Whatever the election outcome this weekend, there is no doubt that political commentators will be talking about both the substance – or lack of it – for years to come.

It has been interesting that, despite guiding Australia relatively unscathed through the worst economic downturn since the Great Depression, the Labor Party has not been able to adequately sell its economic credentials.

Meanwhile, after 11 years of squandering surpluses on tax cuts and middle-class welfare while leaving Australia’s infrastructure to deteriorate, the Coalition can claim superior economic management.

It is hard to pinpoint why this is the case, but a contributing factor has certainly been the focus on issues such as government debt and interest rates  as the underlying fundamentals of our economy are ignored. Key here, from both major parties, has been an inability to envision a post-carbon, post-quarry economy – as opposed to one based on the proverbial sheep’s back (or on this case, the mining industry’s earth movers). There has also been limited discussion on manufacturing, the promotion of a renewable industries or taxation reform.

Repeated mantras like :we will always keep interest rates lower” and “the debt bomb” are both frustrating and false — and this week prompted 51 economists to release a statement supporting the ALP’s stimulus package in response to the GFC. It was organised by Emeritus Professor Raja Junankar and included the names of prominent economists such as Professor Steve Keen (UWS) and Professor John Neville (UNSW).

The statement is clear: without a decisive and massive injection of funds into the Australian economy, we would have rapidly followed the majority of the world into deep recession.

I was initially critical of the stimulus package when it was announced. My criticisms focussed on the design of the package rather than the size – raising concerns about $900 cash handouts and aspects of its implementation.

The question is, why three years later have I taken such a stance? The answer is quite simple: that while we can debate the make-up of the package it undoubtedly resulted in shielding the Australian economy from the GFC.

There are three reasons why the package must be praised. The first is its size: nothing but a massive injection of funds would have had appropriate results. The second aspect was its decisiveness: unlike the umming that characterised the Bush Administration’s response, Rudd and Swan made their intentions clear. Thirdly, it was generally well targeted: the focus on promoting building activity was fundamental in promoting employment and confidence.

There is a fourth reason why the stimulus package remains important: it was recognition that markets do fail and need intervention and regulation. This is not an “anti-market” position – rather one that recognises that in the contemporary world, we cannot rely on markets alone to deliver outcomes. A more complex policy mix is required as well as the ability to identify the point at which markets, left to their own devices, will not deliver the most efficient outcomes.

When describing the “invisible hand” of the market in the eighteenth century, Adam Smith made it clear it was a metaphor to depict a broad range of activities – it is a pity that contemporary politicians and commentators read it literally. The stimulus package confronted this myth – and Rudd and Swan should be commended for it – despite their other shortcomings.

Yesterday, in his address to the National Press Club, when he could wean himself off talking about talking to “real Australians” at Rooty Hill and similar places, and after he spent half his speech attacking the government, Tony Abbott intimated that there might also be some sort of reason to vote for the Coalition other than relentless negativism.

On cue, a policy popped out on infrastructure – a confused mishmash of PPPs and savings measures – involving Infrastructure Partnership bonds, which would be issued by private infrastructure partners to raise capital, and investment in which would attract tax rebates and tax concessions for Super funds. It’s confusing, unwieldy and as usual, just meant to make a political point – which if you can cut through the morass, appears to be something along the lines of “there is an alternative to public debt”.

Robert Merkel discussed this announcement in a previous post at LP. There’s also a good deconstruction of this thing at Grog’s Gamut.

Leaving aside whatever can be made of the policy “detail”, I think what’s significant about this plan is that the Coalition really have done next to no genuine policy development, and any putative agenda for a Coalition government is just a product of whatever they think it will take them to win the election.

You can see why Tony Abbott doesn’t want to debate the economy.

Is she right that there’s a knock on effect from public distaste for the Keneally and Bligh governments?

Yes, and no.

It’s easy enough to point to large swathes of the political cycle when voters opted for different parties at state and federal level. Neville Wran’s 1976 victory and 1978 ‘Wranslide’ book-ended a poor result for Federal Labor in NSW in the 1977 election. Peter Beattie’s rightly argued recently that huge numbers of Queensland electors favoured his government in 2001 and 2004 while giving John Howard a majority of federal seats in elections held in the same years.

What may be different this time around, though, is that federal and state issues are showing an increasing tendency to converge.

Both John Howard and Kevin Rudd, and now Julia Gillard and Tony Abbott, have made traditionally state areas of responsibility – infrastructure, schools and health most prominently – their own business.

Peter Beattie and Kevin Rudd did a double step in 2006 and 2007, contending that health and transport in Queensland were being held back by federal neglect.

Of course, there have always been different swings in different states, but this year, arguably, the differences are looking as stark as they have been since 1990.

