Inflation – William Mitchell – Modern Monetary Theory

Australia’s new White Paper on Full Employment is a dud and just reinforces the failed NAIRU cult

Today (September 25, 2023), the Australian government issued its – Working Future: The Australian Government’s White Paper on Jobs and Opportunities – statement, which portends to define labour market vision and policy for the years to come. White Paper’s are grand statement and this one falls short of that requirement. Compared to the path-breaking – The 1945 White Paper on Full Employment – which set the path for several decades of prosperity for workers, the current effort by the government is a mediocre affair. It is just a restatement of the NAIRU cult that has justified the so-called ‘activation’ or supply-side approach to labour market policy, which effectively relegates macroeconomic policy to the bench and considers micro policies are required to reduce the NAIRU and the measured unemployment rate. This is the failed strategy that has dominated for the last three decades and has cause the problems that the White Paper claims it wants to address. Its release today demonstrates that the Labor Government is really just a neoliberal-lite outfit – full of spin but short on any directional shift in policy. It is very dispiriting.

September 13, 2023
bill
Inflation, Labour Force, Music, Reclaim the State, Unemployment Benefits
7 Comments

Two items this Wednesday before the music segment. First, we saw the stark ideology of the elites on full display in Sydney yesterday with a property developer demanding the government increase unemployment by 40-50 per cent to show the workers that the employer is boss and redistribute more national income back to profits. For anyone who doubts the relevance of a framework based on underlying class conflict between labour and capital, then this outburst should eliminate those doubts. On the same day, a leading research group in the welfare sector released an update in their series tracing poverty in Australia. It demonstrated a rising incidence of poverty (nearly 20 per cent of the population) and 1 in 6 children living in impoverished conditions. And the profit takers want more of that to enrich (engorge) themselves even further. A shocking indictment of what has gone wrong with this nation.

August 30, 2023
bill
Central banking, Inflation, Labour Force, Music, US economy
4 Comments

Yesterday (August 29, 2023), the incoming Reserve Bank of Australia governor was confronted with ‘activists’ as she prepared to present to an audience at the Australian National University in Canberra. They presented her with an application for unemployment benefits and had done her the favour of already filling it in with her name. It was in response to her dreadful speech in June where she said the RBA was intent on pushing the unemployment rate up to 4.5 per cent (from 3.5), which means that around 140,000 workers will be forced out of work. The problem is that even if we believed the logic underpinning such an aspiration, the actual empirical evidence doesn’t support the conclusion. Today August 30, 2023, we received more evidence of that as the Australian Bureau of Statistics (ABS) released the latest – Monthly Consumer Price Index Indicator – for July 2023, which showed a sharp drop in inflation. As well as considering that data, today I reflect on the latest JOLTS data that was released by the US Bureau of Labor Statistics yesterday. The two considerations are complementary and demonstrate that central bankers in Australia and the US have lost the plot. To soothe our souls after all that we remember a great musician who died recently.

Australia – real wages continue to decline and wage movements show RBA logic to be a ruse

Yesterday (August 15, 2023), the Australian Bureau of Statistics released the latest – Wage Price Index, Australia – for the June-quarter 2023, which shows that the aggregate wage index rose by 0.8 per cent over the quarter (steady) and 3.6 per cent over the 12 months. This represented a slowdown over the 12 months on the previous quarter’s result. If we consider the rate of increase in the CPI in relation to this nominal wages growth then in the June-quarter the two were equal and so real wages were steady. However, over the last 12 months, real wages have fallen by 2.4 per cent using the CPI measure. But the ABS note that the CPI is not a good indicator of cost-of-living changes and they have produced special time series based on expenditure patterns for selected groups including employees. If we use the Employee Selected Cost of Living Indicator we find that real wages fell by 0.7 points over the June-quarter 2023 and by a stagerring 6 points over the 12 months. That puts the Treasurer’s spin that the latest data is a good sign into perspective. Further with the gap between productivity growth and real wages increasing, the massive redistribution of national income away from wages to profits continues. Further, the RBA continue to claim there is a threat of a wages breakout and so interest rates have to keep rising to create the necessary unemployment increase to prevent that from happening. It is just a ruse. There is no sign of a wages breakout.

US inflation in retreat as housing policy is exposed as a failure

The US Bureau of Labor Statistics released the latest US inflation data last week (August 10, 2023) – Consumer Price Index Summary – which showed that overall monthly inflation to be 0.2 per cent and mostly driven by housing. And, once we understand how the housing component is calculated then there is every reason to believe that this major driver of the current inflation rate will weaken considerably in the coming months. The rent component in the CPI has been a strong influence on the overall inflation rate and that has been pushed up by the Federal Reserve rate hikes.

No change in monetary easing from Bank of Japan until wages growth increases

The media and the phalanx of mainstream economists from banks etc, the latter of which have a vested interest in interest rates rising in Japan for various reasons, are constantly predicting that the Bank of Japan will relent to the ‘market pressure’ and reverse its current monetary policy stance and fall in line with the majority of central banks. While the concept of ‘market pressure’ is held out as some economic process – something inevitable to do with basic fundamentals governing resource supply and demand – it is really, in this context, just gambling positions that speculators have taken in the hope that the Bank will relent and reward their bets with stupendous profits. So last week, the Bank of Japan announced that it was changing its policy towards Yield Curve Control (YCC), which set the cat among the pigeons again. This is what it was all about.

