Today at 9.30am the Reserve Bank, as expected, decided to leave the cash rate target on hold at 6.25%. Sadly, there is still no commentary when “no change” decisions are delivered.

US Fed Chief Ben Bernanke overnight spoke on “The Level and Distribution of Economic Well-Being”:

“… three principles seem to be broadly accepted in our society: that economic opportunity should be as widely distributed and as equal as possible; that economic outcomes need not be equal but should be linked to the contributions each person makes to the economy; and that people should receive some insurance against the most adverse economic outcomes, especially those arising from events largely outside the person’s control”.

The three principles seem self-evidentially true to most Americans and, we add, Australians, but there are a host of practical issues. “Even when we accept these principles, however, important questions remain. For example, what is meant in practice by equality of economic opportunity? Some might limit the concept to the absence of overt discrimination against particular individuals or groups, while others might extend the term to encompass universal access to adequate housing, education, and health care.”

Chairman Bernanke spends most of the talk on the forces making for greater inequality. It seems it’s all about productivity, which is why the apparent decline in Labor productivity in Australia this century is ringing an important warning bell. Productivity is heavily related to education, which is why Kevin Rudd is on a winner with his vision for educational reform (and increased spending). Other factors canvassed by Bernanke include executive greed, (and greater uncertainty about their tenure), improvements in information and communications technologies, globalisation and “changes in the institutions that have shaped the labor market over the past few decades”, including the decline of unionism.

And, in conclusion:

“… the challenge for policy is not to eliminate inequality per se but rather to spread economic opportunity as widely as possible. Policies that focus on education, job training, and skills and that facilitate job search and job mobility seem to me to be a promising means for moving toward that goal. By increasing opportunity and capability, we help individuals and families while strengthening the nation’s economy as well”.

Interest rates and monetary policy were not, so far as I can see, mentioned at all. Chairman Bernanke could have mentioned the desirability of keeping monetary policy on a firm and even course so as to minimise the need to hit the brakes causing recessions from time to time. But this is a quibble. This is a fine speech that deserves careful attention.

Read more at Henry Thornton.

Peter Fray

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