Again, it’s a bit too simplistic to write it all down to “unpopular Labor governments”. Bligh Labor is not unpopular for the same reasons as Keneally Labor – it’s more to do with the privatisation push than a perception of service delivery crisis. But Labor campaigners are reporting voters raising state issues pretty quickly on door knocks and at street stalls.

Compounding this blurring of responsibility between state and federal governments, I think, is the lack of an overarching theme and the absence of big picture issues in this federal race. It’s not that parish pump promises in marginal seats are anything new. But it is the case that, unlike in 2007, there’s nothing to really raise voters’ sights above the horizon of the everyday.

So we have a federal election which resembles state races more and more.

That’s why Labor really wants the focus of the last week to be on the economy and jobs. Hence Julia Gillard’s counter-challenge today to Tony Abbott’s proposal for another ‘town hall meeting’.

The national economy is one area where voters are very clear that the choice of government matters, much more so than whether there’s CCTV at the local railway station, or whether the local school got the price it wanted for a new school hall.

So we’ll continue to see, over this last week, a twinned focus on the local and the national – expect the Labor campaign launch in Brisbane tomorrow to heavily emphasise economic management.

Cross-posted at The Drumroll.

There are three areas I think Swan should challenge Hockey on:

(a) The claimed $24 billion of savings – which somehow dropped from $40 billion odd early in the campaign with few people noticing. Most of it is smoke and mirrors, with cuts coming from not factoring in Labor spending which disappears from the forward estimates if the mining tax doesn’t go ahead. As I suggested last week, I think the reality of the Coalition’s position is to introduce swinging cuts not foreshadowed in the campaign, which will no doubt be the task of the ‘deficit and debt reduction’ taskforce Abbott previewed in his agenda for office at the campaign launch yesterday;

(b) The stimulus. The Coalition are now running the line that it was irrelevant to Australia’s performance – something contested by almost every economist, and which makes it unclear why the Coalition voted for the first tranche of stimulus under Malcolm Turnbull. Hopefully both Swan and Hockey will both be challenged on what they would do if there is a double-dip recession or further contagion from global financial kerfuffles – something so far only mentioned by Kevin Rudd;

(c) The fact that the latest economic assessment from the Reserve Bank shows the remaining stimulus spending is still important in propping up growth, given that private demand is still weak, and business investment as well in some states – particularly in Queensland where its growth is very sluggish.

Update: Tim Colebatch reports that the Coalition has only submitted 1% of its spend to Treasury for costing, and has given up even indicating costings on policies being released.

The most likely outcome of a Coalition victory would be a proclamation that “the budget is in worse shape than we thought!”, swiftly followed by an austerity package of cuts, and a re-evaluation of promises made during the campaign.

Bob Hawke did it. Peter Costello did it. And this year, David Cameron did it in the UK.

The UK parallel is very significant – because at least in the British election, the fiscal stance of the state was openly debated. Labor and the Liberal Democrats agreed budget cuts were necessary, but sought to delay them in case of a double dip recession. The eventual Tory/Lib Dem government has been swinging the axe almost from its first day in office.

In Australia, by contrast, we’re not seeing an honest debate on economic management.

Labor, spooked by the ability of the ‘debt and deficit’ message to cut through, refuses to contemplate the prospect of economic contagion from further world financial shocks. Nor is yesterday’s Reserve Bank decision to leave rates where they are evidence of a vibrant economy – in fact it’s evidence of a sectorally weak economy.

Neither Wayne Swan nor Julia Gillard have been convincing in responding to press questions about the government’s strategy for economic policy over the next term.

Meanwhile, a Coalition government would be ripping $24 billion out of an economy which might be enjoying good terms of trade, but where consumer spending is sluggish and the housing industry tanking (with important flow on effects for housing availability and affordability).

Julia Gillard has called for a debate on economic management. That would be a good thing, if it was an honest one, because that’s precisely what we’re not having in this campaign.

Cross-posted at The Drumroll.

“The new Julia changes her mind on debates, while the old Tony makes an appearance”, led tonight’s Channel Nine Brisbane bulletin.

Yep, it was that “sexist gaffe”. [Discussion on LP here and over at Hoyden]

Julia getting real apparently is demonstrated by her jumping on the press bus. She then addressed workers on the NSW Central Cost, intoning a few soundbites about jobs and a strong economy.

Tony’s changed his position on the funding of his parental leave. And Jenny Macklin says it’s “a big new tax” which would make all the stuff we buy at Coles and Woolies more expensive.

Tony Abbott said that his “gaffe” wasn’t intended to be offensive, and to say it was is a “Labor party smear”. For reasons unknown, Samantha Maiden, a journo at The Australian was shown saying that he didn’t intend to give offense, but some women had taken offense.

