Gazing into the crystal ball

Courtesy Terry Sedgwick

I’ve been getting increasingly puzzled about the course of this election campaign.  Both parties are promising tax cuts and spending programs that would make a drunken sailor blush, although the Coalition has decisively outstripped Labor ($65 billion to $50 billion so far, according to blogging economic journalist Peter Martin).  At the same time, the Reserve Bank is trying to reduce demand in the economy by ratcheting up interest rates, and warning that it will keep doing so in the absence of some moderation of inflationary pressures.

Meanwhile, John Howard blithely denies that his desperate electoral spending splurge is inflationary:

Mr Howard denied that the spending would be inflationary because the budget was still in surplus and the government did not have to borrow money to make the commitments.

“It would be wrong of the government to hold that money in ever larger surpluses, he told ABC radio in Brisbane.

You have got to have balance.

Mr Howard said while there were inflationary pressures in the system, they were not great and were driven by drought, higher oil prices, as well as being caused by a strong economy.

It’s a bit like arguing that, because a bushfire was started by a lightning strike, it’s perfectly rational and responsible to pour petrol on it. 

The Reserve Bank disagrees:

Domestic demand has continued to grow strongly, with consumption, business investment and public spending all making significant contributions. …

In summary, the economic situation under consideration by the Board at its recent meetings has been one in which the key domestic data on prices, demand and activity were pointing to the likelihood of stronger medium-term inflation pressures.

Economic commentators universally interpret the RBA’s statement as signalling more interest rate hikes, the first of them very probably as early as next month. The additional $9 billion Howard poured onto the inflationary bonfire yesterday almost certainly means multiple future interest rate rises are now assured.

Moreover, it’s perfectly clear that Howard knows that his promises are economically irresponsible.   The RBA’s statement was released just minutes before Howard rose to deliver his speech yesterday.  Why else would the speech have carefully omitted the cost of all those desperate Rudd-emulating retaliatory “me-too” promises?

If by some extraordinary miracle (or catastrophe depending on your viewpoint), Howard’s desperate mix of big-spending promises and bizarre anti-union fear campaign should somehow work and allow the Coalition to scrape back into government, what then?  Peter Costello is hardly likely to be sanguine about an economic situation which ensures multiple successive interest rate rises over the next year or more.  As UWS economist Steve Keen explained recently on the 7:30 Report:

[T]here has been a substantial rise in real wages in the last 17 years since the depths of the 1990s recession, so if you go back to the 1990s recession and compare real wages now to real wages then you see they’ve rise by about 25 per cent, which is quite substantial, but across the same time period the real interest burden has gone up by over 250 per cent, more than 10 times as much. Even if you look at the last election, since the last election, real wages have risen by about five per cent, which is a significant achievement, but across that same time period the real interest rate that households are facing has gone up by almost 50 per cent, so interest rates are cutting more and more into the costs of living, which is why people are not feeling that they’re better off than they’ve ever been before.

Moreover, this record household debt burden isn’t evenly distributed.  Almost two-thirds of owner-occupied households have no mortgage at all, but it’s the other third  of households holding the lion’s share of debt that would be causing sleepless nights for Costello, not to mention rental property-investing households with highly geared second mortgages.  Those households tend to be clustered in the aspirational suburbs of Sydney and Melbourne where lots of Coalition marginal seats are also located.  Just as with Paul Keating in 1996, at the next federal election they’ll be waiting for the newly-installed Smirking Prime Minister with baseball bats if they end up being subjected to an ongoing series of interest rate rises over the next year or more.  Whether most of them are genuinely mortgage-stressed or just vexed by frustrated greed (see Peter Martin’s column today) doesn’t really matter for political purposes, as Keating discovered to his cost.

Costello must surely know that.  Would he really stand by happily while John Howard condemns him to a worse-than-Keating-like fate of less than a single term as PM after political eons in waiting?  What’s going on?

Here’s a couple of thoughts.  Howard has already announced (however reluctantly) that he’s retiring soon.  He’s notorious as a politician with no compunction whatever about expedient lying, ever since he invented that semantically delicious concept “non-core promises”.  Howard has internalised Richo’s political maxim of doing “whatever it takes” to get elected and elevated it to an almost unprecedented performance art form.  As historian Ross McMullin observes in today’s Age newspaper:

John Howard, the leader who said in opposition he would make a priority of restoring trust in politicians, has in office placed himself in a class of his own for deceitfulness in modern Australian politics. Since Federation, in fact, only Billy Hughes who was prime minister from 1915 to 1923 could be ranked with Howard for public untruthfulness (short-lived prime minister Billy McMahon was regarded as a notorious liar, but it seems this was more evident in private than in public).

