Yesterday’s GDP figures came as a surprise to most. So the economists, who were scrambling the previous day revising their GDP estimates down in the light of new economic data, were now scrambling to explain these unexpectedly good figures. Most, but not all commentators conceded, some grudgingly, that the Government’s economic stimulus package probably had made a significant contribution to it. No, it wasn’t entirely due to it, but credit had to be given to that measure. [more]
It’s not often that such a consensus is achieved among economists and economic correspondents. Of course there were a few detractors. Concept Economics chairman Henry Ergas said he still ‘prefers Milton Friedman’s analysis that people spend out of their expected permanent income to the Keynesian hypothesis that one-off cash infusions will provide a sugar hit to growth’. If you are wondering why Ergas chose to stir up the old Friedman/Keynes debate, you’d have to ask him, but it did prompt David Uren to start a piece on the Current Account Blog of The Australian Did the cash hit make a difference? It leaves us none the wiser as to whether Ergas thinks the cash stimulus had any effect at all. Today we have Tim Colebatch in The Age telling us The GDP numbers don't add up: “The figures released yesterday do not add up. They will be heavily revised. Their bottom line could be flipped upside down, turning growth negative.” We will have to wait apprehensively to see if Tim is right and the ABS has messed up its sums.
But leaving aside the few negatives and doubts, let’s run with the consensus, agreed to even by the ABC’s resident pessimist Stephen Long, that the Government stimulus package has done what it was intended to do, and turn to what the Coalition says about the GDP figures.
Perhaps caught a little unprepared at a doorstop yesterday afternoon, Joe Hockey conceded ‘that if you throw enough money at something, some will stick’, and that the GDP figures ‘were a great result for the Australian economy’ something he welcomed. These were probably Hockey’s true feelings, but by Lateline that evening, no doubt firmly briefed by the Coalition spin doctors and maybe by Malcolm Turnbull himself, he presented a different story to Leigh Sales who began: “Today's growth figure is three times what the market had been anticipating. Wayne Swan says that strong performance is due to the Government's strong stimulus package. Correct?” To which he replied “Of course Wayne Swan would claim that. What a surprise. No, he is not correct. And there have been a number of factors that have delivered Australia a very strong economic performance.” To save you a lot of reading, here’s a summary:
“Firstly, unquestionably the Government inherited a very strong economy: economic growth of 4 per cent, unemployment 4 per cent, $40 billion in the bank with no debt.
Secondly, we had no massive financial collapses. In fact, our banks went into the top 12 performing banks in the world.
Thirdly, even today the Government has stronger terms of trade than the last days of the Howard Government. Australia’s exchange rate went from parity with the US dollar to 60 cents - that delivered a windfall.
Fourthly, you had monetary policy. The Reserve Bank cut interest rates more aggressively than any other country in the world bar New Zealand, and in Australia because of variable home loan rates it went straight through to people's hip pockets.”
No mention at all of the stimulus packages – must have forgotten them.
Leigh counters: “Surely all of those factors were secondary to the billions and billions of dollars that were pumped into the economy?”
Hockey now enters the denial chamber and slams the door.
“No in fact they weren't. They were the main factors.” Unable to shamelessly dismiss the stimulus packages entirely, he adds “But of course the Government's massive spending program had to have some impact and it did. But as today's GDP numbers reflect, the fact is that a lot of the money hasn't even hit the economy yet. All this school funding hasn't yet hit the economy. We've had the cash splash which has hit and unquestionably the tax rebate for equipment has hit as well. But the fact of the matter is most of the stimulus hasn't hit the economy yet and what it is is proof that the Government has committed to too much spending.”
So Hockey concedes that the stimulus ‘had to have some impact and it did’, but mindful of his briefing, does a conceptual somersault and now insists that most of the stimulus hasn't hit the economy and that is proof that the Government has committed to too much spending. So all this improvement in GDP has occurred with just a small part of the package, but the remainder involves too much spending, and presumably should be curtailed.
Leigh tries again: “Australia has withstood that better than anyone else. Therefore, doesn't the Rudd Government's management of our economy deserve some credit?”
Hockey gets into repetitive mode “Well in fact, Australia started in a far better position than almost anyone else.” Clearly it was the Howard Government that produced the good GDP figures.
Leigh persists: “Other countries started in good positions as well.”
Not to be put off, Hockey repeats: “Nothing like Australia's position. Obviously having the most significant benefit of the terms of trade, favourable terms of trade and China's economic stimulus.” And so on. He even quoted an expert from Hong Kong who said it was China's very focused fiscal stimulus that did the job. The same expert also discounted the claims of the Rudd Government that they had made a difference. Who would argue with an expert from Hong Kong?
Warming to his task, he returns to the old chestnut: “If anything, the problem is that all the money the Rudd Government has spent is leaving us with a burden that is going to impair our economic recovery over the next few years. We've now got seven years of deficits for what appears to be five minutes of economic downturn with one negative quarter and it's a massive price to pay for a new school hall.”
Note that for the first time he mentions ‘economic downturn’, although he did earlier make reference to ‘an iceberg’. So we did have an economic downturn after all, but it was only for ‘five minutes’.
Leigh then tries another tack: ‘How far should the stimulus be wound back, then, in your view?”
The rest of the exchange is too excruciating to read but after several similar questions Leigh asks again: “I want to try to pin you down specifically because it's not enough to just say, they have to wind it down. What areas do you want them to cut then?”
But Hockey was tight-lipped: “Every time I suggest something they steal it. I am not going to give it ... if the Rudd Government wants to engage the Liberal Party as consultants on the economy, we're available to help.”
Leigh was not about to give up “But you have to convince my audience that you have good ideas so they will vote for you in the future. So where should the money be cut?”
Hockey either didn’t know the answer or he wasn’t telling “Before they go to lodge their ballot paper they will have a very clear understanding of where we will take the Australian economy and what we will do with the Budget.”
Leigh then addressed interest rates, and after a long exchange Hockey gave us this searing economic analysis: “So Australia, arguably, overreacted - massively overreacted but the problem we have is that that overreaction, with the Reserve Bank it might be corrected and it might be arguable that the Reserve Bank acted entirely appropriately to go to 3 per cent but the Government has got seven years of spending, Leigh. Seven years of deficits to fund for this package.”
So it was all a storm in teacup that the Reserve Bank could have fixed with a few interest rate cuts. There was no need for the Rudd Government’s massive overreaction. It would have all been OK without it.
In case you think Hockey is on some jaunt of his own on this subject, Bushfire Bill on the previous thread said: “Turnbull this morning went ridiculously out of his way to tie himself in knots over explaining away the 0.6% GDP growth figure. It was all interest rates, or the advantageous position Howard left the economy in, or exports or.... anything but the Stimulus Package.”
There’s just three points that need to be made:
If one can judge from the utterances of the Leader of the Opposition and his Treasury spokesman, the Coalition is in a seriously unhealthy state of political and economic denial.
We can count ourselves lucky that he Coalition is not in government and hope desperately it will acquire at least a modicum of economic intelligence and plain commonsense before presenting itself at the next election. It’s embarrassing to see such naivety in a party scarcely two years out of office.
Finally, if the Coalition seriously believes such nonsensical analysis, such denial of the value of the Government intervention will win it more votes than simply acknowledging openly that, among other things, the stimulus did bring a substantial benefit, not just to economic growth, but to employment, its economic naivety is matched by a level of political naivety not seen in this country for a long time.