So it goes…

Interesting @PGarrettMP tries to get the strong economy line across but AAP journo just keeps asking about “real Julia” and debate #ausvotes

That’s Katina Curtis, on Twitter just now.

How much more meta can this campaign get? It poses real dilemmas for political communication, which I don’t think either the ALP or the Coalition have really got a grip on. The ‘narrative’ lurches with breathtaking speed, and everyone’s left trying to outrun a moving train.

Social media and 24/7 tv news are factors in all this.

Labor’s campaign was mapped out, in true Hawker Britton style, around a message of the day (announcement, photo op, tie in to broader campaign theme). That worked well at state level for many years. In the federal context, and with the political cycle running at light speed, by the time you get the theme out there, it’s already yesterday’s news.

All that persists is the meta.

So today everyone’s talking about ‘real Julia’ and ‘real Tony’ and the ‘debate on the debates’.

That’s out of both parties’ control. It’s pure momentum, running away from any attempt to corral it.

We really never have seen anything like this in Australian elections. To say that we’re in uncharted waters would be a considerable understatement. You can chuck all the psephological truisms like “no opposition leader has ever won with these ratings” and “no first term government has been defeated since WW2″.

These really are new times.

A slightly different version of this post has been published at The Drumroll.

In the current election campaign, the central argument of the conservative parties is that Labor has mismanaged the economy since coming to power in 2007, spending like a drunken sailor and running up unsustainable debt.

The standard attack line from the Coalition is that Labor is borrowing $100 million a day to service our debt and fund their reckless spending. Furthermore this unrestrained government largesse is said to be crowding out private investment and putting unnecessary pressure on interest rates.

But as with so many things that come out of the mouths of politicians, the Coalition is bending the truth to make a political point. The shame is the media, either out of laziness or ignorance, routinely lets them get away with it.

Firstly, when the Coalition talks about borrowing $100 million a day, it is talking about “gross” debt. This is like comparing people’s mortgages without making referencing to their ability to service those debts – their salaries, rents and other income-generating assets. What matters to financial markets is the “net” debt position, which is calculated after subtracting financial assets such as cash on deposit, foreign exchange and gold reserves. This is the most useful measure for international comparison.

Australia’s net public sector debt in 2010-11 is projected by Treasury to be around $78.5 billion or about 8 per cent of GDP. This compares with 58 per cent of GDP in the USA, 61 per cent in the UK, 64 per cent in Germany and 111 per cent in Japan. Australia is ranked by the CIA at 108th position in the world in terms of public indebtedness, just ahead of China. Moreover, our net debt is projected to contract to 5.5 per cent of GDP within two years.

Secondly, even if we are to insist on using gross debt as the measure, Australia’s public debt position compares extremely favourably with other major economies. According to the OECD, Australia’s gross financial liabilities this year will total just over 19 per cent of GDP. That puts Australia in second position behind Luxembourg in the ranks of of the most fiscally sound countries in the developed world.

Now, this gross debt is overwhelmingly made up of the Commonwealth Government Securities issued by Treasury. What people may not appreciate is that as Australia is a rare ‘AAA’-rated sovereign borrower, its paper is highly sought after on global bond markets. This is particularly the case when sovereign wealth funds are so shy of equity markets and when asset managers are favouring more conservative investments.

If anything, the bond markets grow nervous when the Commonwealth starts running down its gross bond issuance. That is because there isn’t enough paper of this quality to invest in. Without a government bond market, there is no reference point for borrowing.

Thirdly, the Coalition insists that increasing public debt puts up interest rates. This seems hard to fathom when the US government, one of the world’s most indebted sovereigns in absolute and proportional terms, is issuing two-year bonds with a yield of 0.55 per cent, a record low and 10-year bonds at less than 3 per cent. If debt is such an issue for financial markets, surely market interest rates should be heading higher?

Fourthly, the notion that the government is “crowding out” small business borrowers by issuing debt is ridiculous. The government, like our banks, borrows on global capital markets. Its call on those markets in proportionate terms is akin to the pimple on the nose of an undersized gnat.

To give readers an indication of the size of the bond market, data from the Bank for International Settlements shows the international debt securities by all issuers totalled $24.2 trillion in March this year. Of that, Australian issuers accounted for $561 billion. The overwhelming majority of that was from Australian banks ($518 billion). Australian corporate issues totalled $26.5 billion and the Australian government $16.9 billion.

In other words, Australia’s biggest borrowers are our banks. And those banks borrow in global capital markets to fund Australian home, consumer and business loans. Borrowing by our banks accounts for 92 per cent of Australian debt issued abroad. The government is the smallest borrower, accounting for 3 per cent of debt. There goes the “crowding out” argument.

