Wednesday, 10 June 2015

Glenn Stevens and Derp

The RBA governor Glenn Stevens gave a talk yesterday.

There are two things which I want to highlight.

Labour market

"The slowing in wage growth in response to soft labour market conditions has also undoubtedly helped to hold employment up. In fact wage growth appears to be somewhat lower than previous relationships between wages and unemployment would suggest. This may be a sign of increased price flexibility in the labour market and could help to explain why employment recently has looked a little higher relative to estimated GDP than might have been expected. These hypotheses can be advanced only tentatively, though, until we have more data."


"Meanwhile, as often remarked, infrastructure spending has a role to play in sustaining growth and also in generating confidence. I am doubtful of our capacity to deploy this sort of spending as a short-term countercyclical device. The evidence of history is that it takes too long to start and then too long to stop. But it would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects, surrounded by appropriate governance on project selection, risk-sharing between public and private sectors at varying stages of production and ownership, and appropriate pricing for use of the finished product. The suppliers would feel it was worth their while to improve their offering if projects were not just one-offs. The financial sector would be attracted to the opportunities for financing and asset ownership. The real economy would benefit from the steady pipeline of construction work – as opposed to a boom and bust. It would also benefit from confidence about improved efficiency of logistics over time resulting from the better infrastructure. Amenity would be improved for millions of ordinary citizens in their daily lives. We could unleash large potential benefits that at present are not available because of congestion in our transportation networks."

Thus we see the RBA overall ( as it is never just his opinion but a consensus where senior executives see the economy) have a view on two things.
1) the labour market is a lot more flexible than some people think it is. Wages are lower than unemployment would suggest and indeed unemployment is lower considering the state of the economy.
2) it is not appropriate to adopt austerity policies at present and increased  infrastructure spending would be beneficial to the economy particularly considering the price of bonds at present.

I should add Glenn was a lot more confident on both issues in the Question and Answer session than   in his speech.

Glenn is merely airing what sensible people have been saying for a while.

Meanwhile DERP still reigns in places. Have people like Katesy, Sloan or Henderson ever said gosh we were wrong about the labour market and/or fiscal policy.

Well as Kruggers shows people who view Fox news know less  about reality than people who watch NO news at all.

Says it all really.

I should have added Glenn clearly thinks monetary policy loses its effectiveness or potency as interest rates gradually get to the zero bound level.