When I was in London recently, I was repeatedly assailed with the idea that the…
Today, I consider the latest development in the entrenchment of neoliberalism in the Australian policy sector, specifically, the latest decision by the Treasurer to excise his powers under Section 11 of the Reserve Bank Act 1959, which allowed the Treasurer to overrule RBA policy decisions if they considered them not to be in the national interest. This power was considered an essential aspect of a working democracy, where the elected member of parliament had responsibility for economic policy decisions that impacted on millions of people. The latest evolution will further see macroeconomic policy depoliticised and placed in the hands of a small cabal of mainstream economists who regularly advocate policies that serve special corporate interests and leave millions unemployed. I also provide a video from a TV show I appeared on in Tokyo the other day. Then some lovely guitar music. It’s Wednesday after all!
RBA Review – the Groupthink continues …
On July 20, 2022, the new Labor Treasurer announced that there would be a – Review of the Reserve Bank of Australia – “to ensure that Australia’s monetary policy arrangements and the operations of the Reserve Bank continued to support strong macroeconomic outcomes for Australia in a complex and continuously evolving landscape.”
The subsequent process was like getting police to investigate police corruption – there was no diversity in the make-up of the Committee that conducted the Review.
There was a central banker from Canada who is a mainstream economist, a New Keynesian economist, and a public service official from the ‘Canberra set’ (the insiders who operate in an echo chamber).
No alternative views were permitted to be part of the make-up of the panel.
On April 20, 2023, the – Final Report – was made public after the Treasurer had sat on it for some time.
So what would we expect?
More of the same, with the exception that there was a hardening of the depoliticisation process that has characterised the neoliberal years.
The prioritisation of monetary policy as the mainstay of macroeconomic counterstabilisation policy with fiscal policy subjugated remained a central part of their recommendations, despite the massive body of evidence that showed this framework to be ineffective at achieving its stated objectives (controlling inflation with full employment) and that application of this framework had created adverse distributional outcomes (from poor to rich) and elevated and sustained levels of underutilised labour (unemployment and underemployment).
The Report recommended setting up a new Monetary Policy Board full of mainstream economists to replace the current board structure which was intended, but never achieved diversity of viewpoint because successive governments refused to create that balance in the membership.
The current board is full of corporate interests, for example.
But replacing that with an echo chamber of mainstream economists, who are clearly divorced from reality given their theoretical framework is no improvement.
The Report recommended that the Treasury Secretary (the boss of the fiscal policy) should remain on the Board, which is one of the ways that the RBA fails to meet the ‘independence’ test, despite the government and the RBA continually telling the public how independent it is.
Of course, the central bank and the treasury can never be independent because they have to coordinate their respective decisions on a daily basis to ensure that the cash flow implications of fiscal policy are known to the bank as a necessity for managing the reserves in the cash system and therefore maintaining control of its interest rate policy target.
Fiscal decisions impact directly and daily on the reserves in the monetary system and those impacts must be managed to ensure the monetary policy settings are sustainable.
The Report knew full well that the inclusion of the Treasury boss on the committee that determines interest rate settings made it harder to run the ‘independence’ line and responded by claiming:
… risks to RBA independence from the influence of a single member are limited and can be managed
In addition, they claimed that the Treasury Boss was acting “in their individual capacity not at the direction of the Treasurer.”
They went further though.
Right up front – we read:
Recommendation 1: Affirm the RBA’s independence and clarify its statutory monetary policy objectives
1.1 The RBA should continue to have operational independence for monetary policy. The Government should remove the power of the Treasurer to overrule the RBA’s decisions.
Under the current Reserve Bank Act 1959, which established the central bank, Section 11 pertains to “Differences of opinion with Government on questions of policy” and paragraphs 3 to 6 read:
(3) If the Treasurer and the relevant Board are unable to reach agreement, the relevant Board shall forthwith furnish to the Treasurer a statement in relation to the matter in respect of which the difference of opinion has arisen.
(4) The Treasurer may then submit a recommendation to the Governor-General, and the Governor-General, acting with the advice of the Federal Executive Council, may, by order, determine the policy to be adopted by the Bank.
(5) The Treasurer shall inform the relevant Board of the policy so determined and shall, at the same time, inform the relevant Board that the Government accepts responsibility for the adoption by the Bank of that policy and will take such action (if any) within its powers as the Government considers to be necessary by reason of the adoption of that policy.
(6) The relevant Board shall thereupon ensure that effect is given to the policy determined by the order and shall, if the order so requires, continue to ensure that effect is given to that policy while the order remains in operation.
In other words, the elected government, which is accountable to the people, unlike the RBA Board, can if they choose, in the interests of the nation, overrule an RBA decision.
That was inserted in the Act when people cared about what democratic government really meant.
It was recognised that the RBA Board was unelected (it is appointed by the government of the day – another breach in the independence story) and unaccountable to the population, yet its decisions might have far reaching impacts on the people.
So to mollify the concerns about breach of democratic responsibility and accountability, it was deemed appropriate to give the elected government, via the Treasurer, the power to determine macroeconomic economic policy.
The RBA Review Final Report now sought to eliminate that link between voter preferences and the economic policy decisions that impact on them.
Yesterday, the Treasurer announced he would make those changes.
The original 1935 – Royal Commission appointed to inquire into the monetary and banking systems at present in operation in Australia – was established to investigate the conduct of the financial sector largely because it was considered that the banks had conspired to make the consequences of the Great Depression worse.
It was considered that the private banks operated in their own interests rather than the interests of the nation as a whole.
Not much has changed, has it?
In its Report (linked above – note a large download file), it was made clear that fiscal and monetary policy were intrinsically linked and both had to be embedded with the democratic framework.
