On Wednesday, the Reserve Bank of Australian (RBA) raised its cash rate by a quarter of a percentage point to 6.5 per cent the ninth successive rise since May 2002 and the fifth since the 2004 Federal election.
This much anticipated decision is also the first time the RBA has moved rates upwards in an election year since the Howard Government granted it independence at the outset of its first term in office. It will also probably be the most analysed economic policy decision for a very long time.
It’s worthwhile, then, to take a look at the broader social and political implications in order better to understand its significance in terms of the politics not just of this never-ending election campaign but of policy making in the era of globalisation more generally.
Economists have already begun sifting the tea leaves. But insofar as the RBA’s action goes to the core political issue of economic management held by most commentators and the Government itself to be John Howard’s strongest card it warrants contextualisation from a longer view.
Howard is obviously reaping what he’s sown in more than one sense. All the signs are that the RBA Board wanted to shoot a warning shot across the bow of the Ship of State to discourage fiscal profligacy in the lead up to the ‘only poll that counts.’ And, as all the other polls have been discounting Howard’s chances for almost nine months, and Howard has responded by forgetting to count the dollars attached to a plethora of rabbits overflowing from his Akubra, this pre-emptive strike, building on the leaked warnings of Treasury Secretary Dr Ken Henry in April, has become ever more urgent.
But there’s another sense in which this decision reflects the Government’s overall approach going back to the outsourcing of monetary policy in 1996.
Much berated at the time, former PM Paul Keating’s argument on Lateline in June is making more and more sense. Keating forcefully contended that Howard and Costello had been asleep at the wheel for over a decade. There’s more to this than the standard Labor mantra, recited again and again by Shadow Treasurer Wayne Swan, that issues such as productivity, infrastructure and human capital have been neglected (though they have).
Keating’s belief is that the range of policy measures put in place by his and Hawke’s Governments, in the 1980s and 1990s, created the structural conditions for the economy to flourish now: the floating of the dollar provided a stabilisation mechanism; the opening up of the economy to free trade enabled built-in counter-inflationary pressure through cheap consumer imports; and the deregulation of product and labour markets facilitated constant organisational restructuring to respond to global market trends.
In short our economy was globally integrated.
Fiscal policy under Howard has held to the fetishisation of a 1 per cent of GDP surplus but the sea of revenue has been sunk into middle-class welfare, tax cuts and grossly profligate pork-barrelling. Just as we are now reaping the rewards of the resources boom, so too are we reaping what Howard’s fiscal policy has sown in the form of inflationary pressures.
That’s not the whole story, but it’s a much bigger part of the story than any effect that borrowing by States and public corporations may have had. More of that later.
While the economists deconstruct the numbers, we’re also hearing analyses about the social impact of rate rises and housing affordability. But what they miss is some key, long-term trends which explain why a set of economic numbers described by the pseudonymous economics blogger Henry Thornton as ‘nirvana’ can nevertheless produce little electoral gain for the government which has presided over them.
A key to housing affordability trends lies in the ratio between median housing price and average income, which Demographia found was 6.6:1 in Australia and 8.5:1 in Sydney. By way of contrast, it’s 3.2:1 in Canada and 3.7:1 in the United States. Generally, a ratio of about 3:1 is considered an acceptable measure of affordability. In Brisbane in 1968, when my father first entered the housing market, a suburban family house was worth about two years’ wages “ in other words a ratio of 2:1.
There’s a very popular line of argument accepted by the political strategists of both the Labor and Liberal Parties and by social critics of the Clive Hamilton school that ‘aspirational’ Australians have been going on a spending spree not just on McMansions but also on plasma TVs and other consumer goods. That’s bad according to the Australia Institute, but good according to John Howard (and some members of the NSW Labor Right).
There’s a significant disconnect with reality here.
ANU economist Andrew Leigh calculated the median adult income as $26,000 in 2006. Subtracting people not in the workforce, it’s $42,000. Excluding those not in full-time work, it’s $56,000. It’s often objected that household income is a better measure (though this ignores the growing number of single Australians), but it’s worth considering that for many suburban low- to middle-income voters, one partner’s income is normally derived from low-skilled, part-time or casual work precisely the sorts of jobs in cleaning, hospitality and retail where wage growth is almost flat as a result of WorkChoices.
To cut a long story short, there is a very large number of Australians who could only dream of a McMansion, and another large number who are having great difficulty in meeting the repayments on the McMansion their mortgagor owns.
This is a phenomenon that’s been developing across the OECD since the early 1970s the increasing insufficiency of an average wage to meet the costs of living.
