Be afraid: ‘New’ RBA headed for disaster

The ‘accept’ a little higher inflation to avoid higher unemployment is the pathway to economic hell and it is where we could end up with the new RBA policy board.

The single most important change recommended by the RBA review – and accepted absolutely and unqualified by treasurer Jim Chalmers – is intellectually incoherent and a recipe for future disaster.

This is the co-equal policy targets of “price stability” – that’s to say 2-3 per cent inflation – and “full employment”, which is best described as how long is a piece of string.

It is not simply that one is clear cut. We know what 2-3 per cent inflation is. We can tangibly measure it.

Full employment? What’s that? And what about, as RBA governor said in an aside at his press conference Thursday, under-employment?

Ah, the Review cackhandedly responded: the RBA can tell us what it thinks full employment is and how it’s aiming to get there.

The far more substantive and dangerously irreconcilable point is that the two are often directly at odds. As we saw most strikingly in the early 1990s.

We had to accept – or rather the RBA imposed – job-crunching double digit interest rates for years to get inflation down to the 2-3 per cent, which was the foundation of our prosperity through the 1990s and 2000s.

The absolutely fundamental point that the Review trio were seemingly incapable of understanding is that sustained low inflation – and the expectation of sustained low inflation embedded in the business and general communities – is the absolute pre-condition for sustained low unemployment.

Former Reserve Bank of Australia Governor Bernie Fraser. Picture:Mick Tsikas)

Bernie Fraser, who was governor of the RBA from 1989 to 1996 – and was not an RBA insider; he came from Treasury and was appointed by then Treasurer Paul Keating to do the God King’s bidding – knew that in his bones.

To Keating’s eternal disappointment – and to the long-term benefit of the nation – Fraser failed to do that bidding, running down to the 1996 election.

Yes, the original 1968 legislation mandates three objectives for the RBA – prices stability (low inflation), full employment and the feel-good “economic welfare and prosperity of the people of Australia”.

And in a particularly depressing exercise of the bureaucratic mindset, the Review recommended making the third an “overarching” ambition – duh, you mean the RBA shouldn’t be charged with aiming for our economic welfare?

The absolutely key point to understand is that, essentially first with Governor Fraser and then subsequently with the continuing RBA ethos, was that the only way to achieve all three objectives was to first and fundamentally get the sustainable low inflation.

The seductive, dangerous allure is to ‘accept’ a little higher inflation - like, say, 4-5 per cent – to avoid higher jobless.

That is the pathway to economic hell.

And it is a pathway that will be paved by having a policy board with all sorts of different – theoretical – ideas about the target mix.

Where in the Review critique was the counter-factual?

‘This’ central bank did it much better. And it did it better because of this different structure.

There was almost zero comparison of relative central bank performance – certainly no evidence that left the RBA embarrassed.

But one comparison ‘slipped’ through: the Bank of Canada’s performance – worse than the RBA on both inflation and jobless over 30 years.

Hmm. Do we really need advice from that quarter?