In 2008, Australian policymakers charged into the oncoming storm of the GFC by tightening fiscal policy and hiking interest rates.
The RBA has since learnt its lesson and keeps an even keener focus now on events overseas while considering adjustments to monetary policy. It’s also a lot clearer in its statement about the significance of international events in its thinking.
Our political class, to the extent that they’re in the business of learning anything rather than conveniently forgetting hard-earned truths, doesn’t appear to have worked out what happened in 2008.
As Glenn Dyer outlines below, the pieces are falling into place not just for an extended period of low growth or recession in Europe and the US — that much we knew — but signs of bank lending freezing up in Europe. This is starting to feel a lot like 2008, except back then we were confident governments were able to respond.
Now governments are part of the problem — not just because of their dire debt predicaments, but because of systemic political problems. They haven’t got either the fiscal or the political capacity to respond effectively if a crisis unfolds.
Meantime the debate in Canberra is over whether the Government will return to surplus as scheduled or whether the Coalition can display some more fiscal hairy chestedness by coming up with $70b worth of savings. Today there’s talk of a pre-MYEFO razor gang on the hunt for savings.
There’s no problem with a government being perpetually on the hunt for savings and waste. It was something that went missing in the last two terms of the Howard Government. But the question of most relevance to voters — even if they don’t know it — is whether a surplus next year is economically responsible, or a recipe for further undermining domestic growth already imperilled by international events. The debate over next year’s surplus means attention is focused on a fiscal symbol, rather than economic reality, defining the Australian economy purely in terms of a single number manufactured by shifting government spending backwards and forwards.
Instead, Wayne Swan’s been trying to find ways to avoid saying he still wants a surplus but may not be able to produce one, and Hockey and Abbott have been carrying on as though this is some major admission of fiscal irresponsibility.
Some will argue that that simply means that in the event of a crisis, the RBA can be left to get on with the work of supporting demand via interest cuts — indeed, it gives the RBA more flexibility to go hard and early cutting rates if it knows Government is going to be undercutting demand itself. That approach makes a virtue of fiscal and monetary policy working in opposite directions.
But as we saw in 2008 and 2009, despite the bold claims of latter-day monetarists, interest rates are a blunt instrument going down as well as going up. They only add to demand if people make the effort to reduce their mortgage repayments (banks certainly won’t do it for you) – and up to three-quarters of the customers of some of the big banks left their repayments right where they were were in 2009. The most effective direct stimulus back then was — contra the claims of right-wing economists about permanent income — cash handouts.
Bizarrely, the current debate actually represents a retreat from where we were in 2008-09. Voters endorsed the Keynesian approach of Rudd and Swan — indeed, Kevin Rudd’s approval ratings, which had been in slow decline from the stratospheric heights of his early Prime Ministership, surged back up to historic levels when he aggressively responded to the GFC. Bizarrely, Rudd himself didn’t seem to get this, and instead allowed the Coalition to convince him a big budget deficit was a political liability, leading to the nonsense of refusing to utter the deficit figure. We didn’t realise it at the time, but it was a telling moment of Rudd’s, and Labor’s, weakness for allowing their opponents to dictate their political strategy.
Swan has correctly argued the “Keynesians on the way down, Keynesians on the way back up” line, and put in place a fiscal strategy to achieve it. The problem is the ascent is suddenly not looking anywhere near as sharp, and might yet go back to descent if things got (even) worse in the US and Europe.