By Joe Montero

Economics writer for The Guardian and policy director at the Centre for Future Work, Greg Jericho, is right to counter the Reserve Bank of Australia (RBA) deputy governor assertion that the economy is over heated and needs slowing. Andrew Hauser made this comment in during speech last week at an event of the Economic Society of Australia. Greg Jericho was also right to back Australian Treasurer Jim Chalmer’s retort that the economy doesn’t need slowing.

The obvious implication here is that the economy is not performing well. Understanding this is important because this leads towards appreciating hat must be done to turn it around.

The RBA deputy governor followed the claim that Australians are spending too much money on their everyday needs and the economy cannot sustain this. Too much spending causes inflation. Spending must be cut back to stop this. One way to so it is to raise the interest rate and force less consumer spending and more investment.

As Jericho points out, the data says the opposite is happening. Consumption spending is going backwards. Australia has not recovered to pre-pandemic effective demand, and it was not particularly strong then. This is an even bigger problem when much of this concerns services. Australia is now largely a service economy. The bulk of manufactured higher cost goods are now important. This means higher prices than would otherwise have been the case. Interest rated were then being cut.

The RBA misleads by using what people actually spend, rather than the quantity thy spend on as the measurement for demand. They are really talking about effective demand. This distinguishes between what they can spend on from what they would like to spend on. The RBA forgets that the cost of living crisis is real and deepening. It means that a higher proportion of income is spent on essentials and less of discretionary spending. The data shows s shift in the pattern of spending rather than more spending overall if you discount inflation.

Meanwhile wages continue to stagnate. Despite a recent annual rise of 4.1 percent, they remain just a touch above inflation and still a long way behind the rise in prices over the last few years. Real wage growth, which is what the average wage can buy, is well below this, as the graph below illustrates.

This is backed by ongoing stagnation in household income, consumption, and savings.

The graph makes shows a gradual decline in real wages for more than 20 years. The small improvement in 2024 has not been hugely significant and largely explained as the recovery from the Covid lockdown years.

Consider non-mining investment.

You can see that investment has tended to go in the opposite direction. In other words, when real wages are down, the level of investment picks up. This gives us an insight into how the economy is really operating. The much-lauded growth of the economy, and therefore excess in demand, has not been for consumption goods but for investment funds. In the longer run however, investment in the non-mining sectors has been in a slow decline. If the current fall in iron ore and oil prices were factored in, this year’s outcome would be worse.

But we are concerned with non-mining investment here. If we look from the viewpoint of household debt, we see that it is growing gin the log and middle terms.

Household Debt

Although this household debt has seen a decline in 2024, this remains within an already exceedingly high level. The biggest part of this is the cost of housing. It follows that the big area of new investment remains investment in debt. This is obviously not the only type of investment tied to the creation of credit. But it is the most immediately important to households and therefore how far household income will stretch.

Investment is also tied up with the operation of all businesses and government, and these are also mostly financed by debt. Needless to say, these types of debt are significant, alongside household debt. Together, they increase the quantity of the money supply relative to the demand for goods and services when the level of output doesn’t rise or rises at a lower rate, the result is inflation.

The RBA’s spruiking raising the interest rate is to make money more expensive and therefore reduce demand for it on the one hand, and to and to provide a higher return to those who invest in the creation of debt on the other. This is a contradictory approach, which says more about sectional interests and ideology than about managing the economy.

Instead of making the situation worse, it would be much better to do something about the debt problem. This must involve dealing with the excessive cost of housing, and proper regulation of finance to ensure that it goes where it is really needed, not subject to profit through speculation, and this requires adequate public control of and supervision of the finance industry.

Is this too much to ask to ensure the future of the Australian economy and a better life for everyone.