In my column for New Matilda this week, I’ve had a look at the politics of the current economic situation. The real question, in my view, is the degree to which Rudd and co will be able to successfully blame the previous government for the spate of adverse economic news we’re getting at the moment, and whether their own policy settings provide a way forward.
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Mark,
I agree with the basic thrust of your argument, but I do think Rudd has been far too subtle in sheeting the blame for the curreent economic shenanigans - the stock market fall, probably continuing rising interest rates and rising inflation. The latter it seems is due to rising rents and rising petrol prices. And, I would add profiteering by the big supermarkets, who have failed to pass on the benefit of exchange rates. I would like to see the Government going in hard on the results of Howard/Costelo’s careless economic management. I don’t doubt Rudd has the killer instinct - his response to Howard’s profligate spending during the election campaign showed that. And, so long as he gave substantial tax cuts to the low waged and incresed pensions I think he would get awy with junking middle class tax cuts so long as he explained it properly. One unspoken factor of the Rudd victory I think, was the Australian people’s shame how Howard treated the disadvantaged in our society, and the fact they went along with it for so long.
Nicely argued, and the idea that an election sooner rather than later could make things easier for Labor in the Senate gives me hope too. But most of all I love that you used ‘chooks’ in your article.
Aside from a certain metaphor
nice work Mark.
Paul, Rudd has the good will to junk or postpone the tax cuts if needed. The public would go along with this especially if it meant postponing a further rate rise.
Further to this, There is some frustration with home owners (ok, mainly my mates and a few other people I’ve had a chat to) regarding the use of interest rates as blunt tool to try and slay the inflation dragon (I do like that one Mark). I’d be interested what the economically learned can offer as possible alternates to raising interest rates to cool down inflation.
Thanks, folks.
I think Keating invented the slaying the inflation dragon metaphor, Shaun.
Some economic analysis of all this from Dick Bryan from Political Economy at Sydney Uni:
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I would have thought the global financial market ructions and the seeming impotence of even the most powerful policymakers like Bernanke to address the issues makes a nonsense of any thought that Rudd can “do” anything about it.
The Australian government (a target surplus of 1.5 pct of GDP - I mean who cares!!) is really an irrelevance in the looming global economic crisis. Our biggest hope is China. So if anything, Rudd’s biggest value add would be in exercising his Mandarin skills by keeping them on board.
The best you can argue is that he picks up PR points by being seen to stop in at the RBA and yabba over the kitchen table with the ordinary folk about what they want.
If he really wants to buttress the economy, he needs to cancel the tax cuts, or at least redirect them into super. He might also consider reversing the Howard government’s silly decision to halve the capital gains tax on investment property.
Well, yes, Mr Denmore, but he’s got to be seen to be “doing” something. To the extent that some at least of what happens results from decisions based on “confidence” (whether among investors, consumers, or business) then words do have an effect.
We’ve previously discussed junking the tax cuts, and I’m all for doing that except for the low and lower middle, but I very much doubt it will happen.
[link]
The best thing Rudd could do is explain why he can do very little at all. However it is true that this would probably not be his gambit of choice. The real test will be when he has to persuade the punters that all the moolah that has suddenly ‘disappeared’ needs to be replenished by redoubled efforts to toil and be restrained in the earning department. A bit like Cossie explaining Workchoices by proposing that unless people took a shave on wages and conditions they would lose their houses (higher interest rates). Now it looks like they will have the quinella-lower real wages, higher interest rates, higher prices, more insecurity and even later retirement. That’s what you get when you believe the garbage that what you earn doesn’t matter just so long as you can bank on asset inflation for the rising tide effect. The idea that the Chinese working class and peasantry will tolerate forever what their government is doing to them is laughable. If the PRC insist on expropriating the assets and labour of their subjects and refuse to give an inch on the most basic rights, they will find themselves going the way of every previous dynasty that ruled the Middle Kingdom and thought they could ‘junk’ the rules. Just because every carpetbagger in the OECD tells the PRC how much they love the current dispensation in China, and just because the ruling clique in China love hearing it, doesn’t mean that the 1.3 billion people we rarely if ever hear from, are similalry enchanted. When they decide they have had enough we will really see some fun.
