To cut or not to cut? Viewers of The Drum on ABC News 24 just after 6.15pm yesterday would have seen a delicious difference of opinion among from News Ltd’s in-house economists.
There was Jessica Irvine, the company’s new economics face and national economics editor for News Ltd’s tabloids (headhunted from The Sydney Morning Herald because economics guru Ross Gittins wouldn’t retire) and the economics correspondent of The Australian, Adam Creighton (who has some Reserve Bank in his pedigree), disagreeing about whether there will be a rate cut from today’s meeting of the RBA board.
Irvine argued quite strongly why there should be a rate cut. Creighton, hired to fill out the economics coverage at The Oz after Michael Stutchbury
set out to clone The Oz at defected to The Australian Financial Review, donned the hairshirt of the conservative economist and argued why there shouldn’t be a cut.
Creighton in fact went further and argued that instead of a rate cut we should be cutting government spending, public servants and programs, that fiscal policy (in the hands of government) was more important than that little figure overseen by the RBA. It was a real hard Right blast, right from the John Stone, Des Moore of economic management. This item by Creighton last Friday gives you a flavour of his economic thinking, which is more Bundesbank or David Murray than Glenn Stevens:
“Distracted by Europe’s slow-motion train wreck, Australian politicians are yet to acknowledge that this country is hurtling along the same track. For decades, European governments have absorbed more and more of their countries’ incomes. The global financial crisis merely accelerated a trend that has long been apparent.”
Nonsense. Even accepting the argument, governments at federal and state levels are currently cutting spending, with plenty of consequences for public servants across the country. The Gillard government has got tax down 2-3% of GDP from the high-taxing levels of the Howard government. Overall levels of spending aren’t an economists’ parlour game, they have real consequences. Creighton is too young to remember the pain of the last recession in the 1990s and the impact of the wrenching reforms in the 1980s and 1990s as well — or what happened to a generation of blue-collar male workers when we combined the two. Australia went through many of the reforms in those decades that Europe is now only starting to grasp.
In fact Europe has become for right-wing economists an all-purpose bogeyman to threaten the rest of us with, if we don’t embrace their creed that any regulation, any taxation, any restraint on business is too much, when the depression in which much of the Continent is now mired is testimony not merely to decades of policy indolence and lack of reform, but the current focus on fiscal martyrdom coming from the Axis of Austerity in Frankfurt, Berlin and Brussels.
The conservatives also forget a the key difference with Europe: we have a flexible, independent currency, while the eurozone is yoked to a single currency that in turn is anchored on Germany, which is running huge, destabilising current account surpluses, dramatically reducing the capacity of peripheral countries to adjust and trade their way out of recession.
Irvine leads News Ltd’s “shadow RBA”, a clutch of economists invited to predict what the RBA will do. It seems News was miffed that alumnus Stutchbury seized on using the original shadow RBA — an ANU project run out of ANU College of Business and Economics — for the AFR, so it set up its own version. The News Ltd shadow has a bit more of a Hollywood feel to it, with the popular Irvine and celebrity gloomster Steve Keen. Perhaps the two boards can have a pitched battle in Martin Place to see who gets to claim the “Shadow RBA” title — although obviously the esteemed Saul Eslake would have mixed feelings as he’s on both.
This morning in the News Ltd tabloids this morning Irvine suggested that a rate cut is coming, but probably next month. But she thinks the need for a cut is more immediate: There have been three important developments since the board last met. Lower commodity prices have dampened activity and jobs growth in the fast-growing part of the Australian economy,” she argued.
All shadow board members might want to pay attention to what the RBA actually says. In its most recent statement of monetary policy, it observed about the state of domestic demand:
“Recent growth has been broad based across both goods and services, following a period of relatively stronger growth in services consumption. The data indicate that the strong growth in consumption volumes partly reflects falls in some retail prices. Discounting in many parts of the retail sector appears to have been driven by increased competition, including from overseas and domestic online sellers, and by consumers being more value conscious. Ongoing growth in household disposable income has allowed households to increase consumption while maintaining a saving ratio of around 10 per cent of income, well above the levels recorded in the 1990s and early 2000s.
“Indicators suggest that consumer spending has retained considerable momentum in the June quarter. Growth in the volume of retail sales remained above its pace of late 2011, sales of motor vehicles to households increased strongly and the number of Australians travelling overseas has continued to increase over recent months …”
That is, looking at all the data, it’s harder to conclude that the economy needs stimulus — to the extent it would get it from a 25-point cut — than appears to be the case from the commentariat. The issue is external threats, and how they’ll affect the economy over the coming 12-18 months. That means Europe, and its impact on China. And on that basis, the RBA probably will cut at some point soon.
Too vague for you? Ah well, sorry, but we’re not a shadow RBA.