Reserve should resist siren calls for rate cuts

A prominent economist, Ed Shann, last week in this newspaper found unconvincing Glenn Stevens' argument that annual growth is (or "ought be") set to be at the trend rate of around 3 per cent. Growth above this rate (without inflation) is possible, argued Shann, for three reasons.

The current mining boom "is large and sustained". Mining investment is massive and will raise the capital stock faster than trend, increase productivity and therefore allow faster than trend growth without inflation.

While unemployment (as measured by the ABS and paraded by government) is low, there is substantial underemployment, with many people wanting to work longer hours. The participation rate has been falling, thus preventing unemployment rising more.

Skills shortages are frequently seen as a barrier to faster growth. But, says Shann, "skill shortages and regional labour market pressures can be addressed by increases in skilled immigration, accelerated training and more fly-in, fly-out workforces.

"There is no evidence as yet of shortages of skilled labour in mining flowing into general wage claims elsewhere. Government policies can help, but we must be able to have faster aggregate jobs growth than now".

In summary: "Underlying inflation has slowed. That suggests output can grow faster without inflation problems. The debate should be over whether output can only grow at the trend rate, or faster than that."

I would find this argument convincing if I were convinced that inflation really is under control and that wage demands would remain moderate in the face of the great acceleration of mining investment and the introduction of the carbon tax, a curious mixture of a high cost to producers and blatant over-compensation of consumers.

There is the additional argument that the foreshadowed swing from large deficit to (tiny) surplus makes room for further rate cuts. If the Gillard government was set to produce a genuine and sizeable structural surplus this might be a good argument, although even in that (implausible) case I would argue that the Reserve Bank should await the actual budget before rewarding us all with another rate cut.

I have no doubt that many people are doing it tough. I would note that tough times make, or should make, for powerful responses.

The Gillard government has produced no powerful or convincing responses. It has failed to produce a vision for Australia that focuses on what is needed for success in the modern world, or policies to implement such a vision. It is privately supportive of consumerism as the doctrine of the modern working-person's Labor party - a flat-screen television in every lounge room.

Its stimulus package in response to the global financial crisis was wasteful and boosted Australia's by-no-means-trivial total debt. Equally important, it sent the wrong messages to the people of Australia, who have themselves adopted a more frugal set of wealth management standards.

I expect Stevens to ignore the siren calls of the arguments for rate cuts now. If inflation remains low, and wage claims also, the Reserve may make a token further rate cut in response to a responsible budget in May.