Central Bank Has A Strange Idea Of How To Strengthen The Economy

Who wouldn't like to get a huge pay increase?  According to RBA governor Philip Lowe we should all be nagging our bosses for a greater share of the national economic pie.  If we all got a huge pay increase that "would be a good thing".  Mind you — keeping our jobs would be a very good thing.

Therein lies the problem with Philip Lowe's comments.  A growing economy, with surging profits, and a declining unemployment rate should be a great time to be telling the boss that you needed a tad more in your pay packet.  But outside of official government forecasts the economy doesn't look to be in that happy place.  Right now rising wages would simply translate to rising business failures and greater unemployment.

In the last financial year private sector wage growth was a paltry 2 per cent — the lowest level since records began in 1998.  Public sector wage growth was 2.4 per cent.  In the March quarter of this year the annual private wage growth rate was even lower at 1.8 per cent.

The budget papers are forecasting an increase in Australian wage growth over the next few years — to a massive 3 per cent in 2018-19.  Yet we know that wage growth has been in decline since 2011.  Why should the turnaround happen now?  Apart from encouraging workers to get a bit more bolshie what policy will the government, or the RBA, introduce to drive economic growth to higher levels in order to justify massive pay increases?  This is the same government that is increasing the tax burden in a slowing economy.

What isn't clear is why Dr Lowe thinks higher wages is a good idea right now.  Hopefully he does not subscribe to the notion that increased wages will lead to increased inflation.  This populist notion is quite wrong — inflation leads to higher wage demands, but not vice versa.  Similarly I hope he doesn't subscribe to the notion that increased demand from consumers will stimulate the economy.  Economic stimulus will only come from lower taxes, less red tape, and fewer of the bad policy choices that have increased sovereign risks over the last decade.  Australians are very likely to use higher wages to buy down household debt.

SLUGGISH PERFORMACE

The fact of the matter is that Australian economic performance has been sluggish since the GFC.  True, we did avoid a "technical recession" but nobody could seriously argue that we are as relaxed and comfortable as we were prior to 2008.  Given the debt and deficits that successive Commonwealth governments have run and will continue to run for the foreseeable future it is entirely unsurprising that private growth, private initiative, private investment, and private wages continue to languish.

Wanting Australians to enjoy higher wages is admirable but Dr Lowe should be talking to his own bosses in Canberra about their policy choices to make that happen.  He might even talk to them about productivity.  Paul Krugman was quite correct to say that in the long run it is almost everything.  Without productivity improvements wages simply cannot increase without imposing huge economic and social costs on the economy.  With a government that taxes too much and regulates too much it is unlikely that productivity improvements will drive the sort of wage growth we'd all like to see.