If the election is to be decided on who are the best managers of the economy, which the polls tell us is at the top of the electorate's concerns, how on earth are voters supposed to make that decision? As Edgar R Fielder said: Ask five economists and you'll get five different answers - six if one went to Harvard.
This is just what we are seeing day after day from economists as they comment on the pronouncements of politicians and announcements on economic policy.
It is unsurprising that politicians put their own spin on the same situation. Take the RBA’s lowering of the cash rate to 2.5% this week. Chris Bowen and Kevin Rudd pointed out that this would mean a saving of $45 on the monthly repayment of the average $300,000 home loan – good news for homebuyers – and it would be good too for small businesses seeking loans. On the other hand, Joe Hockey was out there preemptively knocking the rise before it was announced, and after the announcement, adamant that the lowering of interest rates was a sign that the economy was weak and weakening, and of course that was because the Government was mismanaging the economy.
How then do economists, all grappling with the same factual evidence, rate this change to the cash rate? If you thought the evidence would speak for itself, and that it would lead to the same assessment, you would have been disappointed.
Around four years ago, at the time the Government was applying its stimulus package, I wrote this in What value are economists to our society?
“One of my longstanding gripes has been about the influence on economics writers of their preferred economic model. Henry Ergas’ reference in the Current Account Blog to his beloved Friedman in response to the upbeat GDP that just about everyone else attributed to the stimulus packages, is a case in point. I wrote about this on TPS in The problem with economists back in February 2009. Referring to the contemporary debate about when and how the stimulus should be withdrawn now that the economy seemed to be recovering, Crikey’s Bernard Keane said: “There are no - no - economists or business groups who think it is time for the stimulus to be wound back, except for those on the far right or Liberal shills such as Henry Ergas, who opposed the stimulus package in the first place.”
“Another grumble is the way journalists allow their political leanings to influence what ought to be an objective analysis of the undeniable facts. Michael Stutchbury of The Australian [now of The Australian Financial Review] is an example. Bernard Keane said in Crikey: “After the March quarter figures, anti-Labor commentators like Michael Stutchbury tried to argue that the modest growth was a consequence of exports only, ignoring the fact that the stimulus packages had prevented domestic demand from collapsing the same way it had in the US, the UK and other developed economies. Today’s figures blow the Stutchbury argument clean out of the water, with exports a trivial contributor to the overall growth figure – although like the Coalition, Stutchbury has now switched to urging that the stimulus has been too successful and needs to be wound back.”
“With commentators of the likes of Ergas and Stutchbury, what can readers who lack a profound knowledge of economics, really believe? As Keane put it in a piece on Crikey, ‘Nothing more stimulating than press gallery groupthink’: “The ‘debate’ over whether the Government should pull back on the stimulus package is a classic case of a press gallery trying to frame a real-world issue into a narrow, political framework that suits its own reporting purposes. It is a collective illusion being foisted on the mainstream media’s ever-smaller audiences by journalists and commentators unable or unwilling to see outside the gallery prism of winners and losers and political personalities.” This past week we saw the same phenomenon – economists using their preferred model of economics to argue their case, and worse still, allowing their political bias to colour their assessments.
On the ABC’s The World Today
on August 7, Eleanor Hall interviewed economists Stephen Koukoulas and Henry Ergas. Stephen Koukoulas is the Managing Director of Market Economics. He has been chief economist for two global banks and was the senior economic advisor to former Prime Minister Julia Gillard for a year after the last election, having moved there from a senior role in the Commonwealth Treasury. Henry Ergas is a professor of Infrastructure Economics and senior economic adviser at Deloitte Access Economics. He was an economist at the OECD in Paris and on returning to Australia in the mid-1990s, he chaired several Howard government inquiries on regulatory and competition issues and more recently advised the Coalition on tax reform.
Hall introduced the discussion with: “So just how responsible is the Coalition's $2.5 billion a year promise to cut company taxes at a time when the Reserve Bank of Australia has now cut interest rates to their lowest level in half a century?
“While Labor is describing yesterday's RBA board decision as a gift to struggling households – and to the Government in the middle of an election campaign – the Coalition says it's more evidence of Labor's mismanagement of the economy.
“So is the Australian economy in dire straits, is the budget in crisis and is Australia's triple-A credit rating under threat?”
The background of these economists gives an inkling of what their responses might be to Hall’s first question: “The Reserve Bank Board has now cut the cash rate to its lowest level in half a century, below what Kevin Rudd described, when he was last Prime Minister, as an emergency level.
“First to you Stephen Koukoulas? Is Australia's economy now in a state of emergency?
” Note Koukoulas’ adamant response:
STEPHEN KOUKOULAS: "It's nowhere near it. It's absurd to think that it is the case. We're growing at about 2.5 per cent. The unemployment rate is 5.7 per cent. Inflation's nice and low. And we're looking at the forward indicators, things like housing, it's clearly on something of an upswing. And of course with the lower dollar we're getting an export boost.
