The state steps in

Monday, 25 May 2009 

At one level, media complaints about the government’s spin on the Budget look odd. Governments managing the presentation of their message! What next! If Costello could present his Budget hand-outs as the product of some political philosophy then surely the Rudd government can be cut a bit of slack on theirs. If anything, the government’s problem is that they don’t seem to be spinning enough. Last week’s pussy-footing about the size of the deficit was fairly transparent even to the nation’s journalists.

The problem, of course, is not really the way the government is presenting the message, but that they don’t really have a message to present. Costello’s hand-outs were supposed to be part of small government, the-individual-knows-best ethos that the mining boom allowed the Howard government to get away with – while it went on spending as much as any government. The current government is not even going through the pretence.

Rudd may have tried to lend a bit of ideology into the economic debate with his attacks on neo-liberalism but it doesn’t go very far. The current deficits do not represent a return to big spending, merely a medium-term response to the downturn to delay its effects for as long as possible. By the government’s own admission, spending will be held back significantly when the economy recovers. Whether this goal is achieved or not, philosophically speaking, it is at least pretty well much the same old fiscal conservative line they were saying before. For all this recent talk about the government playing a larger role, Budget forecasts show that Rudd certainly doesn’t seem to be planning it after 2010.

This seemingly pragmatic response might seem like the most sensible, especially given the limited powers of an Australian government against a global crisis. But there are three political problems with it, that the government’s defensiveness last week reflected.

The first is that without any political agenda behind the response to the economic crisis, and certainly not having received a mandate for one, it is hard for the government to argue for one course of action over another. This is why the government tends to talk less about the right course of action than saying it is better to do something, in contrast to the Liberals who just want to sit on their hands. Doing something for the sake of it, is not a very powerful argument, and leaves the government open to the opposition’s charge that it is making things worse when doing something means running up debt.

Secondly, following on from this, there is a very fine line between just reacting to global economic forces as they hit, and looking out of control. For this reason, it is probably now clear to the government in hindsight that the cash hand-outs were not that politically helpful. Essentially, it was a follow-on from the last one’s small government ethos but this is not really the message this government wants to have right now. Letting individuals supposedly to work out what is the best way to solve the crisis through how they spend the $900, has probably sent the wrong signal from a government that has an increasing need to make it look as though it knows what is best to solve the crisis. It is why, since the Budget, the government has been keen to be seen back in control of the spending agenda with its nation-building programme with Ministers running around bothering the nation’s construction sites.

Finally, and most fundamentally, the government’s response still means that there is no counter-crisis strategy, merely a means to defer it. Just because the economic crisis emanated from overseas, does not mean that the Australian economy will not have to be restructured. The world will be a very different place when this is over and it would be unimaginable that Australia can just go on as before. Every other major recession has required a major restructuring of the Australian economy and given the scale of this one, it is hard to see that this will not as well. Yet other than the speeding up of infrastructure projects already ear-marked, and some tough talk about the financial system (which has gone strangely quiet over the last two months), there has been no sign yet of what is being planned.

So in steps Treasury. Ken Henry’s aggressive campaigning for the government’s Budget last week, marked by his speech to the ABE on Tuesday, marks a new phase in the relationship between the executive and the state apparatus; less in how it is working practically, than how it is seen publicly. Treasury’s greater up-front role is largely, but not wholly, being driven by the political problems of his masters.

Henry is, with some enthusiasm it seems, filling the gap left by the lack of political agenda from the government. This is not new, Costello was already hiding behind the RBA and Treasury. But since Rudd came to power, the use of Treasury as a justification for economic policy has become much more open. The running up of the deficit and the stimulus packages have all been justified by Treasury, which in turn has taken its cue from Treasury departments overseas as well as the IMF. This is less a case of Treasury becoming more political, than government economic policy being depoliticised.

This role of Treasury has been ratcheted up to a new level since the Budget. As Henry set out on Tuesday, the use of a massive boost in government spending was justified by the scale and breadth of the crisis. It was necessary to highlight the unprecedented severity of the economic crisis not only to justify unprecedented stimulus priming, but also to make up for the fact that no political argument had been won to justify it.

But the Budget showed that Treasury’s role has gone beyond that of merely a political cover for the government’s response to the downturn, it has also provided a way out of it. Or at least, he has in his models. Treasury’s unusual move in projecting growth at a higher trend and for a longer forward projection is necessary to provide a guide path out of the downturn that does not come from the economic programs of the political class. It is just unfortunate that all his emphasising of the unprecedented nature of the crisis undermines the justification for using the past as a guide for such modelling.

The front role taken by Treasury has certainly added a tense tone to the post-Budget debate. As seen by his response on Tuesday to journalists in The Age and The Wall Street Journal, bureaucrats like Henry clearly aren’t used to handling the normal argy-bargy after a Budget.

