We Treat the Unemployed with Disdain

It’s Thursday and I have decided I will write three posts a week. Tuesday, Wednesday and Thursday. Today’s post continues on from yesterdays Unemployment is a Political Choice which described when, why, and how we started counting the unemployed. How it began in an era of Full Employment where the Australian Government aimed for spending in aggregate to target more jobs advertised than demanded. I described some detail around what was involved in aggregate spending and finally why unemployment is a political choice. Governments with their monopoly on the currency can always purchase what is for sale, including idle labour.


In yesterday’s post I mentioned the recently elected labour governments decision to maintain below poverty unemployment benefits and maintain the pernicious system of ‘mutual obligations’ that penalises those on the unemployment benefit if they fail to complete certain tasks. This ABC article gives you an overview of what is happening with the changes to the system. The system is summarised

….more than 750,000 people will be placed into one of two Workforce Australia streams: an online portal for self-managing job searches, or into the management of a new job provider for face-to-face appointments.

Significantly, those who will be required to complete mutual obligations will also transition to a process where they will earn points for activities in return for income support.

Which may seem ‘fair’. Absolutely we should aim to have those that can work into work. That includes creating workplaces and designing work for people with disabilities so they too can feel a sense of belonging, a sense of contributing to their communities and an ability to feel in control of their lives with enough income to be able to do that. However, our unemployment system doesn’t do any of that. Some of the nastiness pieces of the system are being retained by the ALP. (emphasis mine)

ACOSS acting chief executive Edwina MacDonald said her organisation welcomed some of the changes outlined by Mr Burke, but voiced concern about the continuation of the “punitive” work-for-the-dole program and automated payment suspensions.

The system automates payment suspensions and we require some people to work for their unemployment benefit while they look for work to receive their below poverty line payment.

I decided to look at the number of people seeking work and the number of jobs advertised. This relationship is known as the Beveridge curve named after a conservative member of the House of Lords in the UK, William Beveridge. You can read why the conservatives decided to deal with the rising levels of unemployment in my post Advocating a Right to Work.

Anyway back to the Beveridge Curve. Wikipedia tells us The curve is a graphical representation of the relationship between unemployment and the job vacancy rate which is the number of unfilled jobs expressed as a proportion of the labour force. The ABS says more less the same thing. The Beveridge Curve is widely used to depict the relationship between the unemployment rate and the job vacancy rate. Economists will study this curve and hope that as vacancy rate increases, unemployment decreases. i.e the higher the vacancy rate, the lower the unemployment.

Beveridge Curve – ABS

When you grasp that as a monopolist of the currency – the government chooses the level of unemployment the Beveridge curve becomes somewhat pointless, unless you wanted to measure how much the private sector is contributing to economic activity.

I ran some numbers on the number of job vacancies v the number of unemployed and underemployed workers. As of the March quarter 2022 there is 0.88 jobs for every unemployed worker. This doesn’t take into account skills mismatches or location.

The ABS gives the quarterly figures for job vacancies at a different quarter to the unemployment figures to make comparisons a pain in the arse. Anyway I did it!

The first image is a table of job vacancies and numbers of people who are seeking work. The last column is the number of jobs advertised relative to the number of unemployed people.

The graph is a visual depiction of the table. The blue columns are the number of advertised jobs and the grey and yellow lines are the number of unemployed and underemployed people in the quarter.

To calculate quarterly figures for those two groups I found the monthly data and calculated an average. The data then matched the ABS job vacancy figures. The orange line is the underutilisation rate – which is the unemployment + underemployment rate.

Sadly, our Government thinks it is fine to force people to seek work that does not exist in sufficient quantity for all those that desire it and punish them for not jumping through bureaucratic hoops to receive a below poverty level payment. In some cases asking them to work for it!

Conclusion

Policy positions a progressive party should be taking;

  • Immediately lift the unemployment (and other support payments) to $88 a day. 
  • Stop mutual obligations 
  • Transition the unemployment benefit (not other benefits) into a voluntary living wage Job Guarantee run under a nationalised unemployment agency.  
  • The new national unemployment agency would form a ‘key pillar’ in a newly established full employment policy – helping those in the JG with education and training and seek employment in the public service or private sector. 
  • Establish a full employment policy with things like expansion of the public sector (childcare, better resourced heath and education etc…)

The labour movement has a history of fighting for ‘the right to work’. I believe this should be at the forefront of any labour movement. The ALP like the Liberal Party are protecting the unemployment industry in Australia – a series of privately owned companies paid to punish those without employment under a system that ensures there is insufficient work.

