Friday lay day – Australian RBA Governor concludes government policy is failing

Its my Friday lay day blog and today a brief discussion about property price bubbles and how the Reserve Bank of Australia (our central bank) has fallen out with the Australian government. This week, the simmering tension between the Governor of the RBA and the Conservative Australian government more or less came out into the open when the Governor told the nation that the fiscal strategy of the Government was failing and a higher deficit was required given the circumstances. The RBA Governor has also come clean on the issue of house prices in Australia which he said he was “acutely concerned” about and called them “crazy” again, a direct contradiction of the claims by the Government that there is no problem and people should just “get a better paying job” if they wanted to buy a home. It is rare for a central banker to be so pointed about the failure of Government policy.

The RBA Governor gave a speech to the Economic Society of Australia in Brisbane this week (June 10, 2015) – Economic Conditions and Prospects: Creating the Upside.

It was his first public speech since the Federal Government published its May fiscal statement (aka ‘The Budget’).

He noted that the economic performance in Australia was “disappointing” – “the economy has not picked up speed as we had hoped” over the last two years.

He discussed international trends:

1. The “euro area was still smaller than it was before the financial crisis. Regrettably, that remains true today”.

2. “Growth has recently resumed in Japan after a dip in activity following the enactment of a tax increase last year”, acknowledge the sabotage that the sales tax increase caused last year.

3. The growth in Asia “that has been achieved has been accompanied in a number of cases by a sizeable increase in debt owed by households, firms or both. How big a vulnerability this will turn out to be under different financial conditions and/or lower growth we cannot yet know.”

4. “the pace of growth in demand for commodities like iron ore will be lower in future than in the past five years, even as supply continues to increase.”

On the Australian front, he noted that:

1. The economy is “heading along the course of a normal economic cycle, but a complex and rather lengthy adjustment both to the once-in-a-century cycle in our terms of trade and an earlier increase in household leverage.” He said the private sector credit binge in the early 2000s maintained growth (and I should add allowed the government to achieve increasing fiscal surpluses – without the massive private debt increase, the government would have cooked the economy in around 1998 given its fiscal settings.

He directly contradicted the Treasurer here who has claimed that household consumption will drive growth. The RBA Governor noted how overburdened with debt the household sector was.

2. Recent data shows that economic growth is “below trend … business investment fell substantially … Public spending didn’t grow at all. Public investment spending fell by 8 per cent over the past year”.

The Speech directly contradicted the Treasurer’s forecasts in the May fiscal statement with respect to non-mining Investment growth and overall economic growth.

3. “the unemployment rate is … higher than forecast two years ago” and the “growth in wages is, as you would expect, lower than forecast.”

4. The policy interest rate is lower because “monetary policy has used the room provided by contained inflation to try to do more to help growth”. But, the lower rates “have contributed to the rise in dwelling prices”.

His conclusion:

… the economy could do with some more demand growth over the next couple of years … But the bigger point is that monetary policy alone can’t deliver everything we need and expecting too much from it can lead, in time, to much bigger problems. Much of the effect of monetary policy comes through the spending, borrowing and saving decisions of households. There isn’t much cause from research, or from current data, to expect a direct impact on business investment. But of all the three broad sectors – households, government and corporations – it is households that probably have the least scope to expand their balance sheets to drive spending. That’s because they already did that a decade or more ago. Their debt burden, while being well serviced and with low arrears rates, is already high. It is for this reason that I have previously noted some reservations about how much monetary policy can be expected to do to boost growth with lower and lower interest rates. It is not that monetary policy is entirely powerless, but its marginal effect may be smaller, and the associated risks greater, the lower interest rates go from already very low levels.

Which means that with export potential somewhat limited, the only alternative is for the government to increase its own net spending (that is, expand its deficit).

In that regard, the RBA Governor said that public “infrastructure spending has a role to play in sustaining growth and also in generating confidence”.

And, pointedly, he said (after noting that public investment has fallen dramatically in the last year) that:

The impediments to this outcome are not financial … The impediments are in our decision-making processes and, it seems, in our inability to find political agreement on how to proceed.

Which is central bank-speak for policy failure on behalf of the Government. He might have said that the obsession that both sides of politics have with achieving surpluses through austerity have prevented us having a mature discussion about public infrastructure development, which would benefit all segments of the society.

He also said that there needs to be “confidence-enhancing” public spending “to extend skills, education, technology” etc. But, of course, the current government is hacking into the public training system (TAFE), undermining the capacity of schools and universities to function properly, cutting research and development grants and funding and are too busy denying things (climate change, housing bubbles, torture of refugees etc) to realise that they are draining the capacity of the economy in the future.

