There’s nothing like watching the commentariate fall into line behind a boffin. Better late than never but apparently the Pascometer now gets it too:
In his key post-budget speech ( ) Treasury Secretary Martin Parkinson neatly flicked responsibility (in economist-speak, keeping demand ticking along strongly) onto the RBA, but in Friday’s “Glass Half Full” speech, RBA Governor Glenn Stevens wasn’t having it.
Parkinson said discretionary fiscal policy should only be used for supporting demand during extreme circumstances, otherwise the RBA’s monetary policy “has the primary responsibility for managing demand to keep the economy on a stable growth path consistent with low inflation”.
“Put another way, good fiscal and structural policy can create the incentives for supply-side expansion while monetary policy aims to keep demand growing in line with that expansion in potential,” said the secretary.
Well, perhaps yes, in theory, but that’s not the way the governor explains it.
Stevens made the point that monetary policy is not just about keeping happy the minority of Australians who have a mortgage – it also has to act to preserve the value of people’s savings. When inflation isn’t a problem, monetary policy can help people adjust to our changing habits and economy with rates that make it easier to deleverage and repair, but it’s definitely not about getting back to bad old days (my description, not his):
“Monetary policy has been cognisant of the changed habits of households and the process of balance sheet strengthening, and has been set accordingly,” said the governor. “As such, it has been responding, to the extent it prudently can, to one element of the multi-speed economy – the one where it is most relevant.
“What monetary policy cannot do is make the broader pressures for structural adjustment go away. Not only are the consumption boom and the household borrowing boom not coming back, but the industry and geographical shifts in the drivers of growth cannot be much affected by monetary policy … ”
So fiscal policy (government spending) isn’t going to make us happy and monetary policy (official interest rates) can’t either, if the unsustainable bubble we were enjoying before the GFC is what we still think of as economic happiness. The challenge for the economic forum is to explore some of those “other policies”, not go chasing more government handouts and protectionism.
Time to load up on investment property? 😉