That is all from me!

*Update: there were minor errors in my spreadsheet and graph. I corrected these and updated accordingly. Update II graph is fixed now. Administrative spreadsheet error.

Unemployment is a Political Choice

I read this article on SBS news today. It is to do with our pernicious system of ‘mutual obligations’ needed to be performed in order to receive the below poverty line unemployment benefit of $46 a day. The ALP is ‘wiping’ the demerits accrued under the previous government and ‘tweaking’ the points based system. The advocacy of the Australian Unemployed Workers Union (AUWU) is highlighted in the article.

But Unemployed Workers Union spokesperson Jeremy Poxon said it was “incredibly disappointing” the new government had maintained its support for mutual obligations, and not removed them completely. ***
“The problem is this new system will just immediately start forcing people to accrue demerits again in huge numbers.” 

The commentary from the AUWU is juxtaposed against the Australian Council of Trade Unions who said

ACTU assistant secretary Scott Connolly said the union welcomed the Albanese government’s new approach to “helping people get back to work.”

The commentary from the ACTU is more than disappointing. It ignores the frame that unemployment is systemic, a political choice and chosen by the government of the day and places the fault of the unemployment onto the individual who needs ‘help to get back to work’

I don’t deny there are those who need assistance in getting back to work. However, a system that cuts people from a below poverty line payment for not seeking work that doesn’t exist in enough numbers is a sad reflection on how we treat some of the most vulnerable people in society. There is little change in the new governments attitude to the unemployed.

Counting the Unemployed under a Policy of Full Employment

I’ve ordered a copy of Inventing Unemployment by Anthony O’Donnell. Unemployment as we know it is a relatively new concept. In his conversation piece he says;

As I outline in my book, Inventing Unemployment, before the second world war censuses tended to divide the population differently – into breadwinners and dependants. 

A breadwinner who wasn’t employed would be recorded as a breadwinner rather than unemployed (with their usual occupation noted). 

That’s probably because until the 20th century, irregular work was the norm.

https://theconversation.com/how-we-invented-unemployment-and-why-were-outgrowing-it-183545

The way we conceive unemployment and count it started in 1947 in Australia and a quarterly survey counting a labour force and dividing it into ’employed’ and ‘unemployed’ started in the September quarter 1959.

It was the post war consensus that gave rise to full employment policies, and albeit under a ‘male breadwinner’ model aimed to ensure

This policy for full employment will maintain such a pressure of demand on resources that for the economy as a whole there will be a tendency towards a shortage of men instead of a shortage of jobs.

http://www.billmitchell.org/White_Paper_1945/index.html

The quote above is from the Australian 1945 tax white paper written by H.C Coombs who would later become Governor of the Commonwealth Bank and serve a variety of roles within the Australian public service. His essay From Curtin to Keating is well worth a read to see his views on the demise of full employment policies.

The way the framework for counting the unemployed was devised operated under different policy settings where the Government would ensure spending in aggregate would aim to ensure there were more jobs than needed to match the workforce preferences. Menzies in 1961 match the then opposition ALP promise to increase the deficit and bring the unemployment rate back below two percent.

I have included a historical graph of the participation rate going back to August 1966. The participation rate rate is the number of people employed or seeking work. You can see under full employment policies (and male breadwinner model) the participation rate for males was higher. The rise in female participation rate is a result of changing social attitudes towards women in the workforce. It used to be the case for instance women were no longer allowed to work once they were married. That is why the female rate is lower in August 1966 than 2022.

https://www.abs.gov.au/articles/historical-charts-august-1966-may-2022

The way we count the unemployed hasn’t changed but a policy of ensuring more hours of work available than those seeking work isn’t in place today. That change of policy has to do with the way economists view the role of fiscal policy. Within the public discourse today you will hear aims of ‘reducing the deficit’ and needing to ‘pay down debt’. Over the full employment era government ‘budgets’ were referred to as full employment or high employment budgets. The fiscal position was not an aim of itself. I’ve wrote what fiscal policy *should* be about in the below posts and the demise of Full Employment here.
Budgets Should Target Socioeconomic Well-Being.
What is the purpose of fiscal policy?

What Causes Unemployment?

