“The recent review of the Reserve Bank acknowledged the challenges to this orthodoxy but didn’t consider them.“
I and a number of colleagues coordinated a write-in to the RBA review that year, all taking different aspects of the RBA's economic and organisational dysfunction into account. However, the reviewers assigned by our Treasurer, Jim Chalmers, ignored all our work.
I know the environment as I used to work for the Reserve Bank back in 2001, reversing the outsourcing of the computer systems that manage our nation’s Exchange Settlement Accounts (ESA) System for the private banking reserves. So, I have worked for the Reserve Bank, and I will say that it was one of the better workplaces I have worked in, certainly at the technical level. The immediate IT management in that organisation was superb, and it was a pleasure to work there. Still, the Financial Senior Management Board and their devotion to neoclassical (and neoliberal) ideology leave much to be desired. I just wanted to clarify the distinction, so nobody thinks I am a disgruntled ex-employee. It was a great job, and I regret not taking up their permanent employment offer. Still, I was hoping to get married (I hadn’t proposed at the time I left, but knew I had found the one — and did so before taking up the next job), and the wage drop to take on permanent work from contracting was significant. Personal guff aside, I spent a good 14 months in that job, and we successfully reversed the previous outsourcing, which involved creating a reverse-engineered alternate system for the nation’s banking reserve system, which at the time handled between $9B to $16B worth of transactions a day. I wrote the operational support and security interface systems for internal staff on the Alpha network we rebuilt in-house.
After I realised our Treasurer, Jim Chalmers, was not paying attention to our collaboratives' multiple letters, I published mine in AIMN. This was noted by John Herman (editor of ERA), who asked if he could republish it in ERA. After some peer review assessment and the usual requests for expanding explanations, rewording, etc. (which only made it larger), they published it in two parts.
It explains how monetary policy “Changes in interest rates can have a reverse effect on inflation.” https://era.org.au/monetary-and-fiscal-policy-frameworks-for-australia-part-1/ Part 2 describes a little more about how money is created (just change the “1” to “2” on that URL to read part 2). It also is a tad critical about the Board’s makeup and their devotion to neoclassical ideology, which has no basis in the reality of how interest rate can possibly affect cost-push inflation (or, for that matter, measure unemployment - but that is another story).
Normally, when I find myself disagreeing with you, John, it means I have to check my logic and assumptions to see where I went wrong, but in this case I might actually disagree.
The simplest problem I have with your analysis is you're saying the distributional effects of a policy are an argument against pursuing it. That's never the case, because distributional effects can always be corrected by simply taking money from the rich and giving it to the poor. If high interest rates favour the rich over the poor, just tax the rich and give more to the poor. By making the RBA responsible for financial stability and equality, you're setting them an impossible task.
My second issue relates to time frames - the current crisis is a result of decades of policy failure and would take decades to unwind (if anyone were serious about unwinding it). If we fall into recession it will be the result of fiscal and policy irresponsibility, not the RBA being a percentage point or two off the mark. Even the blame for the ludicrously low interest rates of a few years ago falls mainly to Coalition governments unwilling to implement appropriate fiscal policy.
Finally, I think moderate interest rates are a good thing. The fact asset prices are so absurdly high is because of the abundance of cheap money over the last three decades. We can't keep accelerating out of trouble without ever touching the brake. Maybe there are better tools for clawing back that excess cash, but they don't belong to the RBA. They're in the hands of the government and the Coalition long ago lost interest in doing the hard stuff and now Labor has got sick of being the responsible parent, so it's left to the RBA - the primary school teacher in this analogy.
The distributional effects of RBA policy aren't (primarily) rich vs poor. The are between holders of negative and positive financial wealth, and don't go consistently in one direction or the other. There is no way for fiscal policy to fix these costly and (from the viewpoint of those affected) largely random shocks.
Ah, that makes sense. So another policy that could achieve a similar end, at least for households, would be supporting the provision of fixed rate 30 year mortgages? That would at least insulate mortgagees from these shocks. I still stand by my argument that the reason we needed a 4% interest rate rise is because we had a 0.1% cash rate, and the reason we needed that was because we had a 1.5% cash rate, which was already unreasonably low and left no room for cuts. The RBA spent a decade after the GFC pushing on a rope when they should have stuck at 3% and told the government to pull their finger out and spend.
Public expenditures have distribution and growth effects. Period. Whether through inflation or through interest rates mean different distribution and growth effects.
I agree that interest rates aren't the best way to carry out distributional policy, but I think the main point point of the article is that sharp increases in IR and low wage growth are the problem, not increases in the cash rate per se. Inflation targeting is a way of avoiding unfashionable fiscal policy like taxing the rich to give to the poor. Suggesting this as a remedy to the effects of interest rate shocks is a bit absurd when you understand the mind set driving economic policy. In fact, this is exactly what John is suggesting with wage indexation and points out that the government is doing with rent and electricity subsidies which are heterodox in the most powerful economic policy circles.
You miss the point of the article by saying cost of living is a problem that beagn years ago. IR shocks are not being blamed as the cause but as unnecessary given higher inflation with appropriate fiscal policy. It makes far more sense to proactively deal with the cost of living this way rather than retroactively rather than as a knee jerk reaction to a knee jerk reaction.
