At
its meeting on 6 June 2023 the Reserve Bank of Australia Board
decided
to increase the cash rate target by 25 basis points to 4.10
per cent.
Banks
and other financial institutions are adjusting their mortgage &
loan investment rates upwards again and the ABS Cost Price Index
(CPI) remains stubbornly high for the category labelled Food &
non-alcoholic beverages.
This
was the twelfth cash rate rise in the thirteen months from 4 May
2022 to 7 June 2023.
The
inflation rate is hovering at 7.0, while everyone hopes that by the
end of June it will stand at 6.25.
The
fact that it appears inflationary pressures might still be with us in
2024 doesn’t make for happy little Vegemites in the average Australian
household.
This
general dark mood can be measured using the Misery Index.
An economic concept created in the1960s by Okun and further refined by
Barro and Hanke.
It
is based on the assumption that:
1)
a higher cash rate/interest rate increases the cost of borrowing;
2)
which in turn drives up the cost price index for essential goods
services;
3)
when these factors combine with the seasonally adjusted unemployment
rate (rate calculated at times two if you are a Hanke purist); and
4)
there is slower/lower growth in the nation’s gross domestic
product;
5)
this combination goes on to create economic and social costs – or
misery – for a country.
To
establish where a country is on the Misery Index basically one adds
the current reserve bank cash rate, cost price index & seasonally
adjusted unemployment figures together and then divides that number
by the year end real gross domestic product per capita to produce
the Index score.
In
Australia’s case the Misery Index according to Professor Guay Lim
and Associate Professor Sam Tsiaplias (University of Melbourne) –
writing in March 2023 – came in at a whopping 16.3 per cent in
third quarter of 2008 during the Global Financial Crisis and 13.7 per
cent in the second quarter of 2022, just as the global pandemic
really began to bite.
The
Misery Index fell sharply in in the second quarter of 2021 but began
to climb again over the following months reaching 9.9 per cent in December.
The
quarterly Economic Misery Index since 2000. Recent high inflation and
high interest rates have caused a rapid rise in the index. Source:
Australian Bureau of Statistics, and the Reserve Bank of Australia.
Graph: University of Melbourne, Pursuit, “WHAT
WE CAN EXPECT FROM THE 2023 ECONOMIC ‘MISERY INDEX’ ”,
March 2023
By
2022 the annual economic misery index was at 9.2 per cent.
Unfortunately
the Misery Index is not currently budging by much. In the first two
weeks of this month, June 2023, it would seem that our quota of
misery is somewhere between 9.0 and 9.11 per cent.
Columnist
Van Badham writing in The
Guardian on 9 June 2023 had this to say:
Australian
households with the average $600,000 mortgage have been asked to find
a spare $17,000 among the couch cushions since the RBA began its
lifting-rates-a-thon last May.
There’s
rising costs of other expenses, such as transport. The Australian
Automobile Association calculated the average cost of running a car
in this country went up $28.31 a week in the March quarter; in
Brisbane and Melbourne, it went up $34. With associated automotive
costs, using a car in Sydney now averages $510 a week.
Meanwhile,
in regional Victoria, one food bank is shipping 40
tonnes of food every day to help struggling families.
Why
are the price rises happening? International research conducted by
the OECD concluded “corporate profits contributed far more to
Australia’s rise in inflation through the past year than from wages
and other employee costs”. There’s been similar analysis from the
European Central Bank. The Reserve Bank of Australia and Treasury
disagree, I guess because the OECD is led by notorious communist
Mathias Cormann.
The
RBA insists that the pay packets of Australian workers have
magically, secretly swelled, and this is driving inflation – even
though, as Australian economist Stephen Koukoulas has said, “real
unit labour costs only rose 0.1% in the March quarter and 1% over the
course of the year”.
And
how is it possible wages are inflicting such terrible damage when the
ACTU could observe major local employers are enjoying profits at
Scrooge McDuck levels? The latest half-yearly statements had Ampol
bathing in $440m, Coles $616m, Qantas $1.4bn … and the Commonwealth
Bank taking a swim in the gold coins pool at a depth of $5.15bn.
Philip
Lowe is the RBA governor. Although he has a whole bank board and a
coterie of senior mandarins alongside him making rate rise decisions,
he is certainly to blame for public statements that imply “workers
pay to solve inflation they didn’t cause”, to quote (yet another)
economist
Jim Stanford.
The
theory for the rises is neoliberal orthodoxy; apply economic pressure
to cause unemployment, and make those who retain their jobs live in
such valid terror of the burning tyre-pit hell that is Centrelink
that they won’t make pay demands and therefore won’t drive “wage
price” inflation.
Lowe
has generously suggested that those households struggling to keep up
with rising mortgages – 27.8% of whom are now at risk of mortgage
stress – to just “pick
up more work”. This is Schrödinger’s employment policy,
where the RBA advocates for and against employment at the same time,
while you place a box on your head and scream at your ballooning
mortgage repayments. An earlier Lowe suggestion
was that those struggling with exploding rents should magic up some
flatmates or move back to a “home” that may or may not exist.
You,
Australian, are responsible for your own misery. But that means
you’re responsible for your own happiness, right?
So
while you’re forced to cut spending, alleviate supermarket blues by
performing a funky dance in the canned veg section the inevitable
moment a Katy Perry song comes over the PA. Similarly, suppressing an
instinct to ask for the wages you need to meet your costs can be a
lot less painful if you hum your favourite 80s sitcom themes at work.
Automotive
costs might force you into long and difficult walks to overcrowded,
underfunded public transport, so maybe commute in a clown suit. If
you’re facing record rent rises, you could consider reciting
beautifully sad poems from the nearest window and lure flatmates to
you with your tender pain.
History
suggests there are alternatives, but demands for rent freezes and
price controls are unconstitutional. Referendums to allow government
economic intervention of this kind were defeated in 1948 and 1973.
Faced with inflationary challenges in the 1950s, though, the Liberal
government of Robert Menzies addressed the problem by raising taxes
on the rich.
Sadly,
the Australian people voted Scott Morrison into power in 2019 on a
promise to implement the stage-three tax cuts, and then a promise by
Labor to keep these cuts on the books arguably convinced enough swing
voters over the electoral line.
There
is no help coming for Australians from the RBA. Perhaps we should ask
ourselves how much of this misery we might have power over, after
all.