When economist speak about spending needing to increase they are referring to several aggregates that make up Gross Domestic Product. These are Government Spending (G), Investment (I), Consumption (C), and Exports (X). Reasons are given for why one sector can/ can not increase or what incentives should be made to increase one aggregate over another. However, spending in aggregate is the aggregate of G, I, C, and X and whether it is sufficient with Full Employment.

Depending on your theory of macroeconomics there are different ways of thinking about Government Spending. These are a bit like religions and economists pick and choose different aspects from different schools of thoughts.

Keynesians/Post Keynesians – budget deficit are warranted to maintain full employment but should be balanced over the business cycle. Governments invest in productive infrastructure and grow GDP to shrink debt:GDP ratio over time.

Monetarist/New Keynesians – aims for budget surpluses, strong incentives for private enterprises, governments should eliminate debt, remove fiscal policy as primary tool of economic management, focus on monetary policy.

Modern Monetary Theorist – Governments that issue their own currency face no insolvency constraint. They can purchase whatever is for sale. Fiscal positions are outcomes and shouldn’t be targets. Monetary policy is a poor tool for controlling aggregate spending.

While there is different thinking with the role of government spending and the definition of what constitutes full employment, there is consensus unemployment arises as a lack of insufficient spending.

Enter the MMT Money Story

MMT places the tax liability as the foremost thing a currency issuing government needs to do to have its currency accepted. The tax liability causes unemployment and government spending alleviates the unemployment. It is always within the governments power to increase its spending and purchase what is for sale, including idle labour. Thus unemployment is a political choice.

That is what is meant by ‘tax liability’ creating a demand for a governments unit of account. It is a coercive mechanism.

(2002) where she describes Colonial Africa as an illustration of a tax driven currency.

“Historians of the African colonial experience have often remarked on the manner in which the European colonizers were able to establish new currencies, to give those currencies value, and to compel Africans to provide goods and services in exchange for those currencies.”

Tcherneva cites Sticher (1985) [In Malawi there was an] imposition of a Sh.3 annual hut tax over the whole colony in 1896. This was a high figure for the northern areas. And undoubtedly stimulated further labor migration [to find work paying shillings].

Tcherneva, P., Monopoly Money: The State as a Price Setter, Oeconomics Volume V, winter 2002

Further evidence of taxation driving a currency can be found during the colonisation of Nyasaland.

It is sometimes forgotten that the plantation sector in Nyasaland dates from as early as the 1890s. During the early years of colonial occupation, most officials shared the opinion of Sir Harry Johnston, the first Commissioner and Consul General, that “the one hope of this, country lies in plantation work and in the cultivation of coffee, tobacco, sugar, etc., for which cheap labour is necessary”.3 Some 800,000 acres were alienated to settlers in the Shire Highlands, the most fertile and densely populated area in the country; hut tax was introduced from 1891 as a means of introducing “the native labourer to the European capitalist”4 and coffee was grown with such success that in 1900 a thousand to exported worth 62,00 making Nyasaland the centre of European agricultural enterprise in Central Africa”

McCracken, J.,Peasants Planters and The Colonial State: The Case of Malawi, 1905-1940; Journal of Eastern African Research & Development, Vol. 12, 1982, pp. 21-35

Conclusion

Unemployment is caused by a lack of spending in aggregate. Currency issuing governments can always hire the unemployed, thus making unemployment a political choice. If the vast majority of the population understood that we could begin to dismantle pernicious unemployment system that punishes people for a failure of our governments to create enough work for all.

Comments from ACTU on ‘helping people get back to work’ are not helpful unless they are backed by a call to abandon targeting of fiscal positions and have a full employment policy. There seems to be little understanding from the ACTU leadership unemployment and underemployment is one of the largest factors that act as wage suppression. As there are more people seeking work, employers have their pick of employees. It is a disservice to the workers they represent. Though workers have come harder to find for some sectors, there are still just under 1.4million under-utilised workers in Australia.

Solidarity with under-utilised workers would call for an end to mutual obligations, an abandoning of fiscal targets, lifting the unemployment rate to at least $88 a day, a full employment policy that guaranteed more hours of work available than demanded and the implementation of a Job Guarantee.

Economists are as Trustworthy as Astrologists

Every economists and his dog has written something on inflation and wages. Opinion on what *should* happen is as colourful and as mixed as a fruit and nut mixture and tends to reflect an ideological preference for either workers or capitalists.

I’ve documented my understanding of inflation as a conflict between labour and capital over national income in my last three blog posts.

