Libs' economic stewardship far from exemplary

“Interest rates will be higher under Labor” - John Howard

It's less crude than "reds under the bed", but its essential vulgarity is a jolt. After eight years, doesn't Howard have a record of achievement that he can display to a wavering electorate? Howard has already debased himself on matters of substance so the puerile nature of an electoral jibe should involve no embarrassment at all.

Letter-writers to the press claim that they were planning to vote for John Howard because of his excellent record on the economy, a contrast with the reputedly disastrous experience under Hawke and Keating.

The claim ignores Howard's depredations with the public purse. But there is a basic problem here with causation. What is the connection between a government in office and the contemporaneous economy? And how is "the economy" and good performance measured? Political parties naturally eschew the rules of inference and hope that electors will suspend judgement. The practice is to claim all the "good" things for themselves and explain away all the "bad" things as due to the other side when in office or to uncontrollable global forces.

What about the mortgage interest rate story in particular? Howard has a poor memory of the escalating rates when he was Treasurer. Rates have been low since 1996, but why? We have a poor understanding of why interest rates are currently at a relatively low level.

Lower inflation is a proximate cause, but why lower inflation? Lower prices of manufactured goods, due to a technological revolution and to the juggernaut which is low-wage Chinese production? The massive destructive shock of the early 1990s recession? Lower tariffs? Higher productivity? But if higher productivity, due to what - better working or harder, longer working? Has the Reserve Bank suppressed price and wage increases by killing "inflationary expectations"?

Plausible stories are all we have. The economics experts tend not to ponder overlong on these questions, and when they do they resort (like everybody else) to gut prejudices. But it is transparent that significant components of the plausible stories have no evident thread attaching them to Howard's reign or Howard's capacity. In short, on interest rates, Howard is talking out of his proverbial.

One shouldn't discount the disastrous interest rate regime over which Labor Treasurer Paul Keating prevailed. But if the Coalition had been in office through the 1980s the story would have been little different. The econocrats were driving policy, and Coalition Ministers would have dutifully followed orders as did Keating.

What should interest us is not just what separates the parties but what they have in common - the domestic institutional structure within which economic policy gets made. Parts of the structure have evolved (the dismantling of the tariff regime and significant components of the arbitration system), but other parts have remained cemented.

Most significant is the central role of the Federal Treasury in economic policy, in place since 1950. The role is both direct and indirect, the latter through the inculcation of the "Treasury Line" throughout the bureaucracy and Ministerial offices. Malcolm Fraser is the only Prime Minister to have made a dent in the treasury domain. Fraser created a separate Department of Finance out of Treasury and elevated the independence of the Reserve Bank; but by the time Labor came to power, the three institutions were offering variations on a common theme.

And what does the Treasury prescribe? The best statement of the conventional wisdom is in Statement No.3 of the 1999-2000 Budget Papers. Sound macroeconomic management (budget surpluses and a cash interest rate aimed at keeping inflation below 2 per cent) and microeconomic reform (eliminate all impediments to free market operation). That's it.

No government plays strictly by the rules. Nevertheless, governments, whether Labor or Coalition, have one foot nailed to the ground because of the perceived necessity to kowtow to the rules. The central economic agencies had a narrow view of how economies work before neo-liberalist ideology came along; neo-liberalism has merely reinforced their authority.

Mr Howard might crow about 3 or 4 per cent growth in GDP, but even within the economists' bailiwick (not counting social policy), one is entitled to ask more troubling questions. What is the "growth" actually of? If it's what we really want, why isn't it higher? If it's not what we want, then the number is meaningless. And what about net overseas liabilities of $500 billion, the 2003-04 current account deficit of $47.4 billion, and the net deficit of trade in elaborately transformed manufactures of $75 billion? ETM export growth has plummeted during the Howard years. These are indicators of sound economic management? The pundits say that the overseas debt reflects Australia's long-term and inevitable dependence on foreign investment. No it doesn't. Rather, foreign investment is insufficiently directed to appropriate objectives. The debt is also recently a product of unconstrained domestic consumer credit creation financed overseas. Treasurer Peter Costello says that the ETM deficit is a sign of healthy growth. No it isn't. Microeconomic reform has no answer for this significant phenomenon.

In short, the structure of the economy matters, and the conventional rules have nothing to say. What can the cash rate, the single instrument of monetary policy, do about excessive lending for investment properties without hitting lending for owner-occupation?

The answer is nothing. Are the monetary authorities inclined to do anything about this limitation of an aggregate macro instrument? No, because it's against the rules.

All thus stuff about "sound economic management" is just so much palaver. We have become so inured to the repetition of the conventional wisdom regarding appropriate economic policy that we internalise the self-hobbling of the political classes.

Australia is a cornucopia of resources - material and human. If the Netherlands and Switzerland, dependent more on their wits than on what comes out of the ground, can consistently return balances on current account in the black, why can't Australia? Sound economic management under Howard? The policy structure is magnificently second-rate. The so-called recent integration into the global economy, rather than transcending the colonial cringe, has reinforced it.