We read, for example, that (paragraph 143):
It is essential for a central bank that its relations with the Government responsible for monetary policy should be close and cordial in order that there should be consistency between Government financial operations and those of the Bank.
There is also a very nice description of the impact of fiscal policy on the banking system (paragraph 146):
When the Commonwealth Bank discounts treasury-bills for the Government, the Bank is lending funds to the Government, and taking in return short-dated government securities. The Bank’s assets and liabilities both increase by an equal amount … Government deposits are credited with the value of the treasury-bills and government securities are increased. The Government then has a right to draw cheques on the Commonwealth Bank equivalent to the increased amount of its deposits. As the Government proceeds to spend the money either in ordinary expenditure … it pays its creditors by cheque. The creditors pay in the cheques to their account at the trading banks, thereby iucreasing the deposits (or reducing the advances) of the trading banks. When the trading banks present the cheques to the Commonwealth Bank, the deposits which they hold with the Commonwealth Bank are thereby increased. The Government’s deposits with the Commonwealth Bank are correspondingly reduced … Since the trading bank deposits with the Commonwealth Bank are the equivalent of cash, the cash of the trading banks has been increased when the process is completed. The net result of the issue of treasury-bills has been that deposits of the trading banks have increased (or their advances have been reduced), and their cash has increased, so that they are in a more liquid position than when the process began.
That is, government spending adds net financial assets to the non-government sector increasing financial wealth.
In the later parts of the Report, it was clear that:
In our view, the proper relations between the two authorities are these. The Federal Parliament is ultimately responsible for monetary policy, and the Government of the day is the executive of the Parliament. The Commonwealth Bank has certain powers delegated to it by statute, and the Board’s duty to the community is to exercise those powers to the best of its ability. Where there is a conflict between the Government’s view of what is best in the national interest, and the Board’s view … the Government should give the Bank an assurance that it accepts full responsibility for the proposed policy, and is in a position to take, and will take, any action necessary to implement it. It is then the duty of the Bank to accept this assurance and to carry out the policy of the Government.
I dispute the claims of mainstream economists that things have changed so much in the intervening period that such a vision is now no longer sustainable.
The Royal Commission’s sentiments were reflected in Section 11 of the RBA Act 1959, as noted above.
That is, that policies that have the capacity to have massive impacts on the population should not be delegated to unelected and unaccountable technocrats, but, rather should also be made by our elected representatives.
It gets worse, when the technocrats are drawn from one school of thought in economics that thinks it is okay to render millions of people jobless in search of some mythical price stability.
The Treasurer is going along with the excision of his right to overrule monetary policy decisions, which was considered to be a fundamental safeguard in our democracy, because the depoliticisation allows him to tell the public that interest rate hikes have nothing to do with him.
It is the fault of them not the government!
It also means that he can avoid doing anything much to ease cost-of-living pressures through fiscal policy because he can always say if he tries to expand net spending then the RBA will push rates up more, when he knows at present, he could instruct the RBA otherwise.
It also means that the RBA remains unaccountable and the Governor can swan around (as she is in Hong Kong at present) telling the financial markets that people in Australia are doing fine after the 11 rate hikes that have increased average monthly mortgage payments by 52 per cent since May 2022.
It allows the RBA to lie about the sources of inflation and push up rates even though it knows the major sources are insensitive to those rate rises.
It allows the RBA to attend all sorts of banking conferences and talk about rate hikes as if they are fighting inflation when they know they are bestowing massive profit boosts to the bank shareholders – both via the increasing gap between loan and deposit rates and also the increased rate paid on excess reserves.
The Treasurer’s decision is another step away from government accountability and using our national institutions to further the interests of the nation.
Television appearance in Tokyo – November 17, 2023
On November 17, 2023, we (Professor Fujii and myself) launched out new book – Fiscal Policy in the Age of Inflation – in Tokyo.
This edition is in Japanese as we negotiate an English version with a publisher.
There was a big audience at the launch (about 185 people) at a hotel in central Tokyo.
Earlier in the day, I was invited to appear on – Tokyo MX – which is a TV station in their ‘Guest Spot’.
Tokyo MX serves the Tokyo metropolitan area and surrounding prefectures and has a span of some 30 million people.
The show was broadcast on November 25, 2023.
Obviously, the program was in Japanese, but my contribution was in English which you can see from the 18:21 mark.
From that point, there is some footage of us at the book launch and signing the book (for almost everyone who attended) and then it shows the actual segment from about 18:55, which runs for about 13.5 minutes.
There was at least one comment on the YouTube site that I agreed with (-:
Music I am listening to today …
There are some pieces of music that are pretty simple in structure but cut deep into the listener.
Slabo Day was written by the great guitarist – Peter Green – and is one of those pieces.
It came out on Peter Green’s 1979 album – In the Skies – which was his second solo album after leaving Fleetword Mac in 1970.
There was an 8 year gap between the two solo albums as he struggled with mental illness, rumoured to be triggered by taking too much acid at a hippy colony in Munich.
The album is hard to get and is one of my favourites – some of the tracks (Proud Pinto and Apostle) are equal to Slabo Day.
This song is effectively two chords – Am and F – but the passing chord in the transition is a G via the open strings in first position.
But that pattern is really beautiful and sets up a wonderful background structure for all the great melody lines that are heard.
The lead guitar on the track, however, is not played by Peter Green.
In fact it was played by English guitar player – Snowy White – who helped Peter Green out on the 1979 album, given that Peter Green was not in a very good mental state at the time.
A great sound – evocative and shifting.
One of my favourite songs.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.