Capital Rule: Interest Rates, Inflation and The RBA
Inflation is a Conflict
The Flawed ‘Logic’ of Capital

The increasing costs that result from a rise in fuel prices have capital pass on those costs rather than reduce profit margins.

Today unlike the 1970s, the legislative and institutional arrangements leave labour unions without much of an avenue to effectively ‘fight back’ and gain real wage rises.

I think it is important to recall from an MMT perspective to remember the source of the price level

With the state the sole supplier of that which it demands for payment of taxes, the economy needs the state’s currency and therefore state spending sets the terms of exchange; the price level is a function of prices paid by the state when it spends. 

There are two primary dynamics involved in the determination of the price level. The first is the introduction of absolute value of the state’s numeraire, which takes place by the prices the state pays when it spends. Moreover, the only information with regard to absolute value as measured in units of the state’s currency is the information transmitted by state spending. Therefore, all nominal prices can necessarily be traced back to prices the state pays when spending its currency. 

The second dynamic is the transmission of this information by markets allocating by price as they express indifference levels between buyers and sellers, and all in the context of the state’s institutional structure. 

The price level, therefore, consists of prices dictated by government spending policy along with all other prices subsequently derived by market forces operating within government institutional structure.

https://docs.google.com/document/d/1sySbx6EHOAYpAjE4FGnYApdZNyY6rh79KzajZxSU884/mobilebasic

From the above perspective and understanding the Government through its regulatory powers has a lot of non-monetary tools to administer prices. That train of thought seems to be absent amongst the public intelligentsia that comment within the mainstream media. The public discourse is as simplistic as wages can and should rise by inflation, or real wages need to be cut because it is/isn’t inflationary.

However little comment is made to the understanding Inflation is distributional. If someone is paying more, someone receives more. The question should be focused on who is benefiting.

Then there’s the discussion on interest rates. I haven’t read a mainstream commentator dismiss monetary policy as useless. I summarised the effect of interest rate in my post Capital Rule: Interest Rates, Inflation and The RBA

The academic theories usually fall back to the higher cost of money meaning a slowing of spending which is the narrative perpetuated in the media. This is propaganda. An increase in the cash rate means; 

1. Increased income for asset (bond) holders; 
2. Rewards markets that have placed bets on rates rising;. 
3. Increased mortgage costs (and reduction on discretionary spending for households) and increased bank profits; 
4. Increased cost for business that have borrowed to fund their capital (likely to be passed on to consumers)

What the net outcomes of the distributional effects of raising the cash rate is inconclusive. But it is probable that businesses will pass on rising costs to consumers. Which is inflationary.

https://jengis.org/2022/06/09/capital-rule-interest-rates-inflation-and-the-rba/

Monetary Policy is a blunt and flawed policy Instrument

The flawed framework of using monetary policy continues to hurt the working class. The ALP Government has now conceded that wages will need to be cut in real terms, (source) agreeing with the Governor of the RBA.

“Three-and-a-half per cent is kind of the anchoring point that I want people to keep in mind,” he says. In other words, it’s a continued real wage cut for most workers in the short term — if we’re to stay on Lowe’s preferred path.

https://www.abc.net.au/news/2022-06-23/rba-boss-philip-lowes-plan-out-of-economic-trouble/101175018

The way we use monetary policy is effectively a threat to The Australian working class. Accept real wage cuts or we raise rates on your mortgages and take your income via another means. It is the most perverse framework and anti-working class.

Though Capital isn’t terribly clever. Their cuts to real wages undermine pushing increasing debt onto households. Australians have enjoyed real wages growth (despite failing to match productivity increases) – The difference between real wages and productivity growth has gone to profits. To maintain sales and realise that profit (as workers haven’t earned enough to purchase that output) Capital has deregulated financial markets and placed increasing debt onto households. Australians are amongst the highest indebted households in the world. Pushing debt onto households becomes harder in an environment of wages falling in real terms. That may manifest as a recession.

Deficit Myth Prevails

In this article Brakes on spending: Albanese warns of budget cuts it seems our newly elected Government falls into the same trap as the previous Government that it’s spending needs to be constrained by revenue. The word revenue is derived from the latin ‘re’ meaning back and ‘venire’ meaning come; Revenire literally means come back. That is your taxes come back to the monopolist of the currency that had to spend it in the first place.

