Wednesday, January 28, 2009

Economic policy and the Opposition are strange bedfellows

Today in Crikey their Canberra correspondent Bernard Keane wrote an open letter to Malcolm Turnbull and Julie Bishop.

It's about the most sensible thing I've read this year (ok not a big call, but it'll take some beating). It certainly is the best opinion column I've read written by a member of the Canberra Press Gallery for some time. I recommend you giving it a read, but here are a few excerpts: case you haven't noticed, just about every economist on the planet is calling for massive government spending to replace at least a small part of the huge gap in private demand left by the financial crisis. This spending will, at least for some Australians, mean the difference between having a job and not having a job. If we learned anything from the last recession it's that unemployment is a bastard of a problem to fix and pernicious in its effect on our social fabric.
But you seem determined to maintain the fiscal hairy-chestedness. As part of that, you like to maintain that when you were in Government, you were the height of fiscal responsibility.
That's complete bollocks and I'm sick of hearing it. The first two Howard Budgets were excellent.

But after that, you dropped the ball. Subsequent budgets got slacker and slacker, especially once the mining boom kicked in. After 2001, your budgets got downright bad as you shelled out money to buy votes. After 2004, you were shovelling money out the door so fast slow-moving people were getting buried under it.
You also completely abandoned the small government agenda. This was a profound betrayal, one that has left Australian with a legacy of middle class welfare and a handout mentality that will take years to undo -- if any politician has the guts to try to undo it.

This last point is especially true - consider the kerfuffle when Rudd decided to bring in a means test for the baby bonus, or the solar panels. Pretty much the default position at the moment accroding to the electorate is that for any scheme, incentives mean welfare for the middle class. Giving rebates for solar panels is all well and good, but there are better ways to make solar power economically attractive for households - a gross feed in tariff for one.

But as I say, give Keane's article a read; I pretty much could only add "ditto" to everything he writes.
Another good piece of opinion writing came via the always sensible Peter Martin. He links an article by 2008 Nobel Prize winner in Economics, Paul Krugman, which again provides some excellent reading, this time on the value of the Obama fiscal stimulus package (which has a bit of commonality with what Rudd and Co are trying to do).

A few excerpts:
...write off anyone who asserts that it’s always better to cut taxes than to increase government spending because taxpayers, not bureaucrats, are the best judges of how to spend their money.

Here’s how to think about this argument: it implies that we should shut down the air traffic control system. After all, that system is paid for with fees on air tickets — and surely it would be better to let the flying public keep its money rather than hand it over to government bureaucrats. If that would mean lots of midair collisions, hey, stuff happens.

The point is that nobody really believes that a dollar of tax cuts is always better than a dollar of public spending. Meanwhile, it’s clear that when it comes to economic stimulus, public spending provides much more bang for the buck than tax cuts — and therefore costs less per job created — because a large fraction of any tax cut will simply be saved.

This is some interesting advice, especially as it seems quite likely Rudd and Swan will bring in tax cuts earlier than they were planned. Personally I think it far better to concentrate on infrastructure projects, and bring in the tax cuts in the budget as planned - if people are saving their bonuses, they'll likely do the same with tax cuts, so let's let the government do some spending, and just make sure it's bloody good spending (I'm sure there are some roads and railways around the traps that could use a touch up, even if my long wished for Very Fast Train from Melbourne to Sydney won't happen).

Krugman goes on:
It’s true that the normal response to recessions is interest-rate cuts from the Fed, not government spending. And that might be the best option right now, if it were available. But it isn’t, because we’re in a situation not seen since the 1930s: the interest rates the Fed controls are already effectively at zero.

Now obviously in Australia, interest rates have a way to go down yet - and the odds at the moment are that there is a 96% chance the Reserve Bank will cuts rates by a full one percent when they meet on February 4th. That would make the cash rate 3.25%. Last time it was that low? Well have you heard of Robert Menzies? (so much for "interest rates will always be lower under a Liberal Government" I guess...).

So given that, I again think the Government should focus on infrastructure and let the interest rates do some work - admittedly low interest rates take longer to kick start the economy than high interest rates do to strangle it.

That said, with inflation now going down fast at least the Government doesn't have to worry about a fiscal boost causing prices to rise, but that doesn't mean they need to throw money around blindly.

Here's a different bit of opinion from Joe Hockey on the Government providing cover for commercial property lending:

"It should not be the Government that starts lending money to the next Christopher Skase or Alan Bond as is being suggested here,'' Mr Hockey told Fairfax Radio.
"Mark my words: this is going to be Tricontinental, Western Australia Inc, State Bank of Victoria all over again.''

This is known as the "let's see how much hyperbole I can fit into one statement" line of attack.

Hockey should calm down and stop acting like a clown. He may be right, but his attempts to criticise the Government by going way over the top is a bad way for the Opposition Finance spokesperson to act. It shows he's learned nothing from his constant over-working of "union bosses" in 2007.

Show some reason Joe, show some caution, and maybe you'll get some credibility. Heck next he'll be comparing the Government's fiscal stimulus to the Nazi's economic policies... oh wait, no that was John Montgomery in today's The Australian:

the New Deal was not a success: the recession was deep and lasted 10 years. It was the tooling up for World War II that ended the Great Depression, and the return of growth in the private sector. The New Deal actually made things worse because it delayed the recovery in the private sector. Similar policies were followed under national socialism in Germany: the building of autobahns, canals, dams, railways, airports, organic farming around the cities. Money was also pumped into the car industry.

I didn't think Godwin's Law could apply to economics, but apparently it does.
Look, anyone with any basic level of IQ knows the Rudd Government can't be blamed for the financial crisis, or for China's economy stalling (though some conservative commentators would love to blame it all on Gillard's IR policy!), but they do deserve to be judged on how they handle the crisis. Australia unfortunately is a bit of a cork on the ocean; the Government really can't steer where we go - the international economic tide has us in its grip; but the Government can at least make sure the cork doesn't disintegrate. And my belief is that government spending will keep the cork together better than lots of tax cuts.

However, I say once again - politics is a tennis match. Just as it doesn't matter if you make a stack of unforced errors, if your opponent plays worse you'll still win the game, it doesn't matter if Rudd stuffs up the economy, if the electorate thinks Turnbull will stuff it up worse Rudd will still win the next election.

And when Turnbull keeps coming out saying such garbage as this today it's still seems pretty obvious he'd do worse:

"We've offered to sit down with Mr Rudd so many times I couldn't tell you how many," he said.
"From the moment I became Opposition Leader we've sought to have a bipartisan approach to this.
"No way, he makes these decisions, ignores the Reserve Bank, doesn't consult with the Opposition."

Poor Malcolm, no one cares what he thinks, and he wonders why. Maybe he should read Keane's letter to find out.

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