A trade off for monetary policy

Since the global financial crisis interest rates in the UK (and the US, Europe and Japan) have been at record lows. The aim was to boost Aggregate Demand and avoid prolonged recession and promote faster recovery. An interesting trade-off has been highlighted as a result of this policy.

The low interest rates have indeed maintained UK output, according to a Bank of England economist, but the low rates have meant firms that should have ceased operations have been able to survive. Around 1.5 million jobs have been protected according to Andrew Haldane.

Of course saving jobs was exactly what the Bank of England were trying to do when they lowered rates. The unintended consequence of this action was that it reduced the costs of poorly performing firms. Those who were not efficient enough to earn the profits necessary to repay loans at 'normal' rates of interest have been able to survive ('Zombie firms' according to Haldane).

The impact has been to allow low productivity jobs to survive and this has led to poor improvements in productivity overall, because the productivity figures reported are an average over the whole economy.

Productivity is a measure of efficiency. It records how many inputs are required to produce a given level of output. For economic growth to deliver higher standards of living a rise in productivity year on year is crucial. The UK has a very poor productivity record generally and the low interest rates since 2008 have allowed this to get worse.

Haldane says that he is happy to have seen 1.5 million jobs saved rather than 2% productivity growth. At least 1.5 million people and their families will be agreeing with him.

The BBC article is here

As this is an article about the UK as an example it is directly useful to IB students. However VCE students can see the example of how all policy has trade-offs and policy actions often have unintended consequences, such as supporting inefficiency to reduce unemployment.

Is Quantitative Easing working in Europe?

The European Central Bank has been fighting the danger of deflation in the Euro Area. Deflation is a sustained fall in the general price level so that the purchasing power of money rises.

The purchasing power of money rising sounds good! However it is generally caused by low demand and so low growth, or even falling output. The most recent period of prolonged deflation occured during the Great Depression, and nobody wants to go back to that. When prices are falling consumers will wait to buy good and services as they expect them to become cheaper. The result is a downward spiral of prices and output.

The ECB has been using conventional expansionary monetary policy, interest rates are now 0%, and unconventional monetary policy, they are printing Euros through Quantitative Easing, in order to boost Aggregate Demand (AD) and so economic growth.

The report below suggests that this is now having some effect, but it is far from certain that a sustained upswing in output, wages and prices has yet been achieved, so they will continue the policy. (Note the difference in headline and core inflation which indicates that there is still some way to go before there is a sustained recovery.)

The BBC cover the story here

A danger for Australia's economy

The ABC today report that the level of Australian household debt has reached 187% of disposable income. This is, they say, the highest in the world.

The problem is that this means that many households are close to not being able to afford to pay their debts (and interest) and buy the goods and services they need. If there was a rise in interest rates, or rise in unemployment this would see more and more households 'running out of money'.

The effect this will have on Australia is that Consumer spending would fall, leading to a lower level of Aggregate Demand (AD). This would put downward pressure on economic growth and could push Australia into its first recession since 1981.

Admittedly this is the 'disaster' scenario. There are other factors that simultaneously affect the economy. However it provides a constraint on the Reserve Banks ability to raise interest rates and should warn the government that further budget cuts and tax rises could combine to cause the recession everyone seeks to avoid.

Debt is a fact of life. It makes sense to borrow to buy a house. There is, however, a limit to the amount of debt a household can take on - the amount they can repay. If banks think households have reached their ability to pay then new loans will start to dry up and consumer spending will fall, leading to that fall in AD we feared. In that situation monetary policy becomes less effective, because lowering interest rates won't help much.

This is an important piece of background to Australia's current economic situation.

OECD data suggests Australia has high household debt, but not the highest

The ABC covers the story here

Australian interest rates stay at record low

As expected the Reserve Bank of Australia (RBA) kept interest rates on hold at their meeting yesterday. They remain at the record low of 1.5%.

The RBA forecast that the Australian economy would continue to grow at about 3% in 2017, but that inflation remains below target. Therefore the RBA wishes to encourage the economy to grow faster by keeping it cheap to borrow and so encouraging consumer spending and investment, both components of Aggregate Demand.

