John Howard says that interest rates will be higher under Labor than under him, and so journalists run out and find a bunch of experts to say that governments have little or no effect on interest rates. They could save their time, because governments do have an effect on interest rates, and even if they don’t, voters believe they do, so as far as election results are concerned, they might as well.
Which is not to say that John Howard has a particularly circumstantially strong argument. A friend, Michael Lee, provided me with this chart. It shows interest rates from the days of Billy McMahon through to the present, both here and in the USA. One can see that under the Howard Government rates have been dramatically lower than under the Hawke/Keating governments – an average of 11.46% versus 5.46%. But it shows a quite different story when comparing the Whitlam and Fraser period. Under Whitlam, interest rates averaged 9.42%, while under Fraser they averaged 12.33%. So the circumstantial evidence to support Howard’s case only appears to hold true in the case of his government versus the previous one. A point that Latham has made.
But there are a few more wrinkles in the circumstantial case, which don’t help Latham. In the period before Whitlam took office, rates had averaged 6.35% since 1969. During his watch they topped out at 21.75% – a figure a touch higher than any reached by Fraser, contrary to Latham’s assertions. So, while the Fraser government did have higher interest rates on average than Whitlam’s, it also inherited a rapidly accelerating trend. One can only speculate what heights Whitlam might have reached if he had inherited the same interest rates of 8% from his predecessor as Fraser did. This leaves Howard with the circumstantially arguable case that the last 30 years have represented a struggle by Liberal governments to get control over interest rates that have run away under Labor Governments.
One objection often raised to Howard’s circumstantial argument is that Australian interest rates mirror overseas interest rates and Howard is just a beneficiary of a benign international interest rate climate. There is some truth in that, but only some. As the graph shows, based on comparing our 90 day bills with US 90 day treasuries, under Labor, in Australia interest rates have been dramatically higher than in the USA. Even though our rates have mirrored international fluctuations, those fluctuations in Australia have been vastly exaggerated on the high side.
So much for the circumstantial argument. What about the causal relationship? Is it true, as Bob McMullan claimed yesterday that “Interest rates don’t respond to political parties, they respond to good policy…History doesn’t support what John Howard is saying, independent commentators don’t support what John Howard is saying, the financial markets don’t support what John Howard is saying.”? The Herald Sun summarised this as “Interest rates [go] up and down regardless of which party [is] in government”.
The answer is no, judged on the basis of history. Political parties do have an effect, because policy and how they implement it is born out of the sort of organisation that they are. Labor tends to want to do more than is financially possible. In fact, Australia’s interest regime became volatile in the 70s as a result of the mismanagement of the Whitlam government where government expenditure grew well out of control so as to fund Whitlam’s wish list. Keating innovated more modestly on the tradition, but given a choice between growth and moderation, he used to go for growth, and boast about it, until he had no choice but to hit the brakes. Journalists may not remember these things, but ordinary voters, even if they can’t remember the particulars, remember the effects. Latham may be different, but will voters take the punt?
Of course, it is not so long ago that Bob McMullen was claiming that Howard was bad for interest rates, so his record as an economic analyst is a bit opportunistic. In fact, he has a lot of front to make the accusation later in the article that “It’s just another instance when the Australian people can’t believe the Prime Minister”. Whether or not interest rates go up under Labor, the speculative bubble that is most interesting to watch is the one in accusations of lying. If they continue to deal with the facts like this, it may burst for them sooner rather than later.