Turning down the economic turbo boost

On February 18 last year Malcolm Turnbull asked Wayne Swan a simple question. He wanted to know what the Treasurer thought the current non-accelerating inflation rate of unemployment was.

At the time Samantha Maiden reported “Swan clueless on NAIRU” in the Australian when he could not answer.

Swan is still clueless on the NAIRU - or more precisely - what his policies are doing to lift it.

Simplified, the NAIRU is the lowest point that the unemployment rate can go to without elevated inflation accelerating. It's a critical “capacity constraint” that a modern economy faces when it grows rapidly.

Importantly, Rudd Labor can maintain historically high labour utilisation rates by locking in hard won gains from microeconomic and labour market reform.

And yet, Rudd Labor with its anti-market policies is undermining the reform legacy of the last two Labor and Liberal governments and ultimately reducing the productive capacity of the economy.

Over-regulation through over-zealous labour market rollback, car industry welfare and the 20 per cent renewable energy target, are among their most dangerous measures.

To provide an idea of what is at stake, throughout the 1980s when unemployment dropped below about 7 per cent, inflation would rise and fiscal and monetary policy had to tighten and constrict economic growth.

But, the NAIRU fell to multi-decade lows during the Howard years and the RBA didn't begin significantly tightening monetary policy until the unemployment rate fell below 5 per cent.

So what had changed, and how much is Rudd Labor changing it back?

Treasury Secretary Ken Henry has argued repeatedly that the “miracle” of low unemployment and inflation in recent times, resulted from three crucial factors.

First, there was macroeconomic stability under Costello. With perfect 20/20 hindsight Henry might have considered fiscal policy stable but profligate during what has turned out to be a temporary commodity boom.