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Howard’s economic record

February 6th, 2008

If there was one thing John Howard and Peter Costello could reasonably have expected as part of the historical judgement on their terms as PM and Treasurer, it was a positive assessment of their record as economic managers. But a game isn’t over until the final whistle, and the last few months have produced some unpleasant data. Howard and Costello have left higher inflation and (if you impute the whole of the current tightening phase to their policies) higher interest rates than they inherited from the Keating government. Given that the ratio of household indebtedness to income has grown massively, the effective burden of interest rates is far higher now than in 1996.

A judgement based on inflation and interest rates is unfair in some senses. The big achievement of the last 15 years has been to avoid a recession. While most of the credit for this outcome must go to the Reserve Bank (particularly for getting policy right in the Asian crisis of 1997) and some is down to luck, the government should at least be credited for not doing anything to muck things badly enough to derail the Bank’s economic management (I’m assuming here that the housing bubble, to which the government’s policies contributed greatly, will deflate gradually rather than popping us into a recession. That would be a really nasty legacy for Howard and Costello to leave).

Unemployment has also fallen quite a lot, though until quite recently, the improvement in headline figures masked a deterioration in broader measures of employment and unemployment, particularly for men.

The problem for Howard and Costello is that they chose the criteria on which they wanted to be assessed. They never cared much about unemployment, abandoned the whole idea of an unemployment target early on, and their occasional policy interventions were either focus-group driven exercises like “work for the deal” or ideological costcutting like the Jobs Network.

By contrast, they ran hard on “keeping interest rates at record lows” and now have to live with their failure.

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  1. SJ
    February 8th, 2008 at 00:22 | #1

    conrad Says:

    I’m aware of some broader measures…

    I know that, I really should have said “Your original question looked to me like you were entirely unaware of what “broader measuresâ€? might exist, but it’s obvious now that that’s not the case.

    And like I said earlier, I’ll let John argue the point further if he chooses to.

    Ernestine Says:

    But this is the problem because the relationship between those who have influence on the results and the results is not made explicit (hence wrongly ascribing achievements or failures to managers is possible) and the focus is on easily quantifable and measureable variables (hence it is possible to measure the values of variables that are not necessarily important)

    Describing or characterising ‘an economy’ by a few macroeconomic variables, which happen to be viewed as important by the finance sector, is not meaningful to the rest of the people who belong to the economy.

    I am saying the previous PM, John Howard, indicated toward the end of his goverment that he understands this.

    Ernestine, you seem to be saying in a lot of words that you agree with John’s argument that they chose the KPIs that suited them at one time, and that was one of the factors that killed them in the end, because they couldn’t abandon the KPIs they’d chosen.

    Still, your statement that “…management of anything by KPIs is the problem” is not a rational or reasonable one.

  2. February 8th, 2008 at 00:38 | #2

    PM Lawrence, today in Australia, for an employer to be swamped with suitable candidates for a vacant position, it would almost be guaranteed to be (a) an unskilled job, and (b) located in an employment black spot, a geographical location which jobs have moved away from, but people are still there.

    Currently I am in the deep south, near to the mighty city of Sydney, and just one look when walking the main street shows that better quality staff are working for lower wages than at my place.

    Sort of a supply & demand thing. If people won’t/don’t move to where the work is, they take lower pay & lesser jobs. Not to say they aren’t happier.

    But if I was out of a job, & unable to get one at home no matter what, I would be humping bluey.

    If people are sitting in (say) western Sydney, with an IQ of 70, no skills & very few career opportunities, and are too stupid/lazy/uninformed/homesick/whatever to go to (say) Darwin where employers are desperate for workers, it is not quite the same as the same people stuck in western Sydney with the same hopeless personal conditions and there being NO WORK at Bourke, Tallarook, or any other place.

    Currently there is opportunity in Australia. Just that those who don’t have a job now are for one reason or another largely unable to take up the available jobs. Mostly it is lack of required skills, lack of mobility, lack of initiative, lack of awareness, or even lack of employer lateral thinking (eg, never occurred to an employer to hire retarded, or criminal record, or something)

  3. Salient Green
    February 8th, 2008 at 08:03 | #3

    steve at the pub
    Claearly a lot of work should move to where the people are.
    Then again, from the tone of your last post, I wouldn’t want to work for you if I was starving. I may have to but would never want to.

