A practical suggestion. At first sight, the CBA is working with the psychology of the 1920s, of Pavlov and Skinner, to estimate a single self-fulfilling variable called “expectations”. Time to update the toolkit to the modern era of Kahneman and Tversky. of prospect theory and behavioural economics. The CBA should spend money on evidence-driven research on what Australians believe is happening to the real economy and prices, and why. The US election brought to light a remarkable and theoretically challenging disconnect between popular and professional opinion in the USA on the matter, and I doubt if Australia is very different.
Favoured hypotheses to explain this gap include: (1) the public are morons; (2) the government statisticians are Deep State liars controlled by lizard men, Soros, etc; (3) Rupert Murdoch; (4) Russian cyberwarfare; (5) the public are using a basket consisting only of gasoline and eggs. If it’s the eggs, one cheap policy option is to make them free.
Central banks by definition have plenty of money and should pay for the highest standards of research, such as survey samples of 10,000 rather than the corner-cutting 1,000 of most political polls, longitudinal studies tracking the same sample, focus groups with passive expert support from people who know where to look up the price of eggs in Adelaide in 2001, the best peer-reviewed number-crunching, and so on.
If you look at the Federal Reserve's published transcripts of FOMC meetings, you might be surprised by how loosey-goosey the talk can be. I think that's right--a judgment should be based on data, but cannot be determined by data. If it were, it would not be a matter of judgment.
That's no reason for not having the best possible data on hand. But it is a reason for ignoring some of the data. I could see a central banker ignoring popular inflation expectations as a matter of judgment. Maybe the only important expectations are those of the people whose expectations directly determine the structure of interest rates: coke-addled bond traders. Another study?
I read somewhere quite recently that Australia is towards the bottom of an index measuring the complexity of the economy. We're down there with underdeveloped economies. I think that this failure to diversify away from low value commodities based industries has the greatest potential to erode living standards. The timidity of the government in taxing the commodities industries means we have far less to invest in encouraging the development of higher value tertiary industries than we otherwise might. The lack of competition in in key sectors such as transport, food and other consumer goods is a significant factor in having inflation stuck at the current level (which may be now it's 'natural' level as has been pointed out). Wasting vast amounts on flights of fancy like AUKUS instead of investing in people doesn't help.
Real period GDP growth rates "in international Geary-Khamis dollars" whatever they are. The percentages do not add up exactly as the trough year of 1931 or 1932 is counted twice.
UK
1928-1931 - 3.0%
1931-1939 +26.9%
1928-1932 +23.1%
France
1928-1932 - 8.9%
1932-1939 +21.2%
1928-1939 +10.4%
Germany
1928-1932 -16.1%
1932-1939 +69.6%
1928-1939 +42.2%
If we start with France, it fits JQ’s story, of harsh austerity followed by slow and presumably below-trend recovery. Britain did better in both contraction and recovery under Chamberlain’s proto-Keynesian pragmatism, available in any democracy. But Germany emphatically does not. A sharper contraction was followed by rapid recovery. By 1939, its economy had gone from being only 8% larger than Britain's to 25% larger, in guns if not butter. A case of the Devil having the best tunes.
Geary-Khamis is the standard method of constructing exchange rates that satisfy purchasing-power parity (PPP). I have a criticism and an alternative measure buried in my archives (though we don't specifically cite Geary and Khamis).
Dowrick S, Quiggin J.: True measures of GDP and convergence. The American Economic Review (1997)
Except that it was pretty much all guns, at the expense of investment in housing, transport and other civilian amenities, predicated on a culminating looting of the neighbours. What's being counted here is rather definitely not welfare.
I disagree with your premise - the RBA doesn't have a "high-interest rate policy". Interest rates are currently moderate, and they should remain so until asset prices return to a somewhat reasonable level. Yes, this will result in significant economic pain for some people, but it will also allow people like me to buy a home.
The real outrage was having interest rates at record low levels for years prior to the pandemic. Although even then - much like in the UK - I'd say the fault lay not with the central bank, but with the government. Economic growth has stalled because of a lack of appropriate fiscal policy and ludicrously unproductive infrastructure spending like Inland Rail and car parks. Growing inequality has also played its part; instead of 1.5% interest, we should have had JobSeeker raised above the poverty line and other measures.
If we're headed for a crunch, it's the result of decades of mismanagement by the government, not the RBA ably filling its remit of predictability.
I agree with your argument about government mismanagement with the exception of Inland Rail. It should be being built alongside high speed rail between Brisbane-Sydney-Melbourne.
I don't think the Reserve Bank is smart enough to have a secret agenda to reduce asset prices. It's more of a side effect. 40 years of experience shows that monetary policy causes more problems than it fixed. We need strong government with a proactive fiscal policy, which unfortunately, we are unlikely to get until we hit rock bottom.
A practical suggestion. At first sight, the CBA is working with the psychology of the 1920s, of Pavlov and Skinner, to estimate a single self-fulfilling variable called “expectations”. Time to update the toolkit to the modern era of Kahneman and Tversky. of prospect theory and behavioural economics. The CBA should spend money on evidence-driven research on what Australians believe is happening to the real economy and prices, and why. The US election brought to light a remarkable and theoretically challenging disconnect between popular and professional opinion in the USA on the matter, and I doubt if Australia is very different.