I havent really got an intelligent response to this subject,accept to say via question,I suppose, the house owners paying off the interests seems pretty unfair,after all, they may not have jobs directly connected to share transactions,or be part of a process by work that has elements in the domestic and non-domestic economic activity that leads to inflation by others?And why are the banks so concerned about their interest setting ,not being criticised when after all the client customer house buyer may not be the greatest risk as numbers and as individuals to their other loaned customers?And the small business and farm sector may not be either.Where are the authorative types who can put the Saul Eastlakes back to school about what they think their sole loaning intention should be,and how the payments to official of the banks appears unfair as payment and represents a force in how the requirement for interest rate hikes are assessed?For example,can they present their evidence honestly to a sickened public themselves ,rather than volunteers with no connection to banks and theorist too boot for some reasons of their own!?This is a democracy,I thought which means we all decide something.I think Paul suggested the disadvantaged hung onto Howard!What analysis from voting outcomes did you read in the Howard years that makes you think that Paul!?Looking for a job at the Electoral Commission,by some inside exchange of information,cause officials could read soup stains!?Oh!Shit sorry!You go to University are a socialist of some type pensioner and have Aboriginal neighbours in Armidale,and will have a TV this week sometime to watch moon face Rudd I would suspect!?
Amused - you’re really not sounding like it today!
Some good insights though - just break up the paragraphs and I’d give you a distinction.
If the Coalition had been returned we would be experiencing the same financial situation as we are currently so it seems strange the electorate can’t understand that the australian situation is directly the responsibility of the previous government.
This applies in two ways - the first is the rise in inflation. Up to 3.8% underlying I think and as has been commented on previously this is essentially demand inflation. Inadequate recycling of funds into projects to reduce production constraints . From what I read this government will address this issue.
The second problem the coalition may not have actively contributed to but they could have been more active in indicating that they saw risks in banks and investors getting involved in the collateralised debt obligations and the like which have lead to the sub prime crisis.
The coalition’s ideological preoccupation with the free market probably left them unable to do this as it would be contradicting their non interventionist attitude.
Mr Swan can be criticised in with regard to inflation with some justification by Mr Turnbull over this.
Making loud public predictions that inflation is coming or will get worse will lead to a risk of prediction fulfillment.
” Inflation is coming ” the consumer may think so people may be tempted to increase their consumption to avoid higher prices later.
This sort of problem in reverse plagued the japanese market in the 1990’s. There consumers stopped spending knowing that prices would drop as deflation took hold.
The Reserve Bank should be left to do the talking in this matter and Mr Swan may have erred by being active in this way.
As was discussed some time ago on the tax refunds thread the government would really show it is committed to rational action when in power if it held off these refunds. The funds can be held , infrastructure planned and built or globally invested superfund investments made.
Many commenters on the previous thread thought the idea of not being able to break an election promise had locked the government into the course it had to take.
I still think it would be more prudent to jaw bone the electorate into accepting restraint now rather than expending energy arguing about who is to blame for the current situation. If inflation does moderate then all the credit will be there to be basked in .
On this point I think most voters have little interest in or sympathy for arguments about who is to blame - they will usually blame the incumbent.
The great unspoken in this debate is that the electorate finally has clicked onto the fact (if not consciously as yet) that Australian governments don’t ‘run’ the economy. That partly explains the rejection of Howard amid supposedly good economic times.
The press is still playing the game, of course, writing supposedly learned articles about Rudd’s attempts to be “seen” to be doing something. But then the press gallery has a vested interest in exaggerating the influence that Canberra has on the economy.
Has anyone looked at the amounts of money being lost in the sub-prime backwash lately? Citigroup and Merill Lynch each dropped $US20 billion in a single quarter. The degree of leverage in the global financial system and the exposure of major financial institutions to this disaster makes a mockery of any piddling attempt by a cowtown government in Canberra to boost the surplus by a billion or two.