Australian interest rates may stay the same for a while. The pressure to raise them might come from higher growth and a rapidly rising housing market. However the pressure to put them down will come from a rising exchange rate (based on events in the USA where interest rates will rise).

Monetary policy is a very important tool in managing the economy and works by affecting the total level of demand in the economy.

Australia's policy interest rate since 2014

Below are two links. The ABC one is for Year 12, the Channel Nine one for Year 11.

The ABC article is here

The Channel Nine article is here

VCE students must be able to explain policy decisions and economic events in Australia over the previous two years prior to their examination. Interest rate decisions (monetary policy) is one of the areas they must be familiar with and be able to explain why policy decisions (change interest rates etc) we made.

IB students can use this as an example of monetary policy too.

The good side to exchange rate depreciation

The exchange rate of the UK Pound against other currencies has fallen considerably in 2016, the result of the vote to leave the EU. The cause of the fall is actually based on the view that the UK economy will do less well outside the EU than in it.

The chart shows the value of the pound against the US$ over 2016.

The pound has performed in a similar way against other currencies.

What does this mean? Firstly UK imports are more expensive because more pounds have to be given to buy each foreign good or service than before. This can lead to higher inflation as the price of imported goods and services in pounds rises and it makes UK consumers worse off.

On the plus side British exports are cheaper as far as foreigners are concerned. This will allow British firms to raise the level of exports. As long as the Marshall-Lerner conditions hold this will mean that the UK will experience rising net exports (X - M) and so a boost to Aggregate Demand and economic growth.

The article below explains how the British tourist industry is already experiencing a rise in demand and expects 2017 to be an exceptionally good year. A silver lining for Brexit?

The Guardian article is here

This article is an excellent example for International Economics for IB and can equally be used to illustrate the effect of changing exchange rates for VCE students. Note the Marshall-Lerner conditions are only part if the IB syllabus.

The effect of Trump on the US economy

We are condemned to live in interesting times, and one of the most interesting things is what Trump's Presidency will do to the US economy.

Joe Stiglitz, a Nobel winning new-Keynesian economist, has written an opinion piece on what he thinks will happen. Some of this is beyond the new Year 12's at present, but will become clear soon. Notice in particular how Stiglitz links together different policy areas as a change affecting one part of the economic system affects others.

For example the idea that the USA will invest more than it presently saves to 'boost' economic growth leads to a rising current account deficit, which reduces Aggregate Demand and so dampens economic growth.

Stiglitz's implies Trump is just a blow-hard who does not understand economics. Can't argue with that.

Stiglitz's article is here

Pretty much essential reading for all IB students. Keep this bookmarked to refer back to.

How economies are highly interdependent

I found the article below while looking through papers on newspapermap.com. It is about how Brazil's recession is affecting Argentina's economic growth. It also details how some other injections into the circular flow will help Argentine growth in 2017.

The key here is that exports are an injection into the circular flow, but depend on foreign income, not domestic income. Therefore as Brazil suffers its 'worse recession in 100 years' their major trading partner suffers a fall in Aggregate Demand too.

This article lends itself to AD/AS analysis and discussion of multipliers. It could be taken to be an article on international trade, but for me would be best suited to a macro IA that discusses how changes in injections have a multiplier effect and to discuss the impact on the economy, government, taxpayers etc.

The article from the Buenos Aires Herlad is here

US raises interest rates

The US Central Bank, The Federal Reserve Bank, (the Fed) has raised interest rates in the US from 0.5% to 0.75%.

This may not seem like much, but for the fact this is only the second rise in ten years. (Note that 0.25% is the usual change in rates around the world.) It reflects the recovery of the US economy from the deep problems caused by 'The Great Recession' and signs that Aggregate Demand  and economic growth is picking up.

Note the factors which the Fed have cited as reasons for the rise. Clearly not everything is going really well, but AD is rising. They also seem to be taking account of the fiscal boost President-elect Trump is proposing.

