From my recent Fin Column.
Recent articles in the Sydney Morning Herald and The Age – sister publications of the AFR – told us that Warwick McKibbin has concerns about the Labor government’s stimulus programs. As those newspapers say, McKibbin is a prominent economist: he is the executive director of the Australian National University’s centre of applied macroeconomic analysis. But what distinguishes him from other professors – and what makes McKibbin’s views noteworthy – is his second hat: for the last nine years, he has been a member of the board of the Reserve Bank. That position gives McKibbin access to Reserve Bank macroeconomic research and analysis. It also allows him to learn of any Treasury views which the secretary of Treasury, Ken Henry, might share with his fellow board members. Thus, when we read about McKibbin’s statements we do not judge them in the way we might assess musings from the score of other economics professors at ANU or the hundreds of economics professors at Australia’s 38 other universities.
One complaint McKibbin reportedly made about the government’s stimulus is that “It wasn’t evidence-based policy, they panicked”. Readers were not told how McKibbin came to this conclusion, but information available to the public – mainly through evidence provided to the Senate Estimates committee – does not support his view. Treasury was aware of economic literature about the effects of stimuli, although little analysis existed anywhere about the likely impacts of the global financial collapse. And reports praising Australia’s policies from the International Monetary Fund last November and from the Organisation for Economic Co-operation and Development in September give no comfort to McKibbin’s argument that the government’s spending package was the result of panic. The government had to act quickly to ensure confidence was not destroyed, but there is no evidence that it acted precipitously or extravagantly.
Indeed, McKibbin could have mounted an argument that the government responded too slowly. In October 2008, a month after Lehman’s collapse, the government showed no willingness to use the budget to increase domestic demand, so worried was it about the political consequences of allowing a budget deficit. It was only in early 2009 that the government introduced programs to protect employment and even then unemployment increased. The Reserve Bank, on the other hand, started to unwind interest rates in September 2008. If the government acted irrationally by introducing spending programs in January 2009, McKibbin might think that the Reserve Bank acted hysterically by cutting interest rates in the previous year.
McKibbin is also unimpressed by some of the government’s spending package. “They put money into school buildings, they put it in insulation, they put it in stuff they could never reverse”, he was reported as saying. Some government programs involved rapid one-off spending by way of grants, some involved short-term taxation incentives and spending on insulation, some involved longer-term spending on infrastructure. None of these is reversible, although it is not clear what McKibbin means by that term. The government can, however, stop, reduce and postpone spending – as some argue it should because the programs have been more successful in stabilising employment than anyone could have reasonably contemplated. The government’s approach was pragmatic and practical, features which might not easily be present in what McKibbin calls a reversible program.
Another McKibbin gripe seems to be that he was not asked before “the government rammed those decisions through the economy even though they were fraught with risk. No one was consulted about an alternative view, and if you did say something you were attacked by the Treasurer and the Prime Minister in public.” Perhaps McKibbin believes his position at the Reserve Bank entitles him to provide advice to government before it finalises decisions. If so, he has a curious view of the workings of government.
But the major problem with McKibbin’s comments is that he necessarily allowed his position as a member of the Reserve Bank board to be used to air his views and, at the same time, he provides insufficient evidence to make those judgements credible. When you wear two hats simultaneously you have a presentation problem that needs careful management.