Swan’s missing link

Connect a number of dots representing events and comments during the past week and spot the missing link in Wayne Swan’s narrative.

Start with three hundred and fifty Toyota workers in Melbourne being made redundant; in plainer words sacked or thrown out of work. Bill Shorten was reported to have said that the workers could tell their children that they did not lose their jobs because they had done anything wrong but because of the high Australian dollar.

As an aside, picture the family scenes as hundreds of unemployed workers, on Mr Shorten’s advice; gather their children about them to explain the relationship between the Australian dollar and the Chinese Yuan. No doubt this will provide much consolation and comfort to families, without a weekly wage, struggling to pay the rent or the mortgage. You have to hand it to these modern day labour leaders turned pollies in their well-cut suits; they really are in touch with people in “Struggle Street”.

But back to the main point: apparently Mr Shorten refused to comment on whether he agreed with AWU’s national secretary Paul Howes that the Reserve Bank had added to pressure on the dollar by failing to cut interest rates.

At more or less the same time as Toyota was sacking its workers, the ANZ was putting up its interest rates. Craig Emerson made the point that bringing the budget back into surplus would contribute to lowering interest rates. Mr Swan has also recently said that a surplus would give the Reserve Bank more room to cut official interest rates:

Just as it was right to step in and support demand when it was needed, it’s right now to be stepping back to provide space for the private sector to grow and to ensure the Reserve Bank has the flexibility to cut interest rates further if it thinks that is necessary.

Here we have a pattern of commentary and events which make some economic sense; even if it encompasses Mr Swan’s Keynesian quackery and is only part of the story. Workers have been sacked because the high value of the Australian dollar has made Toyota’s operations less competitive. Part of the reason for the high dollar has been that interest rates in Australia have been kept relatively high. Bringing the budget into surplus will allow lower interest rates, which will, in turn, tend to lower the value of the dollar and improve competitiveness.

The missing link in this story is any acknowledgment by Messrs Shorten, Emerson and, most markedly, Swan that running high budget deficits has put pressure on interest rates and on the value of the dollar. Of course that would mean admitting responsibility, at least partially, for 350 workers losing their jobs and, of course, many more besides.

How, you might think, can you sustain the position that bringing the budget into surplus will lower interest rates; yet running deficits has not resulted in higher interest rates? Easy! All you need do is to hold two contradictory stories as both true. Can’t manage that? Well that certainly rules you out as a budding occupant of an economic ministry in the Gillard government.

The federal budget deficit is apparently on track to reach $40 billion this financial year; compared with a forecast deficit of $23 billion when the budget was brought down last May. This follows deficits of $55 billion, $49 billion and $27 billion in 2010/11, 2009/10 and 2008/09; following years of substantial surpluses under Howard and Costello.

Yes, our overall level of federal government debt is still low by today’s recklessly over-borrowed European, USA and Japanese standards. Julia Gillard, Wayne Swan and Penny Wong are right about that, even if I tend to throw up whenever they claim this as though it were their doing. It is absolutely all of Howard’s and Costello’s doing. Not a quark of credit is due to the Rudd and Gillard spendthrift governments. However, don’t expect Gillard et al to be held to account (except in Quadrant maybe). Repetitive propaganda tends to drown out the factual historical record; that’s its purpose after all.

While the position would obviously be much worse if government debt were a lot higher; whichever way you cut it, the need for the federal government to borrow $110 million per day to fund the current deficit is bound to put upward pressure on interest rates. Consider these numbers on the growth in credit aggregates in 2011 reported by the Reserve Bank. Credit outstanding provided by all financial institutions for housing grew by 5.4 per cent; for “other personal” (consumer spending) by minus 1 per cent; for business by 1.4 per cent; but for the government sector by a whopping 26 per cent.

This increase in lending to the government sector by Australian financial intuitions represents only part of government borrowing. There is also substantial borrowing offshore. Sometimes it is said by economic luminaries, who should know better, that offshore borrowing does not increase Australian interest rates. This is economic twaddle.

It doesn’t matter where the borrowing occurs, what matters is what happens to the proceeds. In this case they are spent (and in all likelihood unproductively) and, therefore, command and bid up the prices of a range of resources across the economy. The only reason that the Reserve Bank has not lowered interest rates by more than it has, in this parlous economic climate with the enervating mining and carbon taxes still to come, is out of fear of rising prices. Connect the dots.

The dots are not hard to connect unless you are an economic nincompoop or a two-faced politician. Maybe there is a third and kinder explanation that I haven’t thought of.

Peter Smith’s book, Bad Economics, will be published soon by Connor Court. You can pre-order (post free) here…