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The Forum > Article Comments > Job markets and the economy > Comments

Job markets and the economy : Comments

By Fred Argy, published 10/3/2008

2020 summit: can we have 4 per cent unemployment with low and stable inflation?

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The inflation rate, which is the increase in the money supply, has been over 10% for some years. There are several reasons why the CPI has not reflected this. First, many elements of the economy are not included in the calculation. Further, China has been subsidising us by keeping its currency artificially low and hence making its exports cheap - thank you, China. Also the increase in productivity will have tended to lower prices. In any case the concept of a group of bureaucrats trying to calculate the country's economic activity is laughable.
The only way to stop inflation is to stop printing money. However this would stop governments making promises that they could not keep - and that is not desirable, is it?

I agree that more research needs to be done with regard to "WHY there are so many jobless persons unable to fill available jobs" but let's get away from concepts like NAIRU which are spurious and only cloud the debate.
Posted by RobertG, Monday, 10 March 2008 11:57:19 AM
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RobertG, well said! I feel like economists and government officials can't bring themselves to own up to our fiat currency fiasco. They keep talking about "cost push" and "demand pull" inflation as if there really were different types. Simply put, if you increase the money supply without increasing the goods available, you are debasing the currency, and therefore prices will rise.

People don't realize that it was our years of cheap credit/low interest rates that contributed to our problem now. Because of fractional-reserve banking, borrowing money from the bank is essentially creating money from thin air. The cheap rates dramatically increased the amount of money borrowed (created) but the supply of houses was not increasing as rapidly. So all the excess cash proceeded to inflate the housing sector. Meanwhile, our ignorant CPI figures didn't record the inflationary effect of these housing price increases. Eventually, when this excess cash started to hit the rest of the economy (through withdrawn equity and credit cards), the CPI finally started to register the inflation that's been going on for years.

So maintaining a jobless rate of 3 to 4% with low inflation is two-fold. The key is not to print money. So no government deficit budgets and maintain interest rates at a level that is closer to the actual growth of the economy.
Posted by Roy, Monday, 10 March 2008 2:19:01 PM
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The issues you raise are complex. My point is that it is important to understand the causes of the current inflation problem before deciding on the right solution. In a deregulated finacial market, money and credit supply is more a consequence than a cause of inflation, although the two can interact. The two main triggers are demand pull or cost-push.

If Australia's inflation problem is predominantly demand-pull, the authorities can reduce aggregate demand (including through interest rates) without affecting unemployment too much. It becomes a win/win solution. If however demand and capacity are evenly balanced overall and the inflation is triggered mainly by rising oil, energy and food prices, the indirect effects of these external cost-push forces and a structural mismatch between demand and supply, any attempt to curb aggregate domestic demand through higher interest rates will do little for inflation and its only effect will be to increase unemployment in the less fortunate states than WA and Queensland. It may be better in those circumstances to wait for the external cost pressures to ease – as they surely will as world economic growth slows markedly and with it the speculative buying in commodities markets.

That said, the RBA may well be right that
- the inflation problem is in good part due to excess demand,
- world and market events will not fix that without monetary tightening and
- it is better to act firmly now and then cut interest rates later if necessary.

My concern is that this official stance should not translate into a more general medium-term view that we cannot afford to reduce unemployment below 5% because of the inflationary consequences. To minimize this risk, we should address the structural factors which are preventing half a million Australians from filling available jobs. If we can do that, it will reduce both unemployment and the risk of high inflation at the same time
Posted by freddy, Monday, 10 March 2008 4:13:02 PM
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Unemployment rates and especially the hidden rates in Australia has a lot to do with the way we practice - or have practiced a disrespectful Aussie culture. We do not (as a whole nation) understand that good networking be it in business, government or at grassroots levels is about listening, learning and working together (as a whole) to solve problems. That we must follow through.

If we tried more to 'open- gates' rather than shut them on people I believe we would create a more productive environment, pro-active and economically based on the focus of emancipating people.

Administrations and staff contractors from government departments in Health sectors, Employment, Small Business Advisors and Human Resource sectors have been the worst offenders for their traditional practice in exclusive daily politics. Given their jobs are semi-safe, it seems many do just enough to keep their own jobs and little else (hence the increase in data-processing).

In a way this is how technology itself is working against us. There has been a breakdown in innovative standards and the quality of service given to potentially mobile clients.

Worse if there is a complaint, the scenario and resource process often ‘shifts’ into one based on defence, blame and denial of a problem rather than seeking a solution. (Wasteful) There is even less equity in these situations as the client is almost always the looser.

As a productive opportunity mislaid, a life-blood lost at the base of the economy. (Macro-oppressing-Micro)

Hence the apathy, and level of disengagements.

This equates at the other end in a rise in social problems (and crisis) that in many cases may have been avoidable.

This is why the ‘education revolution’.

A person may create the right business and support network of choice if they have access to the right information.

I.e.: Savings is a more productive way to drive an economy over any model based on promoting consumer spending. It is where we went wrong over the previous decade, and it will take some doing to overcome the extent of pressures as experienced (now) in households already carrying current debts.
Posted by miacat, Monday, 10 March 2008 5:07:00 PM
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Some of the most insightful and intelligent posts I've seen on OLO. It's almost a paradoxical issue (inflation versus jobs) but Rudd's fiscal policy to cut Govt spending has some merits. There will be loud squarks from the welfare lobby I fear.
Posted by Cheryl, Monday, 10 March 2008 5:33:25 PM
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Unemployment will always be.. I think it is more important to tackle underemployment. If a person is capable for 4 hours a day, he is probably capable for 7.5. If his employer isnt giving him what he needs, help him find someone else.
Plus we also need to worry about those lesser employed due mainly to social and/or geographical isolation problems whilst their technical and often even interpersonal abilities remain on par. People who are preceived to have imperfect english skills, such as the less fair skinned, need to be able to expand beyond their stereotyped industries. Similar holds with those say more suited to ruralor meteropolitan work when raised in metropolitan/rural areas but unable to make the lifestyle transition.
Posted by savoir68, Monday, 10 March 2008 10:12:28 PM
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