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).
Jacques Chester (not verified) wrote:
Not too bad as an assay, but in practice rental rates are driven mostly by supply-and-demand, not input prices. So in fact government is actually the bad guy (states and councils restricting supply of new land), not the market per se.
liam wrote:
And skewed also by the lack of inheritance tax in Australia.
As for the supply of “new land”, well the rental market in ‘nice’ suburbs is qualitatively different to that in ‘new’ suburbs. Petersham or Bringelly? Carlton or Werribee? The emergent-bourgeoisie has spoken, and supply-and-demand operates independently in different places. More “new land” is likely to benefit investors and speculators, and most unlikely to benefit current tenants anywhere.
I’ve heard quite a few radio ads lately for real estate agents promising such things as “adding 10% on rental income”. Such greed should be punished, with rent controls, punishingly strong tenant’s rights legislation, the encouragement of long-term leases, and maximum prejudice. Or all three.
As for my solution to driving down rental prices, see my posts advocating the 155mm urban-renewal solution.
liam wrote:
…But Mark, I do disagree with your assessment of the current wars as economic cure-alls. Compared to the deficit-led spending of the 1940s we both know about, the US defense (ahem) economy creates relatively few manufacturing jobs.
Historically, cabinet wars are much more likely to be economic money-pits, especially if the domestic economy is in the process of tanking. See for instance the Spanish attempts to convert Flanders to Catholicism under Phillip II, and all the good it did that country. That little liberal intervention took a decent Imperial state and stuffed it—and I think it’s a better comparison to the second Gulf War than is WWII.
Mark wrote:
I suspect, Liam, that we’d have to bring in some hard figures to settle this, but I don’t believe it’s right that the war doesn’t have great job-creating possibilities for the US. The manufacturing industries that are still resolutely First-World-based are 1. armaments 2. aerospace and 3. automotive, and these are the areas where a lot of military spending goes. There’s also job creating in the military (recruitment problems notwithstanding) and in the independent contracting (mercenaries and construction), which is clearly a big deal, particularly when one factors in the fact that little money is spent locally, with so much of the resupply of US bases in Iraq coming from the US itself via US contractors.
The magical economic properties I attribute to the occupation of Iraq and further occupations which might eventuate under Obama or McCain (the latter is a belligerent bastard, albeit not a torturer; the former didn’t like the war on Iraq, but hums a different tune on Iran and Pakistan) are partly because of the real primitive accumulation that is going on there via the demand that revenues from Iraqi oil be used to offset the astronomical costs of the occupation. While there is a credible argument that the costs of occupation are way higher than realisable oil revenues, it’s an open question whether this will be the case over the long term, and there’s no question that money really is flowing to the US from oil – if they have to keep ploughing materiel into protecting and rebuilding pipelines, so much the better economically speaking.
Regarding rental prices, you’ve got to bring in some psychology and not look at it on the neoclassical model of supply and demand. People get attached to housing, to neighbourhoods (Liam’s point) – when rents go up, people will pay them unless they absolutely can’t afford to, at least when everyone’s rents are going up and it’s not just a case of a landlord demanding way more than properties in that area typically cost.
In Sydney, we had the media telling us (and landlords) that rental prices were very low as a percentage of housing costs. The reason for this, we were correctly told, is that landlords were speculating on property values going up – they weren’t trying to make money off mortgages. This economy has now completely shifted – there’s no predictable appreciation of housing value, and mortgage rates are way up, so the prices are getting jacked up. I, and most people I know, will put up with huge rental hikes before moving to outer suburban areas and engaging in massive commutes, being isolated from our social circles. Even if you want to look at it in rational decision-making terms, though, I submit that Sydney traffic and transportation conditions + cost of petrol makes the decision to pay more to live in town rational.
emmeline wrote:
Mark, I have a certain amount of sympathy with your critique of the sudden declaration of a “war on inflation” by the new Rudd government. But I do think it is fair to be worried about overheating. Perhaps it is more that the change in rhetoric seems more abrupt because of the denial about building inflationary pressures under the Howard government.
The latest CPI showed that underlying measures of inflation have been trending upwards, which implies higher inflation is not just being driven by large movements in a few prices, but a more broad-based price rises. And that’s probably not surprising. The Australia economy has been expanding for an extended period, and spare capacity is running low - as seen in today’s fall of the unemployment rate to a generational low - putting upward pressure on prices.
So it seems entirely appropriate for the settings of fiscal and monetary policy to be on the contractionary side. Although more (public and private) investment in productive capacity in the past could have prevented us from hitting capacity constraints now.
Mark wrote:
Emmeline, I’m always glad when someone is willing to reference the figures. The latest CPI does make interesting reading. It shows that the above-average increases are (in order of size) in transportation (increase in petrol prices is important here, surely), financial services (fallout from the crisis?), housing (we’re already discussed it), education, health, and alcohol and tobacco. I think it’s fair then to say that these areas are driving inflation in the economy. Health and education are hard to account for on my picture. It sounds perfectly reasonable to say it’s happening because of wage inflation because of capacity constraints. But why is this only happening now? Australia’s been short of teachers and nurses and doctors for donkey’s years. It would seem my attempt to answer this question is completely inadequate, but I don’t by the ‘overheating’ thesis (insofar as this refers to anything more specific than the existence of inflationary pressure in a growing economy).
anonymous (not verified) wrote:
I don’t like that “trending” is a word now.
that is all.
emmeline wrote:
I tend to rely on the assessment of these folks (pdf) . In particular, Graph 66 (p 48) shows that the proportion of CPI items rising by more that 2.5 per cent (the centre of the RBA’s target band) has risen to 70 per cent. That is, that inflation is broad-based (consistent with ideas of “overheating”), rather than being the result of a few spectacular increases in a few items.
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