If you told someone a year ago unemployment was about to dive below 5%, to just above 4%, they wouldn’t have believed you.
If that person was an expert, and you said it would happen despite a Delta outbreak and lockdowns in our two biggest states, they might have said you had little idea of how the economy worked.
None of them thought it would slip below 5% in 2021 or 2022.
Asked when the unemployment rate might eventually even touch 5%, none nominated 2021. Only two nominated 2022. The rest picked dates years into the future. Three picked “not for the foreseeable future”.
And yet many experts – many of whom use the models that failed to foresee how quickly unemployment would fall – are now using the same models to warn against doing too much to push it down further.
They are worried about absurdly high inflation along the lines of the 7.5% now being experienced in the United States and the danger that authorities will push up interest rates too late and too hard to crush it, bringing on a recession.
In their sights are the Reserve Bank’s ultra-low cash rate and the government’s A$7 billion per year tax offset, introduced in 2018 to provide tax relief ahead of the more comprehensive tax cuts now in effect, then extended twice to support the economy during COVID.
Removing them – removing the economic support set to push it down to where it hasn’t been in half a century – is said to be essential in order to bring down government debt and avoid disastrous inflation.
He told a parliamentary committee that while this was an option “conceptually”, a better idea would be to use government spending to grow national income quickly so the debt-to-income ratio shrank.
Dr Lowe also has ideas about tightening settings to stymie inflation, which don’t accord with those of the experts who warn of a US-style takeoff in inflation if we eat further into unemployment.
Running the economy is a bit like driving a car around a racetrack. You want to go as fast as you can, but you don’t want to go too fast or you will crash.
Go too fast and you’ll get rising inflation, authorities will be forced to lift interest rates quickly, and you’ll bring on a recession. Ease off on boosting employment – be less ambitious – and you won’t crash.
It’s the way many of those who responded to The Conversation’s survey see it. It’s the way many economists with eyes on the US see it. But it isn’t the way the governor sees it.
Dr Lowe told parliament last week that Australia was not the United States.
Australia is not the US
In the US, utility prices jumped 25% over the past year. In Australia it was 2%. In the US new car prices jumped 12%. In Australia it was 6%. The US price increases are largely one-offs caused by shortages. In Asia, inflation has scarcely moved.
In Australia wage growth is no higher (at 2.2%) than it was before COVID, even though unemployment is dramatically lower. That’s because, unlike the US, Australia kept workers in their jobs through JobKeeper and measures to keep jobs safe. Employers haven’t had to offer more to get workers back.