Pearls and Irritations

Since the dawn of neoliberal policy time, at the start of the 1980s, the idea that the population must suffer short-term pain for the sake of longer-term gain has been frequently stated by government and senior public servants.

It has been put again and again and still yet again, in recent times, by Reserve Bank Governor Michele Bullock, who has assured electors that the real threat to them, economically, is inflation, not the high interest rates which she and her Bank colleagues are continuing to maintain and which have resulted, in Treasurer Jim Chalmers’ assessment, in the economy as a whole being ‘smashed’.

These policy settings are counter-intuitive in a couple of respects. You can ask yourself … Would you rather be employed in a good job, with some inflation existing in the economy, or in an economy with very low inflation but unemployed?

Leaving aside extreme scenarios, not seen since the stagflation of the early 1970s, most people would prefer an economy of growth, low unemployment and higher wages because most people get most of their money from the job that they do. A recent study of the societal costs of inflation and unemployment, based on an analysis of a dataset of around two million individuals from 156 countries via the Gallup World Poll spanning 2005 to 2021, found confidence in government and leadership generally unaffected by inflation levels but strongly affected, negatively, by unemployment: ‘Taken together, the results from our study … suggest that unemployment is a much more severe problem for individuals, the economy, and the political process than inflation. This implies that unemployment is a problem that politicians and national governments should prioritise.’

Also, as the Treasurer has commented and as is apparent in any case from economic data and from the many closed down shopfronts in suburban high streets, the inflation Australia is experiencing is not primarily the result of excess money in the economy dragging up prices – even allowing for Covid Jobseeker and Job keeper initiatives – but, on the contrary, derives from prices, especially for essential items, being pushed up for businesses by the Russian war in Ukraine and supply side shocks, and then passed on to consumers.

Why then are wage earners and homeowners with mortgages bearing the brunt of high interest payments which certainly constrain spending and damage the retail sector, along with many small businesses, but which have little if any impact on the most fundamental causes of the current inflation?

As both Bullock and Chalmers have been at pains to point out, the RBA sets interest rates independently of government. The Bank’s Charter requires it to set interest rates consistent with the maintenance of a targeted low inflation range agreed with government.

But if most of the electorate would prefer growth and higher wages with some inflation over recessionary economic conditions without inflation, why is the government wedded to an ultimately arbitrary low inflation figure?

Up until a generation or so ago, the RBA, following government direction, acted in accordance with what most people wanted, pursuing full employment rather than low inflation. It was an Australian, HV Evatt, who, at the United Nations, played a decisive role in having a right to work included in the Universal Declaration of Human Rights.

That changed with the Hawke government, which in 1983 floated the dollar and deregulated the banking sector. From that time on, the finance and banking sector, which had become dominant economically worldwide, wanted a stable currency, low inflation, low interest rates, and high bond yields.

The idea of enshrining a central bank’s responsibility to limit inflation, employment and wages goes back at least to Friedrich Hayek, key neoliberal ideologue and a major intellectual influence on John Howard and the Liberal Party, who argued in a 1960 book for a Constitution of Liberty; in other words for legally enforceable limits on what governments, acting on behalf of the electorate, could do and, most importantly, for limits on what restrictions governments might impose on the private economic sector, on business.

‘Okay’, one may say, ‘That’s not great.’ In a democracy, isn’t the government supposed to act in the interests of the majority, rather than of the most economically powerful?

But it gets worse. In setting a policy framework that punishes Australian wage earners and homeowners and rewards the shareholders of the banking and finance sector, who determine these corporations’ policies, practices and objectives, our government is primarily rewarding people who are not even Australians.

As Professor Clinton Fernandes of the Australian Defence Force Academy at the University of New South Wales demonstrated in a 2020 book, ‘The top twenty companies on the Australian Securities Exchange make up close to half its market capitalisation; [and] fifteen of them are majority-owned by US-based investors’.

This includes Australia’s ‘big four’ banks, plus Macquarie. In 2019 the Commonwealth Bank was 60.89% US owned; Westpac 63.85%; the NAB 61.8%; ANZ 53.42%; and Macquarie 54.41%.

It is hardly surprising then that the International Monetary Fund has recently endorsed the RBA’s approach to inflation management. The IMF is controlled and managed by and for American interests as part of what Chalmers has called ‘The Washington consensus’.

While floating the possibility of the government phasing out some superannuation and capital gains tax breaks, in order to increase ‘fairness’, the emphasis of the IMF ‘Australia’ report was very much on the importance of the RBA continuing to prioritise the reduction of inflation and the promotion of currency stability, at the cost of an ‘anticipated … moderate rise in unemployment’.

So although Treasurer Chalmers has been at pains to try to distance himself and his government from the independent interest rate decisions of the RBA, it can be said that the electorate is right to continue to hold him and federal governments generally accountable for the cost of living pressures that flow directly from these governments’ interest rate policy settings.

By and large it remains the case that, in the words of the notable Australian historian Keith Hancock, Australians think of the state as ‘a vast public utility, whose duty it is to provide the greatest happiness to the greatest number’. This was clearly evident during the Covic pandemic, when the Liberal Party itself, the formal political representative of business, gave government handouts.

It is time for the government to stop acting in the interests of US shareholders and start acting in the interests of the Australian public. It could start by acknowledging that managing inflation and unemployment is ultimately, and rightly, its own responsibility and not that of the RBA. That would be a major change. But in truth, given economic and geopolitical realities internationally, thinking through and acting on a policy framework that better advances Australian independence will require careful, broad-based deliberation and consultation.

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