  4. February 8th, 2008 at 08:39 | #4

    And that, Salient Green, is why my customers keep coming back. Because I DO NOT have people like you on the team! :-)

  5. Tony G
    February 8th, 2008 at 09:46 | #5

    Smiley;

    I am a lay person so I look at things in nominal terms. .i.e. how much they really cost me.

    Interest rates were higher under labour;
    http://www.rba.gov.au/Statistics/cashrate_target.html

    And the they appear to be heading the same way under Rudd.

    Howard did not let an out of control banking oligopoly crank up rates over and above the cash rate targets. He also cut the crap out of the bloated public sector when he first got in. (later he changed)

    Howard was sworn in, in March 1996 and by July 1996 he had got rates down by 0.5 %. Rudd has got another 2 months left to achieve the same record. Early indications are not looking good.

  6. Ernestine Gross
    February 8th, 2008 at 10:27 | #6

    SJ, Your conclusion depends on a partial quote. Setting this aside, would you kindly provide exact conditions under which managment of anything by KPIs is not a problem?

  7. sdfc
    February 8th, 2008 at 14:12 | #7

    “Howard was sworn in, in March 1996 and by July 1996 he had got rates down by 0.5 %. Rudd has got another 2 months left to achieve the same record. Early indications are not looking good.”

    That’s the funniest thing I’ve seen this week.

  8. wilful
    February 8th, 2008 at 14:59 | #8

    Tony, your final comment really is pretty funny. I now understand what you mean by saying you’re a lay person.

    But anyway, interest rates are an indirect way of saying housing affordability, which is something we can and do measure separately anyway. So why don’t we just talk about what we mean to talk about? Or is because Howard left us with the worst housing affordability since this thing started to get measured?

  9. Tony G
    February 8th, 2008 at 15:50 | #9

    The cost of money is the cost of money. If you are paying a higher interest rate you are paying more regardless of the official inflation rate, as every bodies actual inflation rate is peculiar to them.

    “the worst housing affordability since this thing started to get measured?”

    The worst housing affordability was after Keating introduced the capital gains tax and abolished/reintroduced negative gearing.

    The best measure for housing affordability is to divided the Australia Median House Price
    by Basic Wage per Week.

    wages House price hp/bw
    1980 7020 $53,300 7.59
    1981 7280 $61,300 8.42
    1982 7540 $61,000 8.09
    1983 7852 $66,700 8.49
    1984 8164 $73,200 8.97
    1985 8372 $81,200 9.70
    1986 8892 $88,200 9.92
    1987 9412 $100,900 10.72
    1988 10036 $143,800 14.33
    1989 11128 $142,000 12.76
    1990 11128 $135,500 12.18
    1991 11960 $144,600 12.09
    1993 12376 $149,900 12.11
    1994 12376 $154,700 12.50
    1995 12792 $159,600 12.48
    1996 13520 $172,100 12.73
    1997 18148 $191,100 10.53
    1998 18668 $203,200 10.88
    1999 19396 $228,500 11.78
    2000 20020 $243,000 12.14
    2001 20800 $282,300 13.57
    2002 21476 $319,400 14.87

    From 1980 to 1984 house prices averaged 8.3 times the basic annual wage. Keating got it up to 14 times by 1987 and it hasn’t gone under 10 since.

    source of data;

    Median House Prices (approx.): 1980-2003″ page 33.

    http://www.parliament.nsw.gov.au/prod/parlment/publications.nsf/0/c43281eba16c7f36ca2570c40003081c/$FILE/Finalaffordable.pdf

  10. Tony G
    February 8th, 2008 at 16:09 | #10

    The introduction of the GST on new housing in 2000 further compounded the distortions introduced by keating to the housing market- making it housing even more unaffordable compared to income.

  11. Tony G
    February 8th, 2008 at 16:12 | #11

    Should be;

    The best measure for housing affordability is to divided the Australia Median House Price
    by Basic Wage per ANNUM.

  12. krusty
    February 8th, 2008 at 16:40 | #12

    “That’s the funniest thing I’ve seen this week.”

    Tony G (Ali G’s younger, funnier brudder?) is recovering nicely now – e’s not dead yet! – but yeah that was the best laugh I’d had all week too, sdfc.

