While the government probably has not caused the latest collapse in consumer confidence, it certainly has not helped.

In the last week, there has been a notable shift in the economic debate. Worries about the first crisis, inflation, are starting to give ways to worries about the second crisis, an economic slowdown.

The row about the carers’ bonus is a sign that government strategy to create an inflation scare so as to clamp down on ALP spending expectations has largely run its course. But it doesn’t mean it can stop talking down the economy. This gloom is not just a tactic against the Labor big spenders. It goes to the very heart of how this government came to power.

Labor’s economic approach has been contradictory since coming to power, which is why Swan is having such trouble. On the one hand, they respect the RBA’s line that rate rises are necessary to curb demand. On the other they say that this makes it all the more important to carry on with the tax cuts to offset the effect, so undermining the whole point of the RBA’s actions. On the one hand, they claim the previous government overspent, but they then refuse to cut one of its more generous, but bizarre (at least in the developed world) spending programs, the baby bonus (it was fun to watch Tanner try to defend it on Insiders yesterday). This lack of clarity isn’t because the government hasn’t sorted out its economic policy, it is because they haven’t quite worked how to be without one.

Despite what they say about the former government’s economic mismanagement nowadays, there was never any real criticism about Howard’s economic policy before Labor came to power. In fact, Rudd made a point of highlighting the similarities. He could do this because the main economic issues that divided the parties, especially industrial relations, were over. (If it is unusual that a Labor government doesn’t have much to say to the Fair Pay Commission in setting wages for the low paid, it no more so than that the previous one didn’t have much to add either in the last couple of years.)

Howard’s economic policy was basically a con after Hawke and Keating finished their reforms. The power of Rudd’s attack on him was to expose that fact. He did it in three ways, he showed 1) Howard made promises he could not keep (like keeping interest rates low) 2) Howard’s economic policy was really just political tricks to keep him in power and 3) the government had lost touch with the real economic situation of the electorate.

After having done such an effective stripping away of the Liberals’ economic fraud, it is a bit hard for Rudd, having come into office, to then pretend to cover up with a new economic policy of his own. This leads to the question, what is government for?

This is one of the political pressures that was continually nagging at the pointless Howard government and why it had to rely on spending to retain a mandate. Already a few months in, with the defensiveness over seniors’ and carers’ bonuses, the new government is realising it is facing a similar problem. It may have cowed the ALP with its inflation scare (although was that a sign of life from it that the carers’ story was leaked?) but it doesn’t have a firm political basis to justify cuts to the electorate.

However, Rudd has learnt some lessons from the Howard experience. Except for an under-funded education revolution, Rudd does not pretend, like Howard, to have any real policy on the economy, so he is less open to blame if it goes wrong. He has learnt that the most important thing a government can do is empathise with any hardship that comes from events outside his control. In fact the more he talks up the economic dangers, like Clinton is trying to do in the US, the more he can justify for now the importance of him being where he is.

The importance of empathy is being learnt on both sides of the fence. Nelson is turning his political loser status into a virtue by standing up for the other ‘losers’ (as Paul Kelly put it) in the economy. The problem is, if both sides have now agreed that there is nothing any government can do for the economy, then how are the Liberals going to be in a position to suggest an alternative in three years time?

The Liberals are in a good mood at the moment at the discomfort they have caused the government this week. But this discomfort comes from a government getting used to a situation where the need for political alternatives are over. Like Hockey’s over-reaction to their hold on the Brisbane Mayoralty, the Liberals are finding light at the bottom of a pit.

Posted by The Piping Shrike on Monday, 17 March 2008.

Filed under State of the parties

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