The RBA as firm and policymaker

Here is the Financial Times:

Australia has created 1m jobs over five years and its economy is growing at a healthy 3.1 per cent a year, but for workers the “lucky country” has lost some of its shine. Wages growth is stuck near record lows and household debt is among the highest in the developed world.

Average wages grew 2.1 per cent in the year to the end of March, below the 3.5 to 4 per cent levels that Australians enjoyed during a decade-long commodities boom that ended in 2013.

This is causing concern at the Reserve Bank of Australia, which has warned that weak household income growth and high debt posed a risk to the economy. “The crisis is really in wage growth,” Philip Lowe, the RBA governor, cautioned last year as he implored workers to demand higher wages to stimulate the economy.

A few comments:

1. Australia has now gone 27 years without a recession, despite wild swings in the markets for its key commodity exports (iron, coal, food, etc.)  So much for the theory that good monetary policy cannot smooth out the business cycle.  So much for the theory that housing bubbles cause economic instability.  So much for the theory that decade after decade of massive current account deficits are a problem. The naysayers have been telling me “you just wait” since I began blogging in early 2009.  I’m still waiting, and the Australian expansion keeps rolling along.

2.  The RBA is confused.  It is concerned about slow nominal wage growth, but it is the RBA itself that determines Aussie nominal wage growth.  If it wants wages to grow faster, then it should raise the Australian NGDP growth rate.

The consequences of low wage growth are not restricted to workers. Mr Lowe, RBA governor, has warned of a cascade effect whereby it contributes to weak inflation, which keeps interest rates at record low levels — a trend that pushes up asset valuations and social inequality.

Weak wage growth also damps spending by households and restricts income tax collection by the government, which is betting on a rapid recovery of wages growth to 3.25 per cent by 2019-20 to meet its pledge to return the budget to surplus.

Nope, low wage growth, low inflation, low interest rates and slow spending are all caused by slow NGDP growth, aka tight money.

It also poses a risk to industrial peace. Last month, Australia stopped printing money for the first time in 107 years due to a strike at Note Printing Australia, a wholly owned subsidiary of the RBA. Workers are demanding a pay rise of at least 3.5 per cent and have rejected an offer of 2 per cent.

“The RBA is lecturing businesses on the need to lift wages but is refusing to offer its own workers a decent raise,” said Tony Piccolo, regional secretary of the Australian Manufacturing Workers’ Union. “Governor Lowe needs to practice what he preaches.”

The RBA is both a firm and a policymaker.  The RBA as policymaker is confused as to why nominal wage growth is so slow.  The business side of the RBA is fully aware of why this is occurring. It’s “the market”, i.e. slow NGDP growth, which is holding down wage growth.



25 Responses to “The RBA as firm and policymaker”

  1. Gravatar of Christopher Rubicam Christopher Rubicam
    16. June 2018 at 12:49

    How do you think RBA has managed 27 years of growth without understanding the role of monetary policy in wage growth?

  2. Gravatar of Rajat Rajat
    16. June 2018 at 14:20

    Thanks for the post, Scott. You’ve said something like the Fed follows the views of the median academic economist. I think I have made this point before, but Australia has no real coterie of post-1970s PhD-trained macroeconomists outside the RBA. Coupled with the lack of recessions, the RBA is never significantly challenged nor required to respond to new thinking.

    Instead, bored with monetary policy, the Governor and senior executives have expanded into microeconomic advice. The RBA’s news page shows recent speeches on “How Infrastructure Fits In”, “Productivity, Wages and Prosperity” and “Australia’s Deepening Economic Relationship with China: Opportunities and Risks”. What to do? Wait for things to go pear-shaped?

  3. Gravatar of El roam El roam
    16. June 2018 at 14:25

    Boosting growth , has something to do with the central bank , but can’t of course rely solely on that . Monetary policy is a tool among others . The most sustainable and efficient way to do it , is to enhance or render firms more competitive in the International arena . National firms , need to become more innovative . Government needs to invest more in science and development of new technology . The International arena , is yielding in terms of numbers and volume , much more than any domestic one ( potentially ).Stepping in , to huge markets : India , China , US , EU etc…. is the real challenge . All the central bank can do typically, is to create better business environment in terms of the cost of money available for investments and growth ( interest rates ) or , buying concerns bonds . But , that is not the real thing finally . Relying too many years upon one sector ( commodities ) is not a guarantee for long term and sustainable growth ( See Saudi Arabia , and the sovereign fund established recently) .But , Science and technology, have always yielded finally .

    One can think also , of attracting foreign investments , through attractive stock markets and alike .


  4. Gravatar of El roam El roam
    16. June 2018 at 15:20

    Here one may read , about the sovereign fund of Saudi Arabia :


  5. Gravatar of El roam El roam
    16. June 2018 at 16:11

    Here one may read , how the Israeli state , have become the ” Start up nation ” . One major reason is the army , another , is the governmental support , here about the latter :


  6. Gravatar of Lorenzo from Oz Lorenzo from Oz
    16. June 2018 at 16:30

    This perfectly intelligent YouTube commentary manages to say lots of good things about Australia without once mentioning the real reason for no recession for 26 years.