“The recent review of the Reserve Bank acknowledged the challenges to this orthodoxy but didn’t consider them.“
I and a number of colleagues coordinated a write-in to the RBA review that year, all taking different aspects of the RBA's economic and organisational dysfunction into account. However, the reviewers assigned by our Treasurer, Jim Chalmers, ignored all our work.
I know the environment as I used to work for the Reserve Bank back in 2001, reversing the outsourcing of the computer systems that manage our nation’s Exchange Settlement Accounts (ESA) System for the private banking reserves. So, I have worked for the Reserve Bank, and I will say that it was one of the better workplaces I have worked in, certainly at the technical level. The immediate IT management in that organisation was superb, and it was a pleasure to work there. Still, the Financial Senior Management Board and their devotion to neoclassical (and neoliberal) ideology leave much to be desired. I just wanted to clarify the distinction, so nobody thinks I am a disgruntled ex-employee. It was a great job, and I regret not taking up their permanent employment offer. Still, I was hoping to get married (I hadn’t proposed at the time I left, but knew I had found the one — and did so before taking up the next job), and the wage drop to take on permanent work from contracting was significant. Personal guff aside, I spent a good 14 months in that job, and we successfully reversed the previous outsourcing, which involved creating a reverse-engineered alternate system for the nation’s banking reserve system, which at the time handled between $9B to $16B worth of transactions a day. I wrote the operational support and security interface systems for internal staff on the Alpha network we rebuilt in-house.
After I realised our Treasurer, Jim Chalmers, was not paying attention to our collaboratives' multiple letters, I published mine in AIMN. This was noted by John Herman (editor of ERA), who asked if he could republish it in ERA. After some peer review assessment and the usual requests for expanding explanations, rewording, etc. (which only made it larger), they published it in two parts.
It explains how monetary policy “Changes in interest rates can have a reverse effect on inflation.” https://era.org.au/monetary-and-fiscal-policy-frameworks-for-australia-part-1/ Part 2 describes a little more about how money is created (just change the “1” to “2” on that URL to read part 2). It also is a tad critical about the Board’s makeup and their devotion to neoclassical ideology, which has no basis in the reality of how interest rate can possibly affect cost-push inflation (or, for that matter, measure unemployment - but that is another story).
Normally, when I find myself disagreeing with you, John, it means I have to check my logic and assumptions to see where I went wrong, but in this case I might actually disagree.
The simplest problem I have with your analysis is you're saying the distributional effects of a policy are an argument against pursuing it. That's never the case, because distributional effects can always be corrected by simply taking money from the rich and giving it to the poor. If high interest rates favour the rich over the poor, just tax the rich and give more to the poor. By making the RBA responsible for financial stability and equality, you're setting them an impossible task.
My second issue relates to time frames - the current crisis is a result of decades of policy failure and would take decades to unwind (if anyone were serious about unwinding it). If we fall into recession it will be the result of fiscal and policy irresponsibility, not the RBA being a percentage point or two off the mark. Even the blame for the ludicrously low interest rates of a few years ago falls mainly to Coalition governments unwilling to implement appropriate fiscal policy.
Finally, I think moderate interest rates are a good thing. The fact asset prices are so absurdly high is because of the abundance of cheap money over the last three decades. We can't keep accelerating out of trouble without ever touching the brake. Maybe there are better tools for clawing back that excess cash, but they don't belong to the RBA. They're in the hands of the government and the Coalition long ago lost interest in doing the hard stuff and now Labor has got sick of being the responsible parent, so it's left to the RBA - the primary school teacher in this analogy.
The distributional effects of RBA policy aren't (primarily) rich vs poor. The are between holders of negative and positive financial wealth, and don't go consistently in one direction or the other. There is no way for fiscal policy to fix these costly and (from the viewpoint of those affected) largely random shocks.
Ah, that makes sense. So another policy that could achieve a similar end, at least for households, would be supporting the provision of fixed rate 30 year mortgages? That would at least insulate mortgagees from these shocks. I still stand by my argument that the reason we needed a 4% interest rate rise is because we had a 0.1% cash rate, and the reason we needed that was because we had a 1.5% cash rate, which was already unreasonably low and left no room for cuts. The RBA spent a decade after the GFC pushing on a rope when they should have stuck at 3% and told the government to pull their finger out and spend.
Public expenditures have distribution and growth effects. Period. Whether through inflation or through interest rates mean different distribution and growth effects.
I agree that interest rates aren't the best way to carry out distributional policy, but I think the main point point of the article is that sharp increases in IR and low wage growth are the problem, not increases in the cash rate per se. Inflation targeting is a way of avoiding unfashionable fiscal policy like taxing the rich to give to the poor. Suggesting this as a remedy to the effects of interest rate shocks is a bit absurd when you understand the mind set driving economic policy. In fact, this is exactly what John is suggesting with wage indexation and points out that the government is doing with rent and electricity subsidies which are heterodox in the most powerful economic policy circles.
You miss the point of the article by saying cost of living is a problem that beagn years ago. IR shocks are not being blamed as the cause but as unnecessary given higher inflation with appropriate fiscal policy. It makes far more sense to proactively deal with the cost of living this way rather than retroactively rather than as a knee jerk reaction to a knee jerk reaction.
That was very informative. Thanks!