For the Liberals, Treasury’s leading role might be a bit inhibiting given their usual deference to the institutions of government. However, that has not stopped their undermining of Treasury that was evident even before the Budget. They are so out of control in their fight over their values and political rationale that Treasury is likely to get caught up in the cross-fire.

With the press not quite knowing their place, and the Liberals capable of anything in their current state, this may make it uncomfortable for Henry – especially as there is no sign that he has any more clue than anyone else of what to do. This goes beyond just his ability to predict the future.

It is striking how well the state functionaries around the world have so far escaped flak for this economic crisis. Especially amusing is the idea that the problem was caused by too little regulation and more will do the trick. Anyone who thinks there was little or no regulation of the financial system, has little or no knowledge of it. Certainly of all the major banks that ran into trouble over the last year, there was not a single one that did not have its balance sheet known about and signed off by regulators. We are not talking about a string of Bernard Madoffs here. Far from having nothing to do with it, the systemic and widespread nature of the financial collapse should be a clue of regulatory involvement.

The same regulators who oversaw this mess are, by and large, still in place, even in the US with a new administration, mainly because they are protected by political classes who need them to hide behind. Over here, the reputation of Treasury, the RBA and other functionaries has held up much better as the financial crisis has been contained. But let’s see what damage a still unresolved economic crisis and a weak political class can do.

Posted by The Piping Shrike on Monday, 25 May 2009.

Filed under The Australian state

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5 responses to “The state steps in”

  1. Cavitation on 26th May 2009 2:08 pm

    You have to wonder if the central role of Treasury Department in the current economic debate has more to do with a lack of confidence on the part of Swan and Rudd, as well as some insecurity about the myth that the Labor Party is economically incompetent. Though, the desire of politicians to distance themselves from the financial crisis must also play a part, in case some other unexpected financial disaster takes place, which is not a particularly unlikely occurrence. Incumbency will gradually fix Labor’s confidence deficiency, as evidenced by the fact that if Costello could be seen as a good Treasurer in the previous government, then anyone can.

    It is more puzzling that Labor is not challenging the allegations about their economic inadequacy. The Liberal party seems to think it is on a winner with this one; since they keep on pushing it all the time. This idea seems to be big in parliament, but to me, it does not seem to be resonating in the rest of Australia. Looking at history, we have a habit of turning to Labor during crises. We turned to Labor during the Second World War, after Menzies had been caught out appeasing Japan, and being too subservient to Britain. We also turned to Labor to extract ourselves from the Vietnam quagmire, and later, when Hawke and Keating did much of the hard work to restructure our economy and engage with the local region after the previous policy of protectionism and isolation eroded. We have now turned to Labor again to extract ourselves from Iraq and the disastrous US led ‘War on Terror’ crusade. When that morphed into a financial crisis, the Australian public seemed relieved that Labor was managing things, and has since given the federal Labor government unprecedented high levels of support.

    The Liberal party seems to be ignoring the current financial crisis; with their ongoing chanting of support for tax cuts and Milton Friedman and hostility to Keynes’ counter-cyclical approach. Friedman is the man for booms while Keynes is for busts, and the Liberals have not yet realised that we have moved from one to the other, while the public has.

  2. The Piping Shrike on 26th May 2009 7:26 pm

    Yes but two of those times Labor’s relationship with the unions was critical, and it doesn’t have that now. It is why Labor is defensive on economic policy.

    Being too weak to take on the unions directly, the Liberals have never had a counter-crisis strategy, so no change there.

  3. James on 27th May 2009 6:01 pm

    I’m just curious, why does the widespread systemic collapse of the financial market hint at regulatory involvement? I thought it was the fact that regulators in the US were compromised, and instead of acting to constrain the market, were allowing it operate essentially unregulated?

  4. The Piping Shrike on 27th May 2009 11:12 pm

    I tend to see regulatory and government policy going in two directions over the last three decades, less regulation and state intervention between markets, greater regulatory intervention within them.

    One focus of regulatory intervention, especially after the 2000 – 2003 bear market, was the de-risking of balance sheets of financial institutions. An important means to do that was to encourage them to pass on risk and spread it across the market, which is ultimately the driver of the derivative instruments that everyone has been complaining about. Forcing instiutions to take risk off their balance sheet has also removed important stabilisers in the market that would have been able to hold risk internally.

    My view is that regulators may act in trying to stabilise the financial system but end up systemising risk it on a larger scale e.g. the US bank bail-out has now become a global distortion from US debt. In that way, I don’t see the financial crisis causing as much of a change in direction in government policy as some say. More the change is political, by exposing the neo-lib con.

  5. Nick on 28th May 2009 3:06 pm

    I really think the major problems are overseas.

    Not much our government can do about that.

    We are largely responding ok but will need to reign in the deficit and middle class welfare in coming years when recovery begins.

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