Wayne Swan's memoirs of his time as treasurer, The Good Fight, spend a great deal of time on the global financial crisis.
As Swan presents it, the case for massive fiscal stimulus was a slam dunk. Only fools and knaves would disagree.
There's no sense in his memoirs that fiscal stimulus was a policy experiment under conditions of enormous uncertainty. The stimulus is just used as evidence that Swan isn't afraid to make the big calls, isn't afraid to back himself etc., etc., etc.
So more interesting than anything in the book is a memo, two short pages, prepared for an August 2008 meeting in the Lodge between Swan, Kevin Rudd, treasury secretary Ken Henry, and their staff. Swan released it as part of the pre-publicity for his memoirs. It's available here.
The memo underlines the policy trade-offs behind the stimulus decision, how political considerations swamped economic ones, and brings back into the picture an apparently forgotten pillar of Australian economic management: the poor old Reserve Bank.
In other words, this two-page memo is a better policy history of the GFC in Australia than anything yet published.
The memo was prepared just before the September collapse of Lehman Brothers turned an American housing crisis into a global financial one.
(For context, the first Australian stimulus package, $10.4 billion, was announced in October 2008. The big one came in February 2009. It was $42 billion.)
Economies with central banks have two policy options on the table when there's an economic downturn — monetary policy and fiscal policy.
The monetary response comes from the Reserve Bank as it adjusts the cash rate to balance inflation and growth. This happens once a month, in good times and bad, no matter what the elected government does.
The fiscal response has two parts. First are the "automatic stabilisers": economic downturns lead to increased government welfare spending. Second are discretionary stimulus packages, determined by political considerations and the sluggishness of policy implementation.
Why is fiscal policy needed? Well, monetary policy, it is widely believed, has a limit. When the cash rate is at or near zero (the "zero-bound") it can't go lower.
For economists like Paul Krugman, Brad DeLong and Larry Summers in the United States, the fact that interest rates are at the zero-bound means monetary policy has been neutered and fiscal policy has to take over. (For that argument, see this 2012 paper by DeLong and Summers.)
An alternative view is provided by Scott Sumner, who argues that the zero-bound doesn't mean monetary policy is ineffective — central banks have more tools than just the cash rate. (You can read Sumner's argument here.)
It's an interesting debate. But from an Australian perspective it's beside the point. We never got to the zero-bound. We never met the initial condition for discretionary fiscal stimulus. In Australia, monetary policy still had a lot of room to move.
The August 2008 memo opens with the observation that the RBA was deliberately trying to slow the economy down in the first half of that year. But the RBA had overshot. The slowdown was "occurring more sharply than initially anticipated". This was the context for the early stimulus planning — a bad RBA error.
In October 2008 the RBA changed course and cut the cash rate by a full percentage point. In his book, Swan writes how the rate cut news came during a cabinet committee meeting into stimulus planning. The committee was stunned into silence.
"Without doubt this changed the entire dynamics of events over the next 18 months."
What extraordinary timing. But should the October rate cut really have been such a cause for panic? Only insofar as it demonstrated how badly the central bank had misread the economic climate. Over the course of the next six months the RBA completely reversed its earlier policy, plunging the cash rate from 7.25 in August 2008 to 3 per cent in April 2009.
Tony Makin pointed out a few years ago that, from the perspective of individual consumers, this interest rate fall made the $900 cheques look like chicken feed.
But there it stopped. The cash rate never approached zero. It never got close. Even as the stimulus package was being rolled out the RBA began to lift rates. First in October 2009. Then in November. Then in December. Then in March, April, and May 2010.
Those increases were predictable. It's what the memo said might happen: "The Reserve Bank through its control over interest rates, determines the overall level of aggregate demand in the economy, and the Bank would likely take account of any fiscal stimulus in its monetary decisions — that is, more spending would keep interest rates higher than otherwise."
As Stephen Kirchner writes, that's a pretty good description of the "monetary offset". When a country has a central bank targeting inflation and growth, fiscal stimulus is redundant. It's both costly and unnecessary.
So why did the Rudd government push so hard for stimulus? Once again, it's right there in the document: because of "the potential political costs of being seen to do nothing in the face of slower growth and rising unemployment".
Monetary policy is hardly nothing. But the government couldn't take credit for it.
The decision to deploy massive fiscal stimulus set in train all the events and personality clashes that defined Labor's term in government.
The debt racked up in those few months crippled Kevin Rudd's policy agenda, undermined every one of its future budgets, and, by liquidating the surplus in an instant, damaged its economic management credentials.
And for what? To avoid "the potential political costs of being seen to do nothing".
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