July 31, 2023
bill
Inflation
4 Comments

On Friday (July 29, 2023), the Australian Bureau of Statistics released the latest – Retail Trade, Australia – data, which showed that total retail turnover fell by 0.8 per cent in June 2023 and was up 2.3 per cent on June 2022. In May 2023, it was up 4.1 per cent. So things have slowed. Almost all the components (Household goods, Clothing etc, Department stores, Cafes etc) were down on the month. The ABS noted that despite the massive EOFY sales, “retail turnover fell sharply … as cost-of-living pressures continued to weight on consumer spending”. By way of contrast, in the US the June data from the US Census Bureau – Advance Monthly Sales for Retail and Food Services (released July 18, 2023) – shows up 0.2 per cent in June. Moroever, the latest University of Michigan Survey of Consumer Sentiment results – Improving personal finances, business conditions lift consumer sentiment (released July 28, 2023) – reveal a sharp increase in consumer sentiment in the US. But there was a twist, which is the point of this post. The Survey reported “the material improvement in the economic experiences of consumers relative to the peak of high inflation last year … with the notable exception of lower-income consumers, who anticipate continued challenges from inflation and a potential weakening in labor market prospects.” What we will discuss today is that central bankers are effectively intent on increasing poverty in their societies. And, whichever way one looks at it, relying on such a pernicious policy tool – one that deliberately seeks to increase poverty – is not a sound basis for achieving social stability. And, and as inflation has been falling anyway, despite the hikes, the negative distributional impacts should militate against using such a nasty and inefficient instrument.

Australia’s inflation rate continues to fall despite RBA inflationary rate hikes

Today (July 26, 2023), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the June-quarter 2023. It showed that the CPI rose 0.8 per cent in the quarter (down 0.6 points) and over the 12 months by 6.1 per cent (down 0.9 points). The annual inflation rate in Australia was significantly lower again in the June-quarter as the supply-side drivers abate. This was always going to be a transitory adjustment phase after the massive disruption from Covid and the exacerbating factors associated with the Ukraine situation and the OPEC price gouge. There was never any justification for the RBA pushing up interest rates. The correct policy response should have been to provide fiscal support for lower-income households to help them cope with the cost of living rises and wait for the adjustment after the disruption to come. The approach taken by the Bank of Japan and the Japanese government was the correct one and that is now clear even though the mainstream economists still cannot see past their textbooks.

Mainstream logic should conclude the Australian unemployment rate is above the NAIRU not below it as the RBA claims

Let’s put ourselves in the shoes of a mainstream New Keynesian economist for a moment. We would never want to walk in them for long because our self esteem would plummet as we realised what frauds we were. But suspend judgement for a while because to understand what is wrong with the current domination of macroeconomic policy by interest rate adjustments one has to appreciate the underlying theory that is guiding the central bank policy shifts. The New Keynesian NAIRU concept, which stems from work published in 1975 by Franco Modigliani and Lucas Papademos is pretty straightforward. Accordingly, they define an unemployment rate, above which inflation falls and below which inflation rises. So that unique rate (or range of rates to cater for uncertainty of measurement) is the stable inflation rate – where inflation neither falls or rises. They called it the NIRU (“the noninflationary rate of unemployment”). So if the unemployment rate had been stable for some period, yet inflation was continuously declining, then they would conclude that the stable unemployment rate must be ABOVE the NIRU and vice versa. Apply that logic to Australia at present and you will see why the RBA’s claim that the NAIRU (the modern term for the NIRU) is around 4.5 per cent and this is why they are hiking rates in order to stabilise inflation at the higher unemployment rate. They are frauds.

RBA interest rate rises are inflationary and neoliberal privatisations have reinforced that

Modern Monetary Theory (MMT) economists have argued from the outset that using interest rate rises to subdue inflationary pressures may in fact add to those pressures through their impact on business costs. Businesses with outstanding trade credit or overdrafts will use their market power to pass the higher borrowing costs on to consumers. In more recent times, we have seen other mechanisms through which central bank rate hikes actually add to inflation. Regular readers will know that I have been discussing how landlords have been passing on higher mortgage costs in tight rental markets, which then creates a vicious cycle – interest rates up, rental costs up, CPI up because rents are a significant component, inflation rises, interest rates rise. Repeat. The tight rental markets are in part, a consequence of the neoliberal austerity bias, which has seen governments seriously underinvest in social (low income) housing. In recent days, we have witnessed another conflation of neoliberalism and destructive policy insanity. Earlier this month, Australians received messages from the companies that provide them with electricity announcing that the Australian Energy Regulator (AER) had approved price rises of between 19.6 per cent and 24.9 per cent in various East coast states. How did that happen, especially as world coal prices are dropping rapidly and are now below the pre-pandemic levels? And how does the bias towards monetary policy exacerbate this situation?

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