Tuesday, September 25, 2007

Tuesday Column: It's not about economic management

Don’t believe for a moment that the coming election is about who is about who is best to manage the economy.

Decide your vote on the basis of something else - perhaps who will do the most for private schools or trade unions or climate change if that’s what you care about, but don’t for a moment imagine that the name of the election winner will make a jot of difference to the management of the economy.

Smart people already know this...

When US financial markets imploded last month the money market was acutely attentive to the words of the head of the US Fed, the head of Australia’s Reserve Bank and their counterparts worldwide.

They paid next to no attention to what George Bush, John Howard, Peter Costello and their ilk had to say.

The organisation of Australian Business Economists has for decades held a forecasting conference in Sydney. Part of the tradition was annual after dinner speech from the Australian Treasurer. A few years back it stopped inviting him and invited in his place the Governor of the Reserve Bank. Its members were keener to hear from the organ grinder than the monkey.

Think I am being too harsh?

Late last week the Macquarie Bank’s Rory Robertson sent his clients a note asking them, as an exercise, to guess who had made this statement:

“Australia has enjoyed roughly 15 years of sustained economic growth, with low and stable inflation and increasingly healthy public finances. Our unemployment rate is the lowest it has been in about 30 years, and a greater proportion of the population is now working than ever before.”

“For about the past three years, the Australian economy has been operating near, or above, its production potential. Strong economic growth has led to rising incomes across the country. The market for skilled labour is tight throughout Australia, but especially in the western provinces…”

It was a trick. Robertson had substituted the words “Australia” and “Australian” for “Canada” and “Canadian”. It was the head of Canada’s central bank.

Greater trade, enmeshed financial markets and floating currencies have meant that the fortunes of the major industrial economies move together.

It is not just me saying this. Robertson has extracted several quotes in which the former Reserve Bank Governor Ian Macfarlane makes the same point.

Here’s one: “I think it is true to say that if you wished to forecast the path of the Australian economy, and you were able to have foreknowledge of only one economic variable, the one you would choose would be the path of the world economy."

Here’s another: “As a general rule, when the world economy as a whole is in a sustained expansion, there is a good chance that an expansion will also be continuing in an economy such as Australia.”

Can an Australian Treasurer beat the odds by either doing his or her job spectacularly well or spectacularly badly?

Well most of the “levers” that we grew up thinking the Treasurer had to pull are no longer there.

When a younger John Howard was Treasurer in the early 1980s he was able to set the exchange rate, interest rates and lending guidelines for banks.

Robertson points out that these days global markets set the exchange rate, the Reserve Bank sets interest rates and banks do more or less what they want.

“Canberra's macroeconomic management task today is a shadow of its former self. It's not quite on "auto pilot", but institutional changes over recent decades mean the Australian economy runs with less direct input from Canberra than ever before.”

He unkindly observes that the volume of economic commentary emanating from the mouth of the Treasurer about for example the GDP, inflation, interest rates, unemployment, commodity prices and so on dwarfs his ability to do actually do anything about those things.

“The job of any modern Treasurer - Liberal or Labor - is not so much to manage the economy as to pretend to manage the economy. The biggest part of the job is to provide regular and upbeat economic commentary.,” Robertson says.

“On a typical day, the job is to explain that everything is going very well, and that’s all because of us. And, if everything is not going well - it's not our fault.”

That’s not to say that the boffins in the Reserve Bank and the Treasury don’t fret a lot and work hard, but they keep their jobs and do them as best they can whichever Treasurer finds himself “in power”. The Reserve Bank makes its decisions without reference to him.

Robertson says those institutions “don’t skip a beat when one Treasurer leaves and a new one arrives.”

Usually, “new Treasurers are not economists but career politicians. The good news is that Ken Henry at the Treasury and Governor Stevens at the Reserve Bank will be keen to provide excellent economic tuition and advice to any new Treasurer - Liberal or Labor, former lawyer or former union official, whatever. In particular, they will highlight the things to say and do to look smart, or look dumb.”

Treasurers and Prime Ministers do have a lot of say over government spending and tax rates (and that’s why those things are widely and misleadingly reported as if they were important economic levers).

In recent years Mr Howard and Mr Costello have been flooded with tax revenue (for reasons beyond their control - that’s the nature of things). They have used the windfall to cut tax rates and boost government spending.

Would Mr Rudd and Mr Swan have done any different?

I doubt it, after last month sitting through the most excruciating press conference I can remember.

They’d called it to attack “the failure of the government’s economic policy to put maximum downward pressure on interest rates”.

Given that the only levers the government had were tax rates and spending (which together are called fiscal policy) it was natural to ask whether theirs would be any different.

Mr Rudd said four times that his fiscal policy “mirrored” the governments, adding that there was not a “slither of light between us”.

On industrial relations, which could affect the economy if it boosted employment and productivity (in fact both were growing faster before WorkChoices) there’s little more than a slither of light as well.

Don’t take my word for it – consider the actions of the Chamber of Commerce and Industry which has commissioned research and advertising comparing the Coalition’s policy not with Labor’s, but with one that would actually be significantly different.

Please - vote how you like in November, but don’t fall into the trap of thinking that you’re helping decide Australia’s economic future.