Why should the Fed act now when inflation is so low (below target) and Trump has yet to unleash his 'hope for the best' economic policies on the USA and the world? The answer lies in the 'long and variable' lags in monetary policy. It will take at least 18 months for this interest rate rise to have full effect, and possibly two years. 

Another Chairman of the Fed, William McChesney Martin famously stated that the job of the Federal Reserve is "to take away the punch bowl just as the party gets going",  recognising the long lags in policy. (That is raise interest rates early in the upward part of the business cycle and not wait until inflation is already rising.)

US Federal Funds Rate December 2005 to December 2016

The Sydney Morning Herald covers the story here

This article is about monetary policy and how decisions are made. AD/AS analysis can be applied to it and analysis of why the decision has been made can be discussed.

Australian wages growth at record low

The growth in wages in Australia is about half the rate it was four years ago at 1.9%. In a stark contrast to the period of the 1970's and 1980's this is a cause for concern.

During the 1970's Prices and Incomes policies, where governments tried to limit pay rises to control inflation, subdued wages growth would be the cause for celebration. This is because firms costs are closely linked to the prices they charge as wages make up a significant proportion of those costs. Therefore the low rise in wages indicates that inflation in Australia is likely to stay low for now.

In fact inflation is so low that it is a significant cause for concern. It indicates a low level of Aggregate Demand (AD) growth, which is threatening Australia's overall economic growth.

The cause of this low wage growth has several roots. One is the end of the mining investment boom of course and the adjustment of the economy to non-mining sectors. However usually low wages growth is associated with rising unemployment (the Phillips Curve relationship) and in Australia unemployment has been trending downwards.

As noted in several other posts the unemployment figures are misleading. In fact there is growing part-time work and underemployment. In addition the participation rate is falling as people leave the labour market. This is making the unemployment rate look lower as it is calculated using the formula:

Unemployed

                   Employed + Unemployed     x 100

As those not participating in the labour market are counted as neither employed or unemployed the falling participation rate leads to a lower recorded unemployment rate (i.e. they would be unemployed if looking for work).

The ABC provides an excellent commentary with data on this story below.

The ABC story is here

This is an excellent subject for IA's in macro. Note the ABC article has too much analysis to be a good base article, but there should be plenty of articles out there that deal with the story without spoiling the chance to analyse what is going on.

Depreciation of a currency isn't a cure all.

Many people like to see their currency get weaker in a floating or fixed exchange rate regime. this is because it causes export prices to fall and their country becomes more competitive. Few economists recommend depreciation as a policy for good reason, but politicians and manufacturers continue to call for it.

The UK has recently seen a 20% fall in their currency, the pound (GBP), against the dollar. Some now expect there to be a revival in British manufacturing and a rise in growth and jobs as a result. It is unlikely.

Of course a depreciation of a currency does make exports cheaper. There will be a rise in exports as a result, but there are many considerations before we can say this is unambiguously good.

Firstly the Current Account of the Balnance of Payments will only improve if the Marshall-Lerner conditions are met and the sum of the price elasticities of exports and imports sum to more than one. They will.

Mentioning imports is of course more than important. Import prices will rise with a depreciation and so will inflation. If firms rely on imported components then their costs will rise too. And let's not forget the humble holiday maker - it's not more expensive to holiday abroad. Those who champion UK manufacturing will say 'holiday in the UK', but how much rain and fish and chips can they really stand?

There is also the problem that depreciation only masks deeper problems, such as fundamentally low productivity, poor design and low quality. Temporary relief is at best provided by a depreciation which can easily be reversed. Further it isn't possible for all countries to depreciate their currency because exchange rates are a relative measure of value. A series of competitive devaluations will be at best inflationary and fruitless.

The most sensible thing ever said about depreciations is that 'there are just more questions' once they have occurred.

The article below examines the likely effect of the UK's recent depreciation.

