The Reserve Bank – prodding along the next economic downturn

Recovery morphing to a downturn

Last week, as we all know, the Reserve Bank hiked interest rates from 0.1% to 0.35%. It also forecasts current growth (GDP) to fall from about 4.25% this year to about 2% 12 months later. Only one journalist – to my knowledge – has picked this up.

The economic recovery of sorts is happening. However, Australia’s mainstream economic pundits are slowly starting to discuss the possibilities of an economic downturn in 2023. The discussion and the reality are already more advanced in other advanced economies.

Economic growth falling by half. That is serious.

The Bank does suggest that the possibility of error in that forecast is relatively high. Growth could be better, or it could be worse. They sit on the fence between certainty and doubt.

Almost certainly downward pressure on wages and the standard of living, in general, is a contributing factor. The “recovery” is fraught for most of us, just not happening for many, and healthy for a small minority.

Food banks are also a part of the Australian economy. They operate as charities that supply to other charities. They are already overwhelmed. Foodbank Australia described 2021 as follows:

“One in six adults in Australia haven’t had enough to eat in the last year and 1.2 million children have gone hungry. Foodbank provides food relief to more than a million people each month.”

Homelessness is also a part of the economy and is bad and getting worse.

Last week the Reserve Bank governor gave barely a passing thought to hungry and homeless people in announcing the Board’s decision.

The Reserve Bank is one of the great pillars for managing Australian capitalist society (along with the government itself, the main economic bureaucracies like Treasury, and the Fair Work Commission), owned by the government and deeply interwoven with the global banking system.

Its management method is NOT solving the major problems, also known as crises, in the interests of the Australian people. (More on this below.)

The Reserve Bank’s interest rate hike

The RBAs interest rate hike can be looked at either within the framework of the economic theory that it believes in, or, by using an economic theory that disagrees and challenges it. The latter does not accept Reserve Bank decisions and statements as an xpert, infallible holy writ.

The Bank’s Charter is set in law but is then interpreted by the Governor and his Board to be sold to us all as the only possible interpretation.

The Bank’s Charter is laid out in the law that creates the Bank. The Reserve Bank Act. Section 10(2) says:

“It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank … are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:

1. the stability of the currency of Australia;

2. the maintenance of full employment in Australia; and

3. the economic prosperity and welfare of the people of Australia.”

You can see that the Bank’s primary obsession with inflation is not a requirement of the law but, rather, devotion to neoliberal economic theory. The Bank itself puts it this way:

“Since 1993, policies in pursuit of these objectives have found practical expression in a target for consumer price inflation of 2 to 3 per cent, on average, over the cycle. Monetary policy aims to achieve this over the medium term so as to encourage strong and sustainable growth in the economy. The fifth Statement on the Conduct of Monetary Policy, signed by the Treasurer and the Governor in September 2010, records the common understanding of the Government and the Reserve Bank on key aspects of the monetary policy framework.”

The Bank maybe deserves a pass for currency stability, and a serious fail regarding full employment and the “economic prosperity and welfare of the people of Australia”.

I say “maybe” re currency stability because that requires a closer look at the exchange rate than I have space for in this article. (In today’s ABC Online, David Taylor does take this on, and indicates another fail.)

On “full employment” the RBA cannot claim its failed policy has brought us 4% unemployment. Nor can it claim policy success when the only Australians assured of economic prosperity is a rich and relatively powerful minority of 10 to maybe 20% of the population, NOT “the people of Australia”.

The RBA gets away with its policy failures because its embrace of neoliberal theory is supported by mainstream media, governments, and the major corporations that control the economy.

What the governor actually said

Let’s look more closely at what the RBA governor actually said, starting with the Media Release / Statement, his speech that elaborates on that, and the May “Chart Pack” that provides the data to justify the Bank’s decision.

First, he acknowledged the rate hike will cause problems for a big part of the population, especially given assurances last year that he did not expect any rate rises until 2023-4.