The only plausible explanation I can see for Costello’s remarkably sanguine demeanour in the face of electoral promises which would certainly condemn him to the igominy of a half-term Prime Minister if implemented in their entirety, is if Howard has privately promised Costello (and the rest of the Cabinet that said it wanted him  gone only weeks ago)  not only to promise the Australian public whatever it takes (including sabotaging the economy) to get the Coalition across the line, but also thereafter to preside over a post-election bloodbath where he proceeds to break as many promises as it takes to re-establish some semblance of responsible economic policy.  Enough at least to avoid the need for too many more successive interest rate rises and to induce all those mortgage-burdened householders to put their baseball bats back in the cupboard.  The unworkable WorkChoices “fairness test” will be dismantled or completely gutted so employers can revert to stripping away wages and conditions with impunity, and a razor gang will get to work abolishing pre-existing spending programs and inventing ingeniously impossible-to-meet qualifying conditions for new promises that can’t otherwise be evaded.  The whole exercise will be “justified” by the occurrence of some local or international event (like more fallout from the US subprime mortgage meltdown) which Howard will assert however implausibly was completely unexpected and which necessitates sudden and drastic action in the national interest.

Howard would cop all the odium of treacherously broken promises, and then retire and hand over the reins of power to a “cleanskin” Costello, who will embark on an ostentatious campaign to cleanse the Augean stables of the stench of Howard-ism and restore integrity to government (just as Howard professed to do after ousting Keating in 1996) , while assiduously avoiding any attempt to reverse the economic thrust of Howard’s razor gang and trail of broken promises.  

The current state of the opinion polls strongly suggests that we’ll never actually get to see this saga played out in real life.  But I bet I’m right just the same.  Moreover, if Howard and Costello get really really lucky, the subprime crisis might cause a major US economic slowdown or even a recession (preferably a fairly modest one), so they could avoid further interest rate rises without the need for a drastic and risky slash-and-burn.  That Costello does indeed dream about this paradoxically tantalising prospect was confirmed by his faithful puppet Glenn Milne’s column yesterday.

About Ken Parish

Ken Parish is a legal academic, with research areas in public law (constitutional and administrative law), civil procedure and teaching & learning theory and practice. He has been a legal academic for almost 20 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in the early 1990s.
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14 years ago

Club Troppo

Sans Blog
Sans Blog
14 years ago

Will Howard really retire midterm if he’s re-elected? I don’t think so. I believe he’ll leave it to the end of term and then hand Costello a poisoned chalice.

Sans Blog
Sans Blog
14 years ago
Ken Lovell
14 years ago

Ken I think you’re crediting Howard and company with too much capacity for rational planning. They are currently in the mood to do whatever it takes to get back into power. That much has been obvious from the incoherent, half-baked announcements made on the run about everything from WorkChoices to the Mersey Hospital to the Murray-Darling Basin to 100 other things, not forgetting the Indonesian apes. Costello is caught in a complete bind. If he raises the slightest objection to Howard scattering cash from the regal balcony he risks being accused of disloyalty and sabotaging the campaign.

I don’t believe they’ve given a moment’s thought to the issues that you raise. Politics has become a game played exclusively in the present tense, the message is infinitely more important than the substance, and they’ll worry about more interest rate rises next year.

Spiros
Spiros
14 years ago

Ken, your analysis is half right. Howard is promising everything to get over the line. After that, he doesn’t care if he hands Costello a poisoned chalice. It would be completely out of character for Howard to take the rap on anything, let alone to help out Peter Costello, who he hates with a passion (and vice versa, it must be said).

This is history repeating as farce. The dynamic duo of Malcolm Fraser and John Howard, spent up hugely in the run up to the 1983 election. Boondoggles on that occasion included the redevelopment of Brisbane airport in a desperate (but as it turned out, futile) attempt to hold on to a swag of marginal seats in Brisbane. Two of the key seats in question were Griffith and Lilley, then held by the Liberal party, but won by Labor in that election. In a nice touch, those seats are now held by Kevin Rudd and Wayne Swan.

Ptobias
14 years ago

Ken, I read Milne’s piece as a set-up for Costello’s narrative in opposition. If the economy turns south he can say, “See – I told you there were storm clouds and tidal waves on the horizon, and I told you Labor couldn’t handle it.” If it doesn’t, there’s a decent chance interest rates will go up some more, and he can say, “See – Labor can’t keep interest rates under control.” I don’t think they expect to be running the economy for the next three years, so at this point the inflationary nature of their promises and the prospects of an economic downturn only matter in relation to how they can blame the problems on Labor.

Niall
14 years ago

I’m of the opinion that the coalition’s splurging is akin to a military tactic which deprives the enemy of much needed resources during a retreat action. Scorched Earth. If the Howardians are going down, which seems likely, they’re creating an environment for Labor to inherit which will prove to be a fertile ground upon which to attack them from Opposition. If the Howardians retain power, it’s a simple matter to invoke the ‘non-core’ promise stance and reneg on the many & sundry spending programs, citing economic responsibility. Something which is lacking in their ranks of late.

Joshua Gans
Joshua Gans(@joshua-gans)
14 years ago

But Rudd can reneg too, as Howard did in ’96 and Hawke in ’83, claiming that they had been misled about how bad the books were.

Chris Fryer
14 years ago

“… if Howard and Costello get really really lucky…”

Oh my God don’t even dare to suggest that.

“Its a bit like arguing that, because a bushfire was started by a lightning strike, its perfectly rational and responsible to pour petrol on it.” Thats bloody funny and it’s true too.