With budget deficits forecast to reach $261.4 billion over the four years to 2025, the incoming government is rejecting some spending options despite pressure from state leaders and community groups for long-term boosts to outlays on health and social services such as Newstart.

https://www.smh.com.au/politics/federal/brakes-on-spending-albanese-warns-of-budget-cuts-20220623-p5aw7s.html?utm_medium=Social&utm_source=Facebook&fbclid=IwAR1pF6_ay8xqU3FSM50VEnNOWSumIG3WpvxAhWc3aRC_fJsbPxppunatd5A#Echobox=1656013729

Under the guise the government needs to ‘save’ money by reducing it ‘s spending and the need to cut spending because of inflation are excuses made that ensure the most vulnerable people in our society continue to suffer and are left poorer in real terms! The Government can engage in providing universal services like free childcare which have a deflationary impact!

Conclusion

It looks like workers (including me) are set for real wage cuts. It is likely this will manifest as increasing unemployment, increasing rates of home foreclosures and all the social impacts these things bring. The Governments fiscal policy of spending cuts make things worse!!

That is all from me!

The Flawed ‘Logic’ of Capital

My last two posts, Capital Rule: Interest Rates, Inflation and The RBA ,and Inflation is a Conflict looked at how inflation is a conflict over national income (GDP) and the tools used to ameloriate the conflict (monetary policy) between labour and capital benefit capitalist. The labouring class over the neoliberal era are almost powerless to protect their real earnings. I used the excellent article Inflation and Marxist Theory by Pat Devine published by the British Communist Party in Marxism Today, 1974 that analysed this dynamic from an understanding that inflation isn’t a monetary phenomenon but a result of conflict.

I’m not a formally trained economist but with enough ‘self study’ you can easily see the nonsense paraded by our political elite that use language to frame inflation as some external phenomena and how they are working tirelessly to ‘fight’ it.

If our governments were concerned about rising prices, why didn’t our governments keep (or restore) free childcare, that had a negative impact on the consumer price index as it removed that costs from households, why hasn’t the government decided to keep gas for domestic purposes for our short term energy problems on the east coast and claimed ‘sovereign risk’ as a reason why it can’t.

CHRIS BOWEN: Well, those contracts are private, and the mechanism is about uncontracted gas by and large. And you know, you do have to be careful about sovereign risk and you can’t create sovereign risk. That’s a challenge.

https://www.abc.net.au/7.30/energy-minister-chris-bowen-speaks-to-7.30/13922844

Sovereign Risk is a term used to describe the risk of governments defaulting on their own debt. A nonsensical proposition when you understand the difference between the currency issuer and currency user. When you can grasp that, you can see the governments decision is about protecting the profits of a corporation over meeting the energy needs of our population.


Lowe’s Woeful Interview

The Governor of the Reserve Bank of Australia was interviewed on our public broadcaster recently.
I think the dynamics of the class conflict can be highlighted by the framework and commentary made by the RBA Governor.

“Well I think Australians need to prepare for higher interest rates. We had emergency settings during the pandemic – that was the right thing to do – but the emergency is over and it’s time to remove the emergency settings and move to more normal settings for monetary policy. “

This is a statement of intent. The RBA chooses the cash rate and can set the yields on government bonds. It is literally the decision of the monetary policy committee at the RBA which is chaired by Lowe. So if Lowe thinks rates need to be higher, they will be higher.

The question remains as to whether higher rates will bring down the current rate of inflation (see previous posts). And I remain doubtful that they will. The Governor himself admitted there are households that will struggle.

“We certainly are and we spend a lot of time looking at the disaggregated data because we know that even the increases in interest rates so far are putting pressure on some families’ budgets. They’re coping with higher interest rates, higher fuel prices, higher food prices, so we know already for some households they are finding it difficult.”

As a unionist and someone that feels we need to empower the working class, why would we use a framework that places real pressures on individuals and families to help bring down a general price level. The RBA strategy of hiking rates will cause unemployment in the hope it curtails enough demand off our energy usage it drives prices down!

There are regulatory tools we can be using to control prices. A cut to real wages (via bargaining processes and increasing mortgage rates) causes a multitude of social costs. This method (real wages cuts) was tried over the 1930’s with disastrous results. Have a read of The Struggles of the Unemployed published in the UK’s ‘The Labour Monthly’ in 1932!

