Labor, hiding its light under a bushel

A bit belatedly, a piece I posted on Crikey a couple of days ago, bemoaning Wayne Swan’s failure to tell the story of the government’s success in managing the GFC. His obsessive pursuit of a return to surplus with a fixed target date suggests to me that he never really saw Keynesian fiscal policy as anything other than a once-off emergency measure, and that the credit for the government’s courage in 2009 must go to Ken Henry and Kevin Rudd. Regardless, the government should be winning the economic debate hands down, instead of being on the defensive.

Labor cover-up to hide successful economic management

The first thing to be said about the economic policy debate in the lead-up to the election is that we shouldn’t be having one. Economic outcomes under Labor have been good in absolute terms and spectacular when the global economic environment is taken into account. At least as regards the medium-term settings of fiscal and monetary policy, it is hard to see any reason for change.

Labor’s economic success can be traced back to the vigorous and effective response to the global financial crisis of 2008. The government undertook a highly effective fiscal stimulus, co-ordinated its fiscal policy with the monetary policy of the Reserve Bank and fixed major vulnerabilities in the system of prudential regulation, most notably the absence of a deposit guarantee.

The results speak for themselves. Almost alone in the Organisation for Economic Co-operation and Development, Australia escaped recession, whether this is judged on the “two quarters of negative growth” rule of thumb or a more general assessment of economic performance. Inflation has remained quiescent, sitting right in the middle of the Reserve Bank’s target range. Unemployment remains near its 30-year low. Despite unfavourable demographic trends associated with the ageing of the baby boomers, the employment-population ratio is near an all-time high.

At the same time, and despite the global crisis, some of the chronic imbalances that threatened the Australian economy when Labor came to office have abated. The bubble in house prices that emerged in the early 2000s has deflated gradually, in marked contrast with the disastrous bursting of such bubbles in many other countries. Household savings rates, negative in the last years of the Howard government, have recovered strongly to levels not seen since the 1980s. The ratio of foreign debt to national income has declined, and debt has been redirected from financing consumption (including consumption of housing services) to financing investment, primarily in the mining sector.

It is, of course, possible to argue about the appropriate division of credit between this government, its predecessors, the success of monetary policy under the Reserve Bank, and the favourable external circumstances of the mining boom. But on the most important question of how we managed to avoid the effects of the GFC, there can be little doubt that it was government policy that was responsible. The close co-ordination between fiscal and monetary policy means that there is no sense in separating the credit due to the Reserve Bank from that due to the government.

It is possible that a Coalition government, faced with strong advice from Treasury in favour of fiscal stimulus, would have abandoned the focus on headline measures of budget balance that characterised the Howard-Costello era. Under the actual circumstances of the crisis, however, the opposition, then led by Malcolm Turnbull and Julie Bishop, with Joe Hockey as shadow treasurer, opposed the stimulus and proposed instead to pursue permanent tax cuts.

In retrospect it has been claimed that demand from China, and the mining boom more generally, meant that stimulus was unnecessary. This claim is nonsense for at least three reasons. First, minerals prices fell sharply in the immediate aftermath of the crisis, making Australia more rather than less vulnerable. Second, the rapid Chinese recovery was due to the policies of fiscal stimulus very similar to those adopted in Australia. And finally, the failure of economic recovery in other countries that turned rapidly to austerity once the immediate crisis was past is a further demonstration of the validity of the Keynesian analysis.

If public debate were remotely rational then, the best course for the opposition would be to change the subject. Instead, we are in the absurd position where the LNP was until recently seen as better at economic management than Labor, and the Coalition remains equal.

Much of the blame for this fiasco must go to former treasurer Wayne Swan. Whatever the substantive merits of the policies he oversaw, Swan failed to show any conviction in defending them. The huge success of Keynesian stimulus should have resulted in a fundamental reconsideration of the “fiscal conservatism” inherited from former PM John Howard and former treasurer Peter Costello. Instead of pursuing a target of balance or small surplus every year, Keynesian theory prescribes a counter-cyclical policy of deficits in recession and surpluses in booms.

While occasionally paying lip service to this idea, Swan’s public rhetoric mostly treated the GFC as an embarrassing departure from reality and the return to budget surplus as a holy grail. His oft-repeated promise to return the budget to surplus by 2012-13 was, of course, a disastrous failure in practice. Even worse though was the rhetorical gift to the spurious economic analysis propounded by Opposition Leader Tony Abbott, in which budget surplus is the sole goal of fiscal policy.

