Opinion
Despite 10 billion reasons to hate the banks, it’s not that simple
Chris Richardson
EconomistWhich bank? The Commonwealth Bank just reported profits of more than $10 billion last year, thereby cementing its place in the secret list that all Australians keep in their heads. I think of it as the List Of Bastards.
We love to hate, so our List Of Bastards isn’t exactly a new thing. It’s always included both banks and bosses, as well as whoever umpired your team’s footy match last weekend. But outrage has grown amid the current burst of inflation, given that profits have soared while wages haven’t.
The CBA reaps mega-profits but, at last, Australian workers can bank on a pay rise. Credit: Louie Douvis
That phenomenon even has its own name – greedflation – with many blaming the world’s inflationary surge on businesses and bosses.
Yet, like most things in life, it may not be quite that simple.
Yes, it’s certainly true there isn’t enough competition among businesses in Australia, with fewer firms controlling more key industries than ever before. That’s bad in a whole heap of ways. It squeezes the wages you earn, and it pads the prices you pay. That’s why Australia absolutely needs to fight for better competition.
Yet, although we have a worsening competition problem, that’s not the same thing as saying the actions of bosses and businesses explain the inflationary surge of the moment. To be clear, there’s a debate about that.
The Organisation for Economic Co-operation and Development has noted the impact of profits on prices, whereas the likes of Treasury and the Reserve Bank (and their global counterparts) strongly argue against the idea that greedflation is a particular problem.
The bottom line? While there’s no broad agreement, many economists have settled on a far simpler explanation than greedflation for what’s happening right now. Blame opportunity, not evil.
Yes, we have too many businesses with the power to push up their prices. The Commonwealth Bank is as good an example as any, with the gap between the interest it pays on deposits and those it earns on its loans comfortably bigger than it was a couple of years ago.
But it isn’t that the ability of businesses to rip you off has grown. That ability is still there, but it isn’t notably worse than it was a couple of years ago. Rather, it’s that the opportunity to rip you off is much greater when there’s inflation.
And why is that? Because it’s much easier for prices to move than it is for wages to move.
That’s something economists have known for decades: it’s just that the world hasn’t seen a bout of inflation like this for many years.
Businesses can raise prices pretty much whenever they feel like it. But wages are much more heavily regulated than prices. Yes, some of us can march in on the boss and demand more money. But most of us are on agreements and awards that are only renegotiated every few years.
And that’s even more true here in Australia than it is in most of the world. As a nation, we have a more legal – and more careful – way of setting wages than does the bulk of the globe. That system has changed over time.
Paul Keating and then ACTU leader Bill Kelty co-operated to free up the wage system, but in recent years both sides of politics have poured more concrete atop an already slow-moving system.
And although the current government’s Secure Jobs, Better Pay bill delivers extra power to workers, you may have noticed that it hasn’t yet delivered a bonanza for wage gains. That’s not a surprise. Our wages system has been deliberately built to help fairness, but inflation is the biggest fairness challenge this nation has faced in decades. The wage system is so slow that, to date at least, it’s been part of the problem rather than part of the solution.
The upshot is that opportunities provided by demand outstripping supply has led to prices sprinting, meaning profits have sprinted too.
However, this story hasn’t finished yet, and it may have a happier ending than you’d expect. Although the growth in wages has fallen shy of that in prices for a couple of years, the pendulum is already turning. On my estimates, wage growth is already matching price growth. And I think that most forecasters are right in expecting wage gains to beat price growth pretty consistently across the years ahead.
Wages haven’t beaten prices because prices are sprinters. But wage gains will have staying power that prices and profits won’t. No, that won’t be greedflation in reverse. And repairs to your purchasing power will be a marathon rather than a sprint.
But wages will get their revenge. You can bank on that.
Chris Richardson is an independent economist.
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