It doesn’t particularly matter if expectations for plasma TVs, designer kids’ wear and 5-bedroom houses are unrealistic if this is how middle class people believe they should live. What’s central is that there is, in fact, a crisis of underconsumption. That sounds odd, but what it basically means is that the price of people’s purchases housing related or otherwise has outstripped their ability to pay for those purchases from savings.
In the United States, this has been most pronounced with the relative decline of average incomes since the 1970s, and the increasing difficulty many families have in providing for ‘positional goods’ such as a college education (even on two or two and a half wages). And it has become a major political issue there.
It’s also one cause of the move of large numbers of women into the labour market. Even John Howard has acknowledged this with his attempts (through Family Tax Benefit B) to prop up the parlous position of single-income, dual-parent households.
This long-term trend is also very much related to the shift in First World, globalised economies from an industrial base towards the creation of wealth through speculative financial transactions including credit options that enable household expenditure to run massively ahead of income; and the very speculative profits that can be made from derivative markets. To some degree, the underconsumption factor was cushioned by the bubble in housing value but its end has, with the collapse of the sub-prime market in the USA, demonstrated the structural weakness in the recent reign of easy credit.
When discussing interest rate rises, it’s usually forgotten that many of those who will experience mortgage stress are also awash in credit card debt, and so are many who aren’t in the housing market particularly Gen X and Y voters in insecure employment. The explosion of easy credit coincides with the aspirational drive towards privately purchased positional goods such as private health insurance and private education which the Howard Government has encouraged under the rubric of ‘choice.’
What all this means is that, far from never having it so good, many of the voters who’ve supported Howard in the past are in a real pickle. There’s only a certain amount of time that you can convince people that they’re ‘aspirational’ before they realise that the aspirations either don’t arrive or they bring large headaches in their wake.
That’s been astutely exploited by the Labor Party’s emphasis on what Bill Bowtell has called the ‘lived economy.’ As I wrote in On Line Opinion earlier this week, Paul Keating was a master of an economic narrative that convinced voters that financial pain had a worthy national goal long-term global success. Because the economy is an abstraction to most voters, ‘nirvana economy’ figures won’t impress them unless there’s a compelling narrative about where we’re all going. WorkChoices doesn’t fit this groove because it’s been perceived as reinforcing the self interest of business rather than advancing a shared national interest.
The Howard Government, by virtue of its ‘relaxed and comfortable’ rhetoric, has had no such story to tell. Rather, voters have been incited to rejoice in their own share of a national pie.
The underlying economic and social factors I’ve been describing are now hitting home in particular, because of WorkChoices’s creation of a climate of income and job insecurity, and the end of the housing bubble. Thus, Labor has been able to move from Beazley’s failed tactic of painting good economic numbers as terrible, to create a narrative about unequal distribution of wealth and financial stress.
The Howard Government really doesn’t have a clue how to respond to this. The inconsistency of disclaiming responsibility for interest rates on one hand and claiming responsibility for everything else that looks good has been widely remarked. The mess yesterday morning with postponed press conferences is a telling sign of the disarray in the Government.
Howard’s tactics are reminiscent of a previous resources boom when Malcolm Fraser first claimed credit for prosperity, then blamed the recession that followed on world factors and the evil unions. The truth of the globalised economy is, as Paul Keating observed, that in many instances national governments can’t do all that much. What’s important, then, is ensuring that the economy is primed to succeed where the action is in high-skilled jobs and high value-added products and services. That’s where Howard and Costello have been content to rest on the laurels of the ‘nirvana economy.’
But it’s also one of the key reasons why many citizens are stuck in a debt trap, now that the housing bubble has burst.
To concentrate on the rise in interest rates as a broken promise is to miss the significance of its use as an issue in the 2004 campaign. Three years ago, the Australian Electoral Survey found it wasn’t a massive vote-switcher as such it was more of a proxy for the justified distrust of Mark Latham as a sound pair of hands. In retrospect, its salience was already a sign of underlying trends towards a feeling of economic insecurity.
That feeling has now been amplified on Howard’s watch.
All the sound and fury of ‘The War on the States’ isn’t going to dispel the pain ahead. And, in the final analysis, the laziness of the Government’s economic policy settings leaves it bereft of any suggestions as to where we could go in future years.
Howard and Costello have wedged themselves with their talk of beautiful economic numbers unable to admit that many voters are feeling left behind.
Whether Labor can do anything to assuage their discontent in office is another matter entirely, but at this stage, expressing empathy for voters’ plight is a very powerful electoral weapon indeed.
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