Big government driving inflation

Free-market economist Milton Friedman said inflation was a result of inaccurate assessment of the true cost of government policies as much as it was a result of government spending itself. Governments, he said, had not produced high inflation as a result of deliberately announced policy but as a consequence of other policies that raised government spending. He speculated

correctly that the social and political forces unleashed by volatile inflation rates would lead governments to try to repress inflation in still other areas: by explicit price and wage control. Friedman may be less fashionable when Keynesian economics that favours government spending holds sway but it is time to reconsider what he was on about.

At every turn, government response to climate change raises the question: how much is this going to cost and what does it mean for business? Supporters of government intervention are quick to claim that doing nothing will cost more. But the evidence is growing that climate change policy will usher in an extended period of inflationary pressures for the world. US President Joe Biden’s misnamed Inflation Reduction Act, which provides big subsidies to support the green agenda, is evidence. But Australia is not immune. Energy policy is a prime example. It is no longer possible to disentangle the current dilemma of high inflation, rising interest rates, low productivity and rising employment costs from government action. If anything, the link is getting stronger.

Defending the Albanese government against the Reserve Bank of Australia’s decision to increase the official cash rate by 25 basis points to a decade high of 4.1 per cent, Jim Chalmers said the view was widely held that the federal budget had not been inflationary. This ignores the warnings from RBA governor Philip Lowe about the threat of a possible wages-price spiral, something that is unlikely to be acknowledged until it is too late. Wednesday’s national accounts figures confirmed a fall in economic growth to 0.2 per cent in the March quarter, down from 0.6 per cent in the December period. Labour productivity fell 0.3 per cent in March and by 4.5 per cent across the past year – the largest annual decline since at least 1979, when records began. As a result, economists are revising upwards their estimates for the cash rate. Some are predicting rates will move past 5 per cent, up from the current rate of 4.1 per cent.

Further strong rises in wages from the proposed next round of industrial relations reforms without any productivity trade-offs will make things only worse. The Treasurer said national accounts results were in line with expectations. But it is necessary to dig deeper into Friedman’s decades-old warning about the link between inflation and an inaccurate assessment of the true cost of government policies. This includes the propensity for government to regulate obedience in areas such as private rents and price caps for gas. Against the economic storm, Dr Chalmers chose to highlight banning checks that no longer were widely used as a productivity measure while championing greater regulation of companies on climate risk. The government has updated its statement of expectations for the Australian Prudential Regulation Authority to factor risks related to climate into their policing of the banking, superannuation and insurance industries. Environment Minister Tanya Plibersek vowed to make a voluntary scheme to levy every item of clothing sold to fund good environmental work mandatory if all retailers did not sign up.

Government imposts are on a roll and they all add up. The inflation and productivity challenge is a whole-of-government affair hiding in plain sight.