I have been sent the following guest post, by someone who wants to remain anonymous on account of his position in the public sector. (I know the author, but hey, here’s an offer to those hundreds of thousands of public servants out there – if you want to send me a post that’s worth posting, I’ll post it anonymously on Troppo for you.)
Recent moves by the RBA to move to a ‘leaning against the wind’ policy to head off incipient asset price bubbles is a welcome change for those of us who have advocated this approach for some time.
In the wake of the demise of the Greenspan doctrine that asset price bubbles are too hard to recognise, too hard to deal with and too benign to worry about, this is a logical response. It is an incremental approach and one that is not scaring the horses.
The other approach that may still be worth pursuing is one that improves the CPI measure (and underlying) used by the RBA to target inflation by incorporating house prices.
The CPI as it is currently is certainly not beyond improvement.
A variation of this approach was proposed late last year by Henry Thornton (the nom de plume of a prominent economist) on his blog and is worth real consideration. Provocatively dubbed “True Inflation” it is a work in progress and could do with a more theoretical detail, back testing and further debate but it is a great place to start.
The problem is always getting these innovative ideas once developed to be adopted. Ideally for True Inflation, Glenn Stevens would come out next month and announce that CPI based inflation targeting itself was overdue for the next step in its evolution and refinement, and henceforth the RBA would be adopting True Inflation as its main guide to interest rate targeting.
This is, of course, due to a very reasonable amount institutional inertia, extremely unlikely. But this is an idea that does need a champion to have any real impact.
In lieu of radical central bank change a potential protagonist in this story may be the Unions.
The Unions have so far been absent from the most significant attack on the real value of workers wages in a generation in decreases in housing affordability.
To engage with housing affordability, True Inflation, or an adjusted variant, could be consistently adopted by the Unions as the basis for all wage claims. In particular the ACTU in the Fair Wage case, State based lobbying for Government workers, and individual award negotiations.
The clear, logical and defensible motivation would be to stop workers seeing the real value of their wages eroded by the exclusion of the cost of housing.
As housing has already become unaffordable in Australia on a median income to median house price basis there may need to be a period of wages catch-up to adjust for the exclusion of housing from wages adjustment particularly over the last 20 years. True Inflation or a variant should then be able to ensure this ratio does not get out of hand again.
Adoption of True Inflation or a variant by the Unions would enable the Unions to engage directly and effectively with the housing affordability problem and to ensure that Union negotiated wages are no longer slipping behind in real terms by reliance on the false friend CPI.