In an interview with the Financial Review a little while back, Finance Minister Lindsay Tanner commented that governments might face some difficulty down the track when the need for economic stimulus has passed, but when also public revenues are not flooding into the coffers as they were at the height of the mining boom. It’s not terribly surprising to see Tanner thinking ahead – and no doubt the government is also thinking about what sort of narrative might be utilised to justify an era of diminished expectations to the voters.
It’s interesting to set these remarks aside a leak from the Coalition party room yesterday – apparently Malcolm Turnbull mentioned that there may be a need to raise tax in the future. Predictably, this was howled down as being “contrary to Liberal philosophy”.
Therein lies the rub.
Aided and abetted by a quite unique set of economic circumstances, the Coalition’s “economic management” over the last few terms of the Howard government basically translated to reducing personal income tax while maintaining the rate of corporate tax. Add to the mix a crazed melange of transfer payments and electoral bribes, and for a while they had a winning electoral strategy.
It did, of course, trash “core Liberal philosophy” if that meant what John Howard supposedly stood for in the 1980s – ‘dry’ economics. Reduced to a few slogans, the Liberals have proved themselves completely incapable of arguing any economic direction which even vaguely makes sense ever since their defeat in November 2007. Turnbull’s comments, and Tanner’s remarks, suggest that the political playing field of the economic game will be a much transformed one over the next few political cycles. Labor seems to understand this. It’s highly questionable if most Liberals even grasp what’s going on. That absent centre at the heart of their ideology and their political strategy will prove a bigger problem for them than their leadership and their day to day political tactics and messaging. The dysfunctions of the latter are only a symptom of the underlying disease.
What did the economic management of the last labor government amount to? Record interest rate rises and the worst recession Australia had seen in decades. And yes, we all know that keating did some reformst to the economy – like floating the dollar. Funny how that happened in 1983 then 7 years of labor rule later we get a recession globally no-where near as bad as the one we’ve just had and yet australia did far worse.
There’s a possible response to that in terms of the productivity record and opening up of the economy, infrastructure investment etc. but I’m completely not interested in getting into partisan point scoring about the past in comments. What I’m seeking to stimulate discussion on is the very different economic and political circumstances which will be the future landscape of policy discussion and political contestation, and how the two major parties are poised to respond.
What did the economic management of the last labor government amount to? Handing out money like drunken sailors to the Middle class while crowing over the paying down of Government debt, meanwhile making private debt the basis of the economy in a vast ponzi scheme whereby Australians all spent more than they earned for years on end, resulting in a debt burden the like of which we’ve never seen before. Plus, running down infrastructure (the State Labor governments did this too) so as to leave nothing for the next generation.
Erratum – “Labor” in my comment should read “Liberal” (cut and paste and meant to edit… D’oh!)
Private debt the basis of the economy? Since when is it the job of the government to tell people in a growing economy whether they can borrow money for their business?
Will bracket creep be enough to fund extra future expenditure? Not adjusting the thresholds for the various middle class welfare payments should help as well.
Ah yes, Keating floated the dollar. The fact is, in a modern fiat money system the Liberals could keep taxes low if they wanted… they’d just have to live with a structural deficit.
Your comment, Mark, about the “absent centre at the heart of their ideology” is spot on in terms of the conservatives understanding of how modern macroeconomics actually works.
I strongly recommend, to all, reading some of Bill Mitchel’s writings on the fiat money system. It is incredible just how much of the rhetoric spouted by the Opposition in terms of debt and deficit is based on fundamental misunderstandings about macroeconomics.
Try his series on fiscal sustainability, parts 1, 2 and 3.
We have entered an era of deleveraging and a shortage of investment funds exacerbated by the huge demands of governments for capital.
Yet the government prevented the shareholders of Rio Tinto from selling their asset at a price that was agreeable to them.
Given that for the foreseeable future the only source of major capital investment is likely to be China, how would the Libs play that hand, in the unlikely event of their speedy return to the government benches?
It’s fine for people to borrow money to finance businesses. It’s quite another thing when it becomes the norm to use credit constantly to finance consumption. And when the music stops it’s the businesses that suffer, because the person with a mortgage to the hilt plus equity loan plus credit cards plus no interest for three years Harvey Norman furniture plus car… can’t spend anything anymore.
Whoops. Once was funny.
The likely pre-GFC Liberal election agenda was tax cuts which would have pleased both the conservatives and moderates. Now they will probably come up with some complex tax reform plan, drafted by Henry Ergas, that they won’t be able to explain in the campaign.
I strongly concur with Andos.
Professor Bill Mitchell’s economics blog is an excellent one. Many of the hysterical arguments concerning deficit and debt have little or no application to the modern fiat money system.
@Helen #4: How does the Australian economy resemble a “ponzi scheme”? This seems a rather loose — and most likely meaningless — use of the term.
That absent centre at the heart of their ideology and their political strategy will prove a bigger problem for them than their leadership and their day to day political tactics and messaging. The dysfunctions of the latter are only a symptom of the underlying disease.