During the Question time after the Speech, things became even more pointed. He was asked to comment on the claims that Sydney’s housing market is now in a dangerous price bubble.

As background, the Treasurer has surpassed his own standards of arrogance in recent days when he denied point blank that there was a housing price problem. He told Australians that if you want a nice house we should get a better job that pays more!

He had previously said that hikes in petrol prices were not inequitous because the “poor don’t drive cars”.

The RBA Governor responded by saying that Sydney’s property prices were:

… acutely concerning for a host of reasons, many of which are not to do with monetary policy … I think it’s a social problem … So when you’re devising that economic policy for the country, yes I’m very concerned about Sydney and I think some of what’s happening is crazy, but we’ve got a national focus as well and that just increases the complexity.

The reference to policy was a subtle attack on the Government’s tax policy which favours high income earners being able to invest in housing and get massive tax benefits. The rapid increase in investor-finance for housing (rather than to owner-occupiers) has driven the property price boom in our capital cities and prices low-income earners out of the market.

The Treasurer’s “get a better paying job” jibe was consistent with the narratives of the neo-liberal era, which ignores the inequality in opportunity and the massive societal constraints on upward mobility. We are constantly being fed the claim that if you try hard enough then one can succeed and become rich like him.

The fallacy of composition seems to escape him. If everyone had a better paying job then housing prices would explode. It also escapes him that there is a massive shortage of public housing as a result of a few decades of austerity at the State and Federal level and a redirection of public expenditure away from helping the most disadvantaged.

The property price boom and the exclusion of low-income people is totally consistent with the more general rising inequality in Australia. Government policy favours the wealthy and high-income earners who then use the tax incentives provided to them to push up housing prices because the taxation on property gains is much lower than the tax burden imposed on ordinary labour.

This feeds on itself and we get to where we are today with a massive housing affordability problem, a paucity of state housing available for low-income families, and a growing disparity between the wealth held by the top 10 per cent and the bottom 60 per cent.

Fairfax economics writer Peter Martin provided a good analysis earlier this week (June 10, 2015) – Joe Hockey is wrong, houses are becoming unaffordable (Hockey is the Australian Treasurer).

He noted that the latest Housing Finance data from the Australian Bureau of Statistics showed that:

… owner-occupiers accounted for just 48.4 per cent of the money borrowed for home loans in April – the lowest proportion on record … Investors accounted for the other 51.6 per cent … The figures suggest that housing is becoming increasingly unaffordable for would-be residents who find themselves outbid by investors armed with the tax advantages associated with negative gearing.

He also notes that the Treasurer’s own department has contradicted him in the past week about house prices.

So this is the first time I can recall when the senior central bank officials have taking pot shots at the Treasurer and the Government policy stance.

It is clear that the fiscal strategy in place is being driven by ideology and is totally inappropriate for the current situation. I say that all the time. But when a central bank governor says it more people start to listen and the embarrassment factor for the Government increases.

Yet this is a Government that has demonstrated an extraordinary capacity to lie, pay-back, and ignore the obvious.

Michael Pascoe wrote today (June 12, 2015) in his column – What price will the RBA pay for full and frank advice? – that the Government is a “vindictive lot” and the RBA can expect “to pay for the increasingly full and frank advice given by its governor and deputy governor?”

This is a Government that is currently running a public war against the Director of the Human Rights Commission because they don’t like the reports that are coming out which indicates that the Government is in breach of the most basic humans rights when it comes to its management of the refugee situation.

Radio item on yesterday’s Labour Force data

I did an interview yesterday for the national ABC radio current affairs program PM last night on the labour force data release yesterday.

You can see the transcript – HERE – and listen to the segment if you are interested.

A great sax player is no longer with us

The great free jazz sax player Ornette Coleman died yesterday (June 11, 2015).

Here is an obituary from the New York Times (June 11, 2015) – Ornette Coleman, Composer and Saxophonist Who Rewrote the Language of Jazz, Dies at 85.

While he played alto and I prefer tenor, I loved the way he scrapped the “the rules of harmony and rhythm” to produce a sonic feast.

He is one of his earlier repertoire when he was still obeying the rules – Lonely Woman – from the 1959 – The Shape of Jazz to Come, marked a major .

His bad was Don Cherry (trumpet), Charlie Haden (bass) and Billy Higgins (drums). For many years he eschewed playing with a piano player because he didn’t want to get caught up in chord patterns, which he considered would inhibit his freedom.

I have been listening to it while working this today. You either like avant-garde jazz or you don’t!

Unlike most of his music, Lonely Women did become a so-called jazz standard, which means heaps of players since have recorded it or included it in their repertoire.

Its a classic.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.