  7. Gravatar of El roam El roam
    16. June 2018 at 16:44

    Just correction :

    The Saudi Arabia sovereign fund mentioned , has been rather re – established , and not established from scratch as could be perceived by my comment .

    P.S : And of course , I don’t compare both economies ( Australia V. Saudi arabia , but the issue of being dependent on commodities )


  8. Gravatar of ssumner ssumner
    16. June 2018 at 17:22

    Christopher, Beats me–how long has Lowe been there?

    Rajat, Let’s hope it stays boring.

    Lorenzo, Thanks for the link.

  9. Gravatar of Benjamin Cole Benjamin Cole
    16. June 2018 at 20:10

    Nice post. Yes, central banks should move to offset trends, and keep an eye on NGDPLT.

    Still, not conclusive that large and chronic current-account trade deficits are a positive. With more-balanced global trade, Australia might have done better, especially given the predilections of central bankers.

    And wages have been dead. That is a serious indictment of any long-term macroeconomic result.

    What has happened to Australian house prices? Exploded! A$1.15 million for a house in Sydney. Aussie banks now will not give loans to foreigners.

    So dead wages and exploding house prices. Is this really a positive result? Can Aussie-land do better?

    Why is this result of dead wages and budget-busting housing costs, now so common across the developed word, considered “positive”? It strikes me as abject failure.

    “Jun 28, 2016 – National Australia Bank is the last of the big four banks to clamp down on foreign home buyers, after it stopped lending to those who could not …”—-

    The NZ version:

    “Capital outflows from China may have had a bigger impact on … 10, 2561 BE
    In some Auckland suburbs nearly 20% of all sales were to overseas buyers. …. Struggle To Fend Off “Unstoppable Juggernaut” Of Chinese Homebuyers ….. Australian banks liar loans could easily intensify any downturn and generate an …”

    Now Aussie home prices may crack, say pundits. What will happen to Aussie banks if real estate collapses? BTW, Aussie banks extend “recourse” loans. In the US mortgage are “non-recourse.” In the US, banks can seize your house after you defaultm but it stops there.

    In Aussie-land, the banks go after all of your assets. Well, at least they do not have debtors’ prisons, AFAIK.

    I think the RBA has done well with its inflation-band targeting, of 2% to 3%. That is not the Fed’s 2% monetary noose. The RBA has a better plan.

    NGDPLT is even a better plan.

    But dead wages and exploding house prices are not a success story.

  10. Gravatar of Michael Sandifer Michael Sandifer
    16. June 2018 at 21:23

    Productivity growth has been low in Australia for over 4 years. So, tight money is responsible for the low productivity growth. Why can’t the same be true of the US at the moment?

    True, Australian unemployment is about .75% higher than it was in 2008, and inflation’s relatively low. It certainly looks like a tight money situation and the case of the US is not as clear.

    But, I just think it’s too convenient that productivity slowed down in the US, many European countries, and Japan, and has remained slow since the Great Recession. Some of it could certainly be due to real factors, but I think most of it, at least in the case of the US, in nominal.

  11. Gravatar of ssumner ssumner
    16. June 2018 at 22:05

    Michael, What makes you think tight money has caused slow productivity growth?

  12. Gravatar of ANdrew ANdrew
    17. June 2018 at 05:31

    Hi Scott,

    Wondering about your thoughts on united way’s alice project

  13. Gravatar of Mike Sandifer Mike Sandifer
    17. June 2018 at 06:25


    I think monetary policy is too tight in the US, because the trajectory of the S&P 500 has been and continues to be too flat, given the low interest rates. I don’t buy that the hit to future expected earnings due to real factors would be enough to slow the trajectory this much.

    Given that the discount rate’s fallen from around 7%, pre-Great Recession, to around 4% now, we’ve only seen a roughly 10% increase in earnings expectations over this period. Earnings increased 42% in the 90s and 42% from 2000 to 2007.

  14. Gravatar of Michael Sandifer Michael Sandifer
    17. June 2018 at 06:45

    To answer your question more broadly, my thinking is that tight money leads to lower capital investment, which lowers productvity growth. I think the Fed’s reaction function, what I’ve called riding the brake, is what’s keeping a lid on real GDP growth.

  15. Gravatar of ssumner ssumner
    17. June 2018 at 08:42

    Andrew, Not familiar with that project.

    Michael, You cannot judge monetary policy by the S&P500. Full stop.

  16. Gravatar of Michael Sandifer Michael Sandifer
    17. June 2018 at 15:09


    You replied: “Michael, You cannot judge monetary policy by the S&P500. Full stop.”

