The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Wednesday, June 9, 2010

Politicians who are too-smart-by-half...

Prominent economics professor Andrew Leigh of the ANU will be a new ALP candidate at the next federal election. Abstracting away from macro policy considerations, I would almost certainly vote for him if I lived in his electorate.

Andrew writes a regular economics column for the Australian Financial Review. Although I do not always read his articles, they have historically focussed on explaining interesting academic research findings to lay readers, particularly when they have practical, real-world ramifications.

In this way, Andrew has served as an Australian Steven Levitt of sorts (of ‘Freakonomics’ fame). On the occasions that he has been disposed to questioning political policies, he has done so employing economic and evidentiary arguments.

This week Andrew lost some of his objectivity with a disappointingly partisan op-ed in the AFR. Andrew claims that the Liberals under Abbott and Turnbull have developed obstructionist tendencies that are preventing important policy progress. He further alleges that the Liberals are being scripted from the Republican Party’s playbook. The ALP, by way of coincidental contrast, is presented as a much more constructive party that does not engage in these destructive tactics. Here Andrew implies that the ALP are cut from the same cloth as their Democratic cousins in the US, who, he contends, were demonstrably collaborative in their dealings with President Bush.

Andrew’s thesis appears weak and subjective. Any competent political professional can presumably point to just as many examples of the ALP blocking sound policy reforms advanced by the Liberals when they were in power. The GST, which was once favoured by the ALP in the 1980s as a retail sales tax (or RST), is an obvious example that springs to mind.

Andrew argues that one reason the Liberals have been able to thwart policy action is due to an unusual state of affairs in the Senate. More specifically, he highlights the incongruous relationship between Senators Brown and Fielding. One is left wondering what this has to do with the Liberal Party—surely it is idiosyncratic to the individuals in question. Presented with the same opportunities, one would be hard pressed to believe that the ALP would not seek to capitalise on them in the same way.

Perhaps more disconcerting is Andrew’s claim that under Malcolm Turnbull the Liberals sought to ‘delay’ the fiscal stimulus during the GFC. This is incorrect. The Liberals opposed the size and composition of the stimulus (including the ‘Building the Education Revolution’), not the timing of it, as Andrew maintains. Indeed, Turnbull advocated a John Key-style ‘rolling maul’ of stimulatory interventions, unfurled as the circumstances demanded.

With the benefit of hindsight, which is admittedly not something the government had at the time, the Liberal’s strategy may have been the right one. As the chart below from the OECD shows, Australia's fiscal stimulus as a share of GDP was higher than all other developed countries except the US and South Korea. In fact, the public spending component of Australia’s stimulus, which is represented by the purple bars, was larger than any other nation included in the OECD analysis.

A question for economists will therefore be whether given Australia’s benign economic conditions preceding the GFC, and, crucially, the enormous monetary policy ammunition that was available to the RBA to undertake any stimulatory lifting (the cash rate was still 7.25 per cent in August 2008), could we have incurred much lower public debt in combating the crisis?

Recall that the RBA’s cash rate only briefly touched three per cent in contrast to most developed countries that saw their interest rates fall below one per cent, which is where they largely remain today. The reason many of our peers were forced to undertake substantial fiscal interventions was precisely because their monetary policies faced a ‘liquidity trap’ wherein interest rates had reached their lower bound.

If, in this counter-factual, Australian interest rates had been allowed to fall further as a substitute for government spending, we would have in turn required less fiscal policy ‘austerity’ down the track as the recovery commenced. It is clearly in part because of the size of the Australian government’s fiscal deficit that the RBA has had to quickly ‘normalise’ interest rates as the crisis passed.

The chart below from the RBA is revealing in this regard. Observe that whereas the interest rates controlled by central banks overseas have remained incredibly low, Australia’s cash rate, which is denoted by the top blue line, has risen very sharply. With less government spending, the trajectory of rates in Australia would have presumably been somewhat different.

The notion that the Liberals wanted to delay fiscal stimulus during the GFC is one cornerstone of Leigh’s claim that they have been relentless in obstructing robust policy. But his comment that "delaying would have been absurd in the case of fiscal stimulus, since the very point of such a package is timely action" is nothing more than a partisan straw-man. Andrew is better than this.

Authenticity is a vital, yet all too rare, attribute in politics. One of Malcolm Turnbull’s mistakes during his first term as opposition leader was his willingness to discard his ‘real-world’ charm—borne from a life successfully spent outside of politics—and embrace orthodox strategies. There is a case that with the exception of the ETS and criticisms on the execution of the government’s response to the GFC (eg, the nature of the deposit guarantees), the Liberal Party was a policy-free zone. And Turnbull began to lose the one thing that distinguished him from almost all of his contemporaries: he was not a professional politician.

Andrew Leigh needs to be careful that he does not fall into the same tempting trap.