In the first half of the 20th century, before discretionary fiscal and monetary policy had evolved, the major economic failure was the rise in unemployment during the Great Depression of the 1930s. In the post-war period, when discretionary fiscal and monetary policy were widely used, the major macro economic failure was the rise of inflation which reached a peak in the 1970s…

To get rid of the inflation, we have to put up with the pain of higher interest rates for a time. Thus anti-inflation policy is seen to be characterised by high interest rates and is therefore politically unattractive. But when it has succeeded in its central task, anti-inflationary monetary policy allows the return to sustainably low interest rates. Again, the short-run incentives to governments are the opposite of the long-run needs for economic stability.

The evolution of demand management policies, particularly monetary policy over the past 30 years, has largely been an exercise in overcoming this conflict between short-term incentives and a long-term stability. The experiment with monetary targeting in the mid-1970s and the more exotic schemes such as Currency Board or a return to a commodity standard proposed at the end of the 1980s, were part of this evolution.. Finally, during the 1990s in line with the experience of a number of other countries, Australia settled on a monetary policy framework based on the two pillars of inflation targeting, and an independent central bank. That is, it gave the central bank a mandate to achieve a specified inflation outcome.

— Ian Macfarlane, 2006 Boyer Lectures.

The greatest problem with the “my interest rates were lower than yours” argument is that it is simply a grand non-sequitur.

As the economic history of the 20th century unfolded, Australia’s economic institutions and their weapons of choice were forced to adapt – and none more so than the use and purpose of monetary policy.

From the demand management of reducing unemployment in the 50s and 60s, through the monetary targeting regime of the 1970s, through the deregulation transition of the 80s, right up to the contemporary approach of modern inflation targeting, each regime of monetary policy was uniquely its own beast.

Comparing interest rates between these rather incompatible periods, when monetary policy was used to achieve very different direct objectives, is an exercise in apples and oranges.

Yet the counter argument of “My interest rates have been lower than yours” requires a certain amount of technical explanation which cannot be condensed into a 20 second sound grab. The political rhetoric of the claim was always going to work simply because of the difficulty in exploding the nonsense behind it using short, sharp clichés compatible with the format and expectations of the 6 o’clock news.

But while it was always going to work, it was only ever going to work once.

The passage of time, as Howard is now experiencing, has demonstrated to the electorate via their own hip pocket, that which could not be explained in the sound-bites of the last election.

So the next time someone tells you that “interest rates” or “inflation” or “unemployment” or some other macro-economic variable will always be lower under their management, tell them to stick it back in their pants.

Over the longer term, it will probably be for their own good as well as yours.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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