Saturday, November 29, 2008

Talking down v acting up

There's an old saying:  "If you keep your head while all those around you are losing theirs, you don't understand the situation."  It's one thing for politicians to try to keep their heads.  But it's something entirely different if politicians use the requirement to keep calm as an excuse not to reveal the truth.

For the past few months, we've been assured time and time again by Prime Minister Kevin Rudd and Treasurer Wayne Swan that the federal budget won't go into deficit.  After all, the Prime Minister was meant to be an "economic conservative".

And then suddenly two days ago on his return from the Asia-Pacific Economic Co-operation meeting, the Prime Minister announced we were facing a "temporary deficit".  Obviously his meeting in Peru was a life-changing experience.  Apparently he now believes there's no point in "sugar-coating" the situation.

One minute the Australian public is being instructed not to "talk down the economy", the next minute we're informed "we're all in this boat together" and "it will get worse before it gets better".  It shouldn't have taken a visit to Lima for the Prime Minister to realise that financial conditions are, depending on how you look at it, bad, very bad, or terrible.

Politicians, central bankers or Treasury officials should not be in the business of either talking the economy up or down.  Their task is to present the facts so the public can make up its own mind.

Reserve Bank of Australia governor Glenn Stevens has also been preaching the mantra of not talking the economy down.  Last week, he told the Committee for Economic Development of Australia annual dinner that "about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness".

Presumably he thinks such talk would be worse for the economy than the Reserve Bank keeping interest rates too high for too long.  The governor admitted that, "yes, the situation is serious", but he went on to say the situation was not so bad as to warrant "some of the gloomy talk that is around".  These words are not dissimilar to those attributed to Austro-Hungarian bureaucrats facing defeat in World War I and the disintegration of the empire.  "The situation is critical, but not serious."  One wonders just how bad things need to get before they're serious.

For all the discussion about it, no one has yet explained what "talking down the economy" actually means.  And it's doubtful whether anyone actually takes any notice of what politicians say about the economy anyway.

The electorate and home owners are more sophisticated than politicians give them credit for.  Six months ago, shop assistants and waiters were noticing what the Reserve Bank missed.  A restaurant owner who comments that bookings have fallen by 20 per cent is hardly "talking down" the economy.  He is simply stating a fact.

Presumably politicians think that pondering doom will stop consumers spending their money.  We're now coming to fear the so-called "paradox of thrift" whereby an economic recovery is delayed as people become too scared to open their wallets.  However, the collapse of economic growth is the product of something more than just weekend shoppers in suburban malls deciding to buy two DVD movies rather than three.  In the face of immense uncertainty, stopping or at least delaying spending is probably the most rational thing consumers and businesses can do right now.

Stevens's remark that "the biggest mistake we could make" would be to talk ourselves into unnecessary economic weakness is somewhat of a rhetorical flourish.  There are plenty of things worse than talking about the dire condition of the world.

For example, we could introduce an emissions trading scheme before anyone else in the world and so guarantee a cut in our economic growth.

Or in the face of what might be the worst financial downturn since the Great Depression, we could change the law to make it harder for businesses to sack underperforming employees.  Or just at the time when we need to attract the best talent to public company boards, we could impose even more liabilities on company directors.  Or we could introduce new arbitrary restrictions on foreign investment.  Or we could spend billions of taxpayer dollars propping up unviable manufacturing industries.  And the list could go on.

Funnily enough, these are all things the Labor government has done or promised to do.  If the choice is between having a populace talking about how bad things are and having a government implement bad policies, there's no contest.


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