Everyone discusses the unemployment rate that the RBA considers to be "full employment." (Spoiler alert: it is little lower now than it was three months ago, at 4.3%.)
The increase in company failures and bankruptcies needed to get there is something that almost no one notices.
The "highest company failure rate since the GFC" has already made headlines for months, but this year will see a significant increase in that rate.
Furthermore, and this is not a kind way to put it, the RBA and the economy both need things to worsen.
Even worst is yet to come.
When I asked whether the Reserve Bank needed an additional 10% increase in bankruptcies and business failures to meet its inflation target, Reserve Bank Governor Michele Bullock deliberately rejected the word "requires."
"Need," "desire," "like to see," and other such terms are not ones I would use," Bullock stated.
However, what does a name or word mean?
Setting aside the chosen wording, the RBA anticipates that more and more enterprises will fail after being supported by the Australian Taxation Office's credit extension and the Treasury's generously low borrowing rates.
The bank thinks that is beginning to occur. There must be more of it.
Governor Bullock stated that while she did not anticipate a specific increase in company failures, "we are seeing the climb to more regular levels."
The governor's attempt to explain the dilemma of reducing its unemployment projection slightly on Tuesday while simultaneously decreasing its (already weak) economic growth forecast for this year and pointing out that consumption was declining did not address the role of zombie or "propped up" enterprises.
"Interesting query"
According to textbooks, unemployment should increase rather than decrease as a poor economy continues to deteriorate.
She claimed that the state of the labor market was "a very interesting subject" for which she lacked a comprehensive response.
The fact that a large number of newly created employment are in vital sectors like health and education and are therefore not affected by the cycle was one factor. When the labor shortage was at its worst, there were rumors that companies were barely able to hire the workers they had been searching for. There may have also been some "labor hoarding," where employers held onto employees they might have let go of because they did not want to be caught short if business picked up, as happened after COVID.
The word "unemployment" is simple. I find the RBA's preference to use the term "full employment" rather than the non-inflation-accelerating rate of unemployment (NIARU) to be a bit euphemistic and a way to avoid discussing a number that the bank has only learned about after the fact.
The unemployment rate that the bank believes is compatible with bringing inflation down into its goal zone of 2 to 3 percent in the second half of next year was announced in Tuesday's quarterly statement on monetary policy. It was 4.3%, which was one percentage point lower than what it had predicted three months prior.
However, the necessary business failure rate is not specified and does not seem to be predicted.
Therefore, it would seem realistic to predict a 10 percent increase in employers failing from the "more normal levels" we are currently witnessing, especially if the RBA aims to raise the unemployment rate by 10 percent from here.
However, the RBA does not "expect" such actions. Instead, euphemisms are used to hide the advantages of enterprises failing.
The productivity conundrum
The SoMP attributed a portion of the poor productivity growth to "slowing labor and capital reallocation." The governor acknowledged that in order to increase productivity, "enterprise dynamism" is necessary.
All of it means that the marginal, least productive enterprises will fail, go bankrupt, and free up labor and capital for new and more productive businesses.
The business cheer squad, in particular, prefers to overlook the hard fact that eliminating the least productive people is the best way to increase productivity.
Stories of growing failures are invariably framed as some sort of failure of government policy, rather than being truthfully presented as an essential component of the Darwinian phenomenon that is capitalism, however tragic and painful it is for the individual business owners.
One aspect of the monetary policy transmission mechanism that is less discussed is sending businesses bankrupt.
"A lot of money went out the door from the government to support households and businesses in the pandemic," the governor said. Businesses' overall balance sheets improved significantly, coverage rates improved, and debt servicing decreased in tandem with the historically low interest rates.
Businesses that were supported by RBA and Treasury policies are now beginning to run out of support, and the ATO is pursuing repayment of loans that were allowed to run.
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