A debate is raging on who should bear the brunt of taming inflation. Should workers be expected to forgo a pay rise? Or are the high profits of Australian businesses to blame? It's a fierce debate. Luckily, the debate doesn't make a lot of sense and ignores a third option which is a better solution for everyone.
The debate makes little sense because it's not the job of wage bargainers or Australian businesses to ensure price stability. The job of wage bargainers is to get higher wages for workers. The job of businesses is to deliver higher profits for shareholders. Expecting either to deviate from these roles to help reduce inflation is both unrealistic and unreasonable given their fiduciary obligations.
The organisation responsible for price stability is the Reserve Bank of Australia. The RBA is raising interest rates to pull inflation down within its target of 2-3 per cent. There is, however, one organisation that does face a more difficult trade-off: the government.
The government has several mechanisms it can use to get wages higher. These include raising the minimum wage or increasing the salaries of public servants. The problem is that doing either will stoke inflation and push up interest rates.
But there is a cost of not acting, too. If the government does nothing to increase wages, then it is implicitly containing inflation on the back of worker's incomes since their real wages are falling as prices rise.
It's a tough spot for any government to be in, let alone one that's been in the job for about 15 minutes. Luckily, there is better option, and it stems from the key observation that what we actually care about is real wages.
Real wages are nominal wages (ie the number of dollars you get in your pay check) divided by prices. If your pay check stayed the same but prices went up, your nominal wage would be unchanged while your real wage would fall. Australians are experiencing this right now.
Thinking in terms of real wages is important because it means there are two ways to increase wages: raise nominal wages or reduce prices.
Increasing nominal wages runs into all the inflation problems discussed above. The exception is where nominal wages are increasing because productivity has risen. The reason is simple: higher wages increase demand, but higher productivity increases supply. If both demand and supply increase together, prices don't change.
It's true that productivity has grown faster than wages. This is probably due to structural factors, including technological progress, advances in global supply chains, skills-mismatches and declining rates of competition between firms. But even if wages growth kept up with productivity growth, it would still be nothing to write home about. Productivity growth has been anaemic in Australia for longer than economists care to remember.
This brings us to the other option for lifting real wages: reducing prices. Reducing prices ticks several boxes. Not only does it increase real wages, it also reduces input costs for businesses, raises productivity (which boosts nominal wages, too), supports investment and economic growth and lifts business incomes.
So, how do we achieve this magical outcome? There are dozens of ways to achieve lower prices in Australia.
First, we could abolish nuisance tariffs. This could be done quickly and with little domestic opposition. Nearly all tariff rates are below 5 per cent - too low to protect anyone - yet their compliance and administrative burden is likely to be double that or more.
Many businesses have to go through the costly process of working out what tariff to pay just to find it's zero. Export businesses have to apply for rebates on the business inputs they need. Australia's free trade agreements have eliminated nearly all the revenue but left business facing a web of complex regulations. The tariff walls have gone but the structures that held them up remain.
Second, one of the reasons that car prices are so high is that manufacturers have a veto over the cars that can be sold here. Yes, you read that right. Foreign manufacturers decide what cars Australians can drive.
It's a hangover from when we wanted to protect domestic automobile manufacturing. But that industry no longer exists. In New Zealand, about 50 per cent of cars that come in are imported independently, lowering prices and expanding their range.
New Zealand consumers are allowed to choose for themselves, which is a large part of the reason why they have far more electric vehicles on their roads than us.
Third, yet another remnant from the ghost of industry policy past are our restrictions on foreign airlines and shipping that ban them carrying passengers or cargo domestically. Needlessly driving up transport costs has never been in the national interest of the world's only island continent, but it makes even less sense in the face of the COVID-19 stress on our supply chains and tourism industry.
Allowing Australian businesses to put fresh seafood in the hold of a Singapore airlines flight from Brisbane to Sydney, or to catch an Emirates flight from Canberra to Sydney is a simple way to keep costs down.
There are many other reforms that could be done relatively quickly, such as allowing "fair use" of intellectual property or making it easier for Australians to avoid geo-blocking, which hinders Australians accessing the cheaper Netflix streamed in the United States.
Stitching these reforms together in a package of competition reforms would allow the government to present practical solutions to ease inflationary pressures, increase real wages and deliver higher productivity growth. Best of all, they could be implemented with the tap of a keyboard. Why wait?
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