An idiotic idea so bizarrely stupid it defies sense

From this morning’s Oz a story I have just gotten round to now:

The Reserve Bank governor is calling for 3 per cent wages growth across the public sector, apparently to help the rest of us. Ratcheting up public sector pay would damage the economy far more than help it, undermini­ng economic growth, productivity, increasing inequality and further eroding respect for government.

Adam Creighton calls it “a bad idea”, but that is only because he is polite. It is actually an idiotic idea that is so bizarrely stupid that it demands that he explain how it could possibly provide any positive assistance to the economy whatsoever.

How does someone with so little understanding of how an economy works get to make such decisions? But you have to get to the last line of the story to find out why he wants the least productive people in the economy to absorb even more of our productive capabilities:

The Reserve Bank wants higher­ wage growth to boost inflation, which has hovered below its 2-3 per cent target for almost five years. Meeting an arbitrary inflation target is hardly justification to damage the economy and increase inequality further.

He wants the most securely employed people in the country, with the lowest contribution to output, to receive large increases in wages so that the inflation rate can rise even further. It really is infuriating.

The Australian School of Economics

There really is a different way of looking at economic issues in Australia, which is why we are still one of the most successful economies in the world. Two items from the news today, both of which go entirely against the world consensus on economic management. First, from The Australian, Rate cuts failing to bite: RBA. The opening paras:

INTEREST rate cuts are losing the ability to stimulate the economy, with the Reserve Bank warning that it is up to the government to take measures to help revitalise growth.

In a frank admission of the limits to the influence of central banks, Reserve Bank deputy governor Philip Lowe said consumers, businesses and governments were not responding to the extraord­inarily low interest rates that would once have sparked an inflationary debt boom.

The notion that interest rates can be too low is something almost no one can follow if you start with a standard macro model. Arbitrarily lowering interest rates will, in fact, make things worse but who any longer understands even why that might be the case. And if you are looking for what is truly unique about how we go about things, think about this, from the new Secretary of the Treasury, John Fraser:

[Fraser] declared to the Senate Economics legislation committee: “I do not resile from the point that I do not think spending our way out of lower economic activity is the way to go.”

Once, such a view was uncontroversial. Today, practically every international economics organisation preaches the opposite.

How against the consensus grain is all of this. If you want to find your way out of recession, keep interest rates up and lower public spending. And if you are looking for a theoretical explanation of why this is so, there is nowhere else to go other than the second edition of my Free Market Economics. And if you would like some idea of just how unique this book is, this is from an article I am in the midst of writing on the role of the entrepreneur in economic theory:

I have examined each of the following introductory texts because they happened to be on the shelf in our library, and there is either no reference to the entrepreneur found in the index, or the text contains only a perfunctory mention, never continuing for more than a page: Abel and Bernanke (2005); Blanchard (2006); Lipsey and Chrystal (2007); Mankiw (2007); McConnell and Brue (2008); McTaggart, Findlay and Parkin (2006); Parkin (2008); Samuelson and Nordhaus (1995); Sloman and Norris (2010); Stiglitz and Walsh (2006). It is clearly possible to discuss the operation of a modern market economy without mentioning the single most important function in allowing the economic system to work. There is not the slightest doubt that even if the most recent editions had been to hand, nothing would have been in any way different.

The Australian School of Economics can explain the role of higher interest rates, balanced budgets and the entrepreneur and with these concepts in hand explain how an economy works and what needs to be done to get recovery firmly in place.