“So look, the low interest rates are there because inflation is very low because we're part of a global economy where inflation is low and decelerating so that's given the Reserve Bank scope to move interest rates lower.
“The difference between now and back in 2009 when we did have an emergency, is that fiscal policy is now being tightened quite aggressively whereas at the time we had a very, very aggressive stimulus measure, which moved fiscal policy to a very accommodative phase.”
ELEANOR HALL: “So was yesterday's rate cut necessary?
STEPHEN KOUKOULAS: “Oh yes it was necessary because we had the inflation numbers just a couple of weeks ago that confirmed inflation was in the bottom part of the RBA target range.
“We do know that the unemployment rate is drifting a little bit higher and I think we just need that final little bit of an impetus to make sure that the recovery that seems to be underway gets some traction and that when we get to 2014 the economy's back at trend.”
So Koukoulas, Ex-Treasury, who has advised Labor, has a positive view about the rate cut. Now let’s see what Henry Ergas says. He regularly writes anti-Labor articles in The Australian
ELEANOR HALL: “So Henry Ergas, what's your sense of the state of the economy? Would you describe these as emergency-level interest rates?”
HENRY ERGAS: “Well they're certainly very low interest rates. I think the important fact is that despite recovery in the US, the international outlook is highly uncertain with uncertainty about China and where the best that one can say for Europe is that perhaps it's bottoming out. And that, together with increases in global supply, means that we've had a reduction in commodity prices and a fall in the terms of trade and that in turn is reflected in what seems to be the end of the investment phase of the resource boom.
“And as that plays itself out domestic growth has flowed below the levels that it's capable of achieving and looks likely to remain below those levels for a little while with unemployment rising. And so in that situation it was obviously sensible for the Reserve Bank to try to stimulate the economy a bit through this interest rate cut.” Note how he rates the economy as slowing and in need of the stimulatory effect of an interest rate cut.
Hall gently tries to pin him down:
ELEANOR HALL: “Henry Ergas, to try and understand the politics of this a little bit, are low interest rates a sign of good economic management, as the Shadow Treasurer Joe Hockey said in 2004, or of government mismanagement as he's saying now?” Note how Ergas digs himself out of this more pointed question.
HENRY ERGAS: “Well they can be, in a way they can be both right. You can have low interest rates because you've gotten everything working properly, you have low inflation, growth is strong, but the economy has scope to continue to grow at those levels, or grow even a bit more rapidly without inflation picking up.
“In that context, there's clearly scope for low interest rates. Equally, low interest rates can be a response to a situation where the economy is growing by significantly less than potential. And perhaps where growth rates are looking uncertain and in that context a move to lower growth rates, to try to stimulate the economy through monetary policy can be an appropriate response to weaker economic performance.” These are cleverly spoken words that align him with the Hockey view. Hall tries again to pin him down.
ELEANOR HALL: “So is the Coalition right when it says this low interest rate is because Labor has mismanaged the economy?”
HENRY ERGAS: “I think the current low interest rates reflect a growth outlook that is not as strong as it should be. And an important factor in that growth outlook is obviously the uncertainty about both fiscal policy and important areas of structural policy which may be having the effect of both reducing the economy's potential growth rate and preventing it from achieving even that potential in the immediate term.” Ergas is edging even closer to the Hockey view. Note how he points the finger at “…uncertainty about both fiscal policy and important areas of structural policy…," clearly impugning Labor. Note too how he completely fails to mention the slowing global economy, which is impinging on our economy.
So Hall turns to Koukoulas with a different question that explores this reality:
ELEANOR HALL: “Stephen Koukoulas, to what extent does the Government need to take responsibility for the weakening economy?”
STEPHEN KOUKOULAS: “Not a lot. I think the issues, when we look at why the economy has cooled off over the past six to nine months, we've got an unexpected cooling in China where growth has slowed from above 8.5 per cent to around about 7 per cent on the latest forecasts. And that's dragged the terms of trade down as we saw in the Government's update on Friday. So we've got this negative shock that's coming from our biggest trading partner and a fall in commodity prices.
“We've also got this scenario that I mentioned before that global inflation is very low and that translates into a more broadly based fall in commodity prices. So there are areas that are outside the control of the Government. And in fact one of the issues that we saw from the Government is that it's allowing the automatic stabiliser in the budget to work, which has caused the budget deficit to be a little bit bigger in the current financial year 13-14.
“And that's actually going to be providing a little bit of extra stimulus to the economy as well. So we've got fiscal policy moving to a more neutral to a slightly stimulatory stance. We certainly have monetary policy at very stimulatory levels which will be definitely the groundwork for the economy to pick up over the course of the next 12 months.” Clearly, Koukoulas points his finger at: “…areas that are outside the control of the Government…" to explain our current situation, and sees a favourable future when he points to: “…monetary policy [being] at very stimulatory levels which will be definitely the groundwork for the economy to pick up over the course of the next 12 months”, a positive outlook.
