The RBA (and the rest of us) should ignore Paul Howes

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Paul Howes, from the Australian Workers Union, has criticised the RBA for keeping interest rates too high. I have heard this criticism a few times recently – but only from those living in Melbourne or Sydney. Unfortunately, these critics need to get out more and realise that in Australia’s two-speed economy, reducing interest rates will add to inflationary pressures building in the resource states.

Monetary policy is a national instrument that is poorly suited to an economy that is being driven in two different directions by the resources boom. If the residence of new-Athens and new-Lisbon (aka Sydney and Melbourne) want government intervention, then look to fiscal policy.

8 Responses to "The RBA (and the rest of us) should ignore Paul Howes"
  1. I don’t pretend to be a macro-economist, but is not the sloppy fiscal policy over the last few years or so a contributing reason that interest rates are being sustained at the levels that they are?  You know, the symbiotic relationship between the two.

    How much is the government borrowing each day just to service debt?  I used to know the number but it had too many zeros.

    To the extent that fiscal policy is reigned in as promised over and over again, yeah, I am guessing that interest rates will also come down.  Like a snowflakes chance in hell.

  2. Lloyd – The issue is not so much whether fiscal policy is increasing interest rate pressures, but rather that monetary policy is necessarily ‘national’ in nature. It applies to our whole ‘monetary union’ (i.e. the whole country). The EU has found that out in the worst possible way.

    With some states going gang-busters and others looking pretty sick, the federal government would need to focus on interstate transfers (i.e. fiscal policy). Now Australia has a long history of these transfers under various ‘equalization’ programs, but usually the money flows from Vic and NSW to Qld and WA.While the resources boom is underway and pushing up the exchange rate, it may be necessary to reverse these flows in a significant way.

  3. Maybe we should go for a reverse-Euro, and create Banana Dollars and Quokka Dollars backed by new Queensland and Western Australian central banks respectively.  (tongue-in-cheek… mostly).

  4. Tough for a Federal politician to redistribute wealth from WA and Qld to the East coast. Actually, the ALP have nothing to lose, since they have almost no seats in those states! If they had not run with the unpopular carbon tax, they might have been popular enough in NSW and Vic to get away with it.

    BTW: Paul Howes is a politician. Of course we should ignore him. If only we could ignore Wayne and Julia when they talk about getting the budget into surplus. The problem is that they are actually going to do it!

  5. Chris – agree on the issue of political difficulty. Here is a silly quote from the new Qld premier as reported in the Australian:

    He wanted any super profits generated in Queensland to return to the state.
    “If there’s a mining project in Queensland that’s paying this tax and a dollar of tax is paid, a dollar has got to come back to Queensland … to infrastructure across the state,” he said. 

    Maybe Victoria and NSW should send Qld and WA a bill based on the NPV of the interstate payments over the past 100 years. 

  6. kme – I agree.  What would be wrong with each state in Oz having their own currency?  It maybe subject to a constitutional challenge, but makes economic sense.  I think it would take some effort, but hey, so what?

    Politically, it may alleviate the tendency of WA to keep trying to secede.

  7. If WA want to secede, we should offer them the following deal. We create TWO new countries. The nations of SW Australia and NW Australia with boundary just above Perth. I predict that their enthusiams will dry up quickly.

  8. Let’s not get ridiculous, no one is seceding … WA isn’t Tibet, nor Scotland, or Quebec. So the WA and Qld Premiers conveniently have short term memories + want to maximise State revenue. No surprise there, it’s Public Choice 101.

    When it comes to election time, both Federal Coalition + Labor know where the majority of Aust. pop. live. Given the effects of Dutch Disease is becoming more apparent to the public it will be interesting to see what the public discourse will be in 18 months time.

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