Real Wage Cuts For the Working Class

This is the first time since the post war boom Australian workers have experienced real wage cuts.(wages adjusted for movements in the CPI) It will be interesting to see what happens. Over this neoliberal era ad wages failed to rise with productivity (but maintained real growth) Capital maintained sales growth (and profits) by deregulating the financial markets and foisting more debt onto workers. That becomes more difficult in an environment where your real wage is falling.

https://www.theguardian.com/australia-news/2022/feb/09/we-just-get-nothing-why-australias-falling-jobless-rate-isnt-translating-into-higher-pay

Conclusion

Sometimes people speak of inflation as an abstract phenomena. It is important to remember the current inflationary pressures are caused by Capitalists able to pass on increasing costs. Inflation is a redistribution of purchasing power. If I am paying more, someone is getting more. It isn’t necessarily because there is ‘too much’ spending. If anything, we need more public expenditure as we are well below full employment.

I am supportive for the responsibility of full employment (more hours of work available than demanded) to be given to Treasury (with a Job Guarantee in place) and removing it from the responsibility of the RBA. I’d then have a zero interest rate policy and for the RBA to monitor inflationary pressures in supply chains, labour underutilisation, and to manage the payments system because our current institutional arrangements are benefiting the wealthy!

Inflation is a Conflict

I’ve seen texts written by progressive economist on the sources of inflation being driven by supply side issues and not because of demand-pull (wages). They’d be correct!

Their articles detail how rises in rates won’t assist with prices rising from supply side issues. However, one ended by stating the RBA needs to be clear why it is hiking rates and it is for financial system stability. There are issues with the way they are thinking about inflation and the role interest rates play in our society.

Inflation is viewed in terms of rising prices and economic instability. The raising of rates is supposed to ‘cool’ down the rate of inflation. It is often juxtaposed within a context of rising housing costs as the commercial banks often increase their mortgage rates by the same amount. Rising rates are supposed to mean subdued house price growth. Low rates over the last decade have been seen as abnormal which has sometimes been interpreted as one reason for our current high housing costs and a contribution to our inflationary problem. The reality (I think) is very different. The fact that the cost of housing is so entrenched in the public discourse and tied to the cash rate rises makes it difficult for regular people to seperate the two concepts and seek alternate policy for what can be done about rising prices (and housing). There isn’t a level of ‘normal’ rates that needs returning to; nor is there a particular cash rate needed to create some sort of ‘system stability’.

Inflation needs to be viewed by more than just rising prices. It is a conflict between labour and capital over national income. Pat Devine penned Inflation and Marxist Theory, in Marxist Today, 1974 describing inflation as a conflict over competition resources.

Competing Claims on Real Resources
Thus, whether through trade price effects on the real wage, through the influence of international competition on the extent to which cost increases can be passed on or through international influences on aspirations for higher real wages, the international character of the capitalist system impinges on the struggle between capital and labour—the fundamental cause in post-war conditions of chronic inflation.

Inflation and Marxist Theory, Marxist Today, 1974, p.84

I stated in my previous post that we couldn’t know what the net outcomes of the distributional changes of a rise in the cash rate would be. Businesses who have borrowed to fund capital may pass on increasing cost to consumers, we also see an increase to those holders of government debt, as consumers cutback to service increase mortgage costs. So as to whether an increase is deflationary is circumspect.


Today we discuss inflation within a framework where it is the responsibility of the Central Bank to target a particular inflation range.(2-3%) The tool used to do that is monetary policy (interest rates). Historically central banks have not targeted an inflation rate.

In September 1997 a speech Monetary Policy Regimes: Past and Future the then Governor gave an overview of monetary policy

  • the fixed exchange rate period, which lasted until the early 1970s;
  • a period of monetary targeting between 1976 and 1985;
  • a transitional period which followed the demise of monetary targeting and lasted until the early 1990s; and
  • the inflation targeting regime, in place since around 1993.

The first point shows the first regime was to ensure an exchange rate parity

“As was the case for most other countries, the Bretton Woods System of ‘fixed but adjustable’ exchange rates was operated in practice in Australia in the 1950s and 1960s as a firm commitment to fixed parities. The fixed exchange rate was effectively the linchpin of the monetary policy regime.”

https://www.rba.gov.au/speeches/1997/sp-gov-290997.html

The rate wasn’t altered because inflation was deemed ‘excessive’ rather there was a concrete goal that the exchange rate between the $AUD and $USD should remain at a particular parity. The particular ‘inflation targeting’ we see today evolved from the 1970s oil shocks that sent inflation and unemployment to high levels as the Post-Keynesian framework couldn’t offer a solution.

Devine summaries the monetarist theories that would eventually gain hold of the economics profession.