Sure, Rudd can make noises about investing in infrastructure and boosting skills training. But these are medium-to-long-term projects that will do nothing to address the dangerous cocktail of record indebtedness, surging inflation, the rising cost of credit and the impotence of global central banks to avoid a global recession/depression.
In the world of economics, national politics is an irrelevance, a sideshow.
With respect, Mr Denmore, that’s exaggerated. You can’t control what you can’t control but you should try to control what you can control.
It would also be wrong to assume that global factors influence each country in the same way.
A couple of points - Sharon Burrows didn’t give an inch in an interview with News Radio this am.
When asked what was balance in the economy with regard to wages she said that wages must keep up with price increases.
The share of profits had been large in the past few years ( and the proportion increasing ) so wages must also now keep up . As profits decline I gather wages won’t so how that is a balance remains to be explained . She could also be arguing from a starting point for future negotiations.
Re the losses from Merrill Lynch and Citigroup- Mr Denmore , have you noticed that the capital raisings done from sovereign funds have been 50% committed to paying bonuses for the talented staff of these firms? Talented indeed if they can get away with this one !
The japanese learnt to their cost in the 1980’s that you can presume to have the measure of these Wall Street operators but it is rarely the case.
Mark, I am not saying that Rudd and Swan shouldn’t be attending to what they can control. What I am saying is that it is not really very interesting or consequential.
As to the influence of exogenous factors, our economy is much more integrated to the global financial system than many people imagine. The severe shellacking handed out to our big four bank stocks in the past month or so reflects the fact that they are fishing in the same pool of credit as the Citigroups and Merrill Lynchs.
The subprime mess is still playing out, and there is now a real chance that one or more of the monoline bond insurers which insure corporate bond issuers will collapse. Then see what happens to the cost of credit and interest rates that Australians pay on their mortgages.
The RBA, with its miniscule foreign reserves, is not really in a position to do much about this at all. In the meantime, the flacks for Rudd and Swan can keep a gullible media entertained with sideshows that depict them as Horatio Hornblowers, manfully at the helm of the economy.
One things for sure,
If Labor manages not to get us in debt, and manages to control inflation, and manages to give us wellbieng, they will congratulate themselves.
However, if they manage to mismanage the economy, if they manage to blame Howard for world economic crises, if they manage to get the public to ignore any Labor mismanagement, then they will be able to blame Howard/Liberals and hate them for a further ten years. And we will all be well informed of the hate, just like in the past.
One thing is for sure, we will never see a gleaminmg economy like we have just seen in the past ten years.
Nobody thought that Scullin was to blame for the Depression, merely that he mishandled the response to it. Howard lost not because he was to blame for [insert economic ill here] but that neither he nor Costello were convincing in claiming that they could manage the response effectively.
Mark and Paul Burns seem to fall into the same trap as Malcolm Colless in last week’s Oz, where all the Libs need do is wait for the economy to deflate and they’ll romp back in. As I’ve said, this is
crapflawed.“Nobody thought that Scullin was to blame for the Depression, merely that he mishandled the response to it. Howard lost not because he was to blame for [insert economic ill here] but that neither he nor Costello were convincing in claiming that they could manage the response effectively.”
We’re a nation of cynical yet enthusiastic surfers. Most of the electorate does not expect our Governments to make the waves any more, only to tube it well. The Hawke/Keating Goverment did though do some good bayscaping and the Howard/Costello Government rode the consequent waves in sturdy but unimaginative fashion.
But now everyone, everywhere, can tell the global tide is turning. From where and to where we don’t know - but Kruddy and co better start blowing the talc off their full bodysuits. The waves will be coming from many unexpected angles now.
Eg: I’ll bet anyone a bottle of 29 year old Dalwhinne that within five years, the biggest single effective threat to a stable and prosperous global economy community will not be religious/ethnic crazy factions but whatever the Russian Business Network & co will morph into after a few years of pumping bad code and general internet highway robbery from a tacitly-protected Chinese free enterprise zone bastion. Goodbye credit cards and hello supply chain rerouting robbery.