Oliver Blanchard sums up the views on macro policy at recently held IMF/WB meetings.
What’s a savvy, respected central banker to do? Stevens can hardly clone himself to do two jobs — one to cap the exuberance in asset markets, one to shield the nation from hardship. The problem, as is often observed, is Australia’s two-speed economy. One features the mining-heavy regions — Queensland and resource-rich western states — which until recently have thrived on China’s voracious appetite for iron ore and coal. High salaries there have propped up property markets that have more in common with the casinos of Melbourne and Perth than rational exchanges. (To make things worse, rich Chinese buyers have helped drive values higher and higher.) Meanwhile, workers in much of the rest of the country are falling behind.
The more these three moving economic parts diverge, the more inequality grows and the less monetary policy matters. As Stevens said on Feb. 13: “The economy needs a bit more growth than we currently have. The board is also very conscious of the possibility that monetary policy’s power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past.”
In that context, the RBA’s decision to stand pat could be its way of pressuring Prime Minister Tony Abbott. Even as households struggle, Abbott’s 17-month-old administration has been paralyzed by questions about his leadership. He has focused more on trimming the national budget than the hard task of diversifying the economy’s growth engines and bringing them into closer alignment. He killed the previous government’s effort to tax miners to redistribute wealth to depressed areas. He’s done little to invest in education, training or better infrastructure — all crucial to improving Australia’s competitiveness.
Government gridlock has left addressing rising unemployment to the RBA’s blunt interest-rate tool. This isn’t a unique problem, of course. Stevens, says Ben Alexander of Ardea Investment Management in Sydney, faces “a familiar dilemma for central banks. The Bank of England setting monetary policies for London or for all of the U.K.? The European Central Bank for Germany or peripherals? Politicians who can’t or won’t help central banks with fiscal policy — a worldwide problem. Not easy for central bankers particularly since they are arguably pushing on strings anyway.”
Stevens isn’t entirely helpless. “Australia doesn’t need two RBAs,” says Lindsay. It needs economic managers with “a backbone stronger than a chicken wing.” Steeper fees for foreign buyers are one option. So-called macroprudential policies are another. As I’ve argued before, Australia should be slapping harsh curbs on leverage, requiring much larger downpayments and lower loan-to-valuation ratios.
Still, the best remedy for the RBA and the nation is for Abbott’s government to regain focus and get control over its disparate economies. Australia must rediscover the liberalizing instincts that dominated Canberra in the 1980s and 1990s and transition back to a non-mining economy. Rather than prune programs, Canberra should increase research and development spending to create high-paying jobs in science, technology, engineering and education. Also, let’s stop downplaying the potential of tourism, high-end manufacturing and other trade-related sectors that atrophied as mining boomed over the last 15 years. Only after the basic structure of the economy is properly aligned can the RBA hope to have an impact with monetary policy. That’s not a job for Stevens, but for a government that, like Australia’s economy, has lost its way.
On one hand they wish for less and less “govt intervention” and on the other keep asking for more and more “govt support”. Both are different we are told..