Reserve Bank of Australia Shows Again That It’s the Best Central Bank in the World

Glenn Stevens, governor of the Reserve Bank of Australia (RBA), grimaces as he delivers his address entitled ‘The Lucky Country’ to the Australian Business Economists group in Sydney on July 24, 2012.


I’ve noted previously the remarkably underdiscussed fact that Australia hasn’t had a recession in over 20 years. My explanation of why that is is that they have the best central bank in the world, the Reserve Bank of Australia, which just cut interest rates and sent stocks soaring after a period of market weakness driven by pessimism about Chinese growth. This is an important issue because if it’s true that Australia has recession-proofed itself through sound monetary policy, there are lessons that larger countries could be learning here. Heck, we could even be hiring some Australian central bankers to ply their trade in England, Japan, the United States, or wherever.

When the subject of Australia is raised, skeptics of demand-side recession-proofing tend to say that Australia’s opt-out from the Great Recession of 2008-09 should be understood as a real-side issue attributable to booming commodity exports to China.

The big problem with this, in my opinion, is that it completely ignores the fact that the 2000-01 global recession also didn’t happen in Australia even though commodity prices were low then. It’s not that the real side of things doesn’t matter. When foreign demand for Australian commodities is high, the Aussie dollar gets high and Australian citizens’ real purchasing power goes up. When commodities are cheap, the reverse happens. It’s better to be rich than to be poor, and if you’re a commodity exporter it’s better for commodities to be expensive rather than cheap. But the Australian government can’t control global commodity markets. What they can do is try to ensure that whatever happens in the commodity markets, Australia doesn’t shift a large share of its workforce into the ultra-low productivity unemployment sector.

As you can see here, the Reserve Bank of Australia can’t do this perfectly but they’re pretty damn good at it:

When the global economy goes into recession in 2001 and again in 2008, Australian unemployment does tick up. They’re not isolated from the global economy. Real resources have to be reallocated and this doesn’t happen instantly. But it doesn’t take five years either! Given a background of adequate aggregate demand and a functioning democratic capitalistic welfare state, people go back to doing something pretty quickly. The central bankers in the bigger countries and the reporers who cover them have started to set a very low bar for themselves, in which recovery processes play out over a multi-year time frame. The example of Australia shows that it doesn’t need to be like that.

Bringing this back to the beginning, if the C.W. on Australia is right and they’re just lucky, the slowdown in China ought to hammer them and they’ll finally get the years-long spell of mass unemployment that is allegedly just a part of modern developed economies’ lifecycles. But if it’s wrong and I’m right, then they’ll be OK. The Reserve Bank of Australia’s rate-cutting, backed by a higher (but stable) underlying rate of inflation and a faster population growth rate will prevent a crash. Unemployment will drift up, but only a little bit, and then it’ll fall again rapidly.