These excerpts illustrate partisan economics. The political leanings of the two economists influence their ‘opinions’. The ‘facts’ are interpreted in quite different ways: Stephen Koukoulas presents all the facts and draws a conclusion positive for the Government; Henry Ergas cherry-picks the facts that suit his partisan views and draws negative conclusions that align with Coalition viewpoints. Whom do we believe?
George Bernard Shaw said: “If all the economists were laid end to end, they'd never reach a conclusion.”
This piece of dialogue illustrates that well.
Hall then addressed the other burning question of the day – Tony Abbott’s promise of a 1.5% reduction in Company Tax to 28.5%.
ELEANOR HALL: “Well let's look at the Coalition's big spending promise today. To you Henry Ergas - three days ago Mr Abbott said he would deliver company tax cuts "when affordable". Today he promised to deliver them in 2015. Is this $2.5 billion a year tax cut affordable and responsible?”
HENRY ERGAS: “Well I believe it's ultimately affordable. What it really depends on is getting the fiscal policy settings right and the problem is that over recent years what we've seen and had is a government that has a deficit when times are good, has a deficit when times are extraordinarily good, and now has a deficit when it says times are not bad, but not as good as one would like.
“So it seems that under all circumstances, we are running a deficit. And clearly were that to continue, then tax cuts would not be feasible. But if we can get the overall settings of fiscal policy right and return to a situation where we take fiscal rules seriously and try to achieve structural budget surpluses over successive cycles, then cutting the corporate tax rate makes very good sense because as the Henry Review emphasised, the company tax rates are relatively highly distorting and they both reduce our growth potential and reduce Australian living standards in the long term.”
ELEANOR HALL: “You mentioned the former treasury secretary Ken Henry there. Yesterday he said that whoever wins on September the 7th will have to cut spending or raise taxes or both to deal with the deficit problem, and yet here we've got the Coalition with a big spending tax cut. Do you think that is a problem? Do you agree with Ken Henry?”
HENRY ERGAS: “Well clearly the situation is that if we are to return to a sustainable fiscal position, then that will require some tough choices. And those tough choices have to be in the first instance, choices about spending.
“The reality is that if you look at the period from 2007-8 to the present, revenues have risen very sharply. I mean, revenues have increased over that period by almost $80 billion. And this is the source of the deficit. The problem is that payments have increased by close to $130 billion...and so what you need to do is look at that and say how much of that spending really does pass a sensible cost benefit test? If you don't do that you will never bring a fiscal situation under control.” Ergas sheets home the blame to Labor’s spending. He points out, as do Hockey and Abbott, that revenue is rising, but fails to acknowledge that it is not rising as rapidly as projected because of the global economic situation, leaving a large shortfall.
Hall then tackles the elephant in the room – the GST.
ELEANOR HALL: “And we've just heard both sides emphatically rule out an increase to the GST. Of course that's expected during an election campaign, but Stephen Koukoulas from an economic point of view, should they be looking at increasing their Goods and Services Tax rate?
STEPHEN KOUKOULAS: “Well they need to do something on the revenue and I think Henry [Ergas] just got an error there – the tax receipts have actually fallen by around about 2 to 2.5 per cent of GDP. We've got a very, very low tax take at the moment from the Government which is causing the fiscal concerns, that the spending to GDP ratios did increase obviously during the depths of the financial crisis but have now sort of scaled back to roughly the average of the last 30 or 40 years where the tax to GDP ratios are only in around about 21, 22 per cent. Where as recently as 2003,4,5 they were about 24 per cent of GDP.
“So…if there is a problem, and I don't think there is one,…to the extent that we need to balance the budget over the cycle it's got to be the revenue side that does it. And with an income tax cut sort of throwing away a couple of billion dollars a year, while of course we'd all love to have lower income and company tax rates, it is a desirable medium term objective? But at the moment when we've got perhaps a higher priority of balancing the budget it seems to be perhaps the wrong time to be talking about it or implementing it."
ELEANOR HALL: “Well there's a lot more to talk about on the economy. But we'll have to wrap it there.” So there it is. We have two economists looking at the same data set, yet seeing causes and effects quite differently. Economists have a strong tendency to see the facts through the prism of their preferred model of economics. Some, such as Henry Ergas in this instance, see the facts through the optics of their partisan biases, and choose those that suit their argument. This is ‘Partisan economics’ writ large.
How can the average voter decide who is telling the truth most accurately? Economists would argue that what we are seeing is simply different points of view. But it’s not just that. What we are seeing is economists trying to persuade readers to their own viewpoint, instead of doing what they ought to do: present the facts and then argue the case for this interpretation or that, and only then draw a rational conclusion. In the dialogue above, one came close, the other didn’t.
Are such debates, despite their potential, worth the effort? If all we get is another dose of political spin, and from those who are supposed to be balanced, the answer sadly is NO.
sums up the problem for economists: “Business economists long ago learnt to keep their heads down and their lips buttoned during [election] campaigns, for fear something they say is taken up by one side, prompting the other side to blacken their name. Too many people's careers have become collateral damage in the political fighting.” They could avoid that outcome if they simply gave a balanced exposition, but that seems beyond most.
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