Global Warming/Cold Feet

The Australian Bureau of Agricultural and Resource Economics latest report indicates that we are to be one of the countries worst affected by global warming with a decrease in agricultural production on the order of 17%. This figure pales in to comparison to India's 25%, truly a scary number when you consider how many mouths that 25% is feeding. We hardly needed any more reminding, but the visions of our planet's broiling future keep on coming.

This is why I am starting to despair about Bali even before the negotiations have really begun. "Australia's delegation in Bali was quoted as saying Australia 'fully supports' a plan for developed nations to examine cutting emissions by between 25% and 40% by 2020", we read in yesterday's paper, but:

Mr Rudd and his Climate Change Minister, Penny Wong, later issued statements stressing that Australia was not yet committing to any 2020 targets... By playing down the need for Australia to commit to the deep cuts in emissions...Labor under Kevin Rudd has agreed to set a target of a 60% cut by 2050, but has resisted setting a 2020 goal...

This is not encouraging reading. It does not suggest that Australia is about to become a leader in the global response to climate change. What is suggests to me is that Australia, like most other nations, will haggle and bargain and make rhetoric about sharing the responsibility and try and get away with a minimum of commitment. Rudd himself described the process as "horse trading." Horse trading! Need I even point out that coming together to prevent irreversible changes to the Earth's climate needs a different mindset than negotiating a bauxite exporting contract? If we approach global warming as a game to be optimized in our country's favor, we are truly doomed. The horse trading will turn to recriminations as the disaster hits.

The world is crying out for leadership here, and I had high hopes we might provide it. "We owe it future generations to prevent this disaster occurring," a parallel-universe Rudd might have said. "Whatever the cost, Australia will shoulder its obligations, and help those in the developing world to bear theirs. All humanity is in this together, and time is too short for any further prevarication and horse trading." Fictional Rudd then evoked the spirit of the Apollo Project as he called on the world to make a massive investment in alternative energy research. "We not only plan on meeting these agressive targets but surpassing them by harnessing the limitless ingenuity of our scientists, engineers, and entrepeneurs." I wonder, which alarms you more, the imaginary speech or the remarks printed in the real-world newspaper?

Of course, we're much better off with Rudd than the previous government. In the same article opposition leader Brendan Nelson was quoted as saying "a 2020 target in the range mentioned in Bali would damage industries and hurt low-income Australians." I have a hard time understanding the logic underpinning a statement like this. How can one weigh up shaving 0.2%, say, of Australia's economic growth with preventing an unprecedented global catastrophe and decide to err in favour of the former?

It's clear to me that the consequences of global warming are truly terrible. To cut our emissions according to the most agressive schedule, what cut in my standard of living would be required today? Couldn't we as a nation tighten our belts and make do with a 1% increase in the tax rate, higher electricity prices, or a surcharge on the price of new cars? How will my standard of living decrease when war, famine and drought are the order of the day?

This video sums things up nicely. The costs of action can be well understood and are not unbearable. The costs of inaction are to a large extent unknown but could be catastrophic. It doesn't matter if the true extent of global warming isn't a certainty - it merely has to be likely or even possible for immediate action to be warranted. What's more, I think the electorate largely agrees with me. It's time Kevin Rudd and the the world's leaders to step up and do what needs to be done.

Lack of Interest

If interest rates are to be considered a political football, the 2007 Federal election was the Grand Final. They have becomes such a fixture of economic discussion that's it's hard to imagine we'll ever move past it, but I'm hoping this was the last time they will feature so prominently in an election debate. So let's put the issue to bed.

The Coalition were guilty of misleading the public on nearly all aspects of the way role interest rates play in our economy. In 2004 they made as much hay as they could out of this, and paid a price for it. Why couldn't they resist the temptation? Well, we all know that Australia is awash in a sea of debt. The numbers certainly attest to the fact that Aussies were sensitive to interest rates in their political leanings.

The following graph (stolen shamelessly from Possum Comitatus) shows how closely the opinion polls tracked interest rates, and shows what would have had to happen for the ALP to lose the election. If there were be any doubts about the potency of interest rates as a political issue, this certainly shakes them. Cause and effect are of course by no means certain in this sort of analysis, but it's clear the interest rate hikes didn't help the coalition one iota.

Unfortunately, since Latham's days, the ALP has implicitly or explicitly bought into the interest-rates-as-an-indicator-of-economic-gravitas line. Now that we are over the line, though, are interest rates neutralized as an issue? Labor has it's "17% mortgage rate", the Coalition have their broken promise and six interest rate hikes in a row. Now even the most disinterested amongst us knows that the Liberal party does not, in fact, posesss an interest-rate supressing magic wand. Let's admit that the Federal Government doesn't control interest rates. Here are the facts.

1. Despite political campaigns, the government has no control over interest rates. The Reserve bank sets them in accordance with its mandate to keep inflation below 3% (higher interest rates cub spending and so help to lower demand and keep inflation under control).

2. The historical data don't suggest that Labor has a worse record on interest rates. Under the last Labor government, cash interest rates peaked at 19% under Hawke but only 7.9% under Keating. Under Fraser, interest rates peaked at 21% in April 1982. Mortgage interest rates hit the following highs: Whitlam, 10.38%; Fraser, 13%; Hawke, 17%; Keating, 12%.

3. Despite Howard's mantra of "17%", the fact is that mortgage rates were capped by regulation when he was Fraser's treasurer. It was Labor that derugulated the banking industry.

4. Talk of deficits and surpluses is also misleading. Surpluses are a sign that taxation is outstripping spending, indicating a lack of sufficient investment in infrastructure. Deficits are clearly correct policy when the economy is in recession. Promising to keep interest rates low by running surpluses is not sensible fiscal policy. In this day and age, Government borrowing in any case comes from global financial markets and will have little effect on interest rates domestically.

5. Even for mortgage holders, it's not the interest rate that matters per se, but the impact interest payments have on their disposable incomes. Australians were paying more interest under Howard than under Keating because debt levels are so high.

Finally, the rhetoric of Howard was often about "wage pressure". This obviously means keeping your wages low as the economy grows. I don't know what this can mean except keeping wealth growth as much as possible in the share market and as little as possible amongst wage earners.

The economy is a legitimate political issue, of course. It's time to put aside this narrow focus on one misleading economic indicator and judge a government's performance by a more realistic set of metrics: overall growth, environmental responsibility (externalities), standard of living, long term thinking. Under these criteria I have no doubt a Labor government can perform as well as any in the world.

(Andrew Charlton's Comment in November's issue of the Monthly is a great and more detailed debunking of the interest rate myths.)