Monetarist Theories
“Most recently at the theoretical level there has been a vigorous offensive by some neo-classicals in the form of monetarism, receiving its impetus from the self-evident demise of the stable short-run
Phillips Curve relationship. An attempt has been unconsciously and influenced by what has become made to salvage the role of excess demand, in the traditional form of a long-run vertical “Phillips Curve” at a “natural” rate of unemployment, by introducing expectations, with the policy implication of the need to stabilise expectations by pursuing strictly a widely-publicised course of expanding the money supply at a rate equal to that of estimated long-run productivity growth. The ideological function of bourgeois economic theory, especially neo-classical theory, is seen here at its clearest.
***
The attribution of the cause of inflation to asocial abstractions like the money supply, or excess demand, obscures the social conflicts underlying the chronic inflation of modern capitalism. Thus, to say that inflation can be “cured” by curbing the rate of increase in the money supply is in fact merely the currently fashionable way of saying that state expenditure on the social services and welfare pro- grammes should be cut, or that private consumption should be held back by increasing taxes, or that unemployment should be allowed to increase until the workers come to their senses.”

Inflation and Marxist Theory, Marxist Today, 1974, p.87

Devine was discussing the idea that monetarist believe it is the money supply that caused inflation and their solutions ignored that rising prices also meant a rising income of those charging higher prices. If the costs of goods and services increase, the labouring class would use their power to combat the rise in those prices. Monetarism was successful in its approach in taking over the profession and using its methodology to combat inflation, rising unemployment. The NZ film In a Land of Plenty provides what happened when the NZ government abandoned its role in providing full employment and targeted inflation as a goal.

Those same flawed arguments rare used today. It is assumed the raising rates will ‘cool’ spending, despite the issues not arising as a result of wage pressures (and despite commentary to the contrary) Arguments today ignore tend to ignore social conflict taking place. It is the price setting power that firms hold that sees increasing costs being able to be passed on. Today the labouring class doesn’t hold the power to ‘fight back’ as union laws have been constructed to limit bargains power and densities are at their lowest points since the post-war boom.


I am in day four of my covid isolation, trapped in a hotel room. I came across this tune I’d forgotten about. I’ve always been a fan of 1950s Jazz and the wonderfull Ella Fitzgerald. I was watching a film (that isn’t worth mentioning in) but it had a remake of the song ‘They all Laughed’ and I was reminded of the Ella and Louis version.

Capital Rule: Interest Rates, Inflation and The RBA

I’ve been absent from my blog for a while. Sometimes your intentions don’t get realised and life gets in the way! I’ve decided to recommence posting as I learn more about macroeconomics and political economy (a lot of self study) and throw my thoughts out into the public. I find it infuriating that the media has economist spouting bullshit and it just seems to be taken as gospel. If any behavioural scientist out there can explain why orthodox economics hasn’t been delegated to the bin after covid (debt and deficit fears, inflation fear mongering etc..) please share your thoughts. Plus I am trapped in a hotel room with covid. The last few days I’ve been knocked out with sore joints and muscles, a sore chest, coughing, fevers, runny nose, headaches. It’s the worst I’ve ever felt from a virus. Nothing has been ‘mild’ (as some like to make out) and I am triple vaccinated – with my last jab some 5.5 months ago.

It’s not all bad. I took this lovely shot from my room of the sunset.

Anyway…. to our topic at hand!

There is a lot of who-ha on interest rates in the media. Economists that think they should go up (or they’ve gone up too fast/slow) endless talk of inflation, printing money, government spending being too much blah blah blah…. It is safe to toss anything paraded by an economist in the media into the bin with the understanding they are full of trash.

Let us take a deep breath and look at what these decisions mean and whether they will have the desired results. First we need to understand the interest rate discussed in the media is – and how we define inflation.

What is the Interest Rate?

The interest rate referred to is known as the cash rate – and the rate the RBA targets that banks loan to each other. That is the 0.85% figure. In the same way you have an account with a financial institute your financial institute has an account at the RBA. These accounts (known as exchange settlement accounts) need to be positive at the end of each day and account holders who are short need to borrow from account holders who have surplus reserves.

The RBA has started publishing the interest rate it pays on exchange settlement accounts. This is 10 basis points below the target rate. Banks with surplus reserves won’t loan below that rate (currently 0.75%) and they attract a higher interest rate 10basis points above the target to borrow from the penalty window (directly from the RBA) This has banks loaning to each other at around the RBA’s target.

