There’s a booming economy. There’s a Labor Government committed to tax cuts, which are expected to fuel inflation, but could also forestall a wages break-out. There’s a spiralling current account deficit, and a Reserve Bank that has bumped interest rates up repeatedly to try to slow the economy and address worsening inflation figures.

Welcome to 1989. Keating’s recession we had to have is barely 12 months away. A calamitous, prolonged recession that inflicted joblessness on over a million Australians.

Despite later defences from the likes of Ian Macfarlane, the length and severity of the recession of the early 1990s represented a failure of Australia’s political class: not merely the Hawke-Keating Government, but its senior bureaucrats and the Reserve Bank. All of them endorsed a policy that interest rates be kept at punitive highs, oblivious to the impact on the real economy, and then failed to lower them quickly enough when the penny dropped that the economy had stopped cold.

There were few economists and commentators who deviated from that party line, either. Even the Opposition, led by Andrew Peacock and his young shadow Treasurer John Hewson, criticised the Reserve Bank’s easing of interest rates in the lead-up to the 1990 election.

In hindsight, it was clear that there was a disconnection between Canberra-based bureaucrats and politicians and the real economy in the suburbs and shopping malls of the rest of the country. Some Treasury bureaucrats were even relocated to Sydney and Melbourne in subsequent years to ensure some sort of relationship between Planet Earth and the capital.

What’s to stop the Reserve Bank repeating the mistake of nearly 20 years ago? Most of the Bank’s senior executives are long-term Bank staff, but, not surprisingly, none were in the thick of it in 1989. The Bank’s Board was then composed of senior business executives (including the ill-fated Brian Quinn), an academic economist and Bill Kelty.

It’s a similar mix now, though without the ACTU rep. It’s not clear that the current Board is any better placed than its predecessors to provide an accurate perspective on how interest rates are affecting ordinary Australians. Only Ken Henry, who advised Keating throughout the last ’80s and early ’90s, has been through this before.

But, critically, the Bank has made a deliberate approach to improve its understanding of what is happening in the real economy, through extensive consultation with businesses, particularly retailers. It has also improved its own internal flow of information from across the country.

The RBA, with inflation slain by the recession, managed to engineer sustainable growth throughout the 1990s and 2000s. The re-emergence of inflation now is the first serious test since 1989 of the bank’s capacity to curb it while minimising the (regardless of what Wayne Swan says) inevitable damage to employment. It will also test the bank’s internal improvements to its understanding of the economy.

Malcolm Edey today indicated the RBA already thought growth was slowing. Hundreds of thousands of Australians will lose their jobs if Edey and his colleagues haven’t got it right.

Peter Fray

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