Wanted: some out of the box thinking at the RBA

Businesses or the economy operate with spare capacity when:

1. Demand from consumers overall is low;
2. Investment by businesses falls;
3. Negative seasonal variations in demand don't reset themselves; and
4. Productivity improvements mean that more is being produced with less inputs.

Improvements in productivity mean capacity increases for a given level of demand (but this is not the case in Australia where labour productivity fell by 1.4% in the year to 30/06/19). As for businesses not investing, the fact is that investment fell by 0.5% in the 3 months to 30/06/19. Presumably even with such a fall, there still is underutilised infrastructure gathering dust.

While the RBA has looked at various nutrients that could grow the economy, it has ignored one in particular. One that is introduced to students in ECON 100 and whose behaviour, in a free market, is understood by young and old, those learned in economics as well as those educated in the school of life.

That nutrient is the elephant in the room. His name is "minimum wage".

Before lamenting the relatively high jobless rates the Australian economy suffer, the RBA should admit that our minumum wage is responsible for a good many Australians parking their derrièreson the unemployment benches. Australia tops the pops when it comes to paying the highest minimum wage in the world. It can be clearly seen that the more generous the minimum wage, generally the higher the jobless rate is for a respective country.

The RBA is now arguing for a switch in economic policy to Keynesian spend and keep on spending, after realising that flogging the monetarist horse has not ponied up the expected economic results in terms of the number of jobless Australians.

Acutely aware that historic low interest rates have not enticed the business sector to invest in large infrastructure projects, the RBA now wants the public sector to carry this burden. Not content with the amount of infrastructure spending the Morrison Government is already wedded to, the RBA wants to put a rocket under the Prime Minister to turbo charge infrastructure spending, something the Prime Minister, sensibly, is resisting.

The RBA is right in its diagnosis of the economy's ills. It is right to worry about low demand and high unemployment (relative to other countries). It is also appropriately concerned about businesses not investing enough. But it is wrong in its prescription for the Federal Government, or for that matter any state or territory government, to attempt to fix this crisis by spending billions (which would have budgetary consequences) and to burden taxpayers with the superfluous risk of major infrastructure projects.

What the RBA should do is create an environment attractive enough for businesses to undertake these projects. It could do so by making it more appealing for companies to hire more and more labour. As more and more of the unemployed are hired, the numbers lining up for benefits would begin to thin.

The RBA's board is unelected. It can propose policies so out-there, that many politicians world regard as "courageous". It must propose such policies when the need arises. And the need has arisen. It cannot remain shackled to policies that may have worked in the past. It must think out of the box.