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.
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.