Wednesday, 7 August 2013
It is an historic fact that interest rates have always gone up under Labor governments over the last 30 years, because Labor governments spend more than they collect and drive budgets into deficit
JWH 29 August 2004
Within a day of writing how the economic debate has changed to the Liberals’ disadvantage, we had the perfect example of it – their response to the interest rate cut.
When Howard said in 2004 that he could guarantee interest rates would be lower under his government than Labor, there seemed a very good reason why he could do so. The idea was that Labor was more inclined to spend and higher borrowing meant higher rates.
This was essentially based on the long-held view that government’s controlled the economy and it was left to the markets, and the RBA, to give their verdict on it. Since Hawke and Keating liberalised capital markets, the view was that their verdict was important, which in turn led to a view from some that both Labor and Liberal had moved to the right and adopted “neoliberal” policies.
Yet the global financial crisis has turned that on its head. A recession that was caused by the collapse of the capital markets saw governments of any persuasion attempt to control it, not bow down to it. In the US, the Bush government’s immediate response was to pump billions into the financial system and effectively nationalise some of its major institutions. The GFC exposed the phoney triumphalism of the right over the preceding decade and that what had been seen as a victory of the right was in fact a victory of neither side of politics at all.
The intervention of the state into the capital markets has transformed the role of the central banks from being adjuncts of government economic policy to effectively driving it. However, this change was only made clear by the financial crisis, not caused by it. Even before the GFC, government were handing increasing powers and granting independence to central banks on the basis that governments were too “political” (untrustworthy) to decide on areas like interest rates for the good of all. It was the diminishing credibility of political parties that drove this rather than any change in central bank function or the underlying economy.
It is because this change is due to political factors than the financial crisis that we see it happening in Australia as well, but only yet emerging within an economic debate that still appears to be conducted on the terms that Howard set it. Understandably, the Coalition, still stuck in that framework, has been caught out by yesterday’s rate cut. Just how much things have changed can be seen in three ways by what happened yesterday.
The first was that the Coalition struggled to deal with the old formula high interest rates bad, low interest rates good. Howard in yet another of what may be regular reappearances (as Labor must hope, although last month’s combo of Howard and a US style rally might be too much to ask for) did a slippery when he said that “context was all” and he was only talking about it during a boom.
Actually he wasn’t. When Howard talked about low interest rates in 2004, what he was comparing it to was the previous Hawke/Keating recession of the early 1990s when interest rates went through the roof. That was the last of the “classic” recessions when the shortage of capital and the threat of inflation, as businesses tried to recover profits through higher prices, encouraged higher interest rates to squeeze it out.
As Keating complained at the time, the RBA’s hikes had failed to allow for the new flexibilities in labour that had come from him “pulling the teeth” out of the unions as he so eloquently described it. Since then inflation has been less of a problem and the RBA can do the opposite, lowering interest rates during a downturn to prop credit up without worrying about inflation.
Howard presumably knew this full well, indeed the low interest rates during his time were a direct result of the low rates imposed by the world’s central banks in the first “new” recession of 2000 – 2003. This “Goldilocks” economy was experienced throughout the developed world rather than just the result of the wonderful stewardship of Howard and the World’s Funniest Treasurer. It didn’t stop the Old Huckster trying it on though. But given the acceptance by the left and right that he was still in control, why not?
Hockey was, of course, absolutely right. The RBA cut rates this time because again the economy was slowing. The problem was that nobody held the government responsible for it but just expected empathy. As a result, Rudd and Labor quite wilfully twisted the words around to imply that the Liberals lacked it by saying lower interest rates were bad. The Liberals were clearly hoping that people would pick up the economy was slowing and blame the government for it. What they missed was that the government had already been saying exactly the same thing for the last few weeks, but nobody held them responsible. In reality what the Coalition was saying was no different to what the government was saying, but simply putting a negative spin on it.
The second thing that happened was even more striking and counter-intuitive; the government took no credit for it. Rudd in his interview almost glanced it, but never actually did. Obviously because the RBA cut rates due to the economy slowing, the government could hardly say it was a result of the actions it had taken, rather the reverse in fact. But nevertheless the government seemed to own the rate cut merely through the acknowledgement of what good it would do for borrowers (while ignoring the savers).
In fact what happened is the government seemed to identify with the RBA doing just one more thing, like the government putting money into extending school care hours, to help working families. This is the third aspect of the changing nature of the economic debate: having confirmed the independence of the bureaucracy, such as Treasury and the RBA, the government began now more closely identifying with them. This has become especially a problem for Hockey in recent days over his argy-bargy with Treasury.
It would seem that Hockey and the Coalition would be on quite firm ground in their criticism of Treasury. After all, Treasury’s forecasts have been all over the place over the last few months. Whoever is to blame, a Treasury that turns a surplus into a $5bn deficit in a matter of weeks does not look credible. Indeed it may not be. The problem for Hockey, as revealed on 730 last night, is who does have credibility? The Coalition will struggle with that because of the black hole last time and its refusal to publish figures this time. Yet this in turn is because its ideological agenda says cuts, but the political reality does not allow it. This lack of a social basis for political agendas is why we have seen them increasingly emasculated over the last decade by having to be submitted to independent auditors.
Having gone to such lengths to confirm the independence of the RBA and Treasury, we are now seeing on Labor’s side an increasing political synergy with them. But not as before. Not as institutions that are ultimately subservient to the government, but what could be described at best as an equal partnership or even subservience in the other direction. What it does seem though is that perhaps yesterday’s rate cut may have been a factor in going to the polls earlier, and on the hope that the next RBA decision, five days before polling day, will be equally beneficial. Could it be that the RBA had more influence over election timing than Sussex St?
Posted by The Piping Shrike on Wednesday, 7 August 2013.Filed under Tactics