Fifthly, claims about government debt make no sense unless one looks at the reason for that debt. Every economy in the developed world is currently running a deficit. The overwhelming cause of that is the biggest and deepest global recession since the 1930s. If Australia was to be running a surplus at this time, as the Coalition suggested, tens of thousands of Australians would now be out of work and our fiscal position arguably would be even worse as the government would be losing income taxes and paying more out in transfer payments to the unemployed.

Finally on interest rates, the election perennial, there is no credible market economist who believes interest rates are more likely to be higher or lower under one political party or another. Treasury knows this, the Reserve Bank knows this. Everyone knows it but Joe Hockey and the economic illiterates who claim to be the better economic managers.

The fact is Australian cash rates now are back to their long-term average level of around 5 per cent. They are significantly higher than the near zero interest rates of Japan, the US and Europe, but that is precisely because our economy is much stronger and theirs are basket cases. Would you rather have zero interest rates and no job??

So in this election campaign, can my former colleagues in the media do the public they purport to represent the justice of challenging politicians on the facts when it comes to economic policy?

Ian McAuley writes:

Notice something strange in the opinion polls? Essential Media polling has surveyed Australians on a number of specific issues, asking which party they would trust to handle various issues. On education, jobs, industrial relations, housing affordability, climate change and the environment Labor easily scores ahead of the Coalition.

Yet on the question “management of the economy”, the Coalition still leads by a comfortable margin.

There is a strange contradiction in these figures. If economic management isn’t about ensuring high employment and harmonious labour relations, conserving scarce environmental resources, keeping housing affordable, and investing in education, what is it about?

The answer lies in the rhetoric of the Opposition, for whom “economic management” has come to mean keeping a balanced budget. Counter-cyclical economic management to stave off the recession suffered by most other countries has been framed as “reckless spending”. Spending on infrastructure can be sacrificed in the interest of bringing the budget back to an early surplus. And a responsible market-based policy to put a price on carbon is called a “big new tax”.

This dumbing down of the economic debate is serious. Most seriously it has frozen us into inaction on climate change. Rather than seeing environmental sustainability as a basis for economic sustainability, we have come to accept the notion that meaningful action on climate change requires economic sacrifices – as if we place no value on our (and the planet’s) environmental resources.

Budgetary management is but one aspect of economic management. Most economists agree that over a business cycle recurrent government expenditure should be balanced by tax and other income. Similarly, economists do not have a terror of public debt: what counts is the use of that debt. If it is used to finance current consumption then that is reckless, but if it is used to fund productive infrastructure then our economy is strengthened. If anything can be called “reckless” it is a policy which puts a “balanced budget” ahead of investment in productive infrastructure. (Imagine how shareholders would respond if a public company were to cut its capital expenditure and reduce its debt to zero.)

Already in this election campaign the Opposition has exploited this puerile construction of “economic management” to stymie carbon pricing and to devalue even the Government’s paltry infrastructure spending. The blame lies not only with the Opposition, however; political parties are opportunistic and to expect any different behaviour from the Opposition would be as naïve as to expect sailors to practice celibacy on shore leave. The Government too must take some blame, for it has had three years to explain economic policy to the electorate, and has failed to do so.

Appearing before a Senate estimates committee Treasury official David Gruen said if the stimulus was stopped it could “stall the economy”…

Coalition frontbencher Barnaby Joyce had asked why stimulus programs were continuing even though the financial crisis was over.

Dr Gruen replied that they were being withdrawn after keeping the economy afloat by creating almost all of last year’s economic growth.

The phased withdrawal should subtract 1 percentage point from economic growth this year.

“You could argue that you would like to see an even bigger turnaround. I think if you make it big enough you will stall the economy,” he told Senator Joyce.

“That’s the reason for wanting to do this at a measured pace.”

Business investment slipped 2.9 per cent in the quarter in part because of the withdrawal of the investment tax break that expired in December. Private housing investment slid 1 per cent in part because of the First Home Owners Boost. Without the remaining stimulus spending on construction at schools and public housing and health facilities the economy would have shrunk 0.2 per cent.

“In this limited arithmetic sense increased government spending has accounted for more than all of the growth in GDP,” said BT Group economist Chris Caton. “It underscores the point that stimulus has kept the economy afloat.”

There’s an obvious contradiction here with the claim from the Opposition and the mining industry about the contribution of the latter to our avoidance of recession.

There’s also a clear implication that if the Liberals’ attitude towards stimulus spending prevailed, the economy would tank.

The Coalition has been seeking to use its new found role as the political wing of the mining industry to highlight its so-called credentials on economic management. But we are still completely at a loss to understand what their approach to macro-economic policy would be, given that such statements as do emerge deny the facts. Nor are the media putting the question.

We need to examine the Opposition’s bona fides much more forensically, and to recognise that their stewardship of the Australian economy would be disastrous, on the basis of their own statements.