  13. February 8th, 2008 at 17:31 | #13

    Steve at the pub, a good part of the things you listed are structural things, and only work out as “unemployable” in that self-fulfilling sense I mentioned earlier. Specifically:-

    - lack of required skills is often a mismatch thing;

    - lack of mobility is often a mismatch thing;

    - lack of initiative works at both ends (on potential employers as well as on potential employees – you’d be amazed how much of a barrier HR departments erect, from not being themselves familiar with what is needed and having to work from checklists), so it is often a mismatch thing too;

    - lack of awareness, ditto;

    - lack of employer lateral thinking (eg, never occurred to an employer to hire [the] retarded, or [those with a] criminal record, or something) – remember, “something” includes, say, not hiring qualified scientists or linguists as teachers because they don’t have education paperwork, but being willing to take people with the paperwork to teach subjects they don’t know or even like.

    On top of all that structural mismatch, there’s a structural disincentive stopping employers hiring with a view to training people up, making the catch 22 that you can only be hired if you already have relevant experience. (It also encourages retrenchments of and/or deskilling of people you already have, even when things are looking up in the economy.)

    You should only settle for the unemployable label if you have already ruled out these other obstacles as the problem, since we know these can happen and that the faulty incentives are operating.

  14. gerard
    February 8th, 2008 at 19:19 | #14

    By those numbers 2002, the final year, had it worse than the 1988 spike, and it would be interesting to see nation-wide figures for the past five years of housing price boom.

    Australian interest rates have tracked OECD averages since the early 80s, and were especially low in the first half of this decade.

  15. sdfc
    February 8th, 2008 at 20:09 | #15

    Sorry Tony but you’ve done it again. In simple terms nominal interest rates can be broken down into the real interest rate plus expected inflation.

    If inflation rises but nominal interest rates stay the same the real interest rate is falling.

    Again keeping it simple let’s assume you borrow $100 today at 6% for repayment in one years time, principal and interest. Inflation is running at 3%.

    In one year’s time you are paying $106 but the effects of inflation have eroded the purchasing power of that $106. That is it can only purchase the equivalent of $102.91 worth of the goods it could have purchased today.

    That is approximately 3% of the real value of your repayment has been eaten up by inflation leaving you to repay 2.9% in real interest.

    This is why inflation is good for debtors but not so good for creditors.

  16. Ernestine Gross
    February 8th, 2008 at 21:52 | #16

    Yes, sdfc, your real interest rate explanation conforms to any text containing something on Fisher (around 1900) and, later, Mundell (1960s). However, Tony G might wish to know how your notion of inflation relates to the time series introduced by him. It surely isn’t obvious.

    Further, sdfc, would you agree that the notion of ‘real rate of interest’ is not of interest to anybody except those people who make a living exclusively from the ownership of financial securities (financial capital). Furthermore, not everybody can be in this position because if everybody would be in this position then ‘nobody’ would grow food and produce other things useful for the material welfare of humans (central to the subject of Economics, as far as I know).

    (My comment does not imply that I agree with Tony G. per se.)

  17. SJ
    February 8th, 2008 at 23:41 | #17

    Ernestine Says:

    SJ, Your conclusion depends on a partial quote. Setting this aside, would you kindly provide exact conditions under which managment of anything by KPIs is not a problem?

    We’re getting into silly territory again. There may be some alternative to “management by KPIs” that I’m completely unaware of, or perhaps your interpretation of the term differs radically from mine.

    Here’s my interpretation of the term:

    a) a goal for an entity, e.g. a country, a company, is chosen somehow. The goal may be to become profitable, or to reduce income inequality, or to take over the entire world, or to reduce the incidence of malaria, or even to “make the world a happier place”.

    b) identify something that measures the goal. For a goal like “reduce the incidence of malaria”, the measure is obvious, as it is for profitability. For other things, it might be harder.

    c) try something that you think may help achieve the goal

    d) measure your performance. Did you reduce the incidence of malaria?

    That’s the essence of management by KPIs, and it’s just an application of the scientific method.

    You can get into all sorts of trouble in step (a), the choice of goal, and in the rest of the steps, too.

