Sunday, 11 November 2007

Increasing Rates of Disinterest

All this talk about interest rates is starting to get on my nerves. There's been an awful lot of hot air and spin, and very little in the way of facts.

So here's my contribution. I'll let you decide which category it falls into.

The view on the right way to manage the holy trinity of inflation, interest rates and money supply has changed a lot over the last fifty years, particularly in Australia.

In 1996, it was decided that interest rates would be the lever used to control inflation. Prior to this, inflation was controlled by increasing or decreasing the money supply, or by changing various taxation bases. Interest rates were more or less left to their own devices (unless macroeconomic intervention was desperately needed, like Keating's "recession we had to have").

This fact makes recent comparisons between historical interest rates, and which political party happened to be in power at the time, somewhat spurious. And those using this tactic for political gain know this better than anyone else.

Before the 2004 election, interest rates were at record lows and the Coalition, under Mr Howard, won that election by claiming that they would keep them that way. Now interest rates are going up, and they've had to find another angle.

When Mr Howard says that interest rates are up because inflation is up, he's right. When he says inflation is up because the economy is doing well, he's sort of right, but he's starting to lay some spin.

Inflation goes up when demand is up, which can be good. It shows confidence. What is not good right now is that demand is actually outstripping supply. We have demand all over the economy for goods and services, which cannot be met. This is a simple case of limited resources. Or in econo-speak, a lack of capacity.

There aren't enough tradies to build the houses people want. There aren't enough accountants to count all the money flying around. There isn't enough manufacturing power to make all the shit people want to buy.

And it is this economic capacity that is the Government's responsibility. And it is in this area that they have failed.

Mr Howard likes the image of the Government of the day standing proudly on the stern of the economic ship, its hand firmly on the rudder. He does his level best to project this image via the media.

It's all rubbish of course. The only real way the Government can influence interest rates is indirectly, by influencing inflation. And the only way it can do that is either by reducing wages through its IR policies, investing in economic capacity, or increasing taxes.

And here's the point: the only real difference between the Coalition and the Labor party is that the Coalition is all about the first option (which we've seen through their changes to the IR laws) and the Labour party is (or at least claims to be) all about the second. Neither of them are likely to do the third anytime soon.

When Howard promised lower interest rates during the 2004 election, he was thinking that his planned decimation of the IR laws would be enough to achieve his promise for him.

Mr Howard seems to place no stock at all in the value of economic capacity. He's banked everything on his IR changes, which are so deeply unpopular that they're unlikely to last in their intended, draconian, form. And even if they did, they still wouldn't be enough on their own.

So whichever party wins the election on the 24th, we better start seeing some serious investment in infrastructure and education very soon afterwards.

If we don't, then regardless of who wins, it's all looking a little bleak.


Kate said...

Oh, thats cheery! Honey there are many reasons not to vote for Little John and his posse of idiots (tried to think of another word but this really is the most accurate description). I'm sure however it would take more than 60 blog entries.

And remember, friends don't let friends vote liberal...