Wanted: some out of the box thinking at the RBA

A man should look for what is, and not for what he thinks should be. Albert Einstein

In Saturday's Sydney Morning Herald and The Age, "PM Must spend to kick-start slowing economy, says RBA", the Philip Lowe, the Reserve Bank Governor called for a major new spending program on infrastructure including rail, bridges and roads across Australia, in direct opposition to the views of the Federal Government. He argued that more public spending, outside metro Sydney and Melbourne (where there is limited capacity), has the potential to maintain and improve infrastructure, while pouring the government's gravy far and wide.

The Governor added that the US-China trade dispute could harm employment because of the uncertainty it generates in the business community, but if the dispute is resolved soon, it may lead to a speedy turnaround in the world economy, presumably in Australia too. The turnaround would be seen clearly in a retreat from business' underinvestment.

By splashing the Governor's views on the front page of the papers as well as promoting him via a flattering profile in their respective Good Weekend magazines, Nine Entertainment must believe that either the RBA is advancing sound economic policy or very controversial policy. Sadly nowhere in the promotion was there mention of the RBA's failed attempts to jump start the economy by shaving interest rates.

Over the last few months the RBA has lowered interest rates with the aim of raising demand by consumers; increasing investment by firms and lowering the number of those lining up at Centrelink for unemployment benefits. The table below shows just how unsuccessful the RBA has been:

Source: ABS trend estimates

As can be seen, while the cash rate has marched south, the jobless figures flown north. In five months 50bps were trimmed from the cash rate only to see the unemployment rate escalate from 5% to 5.3%, Not the intended result I'd wager.

The RBA's response to this unwelcome development has been to double down. Reviewing developments to date, in July explained that the latest cut of 25bp was an "easing of monetary policy [to] support employment growth and provide greater confidence that inflation will be consistent with the medium-term target".It went on: " In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up".

In the year to 30/03/19 the RBA noted that "the main domestic uncertainty continues to be the outlook for consumption". And lamented that "unemployment is stuck above 5%". For some months now the RBA has aggitated and is now openly calling for higher wages for those in jobs and as a lure to get them to spend more and as an incentive to attract those not in jobs, into jobs.

There is no doubt that the RBA is clear about the outcome it seeks: for consumers to increase their level of demand by spending more of their wages more often. The RBA also wants businesses to soak up some of their "spare capacity" by hiring more staff, which would result put a dent in the unemployment figures.

So just what is "spare capacity"? This refers to those industries which operate below the maximum sustainable level of production - because they have underutilised land, labour and/orcapital. Theargument goes thatunused labour could be hired to mop us that spare capacity if only businesses would open their wallets a bit more (and encourage more folk into the workforce or those already working to work more.