Wednesday, September 17, 2008

RIP "Go for Growth"

If you remember that slogan you will probably also remember the Coalition's similarly appalling: "Aspirational Nationalism".

Pardon me while I. . .

Anyway, today the Reserve Bank Governor Glenn Stevens made it clear what he thinks of "Go for Growth".

It makes you pray that John Howard and Peter Costello didn't mean it.

Here's the relevant bit from Stevens:

"The economics of full employment are different from the economics of trying to get to full employment. This is a simple point, but an important one...

When the economy has too much spare capacity – say, in the aftermath of a business cycle downturn – the aim of macroeconomic policies is to push up demand so that it catches up to supply potential. There may be several years in which demand growth exceeds the normal pace as it eats into the spare capacity.

Once the spare capacity has been wound in, however, actual growth in demand and output has to slow, to match the growth rate of potential supply.

That growth in potential supply is given by the growth in the labour force, the capital stock and the productivity of those factors of production. Typically we think of ‘potential GDP’ in Australia rising by something like 3 per cent a year, give or take a bit.

This, as my predecessor Ian Macfarlane remarked a few years ago, means that once the reserves of spare capacity are pretty much used up, we should expect to be accustomed to growth rates for GDP starting with a 2 or a 3. There will not be many with 4s or 5s, as we had for some years through the 1990s and earlier this decade.

Periods of growth noticeably above about 3 per cent will be roughly matched in frequency and duration by periods below – as we are having now."

If we set our aspirations higher than that – if we try for above‑average performance all the time – we will just get inflation. That is the economics of full employment."