Australia's falling unemployment — not such good news after all

Gerard Jackson
BrookesNews.Com
Monday 15 September 2003

That the fall in Australia's unemployment rate to 5.8 per cent should leave Howard and Costello with self-satisfied smiles is only to be expected. It should, however, give the rest of us a nervous twitch.

Economic laws need to be continually repeated if they are not to be forgotten. One such law states that if labour costs exceed their market clearing values persistent widespread unemployment will emerge. The greater the excess of costs over market values the greater the level of unemployment.

It follows that the way to eliminate unemployment is to allow labour costs to adjust to market determined wage rates, a process that our labour market regulations sabotage. This leaves us with the Keynesian solution: use inflation to reduce labour costs with respect to the value of labour's output.

The key to the Keynesian solution is a sufficiently loose monetary policy. (I have ignored unanticipated inflation for reasons of brevity). Sometimes the obstacles to restoring full employment (jobs for those able and willing to work) are so inflexible that only a reckless monetary expansion can overcome them. And this is precisely what the Reserve Bank has given us.

Since Howard's election win in March 1996 the country's cash base has grown by more than 100 per cent, and M1 by over 90 per cent. It is this irresponsible monetary expansion that triggered our so-called boom, aggravated the current account, fuels the housing market and inflated household debt. It is also why our unemployment rate fell.

As Yogi Berra said: "This is like déjà vu all over again." It sure is.

It was the Reserve's reckless monetary policy that gave us the 1980s boom. From June 1983 to June 1989 M1 grew by over 100 per cent while the currency also expanded by over 100 per cent. The result was the "Recession [more like depression] we had to have." But we did not have to have it at all.

Eventually the Reserve will have to apply the monetary breaks and raise interest rates, just as it did under Keating. When it does, then we'll have another recession.

I am not alone in my thinking, at least with respect to the boom and rates.

Dr Frank Gelber, chief economist for BIS Shrapnel, told a conference in Sydney that he expected the economy to boom at the end of 2004. It would peak in 2007 and then go into recession by 2009

It's clear that Dr Gelber is expecting a classic boom in which bottlenecks emerge along with labour shortages and a deteriorating current account deficit.

But this could only happen if the Reserve continues to steer its present disastrous monetary course. There is no guarantee that it will do so. Sooner or later it will have to change course — and quickly.

Of course, if the connection between the money supply and the so-called boom-bust cycle was fully understood we wouldn't be in this mess. Unfortunately any attempt to raise the subject is generally met with indifference — or worse.

Our establishment right has a tendency to try and marginalise those whose views it is not prepared to debate. (Should that be tolerate?) The unhappy result of this attitude is that the likes of Tim Blair feel free to dismiss my own efforts as the work of a boring illiterate.

So long as certain members of our right feel compelled, for whatever reason, to marginalise, sometimes with witless insults, alternative free market arguments there can be no possibility of a genuine debate about economic policies.

Gerard Jackson is Brookes' Economics Editor