What is Inflation and why is it here?

This is a complex question. There is lots of debate, though most of it not worth listening to, about what causes inflation. I detailed some of that in the mythology of printing money part II and you can see more about inflation here and here. Simply inflation is a rise in the general price level. That in itself is an abstract concept however it’s purpose is to try and eliminate price rises so economists can determine whether real output is growing.

Orthodox economist will usually come out with nonsense around the money supply growth and ‘printing money’ being inflationary. The first thing to acknowledge is that any spending can be inflationary irrespective of who is spending it. Second ‘printing money’ is nomenclature that doesn’t apply to any spending operation in our economies today. The term has its origins when governments started banning private note issuance on notes issued by private banks and started issuing their own treasury notes. You need only look at the hansards from The Australian parliament from 1910 and the introduction of the Australian Notes Act to see the nonsense paraded how it would end the economy and be destructive! Currency is a public monopoly issued by the state. It spends by marking up bank accounts. Once you’ve disabused notions of the nonsense of printing money we can look more seriously at what is causing prices to rise.

The ABS last released CPI results on 27/04/2022

  • Fuel prices caused by easing of covid restrictions and war in Ukraine
  • Rental markets reflecting historically low vacancy rates
  • Grocery products because of transport costs
  • Rising construction costs mostly because the removal of government construction grants that had the effect of reducing out of pocket expenses for consumers.

We can see quite clearly the price increases are a result of supply side issues, due to fires and floods we’ve had, the oil companies cartel behaviour and even the removal of government spending. When you hear politicians or economist say the government should’ve spent less that is simplistic. Government spending can be deflationary – you only need to see my post on the effect of childcare being made free to see what effect that had on the CPI.

Once you break the myth of deficits accumulating debt and it needing to be paid back by our currency issuing government here are some things that can decrease our cost of living.

  • Publicly owned renewable energy infrastructure with a free quota delivered to every household
  • Universal free childcare
  • Parental leave paid at minimum wage until youngest turns 5
  • Free public transport and investment in mass public transit systems
  • Legislated work from home rights
  • Social housing for the masses with buildings built to suit location and strict environmental standards.
  • Expansion of public services to include building local communities and paying people to work in things we currently volunteer for (e.g community gardens, surf life safety, arts etc..)
  • Free Universal Broadband
  • Public Bank to regulate credit markets

My above list reflective of my value system. Our currency issuing government always has the capacity to finance those services, it is a question of whether we have the labour skill and other resources in sufficient quantities to provide them.

What does the Interest Rate have to do with Inflation?

By now the layperson is usually grappling with why the Reserve Bank would be hiking rates to bring inflation down. The academic theories usually fall back to the higher cost of money meaning a slowing of spending which is the narrative perpetuated in the media. This is propaganda. An increase in the cash rate means;

1. Increased income for asset (bond) holders;
2. Rewards markets that have placed bets on rates rising;.
3. Increased mortgage costs (and reduction on discretionary spending for households) and increased bank profits;
4. Increased cost for business that have borrowed to fund their capital (likely to be passed on to consumers)

What the net outcomes of the distributional effects of raising the cash rate is inconclusive. But it is probable that businesses will pass on rising costs to consumers. Which is inflationary.

How we should think about Inflation

Inflation is a conflict between labour and capital. The labouring class has little power to negotiate higher wages because of neoliberal governments that have suppressed abilities to bargain (including striking) and abandonment of full employment where as a society we targeted more hours of work than demanded. Currently, capital has the ability to pass on cost increases (or blindly profit gouge) and workers have little legal recourse to fight for higher wages.

And to make things worse for the working class, our governments claim false fiscal constraints about needing to ‘balance books’ claiming it is too expensive to provide universal social services and allows corporations to profit the services we need!

Conclusion

I’ll let you draw your own conclusions on the RBAs decision to hike rates. I think increasing mortgage costs on heavily indebted households is not a great way to reduce inflationary pressures. Monetary policy is a blunt tool that should be tossed into the bin. Any increase in unemployment will be caused by the contraction in spending and may have a negative impact on the CPI, but it hardly solves any of the supply issues and creates more jobless!

We need a populist left agenda around a public bank option with low to zero interest rates on our homes and heavy regulated credit rules (to keep land affordable). I would also merge the current tasks of the central bank into treasury and create a government body in charge of monitoring supply bottlenecks and preparing the best ways to mitigate them and dare I say it use price controls to keep our essential items affordable.