I think Niall is right it is a scorched earth policy.

marty
marty
14 years ago

That a discussion of a scorched earth policy and deliberate sabotaging of the economy as a political tactic can be discussed without there being a sense of shame and disgust in the wideer public or mainstream press says something about where the Rodent has taken us over the past eleven years, I think.

It’s really quite distressing.

Caroline
14 years ago

Costello, I dare say, knows they haven’t got a hope in hell of being re-elected which is why he can afford to look so sanguine in the face of what can only be regarded as Howard’s vain and ill-advised spend up. Sweetie can continue to smirk, as he knows too that it will be PM Rudd who will wearing the opprobrium resulting from increasing pressures on inflation and inevitable interest rate rises. To all intents and purposes for an electorate with a short memory the Coalition will get off scott free and will be free to continue with their charade in opposition that they were/are the better economic managers.

The economy is going full steam ahead and aside from turning us into an economic totalitarianism, I’d imagine that all any Government can do to slow it down is to tinker at the edges and not aid it on its crash course.

Howard has mused that he might hand over to Costello in 18 months to 2 years if re-elected. I don’t imagine that gives anyone, anywhere, any joy whatsoever.

Robert
Robert
14 years ago

There’s little doubt Howard could sell an economic shake-up if returned – “look, things are changing, this is in the national interest” – and the punters would easily buy it (more than they’re buying his profligacy), being seen as sensible.

Recently some pretty serious reports brought to light that Howard is not so well liked in his party now, if not downright resented. Howard, returned, would be publicly hailed a hero for the post-poll honeymoon but what then? He’ll have to pull off a significant win to stop the wolves from tearing into him, on the basis that they can’t afford to slide along just for the sake of Howard’s personal desires all the while losing days to reset the leadership. And back in, the leadership transition to Costello is no given – who’s to say there won’t be other contenders from the comfort of office seizing this leadership moment, the first and best for twelve years?

We could have a situation, within weeks, where the leadership issue goes rampant. Let’s face it, back in, they won’t have an agenda to inspire them; it will be personal ambition to the fore, to carry whatever new direction each of them believes the party(s) must now take. Howard will be fighting like hell to rort that, but how? They don’t want him. He can hardly brutally reshuffle the cabinet, as it would be seen as outright dictatorship. What’s he to do?

Perhaps his best chance resides in a major economic reshuffle of some kind, and sell that to the public with the approval of the experts. He’d then have won a fair bit of public goodwill back, and perhaps could leverage off that while those under him slash and bash themselves to bits. That way he does nothing about the leadership issue, and watches it burn out under him, taking casualties, with perhaps no-one able to mount or win a challenge. Costello would be effectively dealt with by others, with Howard doing nothing. Under that scenario he could be there for a lot longer than told, as no one is a stand out to take the numbers for a spill, and Howard could arrange the issues and agenda to deny any one a straight and clear avenue to build public and internal momentum to obtain them.

Costello, the leadership leaking, the beloved economy liferaft, his long term maniacal vision for retaining the job, all put to bed.

Anything could happen – except, surely? more of the same, as ‘promised’. Who knows. Howard may even ride a social agenda for a couple of terms, reinventing himself at every turn, dealing piecemeal policy one step ahead all the while of a system which can’t flush this sort of shit out?

JM
JM
14 years ago

“The only plausible explanation I can see for Costellos remarkably sanguine demeanour …. [etc]”

Nup. The basic thing to understand about Costello is that he’s a coward. He wants it handed to him on a plate. He is completely unwilling to take what is his – and he never has. In every instance he’s waited to be drafted “oh really, if you must … I guess I can take a bullet^H^H^H^H^H^H^H^H^H^H^H^ gift for the team, oh well, one does what one must ….”

He’s a weakling, Kroger’s the hitman.

Bring Back CL's blog
Bring Back CL's blog
14 years ago

Howard always spends up big when he panics.
This time round it will not work.

The Anhilliator has a get out clause.

Ken Henry will tell him the actual state of the books when he assumes office and I am hearing quite strongly that the ALP will ‘ditch’ ssome of its policies when they ‘discover’ how bad the structural part of the budget is and how relaint revenie is on company profits from commodity companies indeed the budget will plunge to deficit if ssomething isn’t done.

By gingo haven’t I heard this story before?

Geoff Robinson
14 years ago

Liberals are prone to this, the almost hyper-inflationary boom of the early 50s was driven in part by Menzies pumping up the economy in disregard of Coombs’ advice. J K Galbraith in the 1950s pointed out that the affluent society encouraged a growth in consumer debt that made economic management more difficult.

Joshua Gans
Joshua Gans(@joshua-gans)
14 years ago

Homer

Yes, you heard it in Comment #8.

Bring Back CL's blog
Bring Back CL's blog
14 years ago

gimme a break.

i have been rabbitting on this for yonks.
it is readily apparent if one examines the MYEFO

Niall
14 years ago

Re: #8, I didn’t suggest that he couldn’t, James, but Howard most definitely will, IF he manages to get re-elected. He’ll have no choice given the extent of his largesse of late.