RBA
On federal economic interventions under today's neoliberalism
Every time I blog about economics it gets torn apart, but I can’t seem to help myself.
It strikes me that the policies being pursued to deal with the economic tumult descending upon us by the authorities in the US and Australia are rather sad, a sad reflection on the paucity of controls on the economy under neoliberalism.
The US is rather clearer. The economy is tanking, so both the Fed and the government are doing all they can to leverage it within the constraints of neoliberalism. The Fed drastically cuts interest rates – basically the only thing it can do. Given that the problem is one of people having too much debt, this is both a good and a bad thing to do: good insofar as it takes the pressure off the indebted, but bad insofar as it encourages people to take on even more debt. The government is cutting taxes. This is a bad move insofar as it plunges the nation into even more insane levels of debt to pay for the float. Essentially, the question here is whether the crazy levels of public and private debts in the US are sustainable. For some reason it seems to be widely held that, though unprecedented, they are. I take the view that the economy is teetering on the edge of a precipice - while it doesn’t have to fall over the edge, over a long enough time span something’s bound to happen that will topple it. The US still has an ace in its hand though, viz. the nice fat war that is basically an economic cure-all, should it be possible to amp it up further. We haven’t yet found out how far this strategy can go, but we will. None of the serious US presidential candidates are willing to “take military action off the table”, and as such the wonderful economic and political panacea of aggressive war remains likely to characterise US public policy for the foreseeable future.
The Australian case is somewhat more opaque. Though the ASX has followed the trajectory of the US markets, the RBA sees no sign of recession, but is on the contrary worried about the Australian economy ‘overheating’ because of the rise of inflation. Here is where I’m going to really get in over my head, but it seems to me that this is a shocking misdiagnosis, and that inflationary pressure is not caused by overheating at all. The Aussie economy has been going gangbusters for years, with very low unemployment and high rates of growth, without inflationary pressure mounting – why is it only ‘overheating’ now? The answer is that it’s not. Rather certain extraordinary factors unconnected to economic growth are causing price inflation. The primary one is the price of petrol. This affects the price of almost everything in Australian shops. The drought has also had a big impact, though one assumes that will be abating to some extent now. The other thing is rental price inflation. House price inflation might be a factor too, but I don’t think it is, inasmuch as it didn’t cause inflationary pressure to speak of when Sydney house prices were going through the roof earlier in the decade. Rather, in Sydney at least, the decline in attractiveness of house-buying in outer suburban areas, which is in no small measure a symptom of rising petrol costs, has caused a decline in profitability of outer suburban housebuilding, hence a rise in pressure on rental housing. Even this is probably not decisive, however: what’s really piling on the inflationary pressure here is precisely the high interest rates themselves. Since much rental housing is owned by mortgage holders, higher interest rates drives them to push up rents. Moreover, the high interest rates also put the squeeze on owner-occupiers.
On these fronts, inflation driven by rising consumer prices in consumables and housing, increasing interest rates really doesn’t help. The only thing that could help here is serious state action (e.g. introducing rent controls, creating new public housing, introducing price controls on petrol, creating new public transportation, investing in rail infrastructure for shipping goods). This is the case in the US too (where there is only one possible state action allowable in the conjunction of neoconservatism and neoliberalism in US public policy, namely a military build-up and expenditure). The Rudd government’s only action thus far is to try to constrain government spending. Since I don’t believe that Australian government spending is part of the problem, I can’t see how it can be part of the solution. I regard as at least plausible the arguments of the University of Newcastle’s Centre of Full Employment and Equity that running a public surplus means privatising debt (notwithstanding that in the US both the government and the populace are running up debts like there’s no tomorrow).