    As an extreme example, say you’ve decided that the goal is to reduce incidence of malaria, and you’ve discovered that the administration of lethal doses or arsenic reduce the incidence of malaria. To zero, in fact. This creates another problem, i.e. that more people are dying from the cure than the disease. That may cause you to modify your goal to something like “reduce mortality caused by malaria” or similar.

    In summary, there are no situations where management by KPIs is not a problem, or at least problematic.

    It’s like the Churchill thing: “Democracy is the worst form of government, except all the others that have been tried.”

  18. SJ
    February 8th, 2008 at 23:50 | #18

    …lethal doses of arsenic…

  19. Tony G
    February 9th, 2008 at 00:44 | #19

    “Democracy is the 2nd worst form of government”

    sdfc

    I can appreciate the concept of real interest rates and nominal interest rates, but I don’t see how they reflect reality.

    The problem with varying the price of money with interest rates is that the rate is calculated using a weighted average of many prices. Some of those prices will be applicable to the individual, but it is most likely to be hardly any of those prices as to be many of them.

    To expand on this;

    Let assume hypothetically that the borrower and lender squatted in the country on self sufficient farms. They did not need or transact any other monies.

    At the beginning of year 1, $100 is lent @ 5%pa. Inflation is stated at 5% according to the cpi measure.

    The debtor used the $100 to buy a cow which he kept for one year and then sold for $150 as the price of cows had risen.

    The creditor deferred purchasing a pig for $100 at the beginning of the year, but at years end its price had dropped and he purchased it for $50.

    At the beginning of year 2, $100 is lent @ 10%pa. Inflation is stated at 10% according to the cpi measure.

    The guy with the pig borrowed $ 100 dollars from the guy with the cow. He bought a goat for $100 at the beginning of the year and sold it $150 at the end of the year.

    The Guy with the cow deferred purchasing a sheep for $100 at the beginning of the year, but at years end its price had dropped and he purchased it for $50.

    Like most people the debtor and creditor had different rates of inflation to the cpi.

    In both cases the interest rates and the cpi are the same, but the guy with the pig is $5 worse off; Go figure, the guy setting the cpi basket went to both monetarist and Keynesian schools.

    Is this why economics is dismal?

  20. sdfc
    February 9th, 2008 at 01:01 | #20

    I’m not sure what you’re on about Ernestine. I was referring to Tony’s assertion that inflation does not matter . Do you believe the real interest rate doesn’t matter?

    Tony’s time series needs to include interest costs which in turn incorporate expected inflation.

    Is this a neutrality of money thing. That’s nice in theory but becomes more bollocks the higher inflation goes.

    As for the real interest rates not being of any interest to anyone except for owners of financial capital, don’t forget interest rates are largely set in the capital markets. Of course the cash rate forms the benchmark, but let’s not go there now.

    Getting to those who have no interest in the real rate of interest and I am assuming you are not disputing the inflation component in nominal interest rates. Let’s get back to the example I used earlier, only let’s up expected inflation to 4%. If the nominal rate remains at 6% then return to the lender decllines to 1.9%. Now lets say the demand for credit enables the lender to raise it lending rate to restore the real rate of return. The nominal rate rises to 7.1%.

    Just because not everybody concerns themselves with the real rate of interest does not mean it does not concern everybody.

    What is your point?

  21. Peter Evans
    February 9th, 2008 at 13:22 | #21

    Tony G, what is your obsession with the idea the the government sets (or effectively sets) interest rates? Are you mad? Have you been paying attention at all to the way the world’s economy is structured and how that’s changed over the past 25 years? You sound completely detached and clueless.
    It just looks like you’ve fallen for the old politician’s con of believeing them when they take credit for anything good that happens. (FYI, interest rates were far higher in the early 80s (>21%), with the exception of mortgage rates, which were capped by law at 13.5%, which meant a mortgagee needed to stump up about half the load value to even get in the bank manager’s door.)

  22. sdfc
    February 9th, 2008 at 20:45 | #22

    I’m not sure what you’re trying to say there Tony. It seems to be an example of asset flipping when the real rate of interest is effectively zero. The differences you describe are in effect timing issues.

    The cow guy borrows at only 5% and the 5% depreciation on the $150 dollars he receives in time 1 delivers a real value in time zero (beginning year 1) dollars of $142.86.

