Philosophical Conversations Public Opinion Junk for code
parliament house.gif
Think Tanks
Oz Blogs
Economic Blogs
Foreign Policy Blogs
International Blogs
Media Blogs
South Australian Weblogs
Economic Resources
Environment Links
Political Resources
South Australian Links
"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

the politics of interest rates « Previous | |Next »
October 7, 2009

A divided Coalition is desperate to cut through on economic management as a way to overcome the political crisis it is going through. Is anyone listening to, and decoding, their noise?


They are trying to argue that the Reserve Bank's interest rate rise yesterday has been caused by the Rudd Government's stimulus package, and that it will impact heavily on small business and households with mortgages It's a scare campaign as it has little to back it. Few argue that neither the stimulus package or the government's debt is putting pressure on interest rates. Certainly not the Reserve Bank.

Therein lies the problem. The low interest rates were due to an emergency---a response to the global financial crisis. That crisis is easing so the rates start rising.

According to the Reserve Bank:

In late 2008 and early 2009, the cash rate was lowered quickly, to a very low level, in expectation of very weak economic conditions and a recognition that considerable downside risks existed. That basis for such a low interest rate setting has now passed, however. With growth likely to be close to trend over the year ahead, inflation close to target and the risk of serious economic contraction in Australia now having passed, the Board's view is that it is now prudent to begin gradually lessening the stimulus provided by monetary policy. This will work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

The small rate rise represents minimal pain for people, given the historically low rates.

Sinclair Davidson argues in The Australian that:

..we have paid for stimulus packages that contain a lot of spending but little actual stimulus. The spending is very low quality. This is especially problematic as the government will be borrowing to finance this low-quality spend. Projected government debt is not high by international standards but will be high by Australian standards.Public debt has unfortunate consequences. It crowds out private investment and distorts the economy away from investment in favour of consumption. The deadweight costs of public finance combined with the economic inefficiencies of government spending combine to make it very unlikely that the stimulus packages would add any value to the Australian economy.

Unfortunately, the polls indicate that the majority of Australians think the government is handling the economy very well.

What will play favourably for the Liberals is that the Rudd Government will enter an election year in 2010 with rising interest rates. However that is better than an emerging asset bubble? Moreover, the interest rate rises by the Reserve Bank over the next year will be done in very small steps. So the Coalition has a problem with its fear campaign.

| Posted by Gary Sauer-Thompson at 9:17 AM | | Comments (16)


I think people are generally more concerned about the rising food prices. $250 plus per trolley load factors greater in the household budget.

I agree. Food prices just keep on going up.

The Liberal Party has got problems. Changing leaders yet again isn't going to help.

Michelle Grattan reckons Turnbull's grip on leadership is slipping. Apparently, changing leaders is what the Liberals mean by renewal. The press gallery can now have a feeding frenzy as it stirs the leadership challenge pot into the political story. It's what hey love best.

The trouble with changing the leadership now is that Hockey is most likely the last good option. He has time to do well and time to make mistakes which could stuff him. It is a bit like playing Euchre and having one good card and a few average. If you play it right you can win as long as the opposition doesn't have all good cards. If the election was 3 months away I would say change now and just go with it but in these circumstances Rudd has no need to have an election soon.

Economists' analyses of the need for and consequences of the stimulus packages were (as usual in this dysfunctional 'science') all over the shop; therefore the only sensible thing to do is to judge them on the outcomes. And the outcome, so far at any rate, is much more benign than virtually anybody predicted. Therefore Davidson is pushing his ideological argument up hill with the proverbial pointed stick. As far as most people are concerned, the government's managed a crisis brilliantly.

I notice Davidson studiously avoids joining the criticism of the rise in interest rates. Even he must draw the line at pretending the current very low levels are sustainable over the long term.

Economists now have the same problem everyone else does, thanks to the notion of 'balance' which requires we hear every opinion available on every topic. It seems to erode everyone's authority on everything. Ultimately, we have to rely on our lived experience and as Les and Nan point out, it doesn't feel like much of a recovery so far.

The pain is also unevenly distributed. Economists talk about the national economy, ignoring the political fact that the economy is lived by individuals. You know, all those working families out there? Economists talk as if the economy is the concrete and people are abstract.

I saw a television grab of Turnbull, Coonan and Hockey announcing some policy or other on debt reduction. The body language of the two men was interesting: forced jollity and a subdued, tense Turnbull. His face was drained. He looked depressed. The Liberals now have an alternative leader who is available if wanted.

I agree with Downer--that the Liberals would be foolish to lurch from one leader to the next. They would look a joke. The leadership tensions arise from the conflicts over an emissions trading scheme. They are destroying themselves over the issue and many trying to hasten Turnbull's political death to gain what? Hockey has the same policy on the ETS as Turnbull.

