A nightmare, unevenly distributed.

It’s nobody’s fault. It’s everyone’s fault. But the critical point here is that Reserve Bank governor Philip Lowe doesn’t get stuck with the blame for ruining everything because that’s what’s best for Philip Lowe.

The Guv probably could’ve saved himself his week of grief by not spraying around promises that interest rates wouldn’t rise again until sometime on the far side of the never-never. But he did and will likely join Alan Tudge on the exciting frontiers of the job market because of it. And because someone needs to carry the blame. There are millions of people already doing it tough, and millions more about to experience a hefty kick to the ‘nads, financially speaking, when they come off their fixed-rate mortgages in the next few months.

A nightmare but unevenly distributed.

One of the porkies we get sold by free-market jihadis is the promise of rationality. Money will do what money does best. Just let it run free.

But there is no such thing as pure freedom in any market. Once some choices are made, other options are closed off. Deregulation, for instance, is a choice to let the market decide. Tax and investment policies are choices to shape that market.

A long time ago, just after the Second World War, the Menzies government chose to encourage home ownership as a matter of national security. It might seem a weird connection to make until you remember that the politicians of that era had all lived through the Great Depression and the war that followed. They’d seen mass homelessness and mass violence. Encouraging home ownership through policy was a conscious effort to bind millions of working-class citizens to the nation-state. It also turbocharged the economy as cities and suburbs exploded to accommodate the post-war population boom.

It was a reasonable policy, but seventy years later, the choice to lean into housing construction and home ownership has distorted politics and markets to a point where some people own dozens of negatively-geared investment properties, and many more people literally cannot afford a place to live.

In that environment, cranking on interest rates to tame runaway inflation is a rational choice only because decades of previous choices have closed off other options to respond.

Inflation is a ‘hot’ problem. You can think of it as too much friction in the system, too many collisions between too many little atoms all set on getting what they want. Central bankers cool it down by taking some of those molecular little motherfuckers out of circulation, raising interest rates to take money out of your hands before you can do something terribly irresponsible like spending it on food and shelter.

Of course, there are other ways to remove hot money from the system. You could raise taxes and spend it on deep structural renovations to the economy to increase productivity and…

Yeah, okay, we’re not gonna do that.

We’re not gonna do a bunch of stuff we could do because the dominant paradigm of economic management is not to manage anything. It’s to let the market decide, and it’s been that way since the 1980s.

It’s getting to a point where it’s not just inequitable—demanding, for instance, heavy sacrifices from the third of the working population paying mortgages—it’s ineffective and inefficient. Most of the inflation burning through the economy is due to supply chain shocks. It isn’t amenable to being scared away by a notification from your bank that your home repayments are about to go up.

There are alternative options. This paper by Lachlan McCall at ANU’s Crawford School of Public Policy suggests temporarily increasing the superannuation deductions we all pay to remove hot money from the economy without simply handing it as a windfall profit to the banks. That way, the sacrifice is much more widely distributed, and it’s only a passing measure. Workers would get the money back, tax-free, when they retire. It’s one of those simple and elegant policy proposals with multiple benefits—think increased national savings and smaller demands on the treasury to support an ageing population—that will never happen.

Why?

Because that would be a political and legislative choice, and the reason Philip Lowe got such a kicking this week is that the political class decided four decades ago that they didn’t want to make those choices any more.