The Guardian article is here

Primarily an example for IB students it raises very important questions about the pros and cons of floating exchange rates and the likely effects of exchange rate movements. Never forget the Marshall-Lerner conditions for HL candidates. VCE students will however recognise the effects of the changing value of the Australian dollar and the likely effects on the Australian economy and the macroeconomic goals.

Headline inflation rise hides continued sluggishness

The Australian CPI figure released yesterday showed a significant jump in inflation, and for some this was great news s at least inflation headed back towards the target range of the Reserve Bank of Australia (RBA). This is almost certainly a false hope.

Looking at the figures it is clear that the massive rise in fruit and vegetable prices, largely due to massive flooding affecting supply, has made the CPI figure look more healthy than it really is. Take that out and the underlying rate of inflation actually fell.

Australia's headline and underlying inflation compared

The low inflation figures show that economic growth the Australian economy continues to slow down, and this is not good news. The end of the mining boom is severely affecting WA and the Northern Territory, but indicators don't show massive growth in the rest of Australia that will compensate.

Once again Greg Jericho in The Guardian provides excellent analysis and data of the inflation figures and considers the likely impact on monetary policy settings.

The Guardian article is here

VCE students are especially urged to understand the pressures in the economy at present - demand side pressures on policy settings. The article makes use of the Australian underlying inflation measures which are required knowledge.

IB students can use this as an example of inflation and monetary policy. The article is particularly strong at looking at how the various factors link together to give an overview of the health of the economy and the process and implementation of monetary policy.

Immigration is good for Australia

There have been calls for immigration to be halted, especially by the crazy right in Australia. However the consequences of halting migration would be dire, leaving Australians worse off.

The Age has written a piece describing the effect of halting migration. They point out that growth would slow, the workforce would age faster leading to a demographic imbalance and the government would face larger structural budget deficits. There are several other unpleasant consequences listed.

The article does miss one important point. Most Australian immigration is skilled migration. The immigrants go straight into the workforce without the need for expensive training and fill gaps that the economy would take years (decades) to fill itself. The result is that the supply-side of the economy is expanded (Long-run aggregate supply shifts to the right) and there is faster non-inflationary growth making everyone better off.

The unfortunate politics of immigration must be put to one side and the economic analysis of immigration considered more carefully to achieve a sensible solution. It is impossible to see a situation where Australia will not need at least 100,000 immigrants a year to avoid stagnating growth and an impossible pressure on the working population as the overall population ages.

The Age article is here

This article is directly relevant to VCE Unit 4 on Supply Side policy and to IB Macroeconomics (Paper 1). The impact of demographic changes is something that could easily put into an IB Internal Assessment piece using AD/AS analysis.

Japan stimulates economy - again.

Japan has announced another huge fiscal stimulus package to try and boost growth in the economy. Japan has tried a succession of such measures in recent years, but the Japanese economy continues to perform poorly.

The latest package has been described as an 'old fashioned short term stimulus, based on public works.' What we might call a Keynesian stimulus package. The Aggregate Demand and Supply diagram shows the hoped for effect of the measure.

 

The  brief details of the stimulus package are that the government will spend an additional US$275billion mainly over two financial years. This will boost Aggregate Demand (AD) by raising government spending (G), a component of Aggregate Demand. The government budget deficit will rise as a result. While there will be significant infrastructure spending in the package there is also going to be cash handouts to low income families.

The main aim of the package is to boost Consumption spending, the largest component of AD, which has been very slow to grow in Japan for many years. The overall effects are also expected to be short term only, a temporary boost to AD, partly to overcome any impact of the British Brexit vote on the world economy. 

The real question is will it work? This is the second fiscal stimulus package of the year in Japan and part of the 'Abenomics' approach of Japan's Prime Minister that aims to boost economy (a link explaining Abenomics is given below).

The stimulus is being made along with the supporting policies of expansionary monetary policy and deregulation and will shift the AD curve to the right. In the diagram above this shows a very successful expansionary fiscal policy that leads to non-inflationary growth (Real output rises from 0Y1 to 0Y2 with no rise in the price level.) 