    The pig guy borrows at 10% in time 1 and at time 2 incurrs a 10% depreciation on his eventual receipt of $150 for his goat in time 2 a real value in time one dollars of $136.36.

    Similarly the pig guy pays $50 for a pig he could have bought for $100 in time zero. The real cost of this pig in time zero dollars was $47.62.

    The cow guy buys a sheep at $50 which with 10% inflation means his real cost in time 1 dollars was $45.45.

    Yes the cow guy is better off but so what?

    I’m sure Ernestine will inform me if my sums are out but I don’t see how it would make any material difference to the situation you describe.

    I have no doubt that everybody to some extent or
    another experiences differing rates of inflation, unfortunately there is no way of getting around this.

    Lenders are always going to require an inflation premium on their lending rates to protect their real return.
    It is this real return which is the price of money, the inflation premium just accounts for expected depreciation in purchasing power.

    Why is this important?

    The expected inflation rate is just an estimate. Under estimate and the real rate ends up being lower than expected, over estimate and the real interest rate ends up being higher.

    In times of high inflation, when the rate of inflation is usually volatile, the premium is higher to account for the greater uncertainty in future interest rates as well as inflation expectations.

    If inflation is thought to be credibly under control then the risk premium is reduced lowering interest rates, particularly for debt of longer maturities.

    We have seen this occur over the past decade or so as the credibility of the RBA in keeping inflation in check has grown, risk premiums have fallen.

    Is the CPI a perfect measure of inflation? It’s not even close in my opinion, but that is another story and has no bearing on whether inflation premiums are important.

    They exist, are important and can’t be ignored.

  23. Alison A
    February 10th, 2008 at 19:32 | #23

    Nice to read comments about unemployment. I must remember how “low” unemployment is when I compete with ONE THOUSAND, SEVEN HUNDRED OTHERS for a clerical position. Yes, I must tell myself, over and over, when I find there are SIX HUNDRED AND FIFTY APPLICANTS, that there is hardly any unemployment. Yes, yes, I will keep on, keep on reminding myself when I stand with TWO HUNDRED OTHERS for a dish pig job, that there is no unemployment.

  24. Tony G
    February 11th, 2008 at 02:05 | #24

    Peter Evans said;

    “Are you mad?”
    Yes, but so are a lot of economic theories.

    “what is your obsession with the idea the the government sets (or effectively sets) interest rates?”

    Who sets them then?
    If its the reserve bank, aren’t they the government?

    http://www.rba.gov.au/AboutTheRBA/governance_and_accountability_of_the_rba.html#consultation_with_government

    People can call me what they like “(Ali G’s younger, funnier brudder, ‘detached and clueless’ etc?)” .

    Regardless of different economic views, the fact remains interest rates dropped by 0.5% 4 months after Howard gained office and soon after they went under 7% and stayed under 7% for the rest of Howard’s term….If you are blaming him for the rise to 7% that occurred on labours watch, you should give Howard credit for keeping them well under 7% for all of his watch. (nb the blame for the recent unofficial rises clearly sit with Rudd. He has failed to stand up to the banks.Their funding costs are going down)

    sdfc

    The pig guy and the cow guy have totally different inflation rates applicable only to themselves and that is paralleled to everybody in the real world.

    The RBA use the cpi to determine the rent of money. It is based on a basket of goods. The point I was trying to convey is that as a measure of inflation, the cpi is not a relevant measure to most peoples inflation, This should be highlighted by the pig and cow guy. They have inflation and deflation in respective years.

    As such you say “The cow guy buys a sheep at $50 which with 10% inflation means his real cost in time 1 dollars was $45.45.”

    Inflation is STATED at 10% according to a theoretical (not proven) rate worked out by a 3rd party (RBA). IMHO it is not a relevant rate to the cow and the pig guy.

    They could theoretically go on infinitum trading with each other(loosing or gaining $50 or whatever the current price on trading).

    If this were their normal modus operandi the cow guys real cost in time 1 dollars could be $50 or any figure not just $45.45. IMHO there is no nexus between him and cpi; he has his own inflation rate peculiar to him.

    Money is just a medium to convey assets and it can be an asset it self. Its price, like the price of the assets it conveys can and does go up and down.

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