Malcolm Fraser conducted economic policy with two broad sweeps of the brush; keep inflation low by keeping the federal budget out of deficit, and stopping trade unions increasing wages in a full employment economy. In my opinion, the recent IR legislation has Frasernomics as its driving force.

Gary Sauer-Thompson on his brilliant political philosophy site discusses the contrasts in individualism and conservatism by dissecting an op-ed from Ken Phillips. From Phillips op-ed in the Australian ;

In this respect the Howard Government's proposals [IR] are truly radical because the stark alternative offered is a belief that individuals do and can have the capacity to control their work futures. This individualism assaults the Australian conservative settlement. We have a cultural battle, between a belief in the self and a cultural fear of the self.

I don't agree with this, while there is a tension between conservatism and individualism in Australia, I don't believe the IR legislation fractures along those lines. Rather than individualism, this is an attempt to stop inflationary pressures. In the US, inflation is jumping up past four percent between energy, education, housing and other areas. The Australian CPI has been relatively stable .

The spin appears to be, this IR legislation will make Australia competitive; supposedly through deflationary pressure on wages in commodity industries. Kirby Adams is from Bluescope Steel ;

"This kind of industrial reform is required to attract and retain investment capital in this country and to ensure Australia is globally competitive in manufacturing," he said.

A good chunk of the legislation in the Workplaces Amendment places restrictions on industrial action and how Unions can interact between employer and employee.

I do not like the IR legislation because it is anti-federalist. The federal government has no right to be legislating in this area. It is another massive power grab by a federal government seeking to collapse all authority to Canberra.

From the Workplaces Amendment [PDF Warning] ;

(1) This Act is intended to apply to the exclusion of all the following laws of a State or Territory so far as they would otherwise apply in relation to an employee or employer:
(a) a State or Territory industrial law;
(b) a law that applies to employment generally and deals with leave other than long service leave;
(c) a law providing for a court or tribunal constituted by a law of the State or Territory to make an order in relation to equal remuneration for work of equal value (as defined in section 170BB);
(d) a law providing for the variation or setting aside of rights and obligations arising under a contract of employment, or another arrangement for employment, that a court or tribunal finds is unfair;
(e) a law that entitles a representative of a trade union to enter premises for a purpose other than a purpose connected with occupational health and safety.

I hope it is challenged by Queensland in the High Court, or alternatively, one of the states goes feral on the issue. The legislation also empowers Ministers to break strikes (Division 7, 112). This is like the DIMIA legislation which places undue power in the hands of Ministers, essentially making the use of such powers arbitrary.

Additionally, if I was a small business owner and had to read through all this - the amendments run to 691 pages - I would be throwing my arms up in the air in a quick WTF.

The legislation itself looks par for the course for the Howard Government; it is hostile to unions, hostile to the states, and adds a new layer of complex regulation, overhead and uncertainty to anyone (employer or employee) subject to it.

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In the United States the Dow and S&P indices are barely beating inflation year to date, and the NASDAQ is in negative territory . That behaviour is a long way from the boosterism of a decade ago where Wired published an article that the Dow could go to 60,000. So how is the All Ordinaries doing against the CPI this year?

Equities have been the best method over the last century to protect money from devaluation by inflation. As this graph shows, at an inflation rate of four percent each year, the All Ordinaries outstrips inflation for returns on a 1984 dollar.

I took All Ords figures from finance.yahoo , and the CPI data from the Reserve Bank of Australia's website. Other than one small dip in February, year to date the all ords are out-doing inflation handily.

Economic rationalism and globalisation have been good for Australia. Inflation hasn't always been so benign. As this graph shows, in the 1970s it was out of control;

In the mid-eighties New Zealand adopted a policy of targeting inflation , and inflation only. Basically not caring about other aspects of the economy, and focusing heavily on inflation with the goal of keeping it between 0 and 2%.

Their inflation is similar to Australia's now, though both countries had run-away inflation in the seventies. Even though New Zealand adopted an inflation first policy, other nations all brought inflation under control in the eighties as well.

The M3 is a wider view of the amount of money value in the economy that can be can be used to pay debt. Inflation can mean that there is a surplus of money in the economy and the historical change in the M3 might be the first place to look for those pressures. IANAE.

The are four measures of money supply in the economy;

• M0: All physical currency
• M1: The M0 plus in demand accounts.
• M2: The M1 plus savings accounts, money market accounts.
• M3: The M2 plus all CDs (over 100,000) and repurchase agreements.

The RBA has statistical and historical sheets for the M1 and M3 series. Judging by the M3 sheet, the Australian M3 includes;

• Currency
• Current deposits with banks
• Other deposits with banks (Certificates, term, other)
• Deposits with non-bank
• Non-deposit borrowings from private
• Broad money

IANAE, but it appears there is more money supply in 2004 than in 1980. I don't know how it can be determined from that graph that there is more money than there is demand which can cause inflation.

