The AFR’s David Bassanese has written an interesting article arguing that it is the lack of competitive pressures across the economy, rather than the labour market, that is keeping inflation elevated:
…though there is no doubt scope for greater labour market flexibility in some pockets of the economy, both state and federal governments also need to urgently review competition and pricing policy in areas such as education, health and utilities….labour market regulation is increasingly a second order “micro-economic” problem, rather than first-order “macro-economic” concern.
…if wages are so benign, why did consumer price inflation surprise on the upside last quarter?…
The rise partly reflected a lift in import prices due to the decline in the Australian dollar, but the greatest surprise was that prices in areas less subject to international competition – “non-tradeables” – remained at a stubbornly high annual rate of 3.7 per cent, or only a little below the long-run average.
That led the RBA to note last week “It is somewhat surprising that non-tradables price inflation has not eased, given that growth in labour costs has been weak in recent quarters.”
While lags could be at play, I’d also blame political neglect of the lack of competitive pressure in many sectors not subject to international competition – such as health, education, and utilities…
Ironically, although politicians often shed crocodile tears over cost-of-living pressures, it’s their own neglect of rocketing costs in areas under their own control that seems largely to blame.
All fair enough points, and aligns with what we have been arguing on MacroBusiness for quite some time. Essentially, there has been no significant economic reform in Australia for a decade, and in every sector of the economy we have an effective duopoly or oligopoly at work. Moreover, as argued in detail earlier this month, the nation’s obsession with housing has starved the economy of productive investment, reducing competitiveness and raising living costs in the process.
Signs are mixed that the Coalition understands these pressures. While the Government has announced a root and branch review of the national competition regime, its statements elsewhere have supported increasing market power.
In the lead-up to the Federal Election, the Coalition’s Andrew Robb declared that “Australians should not be opposed to creating national champions in key industries” and asked that we “accept that the nation is an ‘oligopoly economy’”, as “it was important that Australian companies were allowed to expand to achieve ‘critical mass’”.
Similar sentiments were expressed by Maurice Newman, the head of the Prime Minister’s Economic Advisory Council, who argued that “the opportunity for Australian companies to become national champions at home must be considered by rebalancing the interests of consumers and businesses”, which is another way of saying that Australia should embrace increased market power.
Moreover, the Government has explicitly thrown its support behind the housing quango operated by the various levels of government, which has acted to raise land/housing costs, and is partly responsible for Australia’s lack of competitiveness.
All of which suggests that opportunities for genuine structural reform are likely to go missing, to the longer-term detriment of Australian productivity, competitiveness and living standards.
