation low, unemployment was kept high.

Yetsenga says the decision to perpetuate relatively high unemployment was a mistake. “Unemployment, underemployment and the inequalities they cause all affect macroeconomic outcomes. [adversely]”.

“People with higher incomes tend to save more and spend less, while those with lower incomes tend to borrow more. is.”

Still, Yetsenga is optimistic. The policy response to the pandemic is “changing the baseline” and trying to get out of the low-growth trap.

To hire more employees, give part-time workers more hours, and boost wage growth, businesses need to see demand strong enough to pay for their labor.

Richard Jessenga, economist at ANZ Bank

The unemployment rate is the lowest in 50 years and underemployment has decreased significantly. Real consumer spending is 9% above pre-pandemic levels, and business capacity utilization is back to levels not seen before the global financial crisis.

As a result, planned spending on business investments over the next year will be the highest in almost 30 years.

Yetsenga said the Reserve Board hopes some of the higher inflation will continue indefinitely. “If monetary policy can [annual] While we see 2.5% inflation over time rather than the 1.5-2% characteristic of the pre-pandemic, it’s not just the rate of inflation that changes.

“We should expect ‘real’ aspects of the economy to improve as well, such as increased demand, employment and investment,” he said.

“The role of wages in keeping inflation high is well known, but wage growth doesn’t happen in a vacuum. , to boost wage growth, firms need to see demand strong enough to pay for their labor.

“Some of the additional labor costs will be passed on to higher selling prices. The need to invest in more labor may go hand in hand with more capital expenditures.”

The Australian economy created 60,600 new jobs in May.credit:bloomberg

I think Jessenga makes some important points. First, the policy of keeping unemployment high to keep inflation low has created a low-growth trap at the expense of growth.

Second, inequality is not However About fairness. Economists from international organizations have found it to be the cause of the slow growth. Thus, policies that ignore rising inequality also lead to a low-growth trap.

Third, the idea that economic growth cannot be accelerated without further improvements in productivity has turned the “direction of causality” in the wrong direction. Productivity won’t improve much unless it brings more growth.

pandemic panic

Despite all this, I do not share the shock of the pandemic and Jetsenga’s optimism that the econocrats have switched to what I call Plan B. A last-minute attempt to raise the wage rate by 2 percent annually or faster than he said 2.5 percent is enough to get us out of the low-growth trap.

Yetsenga focuses on increasing household income by making it easier for households to provide more working hours to increase their income. He says little about the ability of households to substantially protect and increase their wage income.

Another effect of the pandemic period is the collapse of the consensus view that wages should at least rise in line with prices. Falling real wages should only correct a period of excessive real wage growth.

But the econocrats and the new Labor government were against the sudden, sharp rise in prices (the fearful size While real wages have fallen for the third consecutive calendar year, according to the Reserve Bank’s latest forecasts, they take a different view.

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While the country’s employers, the government and businesses, are cutting their workforce by a cumulative 6.5%, they’re taking a different view because it’s the easiest and quickest way to bring down inflation.

This ridicules all happy guarantees that labor productivity gains will flow to workers as increases in their real wages by some magical economic mechanism.

I’m sorry, but I can’t believe I’ve gotten out of the low growth trap until I see it. more Workers, companies also pay them reasonable wages.

Ross Gittins is the economics editor.

Fixing inflation is not difficult. Returning to healthy growth

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