Wayne Swan was embarrassed by Nairu yesterday. No, not Nauru, the phosphate-rich island once used as a holding facility for unwanted refugees. Mr Swan’s problem was with NAIRU, the non-accelerating inflation rate of unemployment, a concept you’ll rarely hear discussed in the front bar of your local, unless of course your local attracts thirsty macro-economists.
Shadow Treasurer Malcolm Turnbull asked what Mr Swan “regarded as Australia’s current non-accelerating inflation rate of unemployment expressed as a percentage? If the Treasurer regards that rate to be higher than 4.1 per cent, how many Australian jobs does he believe should be sacrificed to achieve it?”
To paraphrase Mr Swan’s response: “I thank the honourable member for his question, but I have no idea what he is talking about.” So here are some other economic theories the Treasurer could familiarise himself with, if not to protect himself from Malcolm Turnbull’s clever questions, then to get a firmer grip on the Australian economy.
Automatic stabilisers: When income is booming and tax receipts increase, the surplus increases to absorb some of the pressures on the demand side of the economy. This year’s tax cuts will violate those automatic stabilisers by stimulating demand.
Labour cost index vs average weekly earnings: Average weekly earnings is the gross number that doesn’t take into account the change in the composition of the labour force. For example, it doesn’t take into account people who move into more senior jobs and earn more, whereas the labour cost index does. Very important in gauging wage price pressures and their effect on inflation.
GNE: “Gross national expenditure really captures what is spent in the domestic economy and is a measure of domestic demand. That’s what the Reserve Bank is very concerned about right now,” Macquarie Bank chief economist Richard Gibbs told Crikey. “We need to clearly delineate what is coming in terms of the terms of trade and what is actually being spent.”
The Lucas Critique: The argument that the government can’t do anything because the population will know what the likely effect of the policy is and immediately change their behaviour to neutralise the government’s attempt to fool them. “In his own Treasury, Mr Swan will have economists quoting it to him, but he needs to know its codswallop,” says Associate Professor Steve Keen, author of Debunking Economics.
Tradables vs non-tradables inflation: Australia publishes separate inflation rate for those two classes of goods. Tradables are items we trade or could and includes petrol and bananas, and non-tradables are everything else, primarily services.
Output gap: The difference between actual GDP and potential GDP. Shane Oliver from AMP Capital Investors explains: “If you’ve got a positive output gap that means you are running below potential, that is, there’s a lot of excess capacity in the economy. Whereas if you’ve got a negative output gap, there is no excess capacity. Given the rise in inflation in Australia, most economists would say we are breaking even or running a negative output gap.”
GOS, or gross operating surplus: Chris Caton, chief economist at BT Financial, calls this “the term that brought John Kerrin down. When he was reading out the national accounts, he said, ‘GOS, GOS’, what’s the GOS?’ It was very big moment in his short-lived treasureship.” Basically, it refers to the profits made by companies.