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If and when Kevvie’s cash-a-thon’s proven to work that is. Of course the adherents of neoliberalism have been in overdrive to write their own version of history that says that govt interference was responsible for GFC (which it was, a bit) and if the climb back up proves slower than hoped they’ll be able to convince others that this is so.
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On the other hand, if we do recover quickly, then that will be definite nail in the coffin. It’s the final battle in The Ideology Wars. Pray for a decisive victory so we don’t spend this century going around in the same bloody circle!
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Nice bit of prose Mark.
How does the Australian economy resemble a “ponzi scheme”?
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I think the whole world is a sort of Ponzi scheme.
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Here’s how it works as far as I can figger (which I can’t):
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1. The engine of the economy is us buying stuff and buildings homes and businesses. To do this we work so that people can buy stuff and build homes and start businesses and we put the money we earn in the bank and we borrow from the bank.
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2. The bank is always lending our money out and charging us for the privilege for some reason. So they don;t actually have our money. In fact due to some wiz bang maths they lend out about $20 for $1 they don’t actually have. If they’re prudent and responsible that is.
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3. That might seem bad but it’s not ’cause our banks borrow from other banks who can always borrow from other banks who can always borrow from other banks…
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- And what if the whole
house of cards on the beachfinancial structure should tumble?.
4. That’s okay because then governments will give the banks our money so they can lend it to us…
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If you want to understand modern global capitalism just think of a chicken with one end of a tube inserted in its rectum and the other down its throat.
What’s interesting about the Rudd Labor Government’s response to this financial crisis, Adrian, is that when we have all the data after this is over it will be an incredibly useful case study in how this kind of stimulus spending can support employment and growth during a world-wide downturn.
What you say about this being part of the Ideology Wars is very true. This is an opportunity for well informed progressives (like most of the contributors here) to counter the intellectually dishonest rhetoric of the neo-liberals and to actually shift perceptions towards a fiscal policy aimed at achieving full employment (which is why I think Bill Mitchell’s blogging is so important).
I doubt it will be the final battle, though.
it will be an incredibly useful case study in how this kind of stimulus spending can support employment and growth during a world-wide downturn.
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Or not?
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I doubt it will be the final battle, though.
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No but we need a new war.
“the modern fiat money system”
Ohmigod we’re not basing the post-GFC new world order on bartering those funny little eye-talian CARS are we? We’ll all be rooned.
Psssst: actually, Giovanni lent me an old one, but he needs a bit of a hand with a few mill lira, so could you ask die kleine Gretchen to rustle up the sniff of a possble few thou at least?
I. It wasn’t so long ago that Labor had an absent core at its heart and a shambles of policies from various chancers, who have suddenly become sages and plugged said void with the substance of Government.
II. Most of the Liberal Party believe that “traditional Liberal values” and “whatever Howard did from moment to moment” are the same thing.
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Yep. Mind you, before the 2007 nobody was promising me $900 – but I still voted Labor anyway. It’s funny how things turn out, isn’t it.
All of them? The same understanding?
Indeed it is. I’ve always said that for the Liberals, the road back to government lies over the dead body of Nick Minchin (see II. above). That said, thinking like that last quote will lead you to the place where Keating was in ‘96, incredulous and disgusted at being beaten by a despised opponent. It almost happened to you at state level Mark, surely the closeness of the escape gives rise to considerations of political mortality?
I would love to see some saner thought and indeed even rhetoric from all parties in govt, but yes at this moment definitely the Liberals.
However, I think it is a little to pay attention to the statements of various politicians, as opposed to their actions. Most of Howard’s actions, thank god, weren’t as bad as his rhetoric, and likewise most of Rudd’s have not been as good as much of his.
I do think saner heads will prevail in most policy development, as they always do.*
*I say saner, not sane.
Helen, you claim that the Liberal Party made private debt the basis of the Australian economy. Fair enough. What should a more competent government do to encourage genuine savings to become the basis of our economy?
BBB
BBB: it should maintain deficit spending. For the private sector to net save, the Government has to net spend (ie a deficit).
Have a look at this from Bill Mitchell, specifically the section headed “Advancement of public purpose.”
“Given the non-government sector will typically desire to net save (accumulate financial assets in the currency of issue) over the course of a business cycle this means that there will be, on average, a spending gap over the course of the same cycle that can only be filled by the national government.”
Ok, I need to say this: I hate the term ‘therein lies the rub’. I find it contrived and redundant. I also hate it when people type ‘bwahahahaha’.
It really sticks in my craw.
therein lies the rub’
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But therein lies the rub. What better way to say therein lies the rub? That’s the problem.
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Will is not redundant his sales have never been stronger and he’s been dead for four centuries. In your face JK Rowling.
Jack, Libs seem to have a short memory: they can remember the 1990-91 recession like it was yesterday, but have no memory whatsover of the very serious recession under Fraser and Howard.
It’s interesting that the Coalition is now making a lot of noise about changes to payments for uni students, tightening eligibility for some students but also freeing money to go towards truly disadavantaged students. The Coalition suddenly cares about the welfare state – well, for kids from upper-middle class backgrounds, at least. Surprise, surprise.