Despite this the simmering discontent amongst the Liberal MPs has gone public. They fear electoral disaster. The problem is not the leadership. They do not control the policy agenda since they are in opposition. They are being played with by Rudd+ Co over an emissions trading scheme and they have become a disorganized rabble under pressure.

you are right. The economy is a mathematical abstraction in the form of a model. Individuals within the model are mechanical units of preferences (desires).The model is what is concrete not lived reality.

Individual pain is not important because economists are utilitarians--the greatest happiness of the number is what is good. that outweighs the pain of the minority.

The greatest happiness of the number is economic growth as that delivers prosperity. It is okay that some suffer pain to achieve this.

You can see the argument being constructed to support the small government, privatisation and deregulation position. Thus deficits are a vice not a virtue.

That involves trying to argue that government intervention in the form of a stimulus has not worked. Therefore government is the problem. It is not a very persuasive argument given that the economic data is showing the opposite.

The implication is that all Australia's problems are the result of big government and cutting government back will automatically make everything better. Slash and burn the budget in an immediate attempt to get the deficit down is the prescription.

The inference is that the financial crisis has all been the fault of government. That means downplaying "market" failure and the role of the banks.

the conservatives ---ie., the anti ETS crowd lead by the WA Liberals --have rocks in their head. Or they are delusional.

Trying to unseat Turnbull doesn't change anything for an enfeebled Liberal Party, especially when Hockey does not want the job now. So what do they gain by trying to unseat Turnbull?

It would also be electoral suicide for the Liberal Party to fight the next election opposing an emissions trading scheme and supporting the big polluters/coal lobby "right" to pollute. They will probably try and argue that more freedom to pollute is "protecting workers" and keeping jobs onshore. That is the line that Julie Bishop is running these days. She is spinning on behalf of the fossil fuels lobby.

Turnbull, Hockey and Connan unveiled a plan to "pay off Labor's debt". This involved: reducing government waste, increasing economic growth and productivity, reducing government spending to less than 25 per cent of gross domestic product, and ensuring independent and accurate scrutiny of Australia's public finances.

Is anybody listening to the rhetoric (there were no detail about how they would reduce government waste and spending to less than 25 per cent of gross domestic product)? They cannot go to the next election promising huge cuts in spending programs or tax increases, so presumably they would achieve the 25 per cent of gross domestic product growing the economy. How do you do that? Why by digging up and selling more coal to India and China and fueling the economy with electricity generated by cheap brown coal! The inference is that baseload renewable energy power generators are a "green pipe dream" and that carbon capture and storage will remove the "problem" of coal.

What we have on show is a classic fear campaign about nasty Labor strangling us with big national debt:

the billions of dollars, hundreds of billions of dollars that the Labor Party is throwing on to the shoulders of our children and our grandchildren, and taxpayers yet unborn will be paying higher taxes to pay off Labor's debt.

We are doomed to live in poverty under Labor. Vote Coalition! Vote prosperity!

The Liberal Party is unable to unify around a sensible policy position on what to do about global warming even though it is a clear electoral winner for Labor.

Amazingly, the Right see the issue in the old terms of big government, reduced economic freedoms and the imposition new taxes and regulations by green zealots and fanatics.

It is well known that Labor's proposed ETS gives big subsidies to the big polluters, paid for by small businesses and consumers. So it is flawed, deeply so.

However, the Coalition fix the flawed scheme by arguing for amendments that increase the subsidies to electricity generators and the emissions-intensive trade exposed industries. They will do so in the name of needing to save jobs, but what they are really mean is the need to protect profits from the exploitation of natural resources. Underpinning the rhetoric is the resort to scare and fear tactics.

The Coalition's fall back position is to oppose government intervention and anything that prevents lower taxes.Ross Gitten points out:

To this end, the Opposition has offered one criticism after another of the fiscal stimulus, not all of them logically consistent. It wasn't necessary, it was too big, it spent on the wrong things, the spending was wasteful and it wouldn't work because the cash would be saved rather than spent.

And so and so on. Gittens points out that there are:
two assumptions built into the Opposition's argument-of-convenience: that the lower interest rates are, the better (what do you think causes asset-price bubbles?) and that all government spending - even on infrastructure - is wasteful.

The current argument of convenience is to try to transfer the blame for the interest rate rise from the Reserve to the Rudd Government.

Sinclair Davidson argued above that:

Public debt has unfortunate consequences. It crowds out private investment and distorts the economy away from investment in favour of consumption.

"crowds out private investment"? How can that happen in a world of deregulated and highly integrated capital markets? The Government's borrowing in that global market is a drop in the ocean.