Similar points may be made with respect to prudential regulation. While the Australian financial system survived the crisis very well and with relatively limited government intervention, the crisis exposed fundamental flaws in the reasoning underlying the light-handed regulation introduced in the 1980s, and extended by the Wallis Review in 1996. It was obvious that a new review was needed?—?even businessman Stan Wallis himself said as much last year. But Swan resolutely refused to consider such a measure, leaving the opposition an obvious opportunity to win votes, which it has taken by proposing its own inquiry. Even such a simple step as charging banks for the guarantee introduced in 2008 and made permanent in 2011 was too much for Swan.

Since returning to office, Prime Minister Kevin Rudd has gone some distance towards remedying Swan’s total inability to communicate an economic message. It remains to be seen, however, whether he will repair the damage in time

96 thoughts on “Labor, hiding its light under a bushel

  1. Another area where Labor has failed to promote its successes is with regards to AGW^fn1, and their policies for putting in place a price signal on greenhouse gas emissions. Coupled with the various subsidies for household PV systems, this has encouraged real innovation around renewable energy. These policies boost the demand for these systems, in turn driving down costs of manufacturing them, a positively reinforcing cycle.

    What is less well considered is the positive boost this has also had upon research and development into effective local reuse of energy at the source of production, particularly for small scale systems. As an example of thinking about small scale systems, PV systems naturally heat up during daylight hours, and instead of letting this heat dissipate back into the environment, it is possible to reuse it as part of a house’s heating and cooling system. As greenhouse gas emissions become more expensive, I believe we’ll see a lot more work in this energy reuse space for localised (eg household) systems. Large scale systems have plenty of work going on, but action at the household level is vital too.

    So why isn’t the ALP promoting the positive effects of GHG emission pricing in terms of concrete examples that the general public can appreciate? Instead, we get these blasé statements by Labor about they put carbon pricing in place, as if that is the end result, the thing the public care about. It is too abstract for many people to appreciate, and abstraction is the friend of the opposition’s attack dogs—they just hack into the fear that carbon pricing is a tax, as if there are no compensating benefits.

  2. fn^1: AWG = Anthropogenic Global Warming. I shudder every time I hear Climate Change used instead of AWG, for the simple reason that it is so easy for people to go “Hang on, climate change is always happening, it is natural.” Which is how deniers muddy the water. At least with AGW, we are identifying both the human factor, and the global nature of the phenomenon, IMO.

  3. @Donald Oats

    I shudder every time I hear Climate Change used instead of AGW, for the simple reason that it is so easy for people to go “Hang on, climate change is always happening, it is natural.” {typo corrected}

    I don’t. “Global Warming” allows fools to say “where’s all the warming?” on any chilly day.

    The term “climate change” (originally ‘climatic change’ until about the late 1970s) is about 80 years old and was in regular use from the 1950s. It became the standard when the IPCC formed in 1988.

    In the end, when some fool dissembles, they need to be corrected. I was in front of some year 7s the other day and making just this point — the difference between weather and climate. I cited the example I gave above and one kiddy put his hand up and said — “hey yea — that’s what my Gramps always says“.

    Ah“, I responded, “adults sometimes like to make jokes about stuff like that. Most of us know the difference, and now you do too, so next time he says it just say ‘good one Grampsand laugh“.

    Sadly“, I continued, “every now and again you will come across people who really don’t know the difference, and that’s really sad, because it shows they weren’t paying attention at school“.

    It’s not really that hard.

  4. @Ikonoclast I was plainly wrong. Rudd needed cheat sheets to get through the debate and was out of touch on basic issues such as the new airport for sydney.

  5. of course rudd knows about the sensitive second sydney airport issue that’s why he dodged the question der. everyone’s briefed to dodge the question. does anyone here know the precise wording of the rule? no news medium to my knowledge has linked to it or quoted it at length. perhaps i missed something. i want to know if as written it can be construed to be referring to stage props and the like of power point presentations mainly or exclusively. -a.v.

  6. The wording was the following (link below):”The Leaders may have a pen and paper on the lecturn [sic] and no other documentation or props.”

