Rudd continues to struggle with economics

Recent musings by Foreign Minister Kevin Rudd provide a timely reminder that economic policy remains his Achilles heel.

Speaking in New York last month Rudd depicted the global economy as a 'wild beast,' and that the task of policymakers is to 'tame the beast to the greatest extent we can.'

What Rudd was alluding to is the recent recurrence of downward volatility in share markets around the advanced economies, which in fact has represented a general pattern for equities so far in 2011.

The United States S&P 500 share index closed at about 1,272 points on the first day of trading for this year. At the time of writing it has trended down to close at 1,195 points.

It is notable that the index plunged 20 per cent between 22 July, when it closed at about 1,345 points, and 5 August at about 1,119 points. During that period, of course, the US debt ceiling crisis unfolded and Standard and Poor's downgraded the credit ratings for US government bonds.

The value of the Dow Jones Industrial Average has also fallen, albeit slightly, over the course of the year so far.

The equity value of companies on the famed index couldn't escape the wrath of adverse financial market sentiment against the US debt ceiling deal, as the overall index fell by ten per cent between late July and early August.

Across the Atlantic similarly bearish sentiments have taken hold of European share markets.

The British FTSE 100 index, another important barometer of global financial market sentiment, has fallen from about 6014 points on the first day of trading for 2011 to 5399 points at the time of writing.

This represents a decline in average share value on this market to the tune of ten per cent, with traders also reacting negatively to the US debt issue and the rolling European debt crisis.

Similar trends can be readily seen with regard to the DAX share market of Germany, the effective bankroller of Greece and other heavily indebted countries on the European Union periphery.

It shouldn't take aggrieved Mum and Dad investors and holders of superannuation accounts tied up in shares to know that Australian share markets have followed the global downward trend, with the S&P/ASX 200 index falling by 11 per cent over the year to date.

Among the assortment of financial and economic indicators available, movements in share market indexes provide some of the more important insights into the vibrancy of national and global economies that one can find.

While economists might quibble the extent to which changes in share market values efficiently reflect financial and other relevant information, they do nonetheless provide invaluable insights about perceptions regarding changing economic circumstances.

If market conditions, or government policies which alter those conditions, are perceived to erode the profitability of publicly listed companies seeking equity capital on the share market then the value of shares will, other things being equal, tend to decline.

To some degree, domestic policies can affect share market sentiment which in turn influences company share values.

When the federal government announced the details of its carbon tax in July the S&P/ASX 200 index fell by about two per cent on the previous day, with significant falls for manufacturing and mining stocks in particular.

There is also international empirical evidence to suggest that share markets returns are lower and volatility is higher when legislatures are in session, which is not altogether surprising given the role of taxation and regulatory policies on the economic climate for private sector activity.

But it is important to also recognise that international policies can also influence share market performance.

The continued reluctance of American and European authorities to repay their burgeoning public debts through credible fiscal consolidation programs, centred upon spending cuts, is being perceived by share market traders as being an important inhibiting factor for future economic growth.

And that, in turn, translates into weaker profitability for companies listed on share markets, many of whom have an international presence, than would otherwise be the case.

It is therefore a bit rich for Kevin Rudd to blame participants in global share markets for responding the way in which they have been doing in recent times.

Indeed, the politicians and their fiscally profligate conduct, rather than the markets as Rudd claims, which need to be brought to heel.

This would entail nothing less than a return to the basic principles of sound public finance, including balanced budgets underpinned by low spending and healthy fiscal balance sheets, rather than kicking debt cans up a hill through endless bailout packages and other political compromises.

The sound bites by Rudd do more than demonstrate his inclination to leapfrog other senior government ministers such as Treasurer Wayne Swan, and Prime Minister Julia Gillard for that matter, to hog the limelight.

It shows that Kevin Rudd hasn't learned the basic economic lesson that economic growth, be it at a national or global level, can only be led from the front by a private sector unencumbered by the unsustainable debts, uncompetitive tax regimes and onerous regulations of big governments.

However Rudd's lack of economic nous, demonstrated through his approval of the wasteful and growth‑retarding 2008‑09 fiscal stimulus, doesn't appear to dent his undiminished public popularity which might prove pivotal to his return to the top job in the land.

And, if a return of a Rudd prime ministership occurs within the next two years, that could spell a repeat of economic policy trouble for Australia if another global recession lands on our doorstep.