    If you can control for variables that affect the value of the S&P 500, apart from changes in expected NGDP growth, then the S&P 500 can provide a reliable market-based NGDP forecast. I have to disagree with you, at least when it comes to S&P 500 market reactions to nominal shocks.

    I have to admit though, that trying to judge whether monetary policy is still tight 10 years after a big nominal shock is quite another matter. It’s hard to overcome ambiguity. There are reasonable arguments that the lower productivity is due to various possible real factors.

    The S&P 500 would be about a third higher if expected trend GDP growth were 1% greater. It seems more likely to me that limited demand is arresting productivity growth and slowing working age population growth even more than would be the case with the concurrent secular changes in working age population growth, for example.

    I find graphs like these persuasive for my point:

    Click on the “max” time range. The above drop in Japanese productivity growth certainly looks cyclical, at least regarding the beginning of the trend.

    Here’s the UK:

    Here’s the EU:


    I could keep going.

    The US case is, admittedly, not so clear:

    Productivity had been on a downward trend since 2004, however, is it reasonable to expect productivity growth to be so low due to secular factors, expecially in light of the kind of technological innovation we’re seeing? Yes, there could be measurement problems, and/or we could be in a J-curve, but the measurement would have to be considerably off.

  17. Gravatar of Michael Sandifer Michael Sandifer
    17. June 2018 at 15:20

    I think it would be interesting to see the Fed adopt a 3% inflation target and see if real GDP expectations don’t rise somewhat.

  18. Gravatar of Michael Sandifer Michael Sandifer
    17. June 2018 at 16:11

    Let me also mention that it seems that the yield curve is flat in healthy economies. The fact that the yield curve is still significantly steep, and that as it flattens, we don’t see sustained increases in long-term interest rates, also suggests tight monetary policy.

    What we should see from sufficient monetary policy is lower short term rates, and higher long-term rates, with long-term rates rising as the Fed starts raising short-term rates. That assumes, of course, the Fed buys short-term Treasuries.

  19. Gravatar of Michael Sandifer Michael Sandifer
    17. June 2018 at 16:14

    I should have said that the yield curve is flatter, as opposed to flat, but steeper during recoveries. Sorry, I’ve had a few drinks.

  20. Gravatar of Benjamin Cole Benjamin Cole
    17. June 2018 at 23:12

    Interesting headline.

    Hong Kong often cited as free enterprise-free trade stronghold.

    Leading today’s Hong Kong real estate news, locals lucky enough to buy a new home will soon be spending an average of 7o percent of their monthly income on mortgage repayment, up from the previous 60 percent as mortgage rates rise….

  21. Gravatar of Benjamin Cole Benjamin Cole
    18. June 2018 at 02:41

    Remember 1997?

    “A falling tide lowers all boats, it seems. Amid an exodus from emerging markets, investors are pulling out of even Asian economies with solid prospects for growth and debt financing.

    Overseas funds are pulling out of six major Asian emerging equity markets at a pace unseen since the global financial crisis of 2008 — withdrawing $19 billion from India, Indonesia, the Philippines, South Korea, Taiwan and Thailand so far this year, according to data compiled by Bloomberg.

    While emerging markets shone in the first quarter, suggesting resilience to Federal Reserve tightening, that image has shattered over the past two months. With American money market funds now offering yields around 2 percent — where 10-year Treasuries were just last September — and prospects for more Fed hikes….”


    Let us say tight money caused the 2008 Global Financial Crisis.

    What are the odds that tight money will do it again, in some fashion? 30% (and rising)?

    What are the odds that tariffs on $50 billion on China imports into the US will set off a Global Financial Crisis? 1%? We are talking teeny-weeny slivers of global output.

    So why all the jibber-jabber about free trade?

  22. Gravatar of Pyrmonter Pyrmonter
    18. June 2018 at 18:13

    Something of an aside, by why central banks _shouldn’t_ be firms:

    This has been a slow-burning, fairly under-reported scandal in Australia. Recent prosecutions arising have been conducted after the issue of what are know as ‘super-injunctions’, banning (for a time) any reference to the defendants, believed to be officials in the governments of friendly countries, as well as the making of the injunctions. They’re a UK development of the past 15 years.

  23. Gravatar of Willy2 Willy2
    19. June 2018 at 06:00

    – How on earth is a central bank able to influence the economy of a country ? Central banks don’t control interest rates, they don’t control to whom commercial banks are lending to, they don’t determine by how much wages are raised.

  24. Gravatar of Willy2 Willy2
    19. June 2018 at 06:05

    – Another thing: australian immigration has tripled after the year say 2000. This explains why GDP has grown but GDP per capita has remained stubbornly flat to down since 2008. And why wage growth (per capita) has remained flat.
    – The gap between INCOME and SPENDING has been filled by the australians going deeper into debt in the last say 18 years.

  25. Gravatar of ssumner ssumner
    20. June 2018 at 13:19

    Willy2, If you wait long enough all predictions eventually come true.

Leave a Reply