9 Mar 2012

Can This Man Handle The Economy?

By Ian McAuley
Joe Hockey's shortcomings on economic policy were on show again last week. Why do the media give the Shadow Treasurer such an easy run on economic issues, asks Ian McAuley

Joe Hockey has the unenviable task of selling the Coalition's economic policy. He has to defend Abbott's contradictory promises to extend welfare payments while cutting taxes, to pretend that we have crippling government debt, and to assert that balancing the budget is the be-all-and-end-all of economic management. It's like the burden of giving a kind reference to a dedicated but not particularly competent employee.

The only thing he has going for him is a media which, either through partisan bias or through laziness, gives the Coalition an easy run on economic issues — an easy run which has almost certainly contributed to the public perception that the Coalition is better placed than Labor to handle Australia's economy.

The Coalition's economic weakness was again revealed on Wednesday when Hockey delivered a speech on the economy to a business forum. Besides the usual promises about cutting spending he said that a Coalition government would be less reliant on fiscal policy (using government spending to boost or to slow demand in the economy) and more reliant on monetary policy (using interest rates to achieve the same ends).

It has been an article of faith among conservative economists that monetary policy is to be preferred over fiscal policy. They don't want governments engaged in direct decisions about spending. Rather, governments should take a back seat and let the "invisible hand" of the financial markets do the job. The only influence the government should exercise is through manipulating interest rates. Low interest rates stimulate business and domestic borrowing, and allow mortgagees to spend more, while high interest rates have a dampening effect.

The shortcoming of that theory is that while it is suitable for an Economics 1 exam question, it doesn't work in the more complex real world. It has long been known that decision-makers are very slow to react to changes in interest rates. It takes time for businesses to make plans for capital expansions, to get approvals and to arrange finance. Similarly, to take a domestic example, there are long time lags for households contemplating renovations.

Had Wayne Swan relied on monetary policy as a reaction to the global financial crisis (rather than going in quickly with cash grants and minor building programs) we would have entered a deep recession, and the monetary stimulus would have come too late. Also, monetary policy is two-edged, for while a lowering of interest rates helps borrowers, it reduces the incomes of lenders, including conservative superannuation investors who have holdings of cash and bonds, and it does nothing to help conservatively managed businesses holding little debt.

In fact, as the recent history of the USA shows, low interest rates were a major cause of the orgy of private borrowing that led to the housing boom and the subsequent financial crisis. The Coalition's focus on Australia's government debt (which is small by any international or historical standard) seems to have taken their eye off our high levels of private debt, particularly household debt. With our interest rates at around their historical levels, Australians are slowly paying down their household debt. Anything to stop this slow repair of our private balance sheets would be irresponsible.

And, as experience over the last few months shows, official interest rates have lost much of their clout. When Australia had a more closed economy, movements in official rates as set by the Reserve Bank were almost immediately reflected in market interest rates, but our financial markets are now much more dependent on global developments. To put it simply, there has been a huge loss of trust in the finance sector, and a consequent reluctance to by lenders to place their money anywhere except in the apparent safety of government bonds. So whatever means governments use to stimulate the money supply, that money comes back to government coffers, doing nothing to stimulate economic activity.

It's a problem in confidence, and in demonstrating that our alternative government is having difficulty in grasping the basics of economic management, Hockey is doing nothing to improve that situation.

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Dr Dog
Posted Friday, March 9, 2012 - 11:49

Thanks Ian, although the question could have been answered with more brevity and equal accuracy with a simple 'No!'.

Further it would be very satisfying to hear about the competency (or lack of) by Coalition shadow ministers more generally. It seems to me when I hear them speak on QandA or read their 'analysis' in the papers that they show a poor grasp of some of the most basic skills, including logic, maths and written English.

David Skidmore
Posted Friday, March 9, 2012 - 14:48

Why do the media give Joe Hockey an easy run? Perhaps the fact that the media consists of Murdoch rags and people like Alan Jones may have something to do with it.

Also, by highlighting private debt is to highlight the fact that individuals in the electorate may be at fault for getting themselves into debt. That won't do because "battlers" are not responsible for things that go wrong in their lives. It's all the government's doing.

Posted Friday, March 9, 2012 - 16:30

What about this beauty from SMH which gave me the best laugh all week: "In a broad-ranging speech on the economy yesterday, the shadow treasurer, Joe Hockey, said that if elected, the Coalition would ask the Productivity Commission to look into the dollar and other structural changes which were afflicting industry and ''recommend appropriate government responses''. Do I detect tongue in cheek from Coorey or is that too much to expect.

David Grayling
Posted Friday, March 9, 2012 - 16:47

Joe's in the wrong job. He should be Friar Tuck in a Robin Hood movie.

Besides, Joe doesn't look mournful enough to be a Treasurer. And his grasp of maths isn't his strongest suit.

If he didn't want the Tuck part, then he could wear a suit of armor and be a Knight seated on a white draft-horse, one who saves fair maidens not money.

Surely there's something he could be good at!


Dr Dog
Posted Saturday, March 10, 2012 - 08:34

He would make an affable if slightly overlarge talking paperweight.

Posted Saturday, March 10, 2012 - 23:29

I cannot describe how well it amuses me to read this criticism of another man's policy from a man who himself believes economic wealth comes from increasing measures of unsustainable debt.

I mean Hockey might be a nutter, but this stuff just brings the house down.

"It's a problem in confidence?" and they have problems "grasping the basics of economic management" - oh dear! Stop please, my sides are splitting.

