Who Do We Target Now In The Inflation Blame Game?
Inflation is rising everywhere, which does not mean it’s not a problem for politicians in Australia, just that they are a subset of politicians everywhere.
So we are seeing a global hunt for alibis and scapegoats.
In Australia, the federal government and the union movement have chosen business—in particular mining and food—as their fall guy.
There are a bunch of reasons why inflation is up.
One is that demand is stronger than normal, but the supply of goods hasn’t kept up due to logistical problems left-over from COVID and normal resource scarcity.
The reason demand has exploded is that money that couldn’t be spent for two years is being spent quickly and immediately. This is being funded by savings that accrued while most of us had our “gap year” for COVID and couldn’t travel or go out.
No blame accrues there, apart from the fact they collectively shut us down when the pandemic handbook said that was the last thing you should do.
Blame does accrue to governments who have also fuelled demand by loose monetary policy in the first place, and debt-fuelled expenditures in the second. They are adding record public spending to private spending.
In the U.S. the spending is in packages such as the so-called “Build Back Better” and “Inflation Reduction” Acts.
In Australia, we have various programs initiated by the government for energy transition, aged care, and childcare.
Another reason is that the price of energy has skyrocketed. This is partly a result of the war in Ukraine, but the stats show prices rising well before then.
This inflation is due to the energy transition, and it will intensify the further we transit into it. While politicians tout wind and solar as “clean, green, and cheap,” they are certainly not cheap, as evident by the rising cost of carbon credits.
This is an outcome of government choice.
Bigger Government, Designating Villain Status to Capitalism
Another driver in Australia that will become more apparent as time goes by is government-driven labour market changes which will make wages artificially higher while decreasing the flexibility of the economy.
Changes like the recent re-introduction of pattern-bargaining, centralised wage fixing, national industry awards, clamping down on the “gig economy,” increasing unionisation, and freeing the CFMEU (the union involved in all infrastructure work) from the oversight of the Australian Building and Construction Commission.
Inflation has been bubbling away under the surface as variants of Modern Monetary Theory—the idea that governments could borrow and spend what they pleased without risking inflation—leading to insanely low-interest rates and over-extended national “credit cards.”
These inflationary pressures manifested first in rising stock market valuations and then in elevated house prices. Now, they are hitting the hip pocket.
None of this is to the credit of any government, so who to blame if you are intent on re-election?
If your constituency is notionally labour, this is a very easy choice, it must be the capitalists.
And so the intellectual establishments of the Australian left, like The Australia Institute and the ABC, are hard at work fabricating a case for inflation being caused by “profiteering” and “price gouging” by corporate Australia, particularly the energy and mining sector and food.
They also point to an increase in capital profits versus labour as a share of the economy.
Except the facts don’t bear them out.
Energy and mining companies are price takers, with the price of their commodities swinging wildly in tune with small fluctuations in demand and supply.
It was only in 2020 that the price of oil went negative for a brief period, hitting -$37 per barrel (negative US$23) in late April.
For a period of a year or two, their financial statements were swimming in red ink.
Now there is a shortage of supply, partly caused by the war in Ukraine, but mostly by the energy transition, with governments deliberately restricting new oil and gas developments. Purchasers know there is not enough to go around, so they are bidding the price up.
This is how shortages are supposed to be handled—high prices encourage new developments and new supply, which eventually increases supply and lowers cost.
Greedy for Profits or Just Better Business Practice?
You can’t blame the energy companies for taking the prices their customers want to give them.
The argument for food is similarly flawed. Take Woolworths, with 37 percent of the Australian grocery market, who reported their first half results this week. Profit is up 18 percent, but not because food prices are up. Their turnover in food is up only 2.5 percent, less than the rate of inflation.
Increased profit appears to be the result of better management, increased sales in Big W, and rotation from expensive products into cheaper but more profitable home brands.
The Australia Institute’s chief economist Richard Dennis points to an increase in the share of the economy of Capital Profits.
However, as the graph below shows, labour has remained quite stable as a share of the economy, with the greatest retreat being “Gross Mixed Income.”
Analysis by the Reserve Bank of Australia fingers the rise in the housing market and the financialisation of the economy (as it becomes more white-collar) as the reason for these moves.
Labour and Capital Income. (Reserve Bank of Australia)
There is nothing unusual about politicians seeking to implicate someone else in their failures, but there is a real inflationary danger here.
If the public is convinced that it is corporate profit gouging that is causing the problem that can lead to price caps and super-taxes, that actually makes the problems worse.
It can also trigger unsustainable wage rises, meant to rectify the situation but which, in fact, perpetuate the vicious cycle of spiralling price increases and inflation.
By world standards, inflation is relatively low in Australia at the moment. Bad analysis followed by bad policy could change that and entrench high inflation for a lot longer.
Tue, 02/28/2023 – 21:25