Where to from here?

Theoretically, the inflation augmented Phillips Curve implies that for an economy at any point in time there is a unique level of unemployment at which inflation will neither accelerate nor decelerate. Any deviations from this unique rate of unemployment are thought to be temporary. The phrase "Non-Accelerating Inflation Rate of Unemployment" or NAIRU was coined to describe this unique rate of unemployment. When the RBA assumed unofficial independence in 1993, NAIRU became the basis of their inflation targeting monetary policy. The difference between the actual rate of unemployment and NAIRU became the determinant of RBA monetary policy stance.

The Friedman Phelps model offered a two-pronged policy strategy. Firstly, inflation had to be expunged from the system by creating a bleak market environment. Under a bleak market environment, behaviour of unions and business would moderate to an acceptable level. For example, whilst unions would not push for large real wage increases, business would be concerned about their ability to pass on rising input costs. Under austerity policies, so long as unemployment remained high, business profit margins accommodate unwinding inflation.

The second policy strategy becomes available when inflation has been driven down to an acceptable level. At this level of inflation, the full employment objective is replaced with the "natural rate of unemployment, or in modern parlance NAIRU. Friedman supported the concept of the "natural rate" of unemployment at which market conditions would not encourage any group to pursue excessive demands. The Australian Treasury in its 1975 Budget discussion papers displayed enthusiasm for this monetarist approach to macroeconomic policy.

Labor had embraced Friedman Phelps inflation expectations augmented theoryas early as 1974.Australia officially joined the monetarist club when Prime Minister Malcolm Fraser's Treasurer adopted monetary growth targets for M_3. over the second half of 1975-76. The political view of that period thought that Friedmans monetarism could be used to argue a connection between government spending, deficits, money supply, economic growth, and inflation. The contemporary political agenda that government spending is responsible for inflation can be dated back to the failed economics of Friedman's monetarist era of the 1960's.

Treasury supported the Friedman idea of inflationary expectations believing that unemployment could not be reduced until inflation was brought under control. Controlling the deficit therefore became central to recovery policy which would allow lowering of deficit induced interest rates.

Monetarism arrived in the Reserve Bank of Australia with its RBA 's 76 model. In the RBA 76 economic model, monetary disequilibrium is assumed a proxy for expectations. From the 1980's onwards economic modelling came to dominate macroeconomic policy. Econometrics became a world of mystery and intrigue for commentators. However, all is not well in the field of economic modelling despite the first general equilibrium model of the Australian economy being developed by Evans in 1970-71. Economic models are only as good as their underlying assumptions reflect the real world. Rational expectations which underwrites inflationary expectation economic models cannot claim accurate representation of real-world behaviour.

On election to Government in 1983, the Hawke Administration set about implementing the competitive equilibrium component of the new monetarist neoclassical synthesis. A first move was to deregulate the financial sector by allowing the Australian currency to float and be market determined. In the 1988 Budget, the Hawke Government began withdrawing historic industry support. Withdrawal of industry protectionism gathered momentum in the 1991 Industry Statement. In 1993, the Keating Administration used Section 51 (xx) of the Australian constitution to introduce enterprise bargaining and establish the ILO minimum wage as the basis of industry policy.

The Howard Administration simply completed the transition of the post-World War II Keynesian mixed economy to a "modern" supply driven internationally competitive economy. In other words, the Howard Administration linked Australia to the international community in adopting the "Third Way". However, the GFC in 2007 and Covid 2019-2020 have generated doubts about the wisdom of acceptance of the neoclassical/monetarist synthesis supply side reforms. Hence today's confused economic debate maintains belief in the supply side monetarist model from the 1970s despite having no answers to today's economic dislocation.

Conclusions

Dislocation from Covid and international hostilities have shown little respect for elegant mathematical economic models. Political parties that supported Thatcherism and Reaganomics are in electoral decline. Informed debate is now needed to develop alternative economic theory and philosophies.