However the diagram shows a simple Keynesian model. There might be crowding out, which reduces the impact of the stimulus, or if the monetarist/new-classical model holds the rise in demand will only lead to a short term output and employment boost and then inflation.

The BBC covers the story here

Abenomics is explained here

This article is most useful to IB students. It provides and excellent example of expansionary fiscal (budgetary) policy and raises the questions of effectiveness and the nature of mutually supporting macroeconomic policies. VCE students can certainly follow the logic of the policy and apply it to Australia's situation.

Transfer pricing. Is it a crime?

A leading authority on corporate accounting has said that the Australian government might be loosing a billion dollars a year in lost tax due to the way multinational firms operate.

When firms operate in more than one country they can often decide where to report their profits by using transfer pricing. Not surprisingly when given this option firms decide to report their profit in the country with the lowest tax rate.

The example of Starbucks is well known. Starbucks sell coffee in many countries. However they report a lot of their profits in Switzerland. This is because the Swiss subsidiary of Starbucks sells the coffee to other Starbucks companies at a high price. The Starbucks in other countries therefore make very little profit on the coffee. 

Of course the coffee never really enters or leaves Switzerland. The Swiss company simply handles the processing of invoices. Starbucks benefit from the low Swiss profit tax and overall the Starbucks corporation gets to keep more of its profits.

George Rozvany goes further by saying the big four accounting firms assist multinational companies in this legal, but unethical practice. This is a different point, but the way the accounting firms operate is certainly open to criticism.

The implications for Australia is that they are losing tax revenue. With most governments running budget deficits that's a pressing issue. 

Is transfer pricing unethical? That's a good question. Many think it is, but if it was banned in Australia would this lead to lower overseas investment and so affect growth and employment adversely?

When talking about the benefits of free trade and the free movement of people and capital, we also have to consider some of the costs.

The ABC cover the story here

This story has direct relevance to Australian Budgetary policy, It also applies to International Trade and Fiscal policy for IB students.

How is the Australian economy doing?

Yesterday the ABS presented a report on the state of the economy. The news was somewhat mixed.

The good news was that the economy is growing more strongly than expected. An annual rate of 3.1% after a strong first quarter. This is encouraging as it suggests that growth might continue to pick up over the next year or so.

However there was bad news on business investment, which contracted 2.2%. Investment is a component of Aggregate Demand and a driver of future growth on the supply side.

There was also bad news on real disposable income per capita which has been declining for two years according to the ABS. This means the purchasing power of households is declining and so lower material living standards will follow.

The picture is very mixed. The 'third phase' of the mining boom is driving output and exports. The third phase of the mining boom is the 'production phase', all those new and larger mines producing coal, iron ore and LNG. But the mining sector is located in remote Australia and provides few jobs, so most people will not see the benefit of this economic growth.

The ABC covers the report here (some nice graphs)

This article is most relevant to VCE students who must know how the Australian economy is performing and what the major demand and supply side influences are on the economy. IB students will be able to use it to understand how economic performance is measured and draw the inference that not all indicators point in the same direction.

A problem of supply side reform

France has an unemployment rate of 10.5%, far higher than other EU countries of similar standing (but not as high as the basket cases of Spain, Portugal, Italy and Greece). That France's unemployment has been consistently higher than the UK's and Germany's really should concern the French.

The charts below show the French and UK unemployment rates. They show that UK unemployment has been consistently lower than Frances and that the UK has recovered from the Global Financial Crisis while France has not. Yet these two countries are neighbours, with broadly similar populations and similar industrial/service based economies.

One explanation offered for this is France's inflexible labour market. The maximum working week is set at 35 hours, there are strict laws about when people can work, generous minimum paid holiday (30 days a year compared to Germany's 20) and employment protection which makes it very difficult for firms to let workers go.

The French government wish to relax labour laws so that while those in work might be a little worse off there will be more jobs overall. 

