Flat White

Inflation for dummies

12 May 2022

12:00 PM

12 May 2022

12:00 PM

My party, the Liberal Democrats, has far more nerdy economists among its members than any other party. It seems low taxes, free markets, and balanced budgets attract them. Not exactly unrelated, it also has more comprehensive economic policies than any other party.

This became an issue when I was elected to the Senate; I’m not an economist or particularly nerdy, so reducing economic issues to a level that I could understand and discuss became a priority. It seems this is a process well known to economists; they call it dumbing down.

One issue I had to learn about was inflation. I obviously know what it is, but defining it is actually a bit complicated because, as I discovered, there are twice as many definitions as there are economists. Nonetheless, I came across a simple definition that, to me at least, explains it quite neatly.

That definition is: too much money chasing too few goods and services.

I think it explains our current situation very well. I also think it’s useful when it comes to thinking about solutions.

In the last two years we have witnessed the biggest cash splash since the second world war. As the Budget shows, the government committed a total of $311 billion to Covid measures, including $290 billion to save businesses and jobs from the impact of its control measures.

None of that money came from reserves; it was all borrowed. Moreover, as economic activity slumped, government tax revenue declined. The national debt was forecast to reach a trillion dollars within four years, although higher commodity prices have now reduced that a bit.

We now know that not a lot of that money saved jobs. According to an Australian National University study, the $89 billion JobKeeper wage subsidy saved just 812,000 jobs out of the 3.6 million workers who qualified for it, with each job costing $112,819.

With working from home, retail restrictions, and no opportunity to travel, millions of Australians experienced no loss of income and had two years of enforced saving. The Commonwealth Bank estimates savings increased by $260 billion since the pandemic started.

That money, borrowed by the government and handed to consumers, is the source of the money that is now fuelling inflation.

As for too few goods and services, this is similarly a consequence of Covid measures, both domestic and international. Lockdowns and quarantine rules disrupted production; log-jammed and chaotic international freight disrupted imports; and with no backpackers or Pacific Islanders, fruit and vegetables could not be harvested. Even now, freight issues and China’s zero-Covid policy are adversely affecting the availability of manufactured goods.

Given the definition above, the solution to inflation might seem obvious: reduce the supply of money and facilitate an increase in production.

In this election, neither of the two major parties has the slightest intention of reducing the supply of money. Whatever the issue – the NDIS, aged care, pharmaceuticals, childcare or education – both are promising to throw more money at it. As far as I am aware, there is not a single item on either side’s agenda that will attract less funding. The problem of too much money is not going away.

As for too few goods and services, some improvement can be expected as temporary and permanent immigration resumes, international freight improves, and quarantining Covid contacts ends. But the problems faced by businesses in Australia – high and rising energy costs, an uncompetitive corporate tax rate, a restrictive labour market, and a mountain of red and green tape – means there is no prospect of a resurgence in economic activity or productivity.

These problems existed prior to Covid. Indeed, the economic policies of the Liberal Democrats have long been directed at fixing them. The problem is, neither of the major parties has an appetite for reform. In fact, neither is genuinely interested in promoting economic growth.

The result is inflation will be with us for quite a while. Plenty of economists can explain how it damages productive economic activity. The simple point I am making is that it is so unnecessary – governments caused it, and governments can fix it.

David Leyonhjelm is a former senator for the Liberal Democrats.

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