The recent remarks by RBA governor Philip Lowe show how mainstream economics leads to misguided policy focused on the wrong goals. While Lowe expressed concern for those 'really, really hurting' from interest rate hikes, the overarching message was that inflation must be reduced through higher rates, even if this slows the economy and job growth. From a Modern Monetary Theory (MMT) perspective, this approach fails to understand how the macroeconomy works and the policy space available to achieve genuine public purpose.
Contrary to Lowe's assertions, the Australian government is not revenue-constrained and could fund programs achieving full employment and inclusive growth without worry of budget deficits. The outdated 'household budget' logic that surpluses are necessary and deficits must be reduced continues to dominate political discourse and policy. Rather than cuts to critical services in pursuit of surplus, public spending could be directed to reduce inequality and cost of living burdens amid crises in housing affordability, healthcare, education, and climate change.
Inflation is also not necessarily 'way too high' or something that necessarily requires interest rate hikes, which do more to slow the economy and disproportionately impact the vulnerable than effectively deal with inflation. If inflation corresponds to supply-side issues, targeted initiatives could address these directly without blunt rate impacts. Price stability is not the sole goal of macroeconomic policy, and inflation is not always detrimental - policies could aim for stability in living standards, wages, and broader economic welfare rather than just low stable prices.
The fear of a 'wage-price spiral' driving runaway inflation is misplaced, and higher wages are not necessarily inflationary if corresponding to higher productivity. Full employment policies could pursue wage growth in line with productivity, supporting living standards rather than seeking to counteract wage growth to control inflation. Interest rates are not required to restrain wage growth and could instead allow income shares to reflect the true value of labor.
Finally, clarifying that the RBA is a Commonwealth body means recognizing it should serve the public interest. While the RBA claims rate hikes meet community needs by reducing inflation, an MMT approach sees room for fiscal/monetary coordination achieving goals like full employment that more directly address inequality and wellbeing. Policy should not be limited by notions of 'central bank independence' divorced from political objectives beyond price stability. The potential gains of an economy should benefit all, not be relinquished to meet a narrow price target.
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