The above graph is the components of the M3 money supply broken out and graphed since 2000. It appears broad money and deposits with non-banks have increased more than the other components during that period. I do not know what that means in relation to inflation though.

Setting price controls is self-defeating and won't solve anything. Inflation is an issue. The deflationary China Effect has meant that white goods and manufacturing has dampened average inflation; yet industries like food, energy, health and education have been rapidly escalating in price.

Big Picture has called the recent inflation in agricultural products Agflation:

The absurd list of what doesn't go into "core" inflation is long, and ever more ridiculously, getting longer: Wheat, Oil, Copper, Gasoline, Gold, Silver, Corn, Soybeans, and Cotton.

Oh, and education and medical care never seems to have much impact, regardless of the extraordinary price gains they have seen over the previous decade -- the past 5 years in particular.

Then there is the actual cost of Housing, not properly reflected in the BLS Consumer Price Index (CPI).

But other than all these items going up in price, there is no inflation.

Nicholas Gruen estimated that inflation in Australia for Jan-June 2006 would have been around 5.2% if it was not for the China Effect.

Outside of Chinese manufactured goods we have a heavily inflationary economy.

It appears the Reserve Bank will up interest rates in a couple of weeks out of concern that inflation is becoming too high. One of the statements from the Prime Minister is that the core inflation is still between two and three percent. The problem with core inflation is that it is an inflation reading with all the stuff that is inflating taken out. Also known as inflation ex-inflation.

Barry Ritholz has an interesting post on the history of core inflation as a metric. It comes from the US Federal Reserve in the 1970s when America was facing heavy inflation pressures. The Chairman of the Federal Reserve asked for inflation with the volatile energy figures taken out of the CPI. Then as each differing part of the economy went into wild inflation they removed those from the CPI too. Quote of a Quote:

As a result, the Fed failed to spot the breadth of emerging inflationary pressures throughout the economy. It looks unlikely to make the same mistake this time . . . Prices took off in the 1970s largely because of serious policy errors. Policymakers now understand that rising inflation harms growth, and independent central banks are more likely to stamp on inflation swiftly

Statistical Process Control Engineers use exponential weighting on their time series charts when their system is out of control or on the point of going out of control. It dampens the volatile readings and brings them into some kind of order for the eye. Core inflation is a similar device. Because the inflationary components of the CPI are being stripped out of the number it will mostly give a figure lower than the CPI.

It was New Zealand in the 1980s that pioneered a policy of focusing on inflation first and foremost in monetary policy. Nearly all independent reserve banks follow those policies now.

Global dynamics have placed Australia in a curious economic position. If it was not for the China Effect we would have had much more serious inflation issues before now. This is not just true of Australia, but the US, Europe and any other nation that imports Chinese manufactures.

The other curiosity is when Japan's economy went deflationary they set their interest rates to 0%. It was only in July last year that Japan raised their interest rate to 0.25%. This has meant the world has been awash in cheap Japanese money to finance all manner of growth including housing speculation.

Chinese goods are only going to get more expensive as the labor force becomes more specialised and experienced. Japan wont be in a deflationary funk forever so cheap interest rates won't be permanent.

However, nearly every other aspect of economic life has been inflating heavily; energy, housing, food, education and health. In the US they have all been in double if not triple digits over the last decade - outstripping the CPI handily. Australia has been no different though education and health is partially hidden to the consumer in Australia, but not the Treasury which has noticed the inflation in those sectors and isn't happy about paying for it.

The institution of an independent Reserve Bank is an excellent one. It is also good that the Howard Government is not interfering with it politically in order to get political outcomes. A temptation they have not been able to stay away from in other executive departments. I don't see any cause for concern (IANAE), the oddities of an awakening China and a delfationary Japan won't exist forever, and the Reserve Bank is good hands to have monetary controls in.

I must admit to being a little bit surprised to see the strong trend downward on this graph. It suggests that there has been a consistent strategy to lower and stabilise inflation over the last forty years. Judging by the trend it has been a very successful one.

I can recall a historian saying, "it doesn't matter who the leader is as long as the strategy is correct."

That is my paraphrasing. It was in relation to the constant civil wars during the Roman Imperial period where a new Emperor was being established every few years but the Roman boundaries continued to expand.

The historian was arguing that the military strategy was correct and as long as the emperors stuck with it this made the 'who' of the emperor position immaterial.