What gales of laughter this piece had brought to me.

I'd like an early retirement, could somebody lend me a couple of trillion and I'll pay it all back in a couple of centuries, promise I will.

How far have standards slipped at the University of Canberra I wonder?

Next their faculty of Human Sciences will have us all believing in the faeries.

Can you hear them convincing us all, in patronising tones, about how "money is really just debt Son"

Posted Monday, March 12, 2012 - 12:19

Rockjaw, please feel free to pad out your comment with some content. I enjoyed the free flowing literary style, but reached the end none the wiser to what you were actually talking about - much like Joe Hockey speech!

Posted Monday, March 12, 2012 - 13:14


The issue centres around the boring old "left' vs "right" views of money and political economics.

The author of this piece suggests the right wing claim to balancing budgets is their nirvana whilst the "left" wing believe eternal debt and state spending are the ultimate route to economic success.

Both the "left" and "right" believe money is that national currency used by western powers to settle transactions and which is brought into circulation through the process of monetising debt.

There are those who contend that money is not merely a medium of transacting but that money is also a store of wealth. By virtue of this line of thought both "left" and "right" groups are tossing about with concepts which are fundamentally flawed at the core, which is the definition of money itself.

This diversity of perception and the resultant contrarian interaction between the two groups is what I find so amusing to witness.

Our own Professor Steven Keen is one economist who has taken the first steps towards reconciling the differences between the two groups of political economists and his views are easily accessed on his website "debunking economics"

I remain firmly in the camp that money is both a medium of transacting as well as a store of wealth, and, as such, currency based on monetised debt, cannot be considered money.

The notion that the continued and unbridled creation of debt should be a source of wealth, as though it were a reasonable substitute for economic productivity, is so far removed from reality that it cannot be addressed without, at the very least, a reintroduction to the Economics I course referred to by the author of this piece.

Posted Tuesday, March 13, 2012 - 00:13

In moderation, debt can and does create wealth, though the continued and unbridled creation of debt will not result in the continued (or unbridled) creation of wealth.

If I borrow my neighbour's cows (incurring a debt) and graze them on my land instead of him destroying the last of his fields in a dusty mess and killing the cows for a Christmas dinner, then the next year I can return his cows, and then some (interest) as well as keeping some cows myself, and now my neighbour's grass has grown back. More wealth all around.

Simple - it's the magic of real investment.

And you know, my neighbour and I don't have to initiate the creation of debt. There could well be a third party who organises the deal to borrow the cows, and he also lends them to me and sets the terms of that transaction. Let's call that third party a "banker". So, the banker has created the debt(s). And resulted in increased wealth.

But now let's imagine that my neighbour and I got together the previous year and had asked the "banker" to provide security to both of us, and to mediate disputes between us. Let us change his name to "government". So now the government has created the debt(s). And resulted in increased wealth.

Of course, it the banker (or government) does something stupid, like create debts that are invested in unproductive activities (borrows the cows from my neighbour, and lends them to me to make sausages - and still expects me to pay him back) then wealth is destroyed. By debt. Debt created by the banker (government).

So debt can create net global wealth and it can destroy net global wealth. Which one it does depends on what would have happened if the debt hadn't been created. And because this is counterfactual, we can argue about that until the cows in question get sent back home to my neighbour - depending on our idealogical predispositions.

And the rules of this argument are simple. If you are on the right of politics, all debt created by those with the label "banker" creates wealth, and all debt created by those with the label "government" destroy wealth. If you are on the left of politics, all debt created by those with the label "banker" at best redistributes wealth from the powerless to the powerful, and at worst destroys wealth in mismanaged financial crises, and all debt created by those with the label "government" creates wealth by stimulating an economy deficient in demand a la Keynes. But everyone at least agrees that there is nothing that a "banker" could do that could instead be done by a "government". Nor is there anything that a government could do that could instead by done by a "banker".

And so we have it. "Banker good, gummint bad" or "Banker bad, government good" (at least the latter has the advantage of alliteration). And in order to have a rollicking good robust political argument, you just have to find what idea the other fellow believes and choose the opposite one, using all sorts of carefully selectively chosen examples to support your case, and whenever there is any sort of apparent evidence provided to the contrary, you just say "Aha - but that's because the banker didn't act like a proper banker because the government got in the way" or "Aha - but that's because the government couldn't act like a proper government because it was corrupted by the lobbying by the banker" and then conclude "No, although the banker looked like they were involved and the problem was caused by them it was really because the banker wasn't allowed to act like a banker enough" or "No, although the government looked like it was involved and the problem was caused by them, it was really because the government wasn't able to act enough like a government"

Wash, rinse, repeat.

Posted Tuesday, March 13, 2012 - 15:08

I've lived through two major recessions. The 'Keating' recession of the early 90s, and the 'Howard' recession of the early 80s.

(Interesting how the former has been seared into the public consciousness, yet the latter, at least as serious in my recollection, seems to have slipped down the memory hole. Maybe it's related to the thesis of this article.)

One thing that at least the economists and bureaucrats learnt from those disasters was that you cannot depend on monetary policy in the face of a rapidly developing economic meltdown. Timely and targeted fiscal measures are called for. They seem to have got that message across to Kevin Rudd and co. in 2008 to great effect.

Abbott, Hockey and their friends seem not to have got the memo. And that being the case they are in no way suitable to be in charge of our economic destiny (or even the local bridge club, IMHO...)