AGAIN AND again, Kevin Rudd talks of the need to help “working families”. He insists that Labor’s priority is to fight inflation and that to do this the Reserve Bank (RBA) must be independent of the government.

Labor and the RBA are urging workers and unions to show wage restraint. Yet the inflation statistics themselves show that workers are not responsible for inflation.

What is inflation?

Inflation is simply the amount by which prices of goods and services rise It is calculated mainly by changes in the Consumer Price Index (CPI). The CPI is based on a common “basket of goods and services”, including prices of things like food, clothing and housing. The CPI usually under-estimates actual price rises. For example, bread and cereals have risen 17.5 per cent and fruit by 27.8 per cent in five years.

Since 1993 the RBA has aimed to keep inflation between two and three per cent. It tries to do this by manipulating the price of borrowing money-raising interest rates when it wants to slow-down economic activity.

But the RBA is not concerned with maintaining living standards. It is concerned with maintaining Australia’s capitalist economy. In fact, the argument for “independent” central banking is pure neo-liberal ideology-based on version of monetarism.

This ideology says that it should be left to the central banks to control interest rates and money supply and that everything else-such as government spending to build services-should be subordinate to the bank’s decisions.

The theory, originally developed by Milton Friedman, is about undermining the welfare state and shifting the share of national income from wages to capital.

Wages Don’t Cause Inflation

Neo-liberal economic theory says that inflation is caused in three ways: demand-pull, cost-push or inflation “imported” from overseas.

Wage rises are an example of cost-push inflation-where companies pass on wage rises in the form of higher prices. But it is rare for this to play any serious role in inflation because mostly wages rises are just making up for price increases that have already occurred. In any case, wage rises are not high by historical standards.

The share of wages to capital (profits) plunged from nearly 65 per cent in the early 1980s to about 55 per cent by the late 1990s.

This has been achieved by a combination of factorsincluding industry restructuring, wage restraint under the Accord, and enterprise bargaining.

Over the last few years in fact, workers have paid for their own wage rises with productivity increases ie working harder, longer with reduced allowances.

The recent sharp rises in the Australian dollar mean that imported goods are less expensive.

So inflation is not caused by wages or the exchange rate. The main culprit is demand-pull inflation as a result of “capacity constraints” and massive profits being made out of the resources boom. Another cause is mortgage borrowing driven by speculation and cheap credit.

A quick look at some other economic data shows even more starkly that wages are not responsible for price rises:

n Private health insurance premiums up by an annual average of 6.7 per cent in the last six years

n Crude oil has reached $US 100 per barrel boosting the profits of the oil corporations by hundreds of millions of dollars;

n According to the Financial Review, iron ore prices are at their “hottest right now”

n Prices of spot thermal coal and coking coal have doubled in the past year

n According to ABS data, property prices grew by 12.3 per cent in the year to December

Policy disaster

Labor is pushing to dampen wage rises-it is going ahead with its tax cuts but is threatening “razor gang” cuts to pensioners and disability carers. This is worse than nonsense.

Meanwhile, they have done nothing about the four big banks jacking up interest rates to cover their exposure to the sub prime credit crisis. And they have just approved a 7.4 per cent increase in private health insurance premiums pumping more millions into the coffers of the private health companies.

Rudd’s commitment to “RBA independence” and the blind faith in conventional market theory means Labor ends up with policies that hurt the working families it claims to represent.

By Tom Barnes

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