It was great listening to the Opposition today, bringing back the debt and deficit diatribe in an MPI…
Some of the worst I’ve heard from Hockey. They really have nothing left.
Broadly speaking in terms of having a coherent set of policies unfortunately I have to concede Mark is right, the Libs don’t have one. I think they rushed too fast over the entire policy range to ditch everything Howard stood for taking the election result to be some massive repudiation of that, whilst I think there was a large enough chunk of the swing voters who just ‘wanted a change”. There was literally no more real science to it than that. You could quiz them and they could not articulate it any better than that. Rudd’s timing was superb.
I’m ambivalent on the Family Tax benefits etc. It effectively lowered people’s taxes and it was targeted at families but I think suffers from being construed not as a tax cut but a hand out and creates that sort of mentality.
Essentially though on the politics Mark is right the Libs aren’t doing a great job and need to get on the same page as each other quick smart. A common problem with oppositions I’m afraid.
There was literally no more real science to it than that. You could quiz them and they could not articulate it any better than that. Rudd’s timing was superb.
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I think you’d find that some could articulate reasons for the change. And there’s records of public opinion that show disillusionment with the war, with the United States and other aspects of Howard’s policies. He’d also been in power a long time. He was tired, it showed. Health and education were substandard. The ALP had its shit together and Rudd outmanouevred Howard every step of the way.
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It’s wise to change governments. It’s not wise to let one government rule for too long.
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The Libs need to trash their approach, regroup meaning sorting out the dog politics and wait for the Rudd govt to run out of steam or nto a wall. Takes time. Some disaster for him notwithstanding, Rudd’ll have at least five years.
Kingsley, Adrien: they called it Workchoices.
A significant contributor to the GFC was there years where the capacity to produce outran the capacity of potential consumers to buy. Countries and business’s got around this problem by lending to their customers in order to keep their business growing. We saw the Chinese using their trade surplus to finance loans that allowed the US to continue buying Chinese products. We saw retailers and lenders in Australia offering great deals that tempted with low starting repayment rates.
In the case of the Chinese the irony was that the citizens of both China and the US would have been better off if China had used its trade surplus to import more goods and grow their internal economy. The additional irony is that there is a real risk that the US will devalue Chinese US$ holdings by printing more money.
Not sure what Harvey Norman should have done but, collectively, Australian business would have been better of if the real value of their employees earnings had risen in line with business capcity to produce. Unfortunately, at the critical time, we had a prime minister who was unwilling to admit that Hawke and Keating had solved the stagflation problem that made Howards time as treasurer hell. Howard appeared to be obsessed with driving real wages down when it would have been smarter to have increased wages while making consumer borrowing less attractive.
Free market ideology contributed to both these problems. The GFC may have been avoided if the WTO had encouraged countries with chronic trade deficits to take direct action to restore their trade balance before it had became a crisis. (I am talking about gradual changes to imports, not dramatic actions that destabilize economies. It may have also have helped if the WTO had put pressure on countries such as China to do something about their trade surplus.
Similar comments apply to wage/tax policies in countries such as Australia. We need policies that link the capcity to produce with customer buying power. We certainly don’t need free market policies that tend to drive wages up and down at the wrong parts of the economic cycle.
If anything, the tax cuts during the Howard and Rudd years have tended to increase the percentage of resources going to the lending pool. Perhaps we should look at extending the stimulus package approach by giving regular payments to those more likely to spend than lend.
Andos – I am happy to agree politically that workschoices was a big negative although curiously I am not s sure it was over here in WA.
Adrien – I guess I compare the avergae Joe Blows attitude to Howard versus Keating at the end. Yes a lot of you on the Left may well have hated Howard but the average bloke wasn’t anywhere near as passionate in his feelings for Howard as he was keating. I particularly note the people who went up to Howard in the shopping centres who politely shook his hand thanked him for his service and said “but I won’t be voting for you this time, we need a change”. Versus Keating who they seemed to despise by the end.
Andos – Adrien: they called it Workchoices.
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Indeed. I musta been very tired to leave that elephant out ‘ey.
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Kingsley – I guess I compare the avergae Joe Blows attitude to Howard versus Keating at the end. Yes a lot of you on the Left may well have hated Howard but the average bloke wasn’t anywhere near as passionate in his feelings for Howard as he was Keating.
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Yeah. Keating made the gaff of running on about his excellent leadership. Like Kennett. That’s a cardinal sin in this country. By all means dress up as a pig and have sex with animals. We don;t mind as long as you can do the job. But don’t tell us how good you are. That’s our call. Do that and we boot you. For good reason.
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Keating presided over Neoliberalism’s renovation of our economy. That wasn’t popular. And then he goes forth culturally and a-ha the Libs have finally got something to kick against.
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But when Keating went up against Hewson we were cheering for him at the end. I mean we hated the guy. And he was doomed. But he never said die: “I’m wanna do you slowly mate”. What chutzpah!