This is a supply-side policy and copies the process begun in their neighbour, the UK, as early as 1981. This type of supply-side policy is called deregulation. The hope is that the reforms will give firms greater flexibility, so they become more responsive to customers and profitable, and encourage them to take on more employees because there is less risk they become 'stuck' with staff they don't need.

This is being strongly opposed by French Trade Unions who are engaging in nationwide strikes.

The article below explains the policy changes and also suggests that this is a battle between those currently in work and those who would like to be, but can't get jobs in the current climate.

The data certainly suggests that there is something stopping the French labour market from working efficiently and that this will cost France economic growth and give the French generally a lower standard of living.

The BBC article is here

This article is more directly applicable to IB students, but VCE students also need to understand the nature of Supply-side policies and their effects and also the difficulties that can be encountered in implementing them. There is no doubt that creating a more flexible labour market is one aim of supply-side policy and it will result in lower wage rate, but higher employment in the short-run, while allowing higher long-run growth.

The 'Prepare - trial - hire' initiative aims to reduce youth unemployment

An important measure in the Australian Federal Budget is the so called PaTH initiative. It replaces 'Work for the dole' for young people (although that is available after a year of unemployment).

The PaTH initiative (it stands for Prepare, Trial and Hire) is a supply-side policy initiative to try to tackle the problem of structural unemployment among young workers.

Structural unemployment arises because of a mismatch between the skills workers have and the skills needed to fill job vacancies. Young workers have the disadvantages of no experience and no in-work skills. Training workers is expensive and is therefore a cost of employment. If the cost of employing workers can be reduced somehow then firms will hire more of them.

The chart clearly shows unemployment among young workers is higher than over 25's

The ultimate goal of this policy is to shift the Aggregate Supply curve to the right. The policy does this by increasing the supply of skilled workers. It does not assume that all young unemployed workers have no skills, but does assume that the lack of current skills means that some unemployed are not really employable and so not truly part of the workforce (or labourforce/labour supply) available to the economy.

The scheme works by paying the young unemployed  $100 a week extra on their benefits to take part in the early stages of the scheme. This is important because they need an incentive. If there was no additional payment the disadvantages of travel to work costs and getting up early each day etc. would mean many would prefer to stay out of work.

After the first two stages of the scheme employers receive help for six months to pay the wages of the young workers they hire - anothVCEer incentive. This is in addition to $1000 paid to firms at the early stage of the scheme. This payment, of between $6,500 and $10,000 helps offset the training costs of the new workers. With hope after six months of employment the new worker is adding more than the value of their wages to the firms revenue and will keep their job.

Will this work? We don't know until we try it. The incentives on both sides of the market have to be enough to fill the 30,000 places a year. It is clear not all 30,000 will go on to full time permanent jobs, but some should. Overall this measure should help to contribute to Australia's economic growth and lower unemployment. However it will do so only slowly.

The Age explains the scheme in detail here

This article relates to an important measure in the Australian Federal Budget 2016. VCE students need to know the details (plenty in The Age article). IB students can use it as an example of supply-side policy and should be able to analyse the effects in the AD/AS model.

Some reflections on the lowering of company profit tax

The Budget proposed lowering the rate of company tax to 25%. This is an example of supply-side policy and deserves some examination.

The first point to make is that the way this tax reduction is being implemented is getting some bad press. This is because the smaller the business the sooner the profit tax rate will fall. 'Small businesses' will enjoy the cut first, defined as companies turning over (have revenue of) $10 million. That's up from $2 million.

Over the next few years that turnover limit will gradually be increased to $1 billion. Some have chosen to ridicule the use of the term 'small business' in this context. Clearly that is irrelevant - this is a supply-side measure to encourage investment and so long-term economic growth.

The issue is that Australia now finds itself with a relatively high corporate tax rate. This means the incentive to make Australia your base of operation is diminished. And the problem has got worse since the Henry Commission on tax reform recommended dropping the rate to 25% in 2010, over the period many countries have dropped their company tax rate even further.

So the Australian profit tax rate has become far less attractive over the period 2005 to 2015. This may be diverting potential Foreign Direct Investment from Australia and is leaving Australian companies a smaller pool of retained profit to reinvest in their businesses. 

