The RBA’s inflation policy is a case of deliberately wrong diagnosis, worse than useless cure

June 28, 2022
Image: Australian Bureau of Statistics business indicators, March 2022.

When it comes to inflation, the Reserve Bank of Australia (RBA) has made clear it would rather make life much harder for workers — even if it means tanking the economy — than touch record-high corporate profits.

RBA chief Philip Lowe has been at pains to stress that a trifecta of interest rate hikes, wage rise restraints and government spending cuts are needed to curb surging prices.

It is true government spending rose during the pandemic — a necessity to keep the economy afloat during lockdowns. But Lowe has provided no evidence to show why low interest rates are to blame and wages can hardly be the cause given they have been going backwards in real terms.

In reality, none of these three factors explain the current inflationary wave; they are simply the RBA’s preferred anti-worker methods for dealing with a crisis of capitalism’s own making.

The fundamental causes of today’s price rises are two-fold and date back to policies implemented during the last period of high inflation (1973–1990).

The first was the concerted push to shift manufacturing offshore in pursuit of cheaper labour. Entire chains of production were globalised during this period, for the sole purpose of locating factories in countries that provided the best profit-making opportunities.

The other major policy decision was to replace the high-paid, generally unionised, manufacturing industries that were moved offshore with low-waged, largely non-unionised service industries. Rather than invest in new technologies as a means to generate profits, capitalists sought to turn a quick buck by cutting back workers’ wages and conditions through the rapid expansion of insecure jobs.

These policies did play a role in driving down inflation, but at a tremendous cost to workers’ livelihoods.

Globalised production made it cheaper to produce certain goods. But the fragility of international distribution chains has been exposed by the pandemic and Russia’s war on Ukraine. Disruptions have spurned supply shocks that go a long way to explaining higher prices.

And while driving down wages helped prop up profits, the failure to invest meant corporations had to look for other means to fatten their bottom line. One way they have done this in recent times — particularly those corporations with price-setting power, such as energy companies and supermarkets — is to simply charge more.

This move largely explains how, amid extended lockdowns and economic downturn, corporations were able to increase their profits by 25.3% between March 2021 and March 2022, thereby reaping a record-high share of the national income.

Despite this, the RBA insists that hitting workers with interest rate rises, wage restraints and government austerity is the only way to deal with inflation caused by global supply shocks and corporate price-gouging.

Much like it did during the last inflationary period, the RBA says workers’ must pay the price of bringing inflation down.

So committed is it to its pro-corporate vision, that it is willing to push its policies even if the likely outcome is that the economy goes into recession — just like it did last time, with the “recession we had to have” of 1991–1992.

The logic behind raising interest rates (and keeping wage rises low) is that by forcing workers to put more of their wages towards repaying interest, they will have less money to purchase goods. The supply shock is therefore resolved not by increasing supply but by squeezing demand.

The price workers pay for a policy that forces them to choose between repaying their mortgage or paying bills and buying groceries is obvious. Experts expect as many as 300,000 mortgage borrowers will be left with no choice than to default on their homes.

The banks, of course, will make money out of all this. But they won’t be alone.

Workers are not the only ones who borrow from banks; businesses do too. In fact, many small businesses require loans, whether to start up or keep afloat during bad times.

While large corporations can drive up prices to compensate for additional costs, smaller businesses generally do not have this luxury. Interest rate rises will mean more economic pain for them and, potentially, bankruptcy. The end result is an even greater concentration of market power in the hands of big corporations.

Add to this the fact that higher interest rates mean even big corporations are going to think twice before borrowing money to invest in production, then the picture you are left with is one of downward pressure on consumption, reduced investment, economic downturn and — almost certainly — recession.

One way all this could be countered is through mass public investment to promote production. This would require raising corporate taxes and regaining public ownership over major branches of the economy — in particular the booming mining sector — to redirect profits and better coordinate production.

But there’s no chance of that under a pro-business Labor government that has already pledged to follow the RBA’s absurd advice to cut government spending. The RBA, of course, knows all this. But it is institutionally wedded to impoverishing workers rather than touching corporate profits.

That’s because for all of the RBA’s talk of “independence”, it has never been independent of the interests of the capitalist class.

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