    So, it seems that the notes weren’t kosher with the agreed rules. Having said that it seems to me these rules are a terrible idea? I’d kill to have the leaders debates be as fact and figure heavy as possible, as opposed to current operating procedure where being repeatedly factually incorrect (as Abbott was about the carbon price and NBN) seems to have little consequence.

  7. @Nathan

    Why on earth are you and others getting distracted by this process issue? I would like to hear your views about the substantial issues.

  8. Nathan :
    The wording was the following (link below):”The Leaders may have a pen and paper on the lecturn [sic] and no other documentation or props.”
    So, it seems that the notes weren’t kosher with the agreed rules. Having said that it seems to me these rules are a terrible idea? I’d kill to have the leaders debates be as fact and figure heavy as possible, as opposed to current operating procedure where being repeatedly factually incorrect (as Abbott was about the carbon price and NBN) seems to have little consequence.

    I have a mathematical background, so what leaped out at me was the distortion implicit in Rudd’s claim that 70% of the Pacific Solution people ended up in Australia anyway (I’m quoting that percentage from memory, but even if I’m misremembering it will do for purposes of illustration). The thing is, the proportion isn’t what counts, the numbers being settled are what counts. If Abbott’s claim that it made the boats stop coming is sound – and Rudd never, ever addressed that as far as I noticed – then even that 70% (which Abbott did challenge) would be on a much smaller base, and that is what counts. So, harping on the proportion instead is not treating the audience with due respect.

    Now, for all I know, Abbott’s factual claims may have been unsound too, but my background qualified me to spot that Rudd was bringing out the wrong thing there, just using internal evidence to spot it (I would have needed all sorts of statistical resources ready to hand to spot other kinds of error on the fly like that). And if Rudd had the advantage of briefing material, then either he or his briefers were supplying a wrong emphasis when they knew (knaves) or ought to have known (fools) better. And I don’t like being treated with that sort of contempt, of being expected to choose them whether they are knaves or fools. Oh, and Rudd’s briefing material really should have been up to the job of demonstrating that his proposed NBN really would deliver all the putative benefits (and it should also have presented costs at the same time, for completeness); as things were, his constant bending back to that topic smelled of nothing so much as counting chickens before they are hatched (or “beautiful plumage”, if you prefer).

    Please don’t get the idea that I agree with what Abbott brought out; while I did see sense in the possibilities of his road building plans etc. (because those have precedents to make comparisons, unlike the NBN), those too can’t be properly assessed without the substance of costs, benefits and roll out times, substance that wasn’t presented either. Limitations of time don’t justify withholding it, since the participants themselves agreed to the debate format with all its limits. I don’t think either party would ever reveal that much substance during an election these days, not only because of the risk of an error being found or made out to be found but also because of the risk of a good policy being poached and run with (from what little I have seen in the Liberal policy document, that document too boxes close like that). That’s not a healthy situation from the point of view of ever having an informed electorate.

  9. The ALP has decided that it’s a good idea to run a dishonest “a vote for Wilkie is a vote for Abbott” in Wilkie’s Tasmanian seat of Denison.

    Hmmm, ‘Hey! Let’s remind everyone that we did a very simple deal with Wilkie to win Government in 2007 (we WILL introduce maximum bet limits on pokies) – and then we screwed him. And now he is just a tiny bit peeved.’

    Pure “Faceless” genius, no less than we have come to expect from the ALP.

    Obviously the ALP is deliberately out to lose this election. They could easily win it by abandoning their right wing policies to Abbott and pursuing some genuinely “Left” type policies, but obviously they are too wedded to the neo-con agenda (even though that will see them defeated at the election).

    In my opinion they don’t care. Ensuring a neo-con win is what they really want.

  10. @Megan

    Obviously the ALP is deliberately out to lose this election. They could easily win it by abandoning their right wing policies to Abbott and pursuing some genuinely “Left” type policies

    Yeah right, stupidity is the new black. Boy am I glad the denizens of the spirit world aren’t running the ALP campaign. You obviously indulge yourself in a comfortable world where it doesn’t matter who wins and who loses the election – “JQ’s echo chamber gives me what I need.” I’ll bet you never engage in political conversation with the disadvantaged and the proletariat – they would definitely tell you that elections matter.

  11. @kevin1

    ALP textbook fallback position of resorting to name calling rather makes my point.