So the aim of the company tax cut is to improve the supply-side performance of the economy, raising the rate of economic growth (shifting the Long Run Aggregate Supply Curve to the right more quickly.

It is important to remember that supply-side policy is competitive too. Having a supply-side policy isn't enough, it has to be a policy that narrows the gap between you and the 'leader' otherwise they just get more competitive than you.

The Guardian looks more widely at tax and the 2016 Budget here

This article has equal relevance to IB and VCE students. VCE students need to know the detail of the tax cut exactly, but both groups need to understand the operation of supply-side policies.

"Monetary policy is not enough."

The Governor of the Reserve Bank of Australia (RBA) has told a New York conference that monetary policy is not enough to allow faster growth. he suspects that the world has entered a period of much lower 'trend growth'.

Stevens has made a number of points and this is a quick summary of what I think he means:

1. With nine years of low interest rates there is no longer any room to boost Aggregate Demand (AD) with lower rates.
2. Simply 'printing money' ('Quantitative easing' or 'helicopter money) will also be ineffective.

Low confidence among both consumers and firms contribute to these first two points, but simply that the incentive provided by these measures is now too small. He therefore thinks the use of negative interest rates (as in Japan and the EU) will fail to raise economic growth.

3. More than monetary policy is needed to promote growth and that should be provided by increased government infrastructure spending.

He makes the point that this can be funded very cheaply by issuing bonds (government debt) at record low interest rates and that the return on this investment will far exceed the borrowing cost.

Stevens is not calling for a naive Keynesian fiscal boost. However he is calling for an end to 'austerity' and a blind adherence to the idea that any government Budget deficit is bad. (Some are, some are not.) What Stevens is calling for are projects that will assist the private sector to grow through active supply side policies which have the advantage of adding to AD as well.

Finally Stevens talks about the wider implications of monetary policy. He pointed out that the low interest rates are destroying retirement plans. Pension (superannuation) funds rely on investing in safe assets such as bonds. The interest rates earned on these assets are so low many find their retirement plans are being ruined. A short period of low interest rates will not affect pensions too badly, they can catch up, but we are now nearly a decade into low rates and that has serious implications.

Business Insider covers his comments here

This article is applicable to VCE and IB students. Australia has record low interest rates and the 'policy mix' between monetary and budgetary policy in Australia is a crucially important area of study. For IB students the limitations of monetary policy and the interaction between fiscal and monetary policy and the operation of supply side policy in the policy mix is directly relevant to Paper 1.

The cost of economic growth may be falling

In economics there are costs and benefits associated with every decision and every change. In recent years when considering the desirability of economic growth the costs have become somewhat more important than they were.

For generations economic growth was seen as good. The benefits of higher real incomes and a higher material standard of living were seen as the primary long-run goal of economic activity. It was not until the 1960's when E.J. Mishan wrote 'The Cost of Economic Growth' that economists began to seriously consider that there was a serious downside to continuous growth.

Today we understand that non-material living standards can be seriously affected by growth (take for example China's atmospheric pollution) often through negative externalities. Also we know that material living standards are are threatened by some elements of growth, such as global warming.

Some economists supported continued economic growth following Mishan's criticism, such as W. Beckerman in his 'In Defence of Economic Growth'. He argued that technical progress would allow society to overcome many of the problems of growth and that the higher real incomes obtained through growth would allow us to devote the necessary resources to deal with the problem.

There had been little to support Beckerman's contention until recently. The article from the New York Times described how growth and CO2 emissions have become 'decoupled' in some advanced economies. This holds out the possibility of economic growth without greater environmental damage. There is a long way to go however, only 21 out of 191 countries have achieved growth without more CO2.

The New York Times article is here

This article is well suited to VCE students as they look at living standards and economic growth in Outcome 2 of Unit 3. It also provides IB students with the opportunity to look at the wider aspects of growth and to evaluate its impact. It provides all of us with the reminder that there are always costs and benefits to consider.