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The Reserve Bank needs cooperation, not quantitative easing

3 0 0
11.10.2019

Quantitative easing is a bit like using a knife to tighten a screw. If you've got nothing else, it's worth a try - but it's far from optimal. Yes, the Reserve Bank would be silly not to buy long-term bonds and securities, and thus reduce long-term interest rates, if it sees no other options. But much better tools than QE are available.

The best of them is cooperation, and two forms of cooperation stand out as being desperately needed: domestic cooperation between the Reserve Bank and Scott Morrison's government, and international cooperation between the Reserve Bank and the world's major central banks.

Scott Morrison (right) and Josh Frydenberg after meeting with Reserve Bank governor Philip Lowe earlier this year. Picture: Peter Rae

Consider the need for domestic cooperation first.

Regardless of whether it makes political sense, the government's pursuit of a budget surplus is economically baseless when the private sector and the global trading system are weak. As we teach first-year students in economics, government taxation subtracts from the economy and government spending adds to it. A government running a budget surplus is, therefore, a net drag on the economy. It is taking more out of the economy than it is putting back in.

The only instance where such a policy would make sense is if the private sector and/or exports are filling the gap left by the budget surplus. That isn't the case today. Australia's private sector is indisputably weak, and the global trading system is grinding to a halt, which is bad news for a country that gets a fifth of its GDP from exports.

Some argue that we need to rein in government spending to prepare for a downturn. But Australia's public finances are among the healthiest in the world, according to the........

© Canberra Times