Favoured hypotheses to explain this gap include: (1) the public are morons; (2) the government statisticians are Deep State liars controlled by lizard men, Soros, etc; (3) Rupert Murdoch; (4) Russian cyberwarfare; (5) the public are using a basket consisting only of gasoline and eggs. If it’s the eggs, one cheap policy option is to make them free.
Central banks by definition have plenty of money and should pay for the highest standards of research, such as survey samples of 10,000 rather than the corner-cutting 1,000 of most political polls, longitudinal studies tracking the same sample, focus groups with passive expert support from people who know where to look up the price of eggs in Adelaide in 2001, the best peer-reviewed number-crunching, and so on.
In Australia it's petrol (gasoline) and electricity. Governments have already adopted the suggested response, but the RBA thinks that's cheating.
It's also interest rates, which makes a complete mess of the policy of using higher interest rates to fight inflation
If you look at the Federal Reserve's published transcripts of FOMC meetings, you might be surprised by how loosey-goosey the talk can be. I think that's right--a judgment should be based on data, but cannot be determined by data. If it were, it would not be a matter of judgment.
That's no reason for not having the best possible data on hand. But it is a reason for ignoring some of the data. I could see a central banker ignoring popular inflation expectations as a matter of judgment. Maybe the only important expectations are those of the people whose expectations directly determine the structure of interest rates: coke-addled bond traders. Another study?
I read somewhere quite recently that Australia is towards the bottom of an index measuring the complexity of the economy. We're down there with underdeveloped economies. I think that this failure to diversify away from low value commodities based industries has the greatest potential to erode living standards. The timidity of the government in taxing the commodities industries means we have far less to invest in encouraging the development of higher value tertiary industries than we otherwise might. The lack of competition in in key sectors such as transport, food and other consumer goods is a significant factor in having inflation stuck at the current level (which may be now it's 'natural' level as has been pointed out). Wasting vast amounts on flights of fancy like AUKUS instead of investing in people doesn't help.
Is there anything we can learn from the previous major peacetime shock in the 1930s? I found a source with real GDP series for 22 European countries in the 1930s– you judge if it’s sound, and check my arithmetic. This is in summary how it played out in the UK, France, and Germany. http://socialdemocracy21stcentury.blogspot.com/2013/07/the-great-depression-in-europe-real-gdp.html
Real period GDP growth rates "in international Geary-Khamis dollars" whatever they are. The percentages do not add up exactly as the trough year of 1931 or 1932 is counted twice.
UK
1928-1931 - 3.0%
1931-1939 +26.9%
1928-1932 +23.1%
France
1928-1932 - 8.9%
1932-1939 +21.2%
1928-1939 +10.4%
Germany
1928-1932 -16.1%
1932-1939 +69.6%
1928-1939 +42.2%
If we start with France, it fits JQ’s story, of harsh austerity followed by slow and presumably below-trend recovery. Britain did better in both contraction and recovery under Chamberlain’s proto-Keynesian pragmatism, available in any democracy. But Germany emphatically does not. A sharper contraction was followed by rapid recovery. By 1939, its economy had gone from being only 8% larger than Britain's to 25% larger, in guns if not butter. A case of the Devil having the best tunes.
Geary-Khamis is the standard method of constructing exchange rates that satisfy purchasing-power parity (PPP). I have a criticism and an alternative measure buried in my archives (though we don't specifically cite Geary and Khamis).
Dowrick S, Quiggin J.: True measures of GDP and convergence. The American Economic Review (1997)
Sweden also an important case of proto-Keynesianism. Sheri Berman, The Primacy of Politics is very good on this period
Except that it was pretty much all guns, at the expense of investment in housing, transport and other civilian amenities, predicated on a culminating looting of the neighbours. What's being counted here is rather definitely not welfare.
I disagree with your premise - the RBA doesn't have a "high-interest rate policy". Interest rates are currently moderate, and they should remain so until asset prices return to a somewhat reasonable level. Yes, this will result in significant economic pain for some people, but it will also allow people like me to buy a home.
The real outrage was having interest rates at record low levels for years prior to the pandemic. Although even then - much like in the UK - I'd say the fault lay not with the central bank, but with the government. Economic growth has stalled because of a lack of appropriate fiscal policy and ludicrously unproductive infrastructure spending like Inland Rail and car parks. Growing inequality has also played its part; instead of 1.5% interest, we should have had JobSeeker raised above the poverty line and other measures.
If we're headed for a crunch, it's the result of decades of mismanagement by the government, not the RBA ably filling its remit of predictability.
The RBA explicitly disclaims any goal of targeting asset prices. https://www.afr.com/policy/economy/why-the-rba-won-t-target-house-prices-like-nz-20210225-p575pq
I agree with your argument about government mismanagement with the exception of Inland Rail. It should be being built alongside high speed rail between Brisbane-Sydney-Melbourne.
I don't think the Reserve Bank is smart enough to have a secret agenda to reduce asset prices. It's more of a side effect. 40 years of experience shows that monetary policy causes more problems than it fixed. We need strong government with a proactive fiscal policy, which unfortunately, we are unlikely to get until we hit rock bottom.