Impartiality and economic pick-up lines

From a blatantly partisan perspective I guess I am somewhat pleased that the RBA has deigned to stick its neck out and suggest that the Rudd Labor Government’s first budget is “mildly contractionary” overall. As Scott Murdoch notes for the SMH, this is manna from heaven with respect to economic credibility for the government. Certainly what we have seen over the last few months is that different economic commentators have interpreted the budget differently, with the result that the mainstream media outlets have been polluted with mixed messages. Inherently this sort of environment benefits the Federal Opposition, with Shadow Treasurer Malcolm Turnbull needing only to reference the expert opinion of some of the commentators who heavily criticised the budget to score some points. The government can of course reference the expert opinion of other commentators who offered begrudging approval, but the result of such a rebuttal is that the average observer is left feeling unsure of who they should really believe.

In this modern era of economic conservatism, of course, the opinion of the RBA board is held in markedly higher esteem than your average economist, and it is likely that Federal Labor is going to be able to dine out on this little “mildly contractionary” comment for some time. The “is not”, “is too” squabble between those two argumentative siblings in parliament (Wayne and Malcolm) has arguably just been settled for the time being; settled by the booming voice of an angry father that leaves Malcolm somewhat chastened and Wayne quiet, but vindicated.

Part of me can’t help wondering, though, whether the RBA board has gone too far by including an explicit summary interpretation of effect of Labor’s budget policies in its public minutes. The crucial line from the minutes is as follows:

Measured in terms of the change in the surplus, fiscal policy was expected to impart a mildly contractionary effect on the economy in 2008/09.

It is one thing to suggest that a certain policy measure is likely to be on balance inflationary or inflationary, and quite another to suggest without rigorous and public explanation that fiscal policy is on the whole inflationary or not inflationary. To be honest, I would have thought it was bordering on misleading to attempt to interpret fiscal policy based solely on the state of the surplus, without at all considering the associated policy measures that the government has implemented.

It’s likely that this little observation from the board was included flippantly rather than because the board’s impartiality is in question, but either way on the whole I don’t think it is particularly helpful – except for making the government feel a little good about itself.

Picking fights with Glenn Stevens

The Coalition are still in search for a strong position to take to the media and the electorate when it comes to matters of inflation and interest rates. To be honest they have it bloody difficult; the Rudd Government has all the running on this issue, given that the Howard Government can in some respects be judged politically culpable for the current situation. We have not quite reached the point from which the Coalition can implicate the government in the blame for future potential interest rate rises, and any attempts to do so would no doubt draw an immediate and likely quite convincing rebuttal from Messrs Rudd and Swan.

Opposition Leader Brendan Nelson’s latest approach seems to be to beat up on the RBA. He does not seem to be ready to question the economics of the bank’s recent decisions to raise interest rates, but rather to question whether the RBA is taking into consideration the stress being placed on those with home loans:

In an unprecedented swipe at the bank chief, Dr Nelson said he supported the independence of the Reserve, but added: “I don’t believe that independence should be incompatible with sensitivity to and caring for the people that are affected by (monetary) policies.”

I am not particularly convinced this is a wise line of argument to run with, although one can see it starting to resonate with the electorate should the interest rate hikes continue to come thick and fast over the next year or two. If it does resonate, of course, it will only be for somewhat dubious reasons. The reality of course is that the Reserve Bank board does not invite mortgagees with their tales of woe into meetings, and base their decisions on their lamentations. The board bases its decisions in relation to interest rates on what it thinks is most suitable for the national economy, given the prevailing conditions. The measures at the board’s disposal are simplistic and really quite blunt; it does not really have the instruments at hand to treat any wounds it may be inflicting on the faceless thousands with mortgages across the country. If such “treatment” is indeed deemed necessary, it can only be realistically be meted out by the elected government of the nation, not the unelected board of the national bank.

In short, if Nelson wants to speak out on behalf of those Australians who are suffering financial stress as a result of the state of the national economy, he should be encouraging the Rudd Government to do something about it, and not pestering Glenn Stevens.