    Although you chose not to address my point, presumably you think attacking Wilkie is a good idea. “Whatever it takes” and so on. But if you re-read my comment calmly you’ll see that what I’m saying is ALP will lose by following that path.

  12. The Wilkie ad is disgraceful and the PR staffer (hollowman) should be sacked, irrespective of party politics. Similarly, those who ascribe their words to other people and claim it was unintentional should be sacked and sent back to highschool. These are substantial issues.

  13. @kevin1
    I was responding to alfred venison’s request for a link to the exact rules. I agree that the whole thing is very much a side point.

    As to the substance of the debate, for my money there were two main points where Abbott was way off base and Rudd didn’t capitalise enough:
    1) Abbot’s NBN alternative. The 25Mbps figure is highly debateable, still significantly less than the NBN will deliver, and there remain serious question marks over upload speeds.
    2) The ETS. At one point Abbott said “there is no way that other countries are embracing the kind of carbon tax and the kind of Emissions Trading Scheme that Australia has..” This is an outrageous lie, especially given that under Kevin’s most recent changes we will literally be in *exactly* the same carbon market as the EU.

  14. @Ernestine Gross

    I agree. Perhaps there needs to an Ethical Behaviours course. Seems like all major political parties have had an ethical by-pass. It’s a sad commentary on the type of people they are.

  15. thanks for the link, Nathan, and sorry i got you into trouble, i appreciate being able to have a look at the rules that someone was said to have broken – “any other documentation” sounds like treasury papers, not hand notes, but that’s peripheral and over. personally i think the greens should be in the debates and both abbott and rudd’s lies about climate could be challenged there and then when uttered on live t.v. but that seems never to be countenanced the excuse given usually being “two party system” blah blah. yeah i say two party system with a proportional voting system and where one “party” is a perpetual coalition and no other party that makes it in from time to time gets a peep in the official state debate. in canada with a first past the post voting system every party with a seat in the lower house gets a place at the debate, even the greens with one seat and the quebec party that runs in only one province. the selection criterion shouldn’t be whether or not they have a chance to form government but whether or not they’re in the lower house. i’d like to see the bush socialists account for their policies and positions themselves and in their own damn words and stop riding the coattails of their semi-sophisticated liberal country cousins. and get the greens in there too, that’d be debate! -a.v.

  16. Great to hear that the Libs are preferencing the watermelons last.

    This will knock the Greens out of the House unless they get 40%+ of the primary vote. See Antony green’s blog post today.

    The long-term implications for the senate are more important. Labour will win any close competition for the 6th seante seat with the greens.

    This will limit green representation in NSW and Qld at a minimum and make things tough for them in SA. The greens get a quota in Tasmania and a near one in Victoria. .

    In WA, the tussle is between the greens and the WA Nats. In 2016 onwards, the tussle for the greens may be with a third labour senator.

    If the national vote for the greens goes down by more than a few percentage points, there long term future in the senate in the main Australia is in long-term doubt.

  17. The whole premise of prof Q’s assertion on Swannys economic management is wrong. Even if you allow that the gummint handled 2008-9 well (and I’m not so sure -see John stone’s article in The Murdoch), its been 4 years of incompetence since- no consistency and pandering to union interests (NBN just one example) Methinks the Euromoney gong is a poisoned chalice.

  18. The pink batts stimulus is overrated because in modern Australian politics it is standard to promise to fund new spending proposals and return to surplus soon.

    That makes the Ricardian theory of deficits the most optimistic theory of deficit spending. Throw in some animal spirits, and it is safe to assume that deficits will lead to more than 1 to 1 tax rises in the future. Why is ignorance about future taxes always assumed to under-estimate the future taxes?

    It is well know that the fiscal burden of an ageing society will lead to tighter future budgets and higher taxes too. Another reason why the Ricardian theory of fiscal deficits the most optimistic theory of deficit spending

    Eugene Fama noted that government bailouts and stimulus plans seem attractive when there are idle resources (unemployment) – but
    1. Bailouts and stimulus plans must be financed.
    2. If the financing takes the form of additional government debt, the added debt displaces other uses of the funds.
    3. Thus, stimulus plans only enhance incomes when they move resources from less productive to more productive uses.

    In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.

  19. Rudd is now more unpopular than when he was dumped last time. The more they see, the less voters like what thet see.

    His problem was the same when he was dumped. Does not know how to fight his way out of a hole.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s