Probablywith more to come, the decision aims to dampen demand so that inflation does not get out of hand, which is steadily outside of the 2-3% range it prefers. Yet, there is no solid evidence that demand is the problem. There is strong evidence that “supply” (break down of global supply chains and shortage of low wage manual labour in the farming sector) is the problem.

We have a decision to tackle the wrong “problem” to fit a “theory” that serves the 10%.

Second, he said the hike is necessary because of the stress brought on by inflation … increases in the cost of living. So, he tackles that stress by making things worse for most.

There is zero consideration that profits may be causing or contributing to the inflation trend.

Third, he said that unemployment was very low and heading lower in the next 12 months. Remember, he is predicting growth will halve in part of that time.

Fourth, he said that business investment is picking up. The Chart Pack shows the opposite. (Check the first 3 slides.) Thus, he misleads the people on evidence produced by his own staff. Is this deliberate or incompetent?

Fifth, he said wages were now heading upward because a collection of the Bank’s corporate contacts had told him they were starting to pay some higher wages.

They told him through the Bank’s business liaison activity. He did not produce any evidence of that. The Bank used to have a Business Liaison Unit but that moniker does not figure in his statement. Does it still exist? Not a single journalist challenged this evidence. (Correct me if I am wrong.)

No one knows how many corporations were contacted or who they were or what questions were put to them, or how.

This scientific approach to data collection overrode the data on suppressed wages that we all know about, mainly from the Australian Bureau of Statistics. Some of the ABS data appears in the chart pack and does NOT support his story. A review of enterprise bargaining agreements negotiated this year might help what he says. But he didn’t go to that source, possibly because it doesn’t.

Effectively, the RBA propaganda aims to create a climate that accepts a minimum wages decision from the Fair Work Commission that is way less than the cost of living increases; that is, an effective pay cut that protects and increases employer profits.

Implications for a possible ALP government: “life isn’t meant to be easy”?

Former Liberal Party Prime Minister Malcolm Fraser handled one economic downturn in the cycle of the seventies by urging cuts to both the industrial wage and the social wage. He justified this to the people with his famous dictum: “Life Is Not Meant to be Easy”.

If Labor (Labor/Greens maybe) win the election, they probably will inherit another downturn (as Rudd Labor did in 2007-9).

They will have to manage a drastic economic decline arising from within economic management under an LNP government. The seeds of the next downturn are sprouting inside the current growth swing.

But an LNP opposition and their acolytes in mainstream media will attack Labor for bringing the downturn on.

The issue will be how serious the downturn will be and how they decide to manage it. Stimulus or austerity? For the people? Or corporate Australia?

Now climate change is also at the heart of economic management because Nature is an essential part of the economy. Big picture economic decisions like the Budget and the RBAs can help reduce climate change, especially in pushing (or not) increased and targeted productive investment in decarbonising.

The Annual Wage Review

Another big decision within the election timeline is the Annual Wage Review by the Fair Work Commission. That Review is now into its final weeks. It's economists at 10 paces as the second stage submissions flow in. The ACTU submission increases its claim to 5.5% in the light of the cost of living data and re-buts the employer claims for wage cuts for the low paid through lower increases and their deferral from the proper start date in early July.

The current national minimum wage is $20.33 an hour.

The ALP has now come out in support of a 5.1% increase for Australia’s lowest-paid if that is what the FWC decides.

The Greens, through their leader Adam Bandt, have called for an increase that takes the national minimum wage to 60% of median wages. That takes it marginally above the current poverty line.

A single union submission from the Australian Manufacturing Workers Union takes the same approach and lays out the reasons for that for all workers not just those on the lowest wage. The AMWU submission should be compulsory reading across our modern union movement over the next 2-to Probably withexpert3 years.

I have long been arguing in favour of a more serious industrial campaign in support of the ACTU claim(s). Albanese's statement for the ALP makes something like that essential because the full array of employer and their supporters, including of course the LNP, will be raised against it.

The next week and the decision itself after that can shape the struggle over the standard of living after the election is decided, as will any possible changes to workers’ rights to the Fair Work Act, for better or worse.