The Reserve Bank has just released what is hopefully its last interest rate rise for this cycle. It has done this in order to deliberately hurt the economy enough to curb our rampant spending habit. Higher interest rates mean less borrowing, less spending, and thus less pressure on scarce supply. This should lead to a slowing in inflation which is what the Bank wants. Essentially then, the Bank is trying to reduce spending by making it more expensive. This is called monetary policy, and is the preferred countercyclical policy tool at the moment. It works, but can be very painful.
Here is my suggestion. Why not have the government appeal to the public directly, asking them to defer nonessential spending until after the inflation crisis has passed? After all, in a water crisis, we don't just raise the price of water, we appeal to people's sense of civic duty, tell them there is a physical problem with supply, and ask them to voluntarily reduce their consumption. It works, Brisbane's domestic water consumption is only 140 litres a day. Also, those people who for patriotic/protectionist reasons "buy Australian" could be told that at the moment they can best help their country by buying anything but Australian. Surely such an attempt could at least do no harm, and could take the edge off the harshness of tight monetary policy. Kevin Rudd's message could be; "Save your money now, so everyone can pay less on their mortgage."
What do you think?
7 comments:
That's an interesting idea, which I think would be too hard to sell politically. I can't imagine retailers being happy with exhortations from the government to tell people not to buy their products, even if the net difference between that and an interest rate rise is minimal.
I don't think that the water analogy works. With water, everyone's equal - there's no need for anyone in residential Brisbane to use more then 140 litres per day. So you can have a big advertising campaign, telling everyone to aim for 140L, the Council can send you a letter if you're using too much, etc.
With spending, there's a huge difference between rich and poor. Telling everyone to cut spending by x dollars a week would be massively unpopular, since the poor would disproportionately notice it. Telling them to cut by a percentage would be too complicated.
I don't think that you would tell them to cut by a certain amount. You would just tell them to cut as much as they feel comfortable with.
Chris's criticism is (alliteratively) correct. The fact remains there is a fair bit of discretionary spending in the economy. Jo Bloggs might be thinking of either buying the LG 6000 plasma screen TV now, or waiting a year for the even better LG 7000 to come out. If he is pretty much indifferent as to which choice he makes, an appeal to his civic duty could see him delaying his purchase. This is a much better way to reduce spending than by ramping up his home repayments to force him into the desired choice, this way there is no coercion, just a "friendly invitation."
I chose the water analogy because everyone understands the problem, a limited supply of a quantity called dam water; if Jenny uses more, there is less for Eddie. Jenny only gets a nasty letter if her average daily consumption exceeds 800L, yet she constrains herself anyway. Why? Partly because of slightly higher prices, but mostly because she thinks of herself as a good person, and wants to help out. Also, people tell her that if she conserves now, there will be less need for more draconian measures in the future.
I think the main difference with the economy is that most people DON'T understand the problem. I certainly didn't, before I took first year macro-economics as a subject.
My idea is to have people, hopefully on both sides of politics (this is a pretty centrist proposal after all) getting on telly every chance they get and saying "Please cut spending by as much as you can. Not x dollars a week, or y percent, just as much as you feel comfortable with. Don't worry, the RBA will make sure everything turns out ok in the end, but if you make their job easier, everyone will thank you for it."
I'm also not sure about your point on the retailers. Most of these have business loans after all, and shops in an overheated economy face problems of dwindling inventories and rising wage costs, so they might even welcome a bit of relief from excess aggregate demand. Lets not forget too, that the alternative to my proposal is simply to hurt consumers enough that they CAN'T buy as many goods anyway, so the effect would be the same. I'm sure if politicians took the time to explain this, most reasonable people would accept it.
I'm not convinced that telling people to spend less will actually make them spend less. And if they did, I'm not sure how easy it would be to measure quickly to see if it's not enough or an over-correction - how often do they get overall spending statistics etc.? I don't know how important these things are. What I'd like is an economist called Andrew to consider this topic and give an opinion.
Your use of the term 'discretionary spending' makes my argument look out-gunned.
I've never heard of a retailer who's happy when they sell less stuff. Usually I hear them saying that they're happy that people are buying more, or unhappy that people are buying less.
Also, I like how the plasma television has become the symbol of discretionary spending. Look how erudite I am! I was thinking of referring to them myself while channelling a Terry McCrann column, but I ended up not doing so.
It seems to me that it'd certainly be worth a shot.... and it'd certainly be nice for the public to realise that, collectively, they have to shoulder responsibility for interest rates.
Politically, I'm inclined to agree with Dave, though. There's a real difference between the forcible brake and the voluntary one from the point of view of the retailer. What they ideally want is for everybody to be buying as much as they possibly can be (taking inflationary pressures into account). They want for the only reason you wouldn't want the plasma tv is that you can't afford it. They want you to grumble about not being able to have the plasma tv so that, when interest rates go down again you immediately DO go and buy the thing.
Under Sam's scheme it becomes socially O.K. not to want the stupid plasma tv - laudable, in fact. The last thing they want is for people to feel good about not buying stuff.
Still,.... how powerful is the retail lobby anyway? Perhaps there is some other powerful group that would stand to benefit from a softer approach? I don't know.
Oh, and while we're talking water saving ... this is one of the few ways moving to NZ is a bit of a culture shock. You flush some of the toilets on campus and it's like your refuse is being sucked away by white water rapids.
Also, ZOMFG another post!!
O.K. So YOU hang up, Sam.
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