Judith Sloan hits the fallacy trifecta!

Judith Sloan has really outdone herself.

In a recent article in The Australian[1]:

1.     She blames the RBA for the government’s failures.

For several years Judith has criticised the RBA for dropping interest rates down to 1.5 per cent back in the years to August 2016, saying it overheated the housing markets.

The RBA dropped interest rates during this period because the mining boom had ended and the real economy was sluggish. The risk of overheating the housing markets should have been addressed by regulators (through financial oversight) and government through planning for faster housing development to meet demand. Interest rates are a blunt tool to curb asset markets, would need to be raised significantly to do so, and would damage the real economy further in the process.

Any failures during this period were failures of government, not the RBA.

2.     She says the RBA should have raised interest rates in 2017/2018 when “the economy ran relatively well”.

Judith’s words were:

“Why the RBA chose to keep the cash rate so low for over two years as the economy ran relatively well is anyone’s guess. … If there were ever a time to raise the cash rate, it was during 2017 and 2018.”

You mean when inflation (you know, one of the RBA’s official KPIs) was barely touching the bottom of its target band?

You mean when the unemployment rate was far above where we estimated the rate of full employment was even back then and an average of 590,000 people were unnecessarily unemployed?

You mean when the housing market had started to turn down and where, in hindsight, the real economy could have done with some additional stimulus in preparation for the headwinds we now know were coming?

That’s when you think the RBA should have raised interest rates?

Judith even points out that the RBA has failed to meet its inflation target for a long time. How on earth does she see this as a reason to do anything but provide more stimulus, not less?

3.     She falls for the popular fallacy that by raising interest rates a few years ago, the RBA would have more ammunition today to combat the current slowdown or any potential future shock.

This is akin to telling a hiker struggling up a hill to put an extra 10kg of weight in his backpack just so he has something to drop in a few kilometres’ time. Weighing yourself down with unnecessary baggage now doesn’t make it better for you tomorrow. When the economy needs support, we should give it support, not wait for something worse to happen.

If the RBA runs out of ammunition, the government should do its damn job!

·       Further tax cuts could be implemented (not my preference at the moment).

·       Automatic stabilisers that (as the name suggests) automatically kick in when the economy slows could be expanded. A boost to Newstart for example, would provide more support to people who become unemployed during a downturn and avoid the tedious political process at a time when quick decisions are needed.

·       Certain infrastructure projects could be fast-tracked in areas that most need them.

·       Microeconomic reforms to stamp duty or industrial relations to boost productivity could be enacted.

Alternatively we could expand the RBA’s toolkit beyond just indirectly affecting economic activity through interest rates. ‘Helicopter money’ transferred directly from the RBA to households or government would work but would probably create a nasty case of moral hazard where the government expects to be bailed out repeatedly in the future. But their powers could include the ability to invest directly in infrastructure, as I’ve written before.

Even without the ability to lower interest rates further, there is no lack of ammunition – just a lack of will to use it.

The RBA has the right idea. Judith Sloan does not.

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[1] As well as in commentary over the last few years.