The converse is true as well. We look to leadership to lay out a coherent and consistent strategy. Thomas Ricks on Iraq:

It was a moment that captured in a nutshell the weakness at the core of the Bush Administration's national security team: Strategy was seen as something vague and intellectual, at best a secondary issue, when it fact it was the core of the task they faced. ...

By failing to adequately consider strategic questions, Rumsfeld, Franks, and other top leaders arguably crippled the beginning of the US Mission to transform Iraq.

One of the benefits of coherent and consistent strategy is that it permeates the decision making process at all levels - other than just the leadership. It makes for a common goal as well as a knowable and discernible set of milestones along the way. Ricks writes dramatically:

A confused strategy can be every bit as lethal as a bullet.

More discussion of Australian economic policy/strategy at troppo's graphaturday.

Big Picture has an interesting post on inflation in China. Food is running at 18% inflation with meat and poultry at 49%.

It has been a bit of a bumpy ride in recent history for Chinese inflation.

Western Reserve Banks like to keep economies slightly inflationary. It looks like Chinese economic policy is starting to follow the same path after deflationary and inflationary swings back and forth. Inflation is certainly being kept in a smaller range.

Barry Ritholtz argues that the US Reserve Bank is the only one that makes interest rate movements based on core inflation. This is an inflation reading without all the inflationary bits in it and can be traced back to President Carter's time. Inflationary stuff like energy costs and food are removed from it. Ritholtz considers this indefensible. As to the recent increase in interest rates in Australia:

Unlike the spendthrifts here in the US, other Central Bankers around the world understand what the true definition of inflation is. Consider the following: The Reserve Bank of Australia hiked rates to an 11 year high (due to inflation concerns). And, Miller Tabak's Peter Boockvaar points out that, over the past month, Iceland, Romania and Mexico have raised interest. While the RBA move was expected, the Australian $ rallied to a 23 1/2 yr high vs the US$.

The US bailing out of speculation by lowering interest rates and making money cheap was known as the Greenspan put, it is now getting known as the Bernanke put too. Ritholtz believes that this policy goes against the Reserve Bank's mandate for price stability. Consequently the US Reserve is directly contributing to inflation and a weak US dollar.

Paid $3.79 USD a gallon yesterday making this quickly out of date.

Despite appearances my car is pretty easy on petrol averaging 23 to 24 mpg in commuter driving and nearly 30 mpg when on the highway. Better than a family sedan, most smaller cars and certainly an SUV. The issue isn't the gas price itself, it is the rabid inflation that has come with gas prices recently. It was not long ago when I came to Arizona that I was paying $2.50 a gallon.

While petrol is a small cost in monthly expenses for most people, being around than 25% of the monthly budget, rapid inflation that has been occurring recently does pinch. There is no way that salaries can expand so quickly to cover the increase costs of fuel, food and other essentials of modern living.

The US and Australia have it better than most countries as gas/petrol is pretty cheap. An English friend of mine complained about paying 75 pounds to fill up his car. We worked out it was about $9.50 USD a gallon he was paying. I recall when I was in Germany a couple of years ago being horrified at how much a tank of petrol cost.

I make a decent living and do pretty well for myself, if I am noticing the increased costs of gas, then I can only imagine what most other people are thinking of this recent inflationary burst in the cost of living.

This article is correct, but it is also an inside window into the fall of American conservatism. It is written in populist terms with some mythical conspiratorial elite and supposedly non-elected policy makers:

That is the deal the Federal Reserve has made on behalf of the public. It's the latest chapter in the socialization of risk and its corollary, moral hazard.

Anyone who works long enough on Wall Street knows, at least subconsciously, that this is the way things work: if the going gets tough, a small coterie of unelected and mostly unaccountable officials in Washington will probably decide that your employer is too important to fail.

In an effort to keep that from happening, wages, savings, fixed-income streams, and Social Security checks will be inflated away to "ensure the stability of the financial system."

I agree that this risk shouldn't be socialised, and there was a time when US policy makers would let big companies fail without being bailed out, however this article serves more as insight into conservatism's lost nature. You can imagine a populist like Chavez railing against the government with the same language.

The supposedly unelected policy makers are not the apolitical hidden elite this article imagines. The US Federal Reserve is one of the more political reserve banks and is politically influenced. There was an article not so long ago of Bush himself persuading fed policy by sending a bunch of cuss-words down the telephone line.

It is populism at its worst, similar to Cheney's "deficits don't matter." They do, just not politically.

Populism from the current Administration and Congress is an easier cop out than enforcing an economic policy that punishes failed risk with economic failure. This darwinianism is how it is supposed to be. The Bush Administration and Congress are avoiding that by inflating their way out of economic difficulties.

The title of the article, "Papering over the problem" is absolutely correct. It is a bad policy. However it is not one from